UHS execs, directors escape lawsuit over billing practices

A Pennsylvania federal judge has dismissed a shareholder lawsuit against several of Universal Health Services' top executives and directors.

Shareholders began filing derivative lawsuits against King of Prussia, Pa.-based UHS in 2017 after Buzzfeed News reported that UHS psychiatric hospitals kept patients longer than necessary and against their will to maximize reimbursement from insurers. The report, which was based on a yearlong investigation, described how the company allegedly manipulated the patient admission process and also raised questions about the quality of care provided at the psychiatric hospitals.

Four of the derivative lawsuits were consolidated into one action in March 2018, and the shareholders filed an amended seven-count complaint roughly eight months later. The plaintiffs contend that starting in January 2013 the UHS board of directors "pushed forward" aggressive business plans that incentivized or encouraged UHS behavioral health facilities to engage in fraudulent billing practices and other misconduct to meet financial goals. The plaintiffs further allege that UHS directors and officers violated the law and breached their fiduciary duty to the company by knowing about the misconduct and failing to correct the issues.

UHS brought a motion to dismiss the lawsuit in February 2019. The company argued the amended complaint should be thrown out because the shareholders failed to adequately plead demand futility. As a precondition to a derivative lawsuit, most jurisdictions require shareholders to first demand that the company's directors prosecute the action, unless such a demand would be futile. The shareholders did not make a presuit demand, and UHS argued the shareholders failed to demonstrate demand futility.

The shareholders argued in their response to the motion to dismiss that the presuit demand was excused under state law in this case for several reasons, including because the complaint alleges UHS' board likely faces personal liability for allegedly incentivizing fraudulent activity and the majority of the board lacks the level of independence needed to fairly evaluate litigating a claim against senior managers and the board.

Judge Joel Slomsky from the U.S. District Court for the Eastern District of Pennsylvania disagreed with the plaintiffs and granted UHS' motion to dismiss on Aug 19.

The judge found that the plaintiffs failed to demonstrate demand futility and should have asked the board to bring the litigation before they did. The shareholders "failed to plead particularized facts that raise a reasonable doubt that a majority of the board lacked independence. Nor does the amended complaint contain particularized facts that raise a reasonable doubt that the board was not disinterested," reads the opinion issued by the district court.

UHS and its behavioral health facilities were also the subject of an investigation by the Department of Justice. In its earnings report for the second quarter of 2019, UHS said it reached an agreement in principle with the Justice Department to resolve the civil aspects of the investigation for $127 million. The company also said that the Justice Department's Criminal Frauds Section has closed a related investigation into UHS' operations.

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