in re health management associates, inc. 12-cv-00046-second...

Case 2:12-cv-00046-JES-DNF Document 49 Filed 02/25/13 of 172 PageID 1020

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA

FORT MYERS DIVISION

IN RE: HEALTH MANAGEMENT ASSOCIATES, INC., GARY D. NEWSOME, KELLY E. CURRY, and

Case No. 2:12-cv-46-FtM-29DNF

ROBERT E. FARNHAM

2:12-cv-163-FtM-29DNF

SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


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TABLE OF CONTENTS

I. INTRODUCTION AND NATURE OF THE ACTION .........................................1

II. JURISDICTION AND VENUE..............................................................................8

III. PARTIES .................................................................................................................9

IV. CLASS ACTION ALLEGATIONS ......................................................................10

V. CONFIDENTIAL SOURCES ...............................................................................12

VI. SUBSTANTIVE ALLEGATIONS .......................................................................20

A. HMA and the Medicare Program...............................................................20

B. During the Class Period, Defendants Artificially Inflated HMA’s Financial Results and Misrepresented HMA’s Future BusinessProspects.....................................................................................25

1. Prior to the Class Period, HMA Faced Serious Financial Challenges......................................................................................25

2. Newsome Joins HMA with a “Strategy” for Turning the CompanyAround...........................................................................27

C. Defendants Boost HMA’s Admissions Through Medicare Fraud..........................................................................................................30

1. Data Demonstrates the Material Impact on Admissions Generated by Defendants’ Medicare Fraud...................................37

2. HMA Pressured Physicians to Admit Patients and Increase Patients’ Length of Hospital Stay....................................45

3. HMA Used Pro-MED Software to Generate Reports Discussed During Daily Meetings Focusing on the Need to Admit More Patients as Inpatients as Mandated by “HMA Corporate”.....................................................................49

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D. Daily Reports Were Circulated in HMA Hospitals Documenting the Number of Observation Patients...................................55

E. Red Flags Regarding Improper Patient Admissions Reported Within HMA Were Ignored.......................................................................56

F. HMA Employees Were Terminated for Reporting or Complaining about Fraudulent Billing Practices.......................................62

G. HMA Hired Accretive Health to Review its Patient Cases and Put Pressure Upon HMA Physicians to Admit More Inpatients................64

H. Defendants Had Extensive Knowledge of HMA’s Admissions Numbers.....................................................................................................66

I. The Information and Documents Revealed During the 60 Minutes Segment Corroborates Lead Plaintiffs’ Allegations....................70

J. HMA’s Fraudulent Financial Reporting....................................................75

1. HMA’s Revenues and Earnings Were Materially and Artificially Inflated ........................................................................76

2. HMA’s Undisclosed Contingent Liabilities...................................79

VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD ...........................................................81

A. The July 27, 2009 Press Release and Conference Call..............................81

B. The Second Quarter 2009 10-Q.................................................................86

C. The September 14, 2009 and September 30, 2009 Conferences ...............87

D. The October 27, 2009 Press Release and Conference Call........................89

E. The November 3, 2009 Conference...........................................................91

F. The Third Quarter 2009 10-Q....................................................................91

G. The November 12, 2009, November 18, 2009, and December 3, 2009 Conferences.................................................................92

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H. The January 12, 2010 Press Release..........................................................94

I. The February 8, 2010 Conference .............................................................96

J. The February 22, 2010 Press Release and February 23, 2010 ConferenceCall .........................................................................................97

K. The 2009 10-K...........................................................................................99

L. The March 9, 2010, March 10, 2010, March 23, 2010 Conference, and the March 25, 2010 Analyst Meeting...........................102

M. The April 26, 2010 Press Release and the April 27, 2010 ConferenceCall .......................................................................................105

N. The May 3, 2010 Conference...................................................................107

O. The First Quarter 2010 10-Q....................................................................108

P. The May 11, 2010, May 20, 2010, May 27, 2010, June 16, 2010, and June 24, 2010 Conferences .....................................................109

Q. The July 26, 2010 Press Release and July 27, 2010 ConferenceCall .......................................................................................111

R. The Second Quarter 2010 10-Q ...............................................................114

S. The September 14, 2010 and October 6, 2010 Conferences....................115

T. The October 27, 2010 Press Release and October 28, 2010 ConferenceCall .......................................................................................116

U. The November 2, 2010 Conference.........................................................118

V. The Third Quarter 2009 10-Q..................................................................119

W. The November 10, 2010, November 16, 2010, November 17, 2010, January 11, 2011 and February 8, 2011 Conferences....................120

X. The February 16, 2011 Press Release......................................................121

Y. The 2010 10-K.........................................................................................123

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Z. The March 2, 2011 Conference ...............................................................125

AA. The April 25, 2011 Press Release and April 26, 2011 ConferenceCall .......................................................................................126

BB. The First Quarter 2011 10-Q....................................................................129

CC. The May 12, 2011 and June 6, 2011 Conferences...................................130

DD. The July 27, 2011 Press Release and July 28, 2011 ConferenceCall .......................................................................................131

EE. The Second Quarter 2011 10-Q ...............................................................135

FF. The September 14, 2011 and October 12, 2011 Conferences..................136

GG. The October 24, 2011 Press Release, the October 25, 2011 Conference Call, and the Third Quarter 2011 10-Q ................................138

HH. The November 10, 2011, December 1, 2011, and December 14, 2011 Conferences.............................................................143

II. The January 9, 2012 Press Release..........................................................144

VIII. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING HMA’S BUSINESS CONDUCT ANDETHICS......................................................................................................147

IX. ADDITIONAL SCIENTER ALLEGATIONS....................................................148

X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE........................................................................152

XI. LOSS CAUSATION/ECONOMIC LOSS ..........................................................153

XII. NO SAFE HARBOR ...........................................................................................158

XIII. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10 b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS ............................................159

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XIV. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS...............163

XV. JURY TRIAL DEMANDED...............................................................................164

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1. Lead Plaintiffs New England Teamsters & Trucking Industry Pension Fund,

Norfolk County Retirement System and the Operating Engineers Trust Fund (“Lead

Plaintiffs”), individually and on behalf of a proposed class (the “Class”) of all purchasers of

the publicly traded common stock of Health Management Associates, Inc. (“HMA” or the

“Company”) between July 27, 2009 and January 9, 2012, inclusive (the “Class Period”), by

and through their undersigned counsel, bring suit against HMA, Gary D. Newsome

(“Newsome”), Robert E. Farnham (“Farnham”), and Kelly E. Curry (“Curry”) (HMA,

Newsome, Farnham and Curry are collectively referred to as “Defendants”).

2. Lead Plaintiffs seek remedies under the Securities Exchange Act of 1934 (the

“Exchange Act”) as a result of the fraudulent scheme undertaken by Defendants and the

economic loss suffered when the true facts were revealed to the public. The claims asserted

herein arise under and pursuant to §§10(b) and 20(a) of the Exchange Act, 15 U.S.C.

§§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5.

I. INTRODUCTION AND NATURE OF THE ACTION

3. HMA, through subsidiary entities, owns and operates (either outright or as

part of various joint ventures) acute care hospitals and other health care facilities in non-

urban areas throughout the United States, primarily in the southeast.

4. Prior to the start of the Class Period, HMA was one of the most highly

leveraged hospital companies, with Moody’s Investors Service (“Moody’s”) downgrading

the Company’s corporate family rating on March 19, 2008, to reflect declining profitability

and cash flows, which had led to debt reduction and credit metric improvements below

Moody’s previous expectations.

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5. On September 15, 2008, following the resignation of HMA’s Chief Executive

Officer (“CEO”) Burke Whitman, the Company announced the Board of Directors’

appointment of Newsome as the Company’s President and CEO, and as a member of the

Board. Newsome, who came to HMA from Community Health Systems, told investors the

strategy for improving HMA’s financial performance would focus on three operational

initiatives: (1) the Emergency Department; (2) physician recruitment and development; and

(3) market service development. These initiatives (the “three initiatives”) became HMA’s

public mantra and were touted throughout the Class Period in Defendants’ public statements.

6. By the start of 2009, however, HMA continued to experience declining

operating performance as it lagged far behind the for-profit hospital industry in organic

volume growth. In need of a financial turnaround, Defendants implemented and oversaw a

scheme whereby the Company systematically and improperly admitted patients who sought

Emergency Department services to artificially boost HMA’s financial results and,

correspondingly, its stock price. Defendants were able to achieve their goal of improperly

admitting patients on a company-wide basis by setting quotas for admissions that applied at

each HMA hospital, increasing pressure on HMA physicians to admit Medicare patients who

did not meet admission criteria, and using the Company’s Pro-MED software to flag patients

who could be improperly admitted.

7. As the Class Period progressed, HMA’s scheme to improperly admit patients

from the Company’s Emergency Department took hold and had the intended consequences

(i.e. to fraudulently drive up Medicare billing in furtherance of Defendants’ scheme). The

market was repeatedly told that it was the three initiatives that were driving the Company’s

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seemingly improved financial results, squarely putting the source of HMA’s revenue at issue

to investors.

8. Defendant Newsome unquestionably knew about, and in fact was the driving

force behind increasing HMA’s Medicare billing and inpatient admissions by mandating the

improper admission of patients to inpatient status regardless of medical necessity, in part, by

converting observation patients to inpatients, as demonstrated by his comments at a National

Meeting of all hospital administrators in 2009, during which he brashly proclaimed “there is

no excuse for patients in observation.”

9. As a result of Defendants’ fraudulent scheme, HMA’s Emergency

Department admissions began far exceeding those that could be explained by patient acuity

or hospital geography, and HMA hospitals owned as joint ventures with physicians were

exhibiting notably high excess Emergency Department admissions. Data indicates that in

2009 alone, HMA’s excess admissions generated $40 million in exorbitant Medicare billing

– which amounted to roughly 25% of HMA’s 2009 net income. At the same time, additional

data indicates that the number of patients admitted to observation status in HMA hospitals

fell dramatically.

10. Simply put, HMA hospitals saw significant improvement in performance after

Newsome joined HMA because, under Newsome’s tutelage, HMA improperly upgraded

patients from observation to inpatient status in order to fraudulently increase HMA’s

Medicare revenue.

11. The truth about HMA and the reasons behind its positive financial results was

revealed to the market through two partial disclosures.

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12. The first disclosure came on August 3, 2011, when HMA revealed it received

two subpoenas (one on May 16, 2011 and one on July 21, 2011) from the U.S. Department

of Health and Human Services (“HHS”), Office of Inspector General (“OIG”). The

subpoenas related to “physician referrals as well as ownership and management at [HMA’s]

whole-hospital physician joint ventures, among other items” and information regarding

HMA’s “Emergency Department management including the use of Pro-MED software.”

13. Disclosure of the subpoenas caused two Wall Street analysts to downgrade

HMA stock, with one issuing a report on August 4, 2011, entitled: “How Can We Believe

You Now, HMA? Failure to Disclose July OIG Pro-MED Subpoena with Earnings Crushes

our Confidence.” Although disclosure of the OIG subpoenas revealed a portion of the

Company’s true financial condition and future business prospects, indicating that two of the

Company’s three corporate strategies were now the subject of regulatory scrutiny, the market

had no idea of how deep Defendants’ fraud ran. Indeed, despite the negative news, because

the market had not yet learned the full extent of Defendants’ fraud, the price of HMA stock

declined only 9.12% to close at $7.97 per share on August 4, 2011.

14. On October 25, 2011, when HMA revealed in its Form 10-Q that the OIG

subpoenas might be related to violations of the Anti-Kickback Statute and the False Claims

Act and could have been prompted by a whistle-blower complaint. HMA, however, omitted

any details concerning the whistle-blower’s complaint (discussed below), and continued to

mislead the market by failing to reveal Defendants’ company-wide scheme to fraudulently

admit patients from the Company’s hospitals’ Emergency Departments.

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15. The second disclosure occurred on January 9, 2012, when equity analyst

Sheryl Skolnick (“Skolnick”) of CRT Capital Group LLC (“CRT”) provided the market with

specific details regarding a lawsuit filed by Paul Meyer (“Meyer”), HMA’s recently

terminated Director of Compliance, who previously worked for 30 years at the U.S. Federal

Bureau of Investigation (“FBI”) – most recently as the supervisor of the FBI’s health care

fraud unit in Miami, Florida. Meyer first raised egregious compliance concerns to the

Defendants in January 2010. At that time, Meyer informed them that he observed that HMA

hospitals were securing higher government payments from the Medicare program by

submitting fraudulent billing to Medicare through the improper admission of patients as

inpatients, even though such patients clearly did not meet the standards for inpatient

admission. Thereafter, when Defendants failed to put a stop to HMA’s fraudulent billing

practices, on August 19, 2010, Meyer wrote an extensive memorandum further detailing the

fraudulent activity and delivered it to his superiors – who had a direct reporting line to the

Company’s Board of Directors, Audit Committee, and to the CEO. 1 In response to Meyer’s

revelation of Medicare fraud, HMA took steps to remove Meyer from contact with certain

hospitals and changed his job responsibilities by eliminating his oversight duties. Meyer was

fired on the afternoon of September 6, 2011, the day he told HMA that he would report

HMA’s violations to the U.S. government.

1 It was later revealed that Meyer spoke directly to Newsome about HMA’s fraudulent billing practices. It was also revealed subsequently, that Meyer’s superiors directed him to revise and water-down his memoranda before they were finalized, and that HMA’s general counsel specifically instructed Meyer to destroy the drafts of his memoranda, which Meyer refused to do. See ¶¶149, 184-185.

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16. As a result of these additional partial revelations, the price of HMA stock

declined more than 7% from its January 6, 2012 closing price of $7.49 per share, to close at

$6.96 per share on January 9, 2012 – the next trading day – on abnormal trading volume of

more than 11 million shares traded.

17. The following day, January 10, 2012, the Company disclosed that on January

5, 2012, Timothy R. Parry, Esq., Senior Vice President, General Counsel, and Secretary of

the Company, had abruptly announced his intention to resign “effective immediately.”

18. On January 10, 2012, the stock fell an additional 13% , or $0.91 per share, to

close at $6.05, on heavy trading volume of more than 68 million shares traded – far in excess

of the stock’s three-month average trading volume of 3.7 million shares. All told, between

January 9, 2012 and the close of trading on January 10, 2012, the price of HMA stock fell

more than 19% , with more than 80 million shares traded.

19. The revelations of HMA’s fraudulent conduct, which were more fully

exposed by Meyer’s lawsuit and the January 9, 2012 analyst report by CRT, stand in stark

contrast to Defendants’ Class Period statements. As pleaded herein, as a result of

Defendants’ false statements and material omissions, HMA’s common stock traded at

artificially inflated levels during the Class Period. As the truth about HMA’s practices was

revealed to investors, the Company’s share price dramatically declined, and Lead Plaintiffs

and the other members of the Class suffered significant losses and damages as the artificial

inflation was removed.

20. These allegations were corroborated on December 2, 2012, when CBS aired a

segment on 60 Minutes entitled “Hospitals: The Cost of Admission” (the “60 Minutes

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Segment”) focusing on HMA’s admissions and billing practices. 2 The 60 Minutes Segment

focused on revenue HMA generated from Medicare. 60 Minutes interviewed “more than

100 current and former [HMA] employees” who provided details demonstrating that HMA

pressured its physicians and staff to admit patients who should not have been admitted in

order to generate higher Medicare revenue, set quotas for admissions that could not

legitimately be met in the absence of Medicare fraud, and customized its Pro-MED computer

system in order to justify the improper admission of more patients. 3

21. These allegations were also corroborated by Skolnick and CRT in a highly

detailed analyst report (the “CRT Report”) published on December 3, 2012 entitled “Our

Data Tells a ‘Significant’ Tale of Trouble; A Robust Analysis of Medicare Data: Short Stays

UP, Obs Rates Down, EBITDA Up”. 4 The CRT Report analyzes HMA’s admissions rates

before, during and after the Class Period and concludes, among other things, that beginning

in 2008, after HMA’s leadership changed, “HMA’s hospitals had a statistically significantly

higher rate of admission of Medicare patients who came through the ER as a percent of all

Medicare heads in all years.” More specifically, HMA had lower observation rates and

higher short stay rates (admissions) compared to its peer groups, especially after 2008.

2 “Hospitals: The Cost of Admission .” Narr. by Steve Kroft. 60 Minutes. (CBS television broadcast Dec. 2, 2012).

3 The transcript of the 60 Minutes Segment is attached hereto as Exhibit A . The complete 60 Minutes Segment can be watched at http://www.cbsnews.com .

4 The CRT report is attached hereto as Exhibit B and is described in further detail below.

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These statistics support Plaintiffs’ claims and demonstrate the implementation and

effectiveness of HMA’s fraudulent billing practices.

22. In addition, the existence of Defendants’ mandate to improperly admit

patients is further demonstrated by the filing of a wrongful termination of employment

lawsuit by an HMA physician who claimed he was fired for failing to meet HMA’s

admissions quotas. As detailed below, Jeffrey Hamby, M.D. (“Hamby”), a physician who

worked at HMA’s Summit Medical Center in Arkansas (“Summit”), which is partly owned

by HMA, filed an action against HMA for wrongful termination, among other things, based

on Hamby’s failure to meet HMA’s admissions targets (the “Hamby Complaint”). 5 Included

in the Hamby Complaint are allegations detailing HMA’s practice of pressuring physicians

to meet admissions quotas, improperly using the Pro-MED software system to maximize

billable services to patients, identifying patients who are potential admissions and

fraudulently billing Medicare.

II. JURISDICTION AND VENUE

23. Jurisdiction is conferred by §27 of the Exchange Act. The claims asserted

herein arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a),

and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. §240.10b-5.

5 Hamby also appeared on the 60 Minutes Segment, more fully discussed below, to discuss HMA’s fraudulent practices. A true and correct copy of the Hamby Complaint is attached hereto as Exhibit C . Hamby was also deposed in this case on September 10, 2012 and October 22, 2012 (the “Hamby Deposition”). Excerpts from the Hamby Deposition were attached to HMA’s Motion to Dismiss Hamby’s Complaint, which was filed on November 26, 2012.

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24. Venue is proper in this District pursuant to §27 of the Exchange Act. Many

of the false and misleading statements were made in or issued from this District and HMA

maintains its principal executive offices in this District.

25. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

III. PARTIES

26. Lead Plaintiffs Teamsters & Trucking Industry Pension Fund, Norfolk County

Retirement System, and the Operating Engineers Trust Fund purchased HMA common stock

during the Class Period, as set forth in the certifications previously filed with the Court and

incorporated by reference herein, and were damaged when the revelations described herein

reached the market and the artificial inflation was removed from the price of HMA stock.

27. As described above, Defendant HMA, through subsidiary entities, operates

acute care hospitals and other health care facilities in non-urban areas throughout the United

States, primarily in the southeast. The Company is incorporated in Delaware and maintains

its principal executive offices in Naples, Florida. The Company’s stock is listed on the New

York Stock Exchange (the “NYSE”) and trades under the ticker symbol “HMA.”

28. Defendant Gary D. Newsome has served as President and CEO of HMA since

September 15, 2008. Newsome is also a member of the Company’s Board of Directors.

29. Defendant Robert E. Farnham served as Senior Vice President and Chief

Financial Officer (“CFO”) of HMA from March 2001 through January 12, 2010. Farnham is

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also HMA’s Senior Vice President of Finance. During the Class Period, while the price of

HMA stock was artificially inflated, Farnham sold 201,317 shares of HMA stock at

artificially inflated prices, generating trading proceeds totaling $2,290,965.

30. Defendant Kelly E. Curry has served as Vice President and CFO of HMA

since January 12, 2010.

31. Throughout the Class Period, Newsome, Farnham and Curry (the “Individual

Defendants”) were responsible for ensuring the accuracy of HMA’s public filings and other

public statements, and they personally attested to and certified the accuracy of HMA’s

financial statements.

IV. CLASS ACTION ALLEGATIONS

32. Lead Plaintiffs bring this action as a class action pursuant to Rule 23 of the

Federal Rules of Civil Procedure on behalf of all persons who purchased or otherwise

acquired HMA common stock during the Class Period (the “Class”). Excluded from the

Class are Defendants and their families, the officers and directors of the Company, at all

relevant times, members of their immediate families and their legal representatives, heirs,

successors, or assigns and any entity in which Defendants have or had a controlling interest.

33. The members of the Class are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial

benefits to the parties and the Court. As of February 17, 2012, shortly after the last day of

the Class Period, HMA had more than 254 million shares of stock outstanding, owned by

hundreds, if not thousands of shareholders.

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34. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class which

predominate over questions which may affect individual Class members include:

(a) whether the Exchange Act was violated by Defendants;

(b) whether Defendants omitted and/or misrepresented material facts;

(c) whether Defendants’ statements omitted material facts necessary to

make the statements made, in light of the circumstances under which they were made, not

misleading;

(d) whether Defendants knew or deliberately disregarded that their

statements were false and misleading;

(e) whether the price of HMA common stock was artificially inflated; and

(f) the extent of damage sustained by Class members and the appropriate

measure of damages.

35. Lead Plaintiffs’ claims are typical of those of the Class because Lead

Plaintiffs and the Class sustained damages from Defendants’ wrongful conduct.

36. Lead Plaintiffs will adequately protect the interests of the Class and have

retained counsel who are experienced in class action securities litigation. Lead Plaintiffs

have no interests in conflict with those of the Class.

37. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

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V. CONFIDENTIAL SOURCES

38. Lead Plaintiffs make the allegations herein concerning the falsity of

Defendants’ statements and the scienter of the Individual Defendants based upon the

investigation undertaken by Lead Plaintiffs’ counsel, which included analysis of publicly

available news articles and reports, public filings, securities analysts’ reports and advisories

about HMA, interviews of former HMA employees, press releases and other public

statements issued by the Company, and media reports about the Company.

39. The allegations made herein are supported by the first-hand knowledge of

nineteen (19) confidential witnesses (“CWs”). These CWs include many former employees

of HMA who were employed during the Class Period and who provided first-hand

information from various departments of the Company. As detailed below, the CWs each

served in positions at HMA that provided them with access to the information they are

alleged to possess.

40. Confidential Witness #1 (“CW 1”) was employed by HMA as a Resource

Manager at the Dallas Regional Medical Center (“Dallas Regional”) located in Mesquite,

Texas from March 2010 until CW 1 resigned in April 2011. As a Resource Manager, CW 1

was tasked with utilization review and discharge planning, encompassing the tasks typically

undertaken by hospital case managers. CW 1 reported to Nancy Alford (“Alford”), Dallas

Regional’s Director of Case Management. CW 1 provided information concerning HMA’s

mandate that all observation patients be converted to inpatient status in order to improperly

increase patient admissions.

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41. Alford (formerly identified as Confidential Witness #2 in the Amended

Consolidated Class Action Complaint for Violations of the Federal Securities Laws, filed on

July 30, 2012,) worked as the Director of Case Management for HMA at Dallas Regional in

Mesquite, Texas from February 2010 until June 30, 2010. As Director of Case Management,

Alford managed and organized the nursing department personnel and conducted hiring,

firing, training and counseling of the nurses who reported to her. Alford reported to Linda

Broome (“Broome”), the Chief Nursing Officer, who reported to Dallas Regional CEO Justin

Davis (“Davis”). Alford provided information regarding the Company’s improper admission

of patients, which was implemented, in part, by converting observation patients to inpatients,

even though the patients did not meet the criteria for inpatient status, allowing HMA to

improperly bill and receive higher Medicare reimbursements.

42. Confidential Witness #3 (“CW 3”) worked for HMA from 2008 until August

2011. CW 3 was employed as the Health Information Management Coding Supervisor in the

Sebastian River Medical Center (“Sebastian River”) in Sebastian, Florida for two and a half

years, and then, for the last three months of her/his employment, CW 3 was an interim

Health Information Manager and HIPAA Privacy Officer at Wuesthoff Medical Center

(“Wuesthoff Medical”) in Rockledge, Florida. At Sebastian River, CW 3 reported directly to

Health Information Management (“HIM”) Supervisor, Diana Spaulding (“Spaulding”), who

reported to the CFO. At Wuesthoff Medical, CW 3 reported directly to the Wuesthoff

Medical CFO. CW 3’s main responsibility at both Sebastian River and Wuesthoff Medical

was coding treatments provided to patients and auditing coding and charges. She/he also

handled bill alerts and charge corrections. In addition, CW 3 was also responsible for

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HIPAA policy at both hospitals. At Wuesthoff Medical, CW 3 led the transition from the

Company’s 45 year old software systems to new systems. Moreover, CW 3 provided

information concerning HMA’s improper coding of patients as inpatient instead of outpatient

allowing HMA to improperly bill and obtain higher reimbursements from Medicare.

43. Confidential Witness #4 (“CW 4”) was employed at Dallas Regional as an

Emergency Room Registered Nurse from approximately May 2002 to January 2012, and was

responsible for preparing admissions and caring for Emergency Department patients, as well

as storing, purchasing and restocking Emergency Department supplies. CW 4 reported to

Emergency Room Director Juliet Horne (“Horne”) and then to Frank Pool (“Pool”) who

replaced Horne. The Emergency Room Director reported to Chief Nursing Officer Broome,

and then to Tina Polack (“Polack”), who replace Broome. The Chief Nursing Officer

reported to Davis. CW 4 provided information supporting HMA’s mandate to improperly

increase inpatient admissions allowing HMA to improperly bill and collect higher Medicare

funding.

44. Confidential Witness #5 (“CW 5”) was employed as a Registered Nurse by

HMA at Stringfellow Memorial Hospital (“Stringfellow Memorial”) located in Anniston,

Alabama from November 2000 until October 2011. CW 5 reported to Nurse Manager Mary

Jones (“Jones”) who reported to Chief Nursing Officer Melissa Samuelson (“Samuelson”),

who in turn reported to hospital CEO John Gallagher (“Gallagher”). CW 5 provided

information concerning HMA’s inappropriate admission of patients as inpatients when they

should have been observation patients and as observation patients, when they should not

have been admitted to the hospital at all.

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45. Confidential Witness #6 (“CW 6”) was employed by HMA as an Emergency

Department Trauma Medic in Dallas Regional from September 2009 until October 2011.

CW 6 reported to Emergency Room Coordinator Lakisha Taylor (“Taylor”), the Emergency

Department Coordinator, who reported to Horne and then to Poole, who reported to Broome

and then to Pollack. CW 6 provided information concerning HMA’s inappropriate

admission of patients as inpatients when they should have been observation patients and as

observation patients, when they should not have been admitted to the hospital at all.

46. Confidential Witness #7 (“CW 7”) was employed by HMA as a hospital CFO

for approximately six years, from July 2006 until November 2011. CW 7 first worked for

HMA at Lower Keys Medical Center in Key West, Florida. In November 2008, she/he was

moved to Peace River Medical Center in Port Charlotte, Florida. CW 7 remained at Port

Charlotte from November 2008 through June 1, 2011, when she/he moved to Midwest

Industry Medical Center located in Edmond, Oklahoma until November 2011. As CFO, CW

7 was responsible for financial reporting, materials management, information technology

(“IT”), accounting, and business office/collections, including oversight of the hospital

medical records and Medicare billing. CW 7 reported directly to the respective CEO at each

hospital, but had “indirect” reporting responsibility to the Vice President of Operations,

Finance Mark Spafford (“Spafford”), who reported to Division President Josh Putter

(“Putter”) and to defendants Curry and Farnham. CW 7 provided information regarding,

among other things, the Company’s aggressive approach to admitting patients to HMA

hospitals regardless of medical necessity.

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47. Confidential Witness #8 (“CW 8”) worked as a physician in the Emergency

Department at the Sandhills Regional Medical Center (“Sandhills Regional”) in Hamlet,

North Carolina under a private placement contract, from 1997 until 2010. CW 8 began

working as an Emergency Department physician at Sandhills Regional in 1997 and became

Medical Director of the Emergency Department in 2000. CW 8 was responsible for

managing the medical staff, including physicians and nurses, in the Emergency Department

with regard to patient care. CW 8 reported to the CEO of Sandhills Regional, Michael

McNair. CW 8 provided information about the pressure from HMA corporate to admit

Medicare patients in the Emergency Department to the hospital whenever possible.

48. Confidential Witness #9 (“CW 9”) worked for HMA as an Emergency

Department nurse at Sandhills Regional in Hamlet, North Carolina for 37 years, retiring in

July, 2011. CW 9 was the manager of the Emergency Department intermittently during the

last 15 years at Sandhills Regional. CW 9 provided information regarding the pressure put

on physicians to increase admissions, which began approximately around the end of 2009.

49. Confidential Witness #10 (“CW 10”) worked as a physician at Dallas

Regional in the Emergency Department under a private placement contract from August

2008 until June 2011, serving as the Medical Director of the Emergency Department from

January 2009 until the end of 2010. CW 10 was responsible for the medical care of patients

presenting to the Emergency Department. CW 10 reported directly to the Dallas Regional

CEO, Davis and then to Matthew Caldwell (“Caldwell”) who replaced Davis. CW 10

provided information regarding the pressure upon physicians and nurses by hospital

administrators to increase admissions as well as the focus on admitting patients over age 65.

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50. Confidential Witness #11 (“CW 11”) worked as a Registered Nurse on the

Med-Surge floor of the Twin Rivers Ridgeville Hospital in Kent, Missouri from 2002 until

February 2011. CW 11 reported to the head of the Med-Surge unit. CW 11 provided

information regarding the push to inappropriately admit Emergency Department patients.

51. Confidential Witness #12 (“CW 12”) was employed by HMA as a Case

Manager at Physicians Regional Medical Center – Collier Boulevard (“Physicians

Regional”) in Naples, Florida from August 2009 through March 2010. As a Case Manager,

CW 12 was responsible for updating patient status and preparing surveys for state regulators,

among other things. CW 12 provided information regarding the improper admission of

patients as inpatients for only one day as well as the termination of HMA employees who

complained about the Company’s inappropriate admissions practices.

52. Confidential Witness #13 (“CW 13”) was employed as an Assistant Director

of Medical Surgery/Operating Room at Shands Starke Regional Medical Center (“Shands

Regional”) from April 2008 until November 2010, reporting to Director of Nursing, Mary

Andrews. Shands Regional was acquired by HMA in or around July of 2010. CW 13

provided information about the change in admission policy and improper admission of

patients through the Emergency Department once Shands Regional was acquired by HMA.

53. Confidential Witness #14 (“CW 14”) was employed by HMA in the Barrow

Regional Medical Center (“Barrow Regional”) in Winder, Georgia from October 2007 to

June 2011. CW 14 described her/his job title as Medical Staff Office & Provider Relations

and was responsible for running the medical staff office, including oversight of the

physicians and nurses employed by the hospital. CW 14 also worked in the same capacity

- 17 -


on a part time basis at Clearview Regional Medical Center in Monroe, Georgia (“Clearview

Regional”). CW 14 reported to Barrow Regional CEO Blake Watts (“Watts”) who reported

directly to Chris Hilton (“Hilton”). CW 14 provided information regarding the inappropriate

admission of patients to the hospitals as inpatients.

54. Confidential Witness #15 (“CW 15”) was employed by HMA at Barrow

Regional as an Emergency Department nurse from July 2009 until June 2011. CW 15

reported directly to the Assistant Director of Emergency Services, Jay Mollett (“Mollett”).

CW 15 provided information regarding the inappropriate admission of patients to the

hospitals as inpatients.

55. Confidential Witness #16 (“CW 16) worked at Clearview Regional and also

at Barrow Regional, for approximately six months, until April 2012 as a hospitalist. 6 CW 16

reported to Group Manager Bill Lytollis (“Lytollis”) at both hospitals, but during the last two

months of his/her employment, while continuing to report to Lytollis at Barrow Regional,

CW 16 also reported to Dr. Jeff Lamp (“Lamp”), the Medical Director at Clearview Medical.

Lytollis reported to Watts, CEO at Barrow Regional, and J.T. Barnhart (“J.T. Barnhart”)

CEO at Clearview Regional. CW 16 provided information regarding HMA’s mandate to

inappropriately admit patients to the hospital whenever possible and to inappropriately

upgrade patient status from observation to inpatient status.

6 A “hospitalist” is a physician who specializes in treating hospitalized patients and is a specialist in inpatient medicine.

- 18 -


56. Confidential Witness #17 (“CW 17”) worked at Clearview Regional for

approximately 18 months until February 2012, as a hospitalist. CW 17 reported to Medical

Director Lamp. CW 17 provided information regarding the pressure HMA put on physicians

to admit patients even when not medically necessary, as well as the manipulation of patient

diagnoses in order to boost admissions.

57. Confidential Witness #18 (“CW 18”) was employed by HMA as the

Emergency Department Director at Jamestown Regional Medical Center (“Jamestown

Regional”), located in Jamestown, Tennessee, for approximately three years, until August

2011. As the Emergency Department Director, CW 18 was responsible for overseeing the

overall workings of the Emergency Department. CW 18 reported to Jamestown Regional

CEO Kim Anthony (“Anthony”) and Director of Nurses Amy Regan (“Regan”). CW 18

provided information regarding HMA’s admissions quotas, the pressure to admit patients and

the improper admission of patients.

58. Confidential Witness #19 (“CW 19”) worked at Barrow Regional in Winder,

Georgia, as the Director of HIM from July 2009 until September 2011. As Director of HIM,

CW 19 had direct oversight for all functions and staffing within the HIM department, and

was responsible for confirming that patient charges matched their DRG, and coding the

charges. In addition, CW 19 was appointed the RAC coordinator and contact for Barrow

Regional, responsible for assuring that Medicare claims were properly billed. CW 19

reported to Barrow Regional CFO Jared Whipkey (“Whipkey”), who reported to CEO Watts

who, in turn, reported to Division President Alan Levine (“Levine”). CW 19 provided

- 19 -


information regarding HMA’s inappropriate admission of patients and the submission of

bills to Medicare for the inappropriately admitted patients.

VI. SUBSTANTIVE ALLEGATIONS

A. HMA and the Medicare Program

59. The Medicare Program, 42 U.S.C. 1395, et seq ., (“Medicare”) provides

reimbursement to providers of medical services for individuals covered under the program.

Institutional care, such as hospital, skilled nursing facility, or home health care, is

reimbursed pursuant to Medicare Part A. Most hospitals, including HMA’s hospitals, derive

a substantial portion of their revenue from Medicare. HMA, as an operator of hospital

facilities and a Medicare participant, must comply with the requirements of Medicare for

assessing and admitting patients to its facilities in order to properly receive reimbursement

from Medicare.

60. When a patient suffering from a medical condition seeks treatment at a

hospital, physicians have three choices with respect to disposition: (1) admit the patient to

the hospital as an inpatient; (2) admit the patient to the hospital on observation status; (3)

discharge the patient after immediate treatment. Both inpatient and observation status place

patients in a bed in the hospital and both may include one or more overnight stays. In

general, inpatient admission is reserved for patients in need of higher intensity of service

based on their diagnosis, while observation status patients require less intensity of service or

are still in diagnostic stages to determine whether inpatient admission will be necessary.

Observation status requires patients to be in the hospital receiving care for a minimum of

eight (8) hours and, with few exceptions, a maximum of forty-eight (48) hours.

- 20 -


61. The Medicare Benefit Policy Manual at Chapter 1 – Inpatient Hospital

Services Covered Under Part A discusses the definition of inpatient for purposes of Medicare

reimbursement. As Paragraph 10 states: “Patients covered under hospital insurance are

entitled to have payment made on their behalf for inpatient hospital services.” It further

states: “An inpatient is a person who has been admitted to a hospital for bed occupancy for

purposes of receiving inpatient hospital services. Generally, a patient is considered an

inpatient if formally admitted as inpatient with the expectation that he or she will remain at

least overnight and occupy a bed even though it later develops that the patient can be

discharged or transferred to another hospital and not actually use a hospital bed overnight.”

62. The Medicare Claims Processing Manual, Chapter 4, at Paragraph 290.1

provides an overview of the observation level of care: Observation Services Overview

states: “Observation care is a well-defined set of specific, clinically appropriate services,

which include ongoing short term treatment, assessment, and reassessment, that are furnished

while a decision is being made regarding whether patients will require further treatment as

hospital inpatients or if they are able to be discharged from the hospital. Observation

services are commonly ordered for patients who present to the Emergency Department and

who then require a significant period of treatment or monitoring in order to make a decision

concerning their admission or discharge. Observation services are covered only when

provided by the order of a physician or another individual authorized by State licensure law

and hospital staff bylaws to admit patients to the hospital or to order outpatient services.”

63. As with inpatients services, “Observation services must also be reasonable

and necessary to be covered by Medicare. Only in rare and exceptional cases do reasonable

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and necessary outpatient observation services span more than 48 hours. In the majority of

cases, the decision whether to discharge a patient from the hospital following resolution of

the reason for the observation care or to admit the patient as an inpatient can be made in less

than 48 hours, usually in less than 24 hours.”

64. The Medicare Benefit Policy Manual, at Chapter 6, Paragraph 20.6 B

provides further support in this regard: “When a physician orders that a patient receive

observation care, the patients’ status is that of an outpatient. The purpose of observation is to

determine the need for further treatment or for patient admission. Thus, a patient receiving

observation services may improve and be released, or be admitted as an inpatient . . . .”

65. Medicare reimbursement for inpatient services is substantially greater than

reimbursement for observation services. Both inpatient and observation services are

reimbursed under Prospective Payment Systems. Medicare inpatient reimbursement is based

upon Diagnosis Related Groups (“DRG’s”) and based upon the patient’s diagnosis.

66. DRG’s refer to a patient classification system adopted by Medicare in 1983

and are based upon distinct diagnosis groupings. This system provides a means for relating

the type of patients a hospital treats with the associated costs of treating the patient. DRG’s

are based upon the patient’s principal diagnosis, gender, age, surgical and diagnostic

procedures, discharge status and the presence of complications or co-morbidities. Medicare

utilizes this system to reimburse acute care hospitals prospectively utilizing a predetermined

rate per case, based upon the patient’s principal diagnosis. Medicare’s belief is that patients

within a given DRG category are clinically similar having common demographic, diagnostic,

and therapeutic attributes and use approximately the same proportion of hospital resources

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and have similar acuity levels. If other co-morbidities (diagnoses) are documented or other

procedures are performed, the DRG can change and the prospective payment in turn

increased.

67. Medicare reimburses outpatient services, including observation services,

based upon Ambulatory Payment Classifications (“APC’s”). The Outpatient Prospective

Payment System (“OPPS”) was introduced by Medicare in 2000 and since then, all

outpatient services are assigned to one of approximately 900 categories and each APC is

assigned a national payment rate that is based upon the median cost for all services within

the APC.

68. Medicare reimbursement for inpatient services is substantially greater than

reimbursement for observation services. By way of example, Medicare reimburses the

following DRG’s, typically admitted through the Emergency Department, with an average

mean length of stay (“AMLOS”) of three (3) days or less as follows:

DRG Description AMLOS Number

282

Acute myocardial infarction, discharged alive

2.9 without CC/MCc

313

Chest Pain

2.1

203

Bronchitis and Asthma without CC/MCC

3.3

287

Circulatory Disorders except acute myocardial

3.1 infarction with car cath without MCC

69

This compares to Medicare reimbursement for observation services where the

patient was admitted to observation status via the Emergency Department of approximately

$529.00 excluding beneficiary co-insurance amounts. If the patient is admitted directly from

a physician’s office or a hospital outpatient clinic to observation status, Medicare

DRG Reimbursement

$4,921.39

$3,252.44

$3,644.25

$6,211.78

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reimbursement approximates $286.00. Medicare does not make a separate payment for

observation services for less than eight (8) hours of observation care. It is important to note

that clinically, many Medicare beneficiaries are admitted to observation status initially to

evaluate their condition fully to determine if inpatient admission is required.

70. As the above demonstrates, the reimbursement rate for inpatient admissions is

substantially more than the reimbursement rate for an observation patient. Thus, a

tremendous financial incentive existed for Defendants to improperly admit patients in order

to spearhead HMA’s turnaround. For example, if a patient is improperly admitted as an

inpatient, when admission to observation status is clinically indicated, payment will be made

by Medicare inappropriately in accordance with the DRG based upon the principal diagnosis,

which is significantly higher than the observation payment to which HMA would be entitled

under OPPS. This, too, leads to inappropriate classifications of inpatient and outpatients

revenue of the HMA facility’s Medicare Cost Report and overpayments to which the HMA

facility would not be entitled.

71. Medicare may only reimburse hospitals for treatment that is “reasonable and

necessary. . . .” 42 U.S.C. 1395y(a)(1)(A). Medicare-participating hospitals are required to

ensure services provided are, in fact, medically necessary. In general, if a patient can be

safely treated without inpatient admission ( e.g. , through outpatient observation) that patient

must not be admitted as an inpatient. 7 Additionally, Medicare participants are required to

7 Prior to 2008, the Centers for Medicare and Medicaid Services (“CMS”) limited the use of observation status to just three conditions: heart failure, heart attack, and pneumonia. In 2008, however, CMS broadened the scope of ‘observation’ status to include all diagnoses. This expansion in the scope of observation status would be expected to increase observation rates at HMA hospitals after 2008, but it did not. See ¶117.

- 24 -


disclose all known errors and omissions in their claims for reimbursement, and failure to do

so is a violation of law. 42 U.S.C. 1320a-7b(a)(3).

72. HMA recognized the requirement established by CMS that hospital services

provided to Medicare beneficiaries must be medically necessary. In fact, in its 2009, 2010

and 2011 Form 10-K, HMA stated, in pertinent part:

In accordance with the requirements of CMS’ Services Conditions of Participation, hospital services provided to Medicare and Medicaid beneficiaries are evaluated to ensure that the care meets professionally recognized standards of practice and are medically necessary. Our hospitals are required to conduct utilization review activities, including medical necessity reviews (admission, continued stay and retrospective), discharge planning and quality improvement initiatives to address identified trends, extended lengths of stay and high cost cases. Additionally, many managed care organizations require utilization reviews.

73. According to HMA’s 2010 Form 10-K, Medicare payments made up 32% of

HMA hospital revenue during both 2009 and 2010. HMA’s 2011 Form 10-K states that

Medicare payments made up 31% of HMA hospital revenue in 2011.

B. During the Class Period, Defendants Artificially Inflated HMA’s Financial Results and Misrepresented HMA’s Future Business Prospects

1. Prior to the Class Period, HMA Faced Serious Financial Challenges

74. As set forth above, prior to the start of the Class Period, HMA was a highly

leveraged company facing declining admissions. On January 17, 2007, the Company

announced it would take a $200 million charge for bad debt expense as an additional reserve

for self-pay receivables. In conjunction with this, the Company also announced a large

recapitalization plan. The recapitalization, executed in March 2007, included payment of a

special $10 cash dividend to all shareholders of record. As part of the recapitalization plan,

- 25 -


HMA borrowed $3.25 billion of new senior secured credit facilities to refinance existing debt

and pay shareholders the one-time $10 cash dividend. As a result of its March 2007 debt-

financed dividend recapitalization, HMA became one of the most highly leveraged hospital

companies in the United States.

75. At the same time, HMA also announced changes to the way it reserved for

self-pay receivables, so that the Company would reserve 75% against self-pay receivables

immediately, and 100% after the account at issue aged 300 days. With its new policy in

place, the company continued to experience an increase in self-pay patients, a deterioration

in the collectability of uninsured accounts, and correspondingly had under reserved for bad

debt expense. For example, on July 31, 2007, HMA announced it was taking a charge of $39

million, recorded as an additional reserve, to reflect a decline in the collectability of accounts

receivable from uninsured patients.

76. Market analysts took note. On March 19, 2008, Moody’s investors’ service

downgraded HMA’s corporate family rating to reflect declining profitability and cash flows,

which had led to debt reduction and credit metric improvements below Moody’s previous

expectations. Moody’s stated that since the recapitalization of the Company, including the

payment of the $2.4 billion special dividend in the first quarter of 2007, HMA’s margins

were pressured by rising bad debt expense and weak volume growth. Moody’s also pointed

out that HMA was contemplating several divestiture and joint venture opportunities that

would provide the company with between $200 and $400 million in proceeds.

77. On May 15, 2008, HMA announced plans to offer in a private placement as

much as $225 million in convertible senior subordinated notes due in 2028. The Company

- 26 -


stated it would use the proceeds to repurchase part of its 1.5% convertible senior

subordinated notes due in 2023. At the time, Moody’s rated the company’s debt B1, four

levels below investment grade, and an equivalent B+ by Standard & Poor’s.

2. Newsome Joins HMA with a “Strategy” for Turning the Company Around

78. On September 15, 2008, following the resignation of HMA’s former CEO

Burke Whitman, the Company announced the Board of Directors’ appointment of Newsome

as the Company’s President and CEO, and as a member of the Board. Newsome, who came

to HMA from Community Health Systems, told investors the strategy for improving HMA’s

financial performance would focus on three operational initiatives: (1) improving the

Company’s Emergency Department operations; (2) focusing on physician recruitment and

development throughout the Company; and (3) market service development. These three

initiatives were held out to the market as the driving reason behind HMA’s apparent Class

Period financial success. For example, on February 8, 2010, Newsome spoke at the UBS

Global Healthcare Services Conference, and stated:

Now back in October of 2008, I laid out a very clear and measurable plan of how we were going to tackle volumes and improve the performance of the Company. There is a very simple and very succinct in how [sic]we approach that. The three areas that I focused on as I came in in 2008 was [sic] the Emergency Department, which is truly the front door to the hospital, physician recruitment and development throughout the organization, where we have had a deficit of performance of recruiting for a number of years. And the third area is market service development, footprint expansion and actual service enhancements and additions in certain markets.

79. These three initiatives became Defendants’ public mantra and were touted

throughout the Class Period in Defendants’ public statements, and the market was repeatedly

told the three initiatives were driving the Company’s seemingly improved financial results

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and future business prospects. For example, on October 27, 2009, Newsome stated in a

Company press release:

“Our growth in patient volumes and operating earnings continued during the third quarter, as we benefited from the successful implementation of our proven operating strategies that focus on Emergency Department operations, physician recruitment and service development,” said Gary D. Newsome, HMA’s President and Chief Executive Officer. “We are in the relatively early stages of implementation of these three key operating initiatives, and we have additional opportunities going forward for the remainder of 2009 and throughout 2010.”

80. By the start of 2009, HMA continued to experience declining operating

performance as it lagged far behind the for-profit hospital industry in organic volume

growth. In need of a financial turnaround, Defendants created and oversaw a scheme

whereby the Company utilized improper Emergency Department admissions, which included

mandated admission quotas, increased pressure on HMA physicians to admit Medicare

patients who did not meet admission criteria, and use of the Company’s Pro-MED software

to flag patients who could be improperly admitted, to artificially boost HMA’s financial

results and, correspondingly, its stock price.

81. Pro-MED is a software documentation system used by HMA to gather

information about patients entered by Emergency Department physicians and nurses.

According to Putter, the information gathered in the Pro-MED system:

[G]ives us the ability to give the most appropriate coding for our coder, so that we can draw up the most appropriate bill. So that we can get paid the most appropriately for what we give. So it really helps in documenting, because in healthcare if it is not documented, you didn’t do it. So it really provides an excellent tool for documenting. In fact, before that record is ever closed, it is complete. So there is no -- you don’t have to worry about going to the physician, please, we forgot to document it. Not only does it help on coding for us, it helps with the coding on a physician, because now when the

- 28 -


physicians bill, their billers have all the information as provided by the Pro-MED system. 8

82. Notably, HMA had used Pro-MED software for more than a decade. One of

Newsome’s immediate priorities when he became CEO in September 2008 was to “update”

and “upgrade” Pro-MED because the “guidelines used by the physicians also needed to be

made uniform to ensure consistent treatment processes throughout the hospital thereby

establishing comparable benchmarks.” The Pro-MED upgrade was completed by the end of

the first quarter of 2009. HMA management predicted at the Cowen & Company Healthcare

Conference on March 16, 2009, that “the improvements that [HMA will] get from this [Pro-

MED] initiative will increase [Emergency Department] admit rates, over time.” As stated by

Defendants at the Bank of America Securities Investor Conference on May 12, 2009, once

the Pro-MED upgrade was complete, HMA became “aggressively involved” in training

Emergency Department physicians, clinical staff and hospital CEOs throughout the

organization. Defendants’ statements came true, as HMA pointed out during investor

conferences during the Class Period:

We have led the peer group for four consecutive quarters in admissions growth. And this is truly as a result of our emergency room initiatives. (Statement by Kelly Curry, HMA CFO and Executive Vice President, at the UBS Global Healthcare Conference on February 8, 2010)

* * *

“. . . with proper diagnostic testing and certain activities generated through this Pro-MED system that I discussed previously, we are actually showing a higher level of service, a higher level of admissions coming out of the emergency room . . . . It’s not a significant increase in acuity. It’s just a

8 Putter discussed the Pro-MED System during HMA’s Analyst Meeting day on March 25, 2010.

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different way of dealing with who comes in our front door, anyway.” (Statement by Joe Meek, HMA Treasurer and Vice President, at the Deutsche Bank Healthcare Conference on May 19, 2009).

83. The “upgrade” to Pro-Med was not limited to the software and was in no way

benign. Through the aggressive training of physicians, and pressure on physicians to

increase admissions, HMA was able to manipulate the Pro-MED system by ensuring

physicians entered data that would enable the system to recommend the patient be admitted

to inpatient care. Indeed, as discussed below, the 60 Minutes Segment described Pro-MED

as a system to control physicians and increase patient admissions whereby “HMA

customized the program to automatically order an extensive battery of tests -- many of them

unnecessary -- as soon as a patient walked into the emergency room.” As stated by former

HMA physician Scott Rankin (“Rankin”) during the 60 Minutes Segment, Pro-MED “has

nothing to do with patient safety and patient care. It has everything to do with generating

revenues.”

C. Defendants Boost HMA’s Admissions Through Medicare Fraud

84. In need of a financial defibrillation, and in an effort to artificially inflate

HMA’s sagging financial performance, throughout the Class Period, HMA had a corporate

policy of mandating admission of Medicare patients to its hospitals, even when unnecessary,

in order to reach admissions quotas and maximize the Company’s receipt of Medicare

reimbursements. For example, HMA admitted patients: (1) to observation status when they

should not have been admitted at all; and (2) to inpatient status when they should have been

admitted to observation status.

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85. According to CW 9, the corporate policy went into effect approximately

towards the end of 2009, when HMA suddenly changed how admissions generated through

the Emergency Department were handled. CW 9 recalled HMA increased pressure on

physicians by hospital administrators to admit more patients.

86. Many of the improperly admitted patients arrived at HMA hospitals via the

Emergency Department and were Medicare or Medicaid beneficiaries. CW 5 stated that

almost all of the inappropriately admitted patients were Medicare or Medicaid patients, and

CW 6 stated that “99% were Medicaid or Medicare recipients.” CW 8 stated there was an

emphasis on admitting patients over the age of 65. According to CW 5, patients who arrived

with private health insurance or no insurance were screened much more diligently than the

Medicare/Medicaid patients. Similarly, CW 16 stated the Emergency Department physicians

were told to focus on patients over age 65, because those patients had “guaranteed

insurance,” meaning Medicare.

87. The majority of the improperly admitted patients were potential cardiac

patients, who arrived in the Emergency Department complaining of chest pain, or asthmatics.

These patients were automatically admitted to either observation or inpatient status. For

example, CW 1 stated that the majority of patients who were improperly billed at inpatient

rates were cardiac and asthmatic patients. CW 6 stated that cardiac patients and those

complaining of chest pain or shortness of breath were frequently admitted as inappropriate

observation patients and were considered “automatic overnights,” but that “9 out of 10 were

illegitimate.” CW 8 stated there was an emphasis on admitting elderly patients, particularly

those complaining of chest pain or abdominal pain. CW 5 also stated that most of the

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patients who were inappropriately admitted to either inpatient or observation status were

either cardiac patients or patients who arrived via the Emergency Department complaining of

chest pain. In fact, CW 5 estimated that 50% of both the inpatient and observation patients

at Stringfellow Memorial were inappropriately admitted.

88. CW 16 confirmed that the largest number of inpatients who were

inappropriately admitted were those arriving in the Emergency Department complaining of

chest pain. When CW 16 was working, she/he would suggest that the Emergency

Department call the cardiologist on call and, according to CW 16, 9 times out of 10 the

cardiologist on call would state that if the patient had been evaluated in the prior 6 months,

the patient did not need to be admitted to the hospital, even though the Emergency

Department was pushing to admit the patient.

89. The improper admission of patients was rampant at HMA hospitals and

occurred on a daily basis. According to CW 1, at least five patients per shift were

legitimately under observation status, but were fraudulently being documented as inpatient in

order to bill them to Medicare at a higher rate. CW 6 stated two or three patients per shift

were inappropriately admitted to observation and that there were “tons” of inappropriately

admitted observation patients. Similarly, CW 4 stated that at least three to four patients per

shift were inappropriately admitted into observation when they did not meet the criteria to be

characterized as observation patients.

90. Although there were patients inappropriately admitted into observation, HMA

enforced a top-down, mandated policy of increasing inpatient admissions, which included

improperly admitting observation patients to inpatient status regardless of medical necessity.

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Both CW 1 and Alford confirmed that HMA focused on decreasing observation numbers and

increasing inpatient admission numbers and that Medicare was billed at the more expensive

inappropriate inpatient rates.

91. CW 19, the Director of HIM at Barrow Regional who was responsible for

assuring Medicare claims were billed correctly, also confirmed that there were “many”

inappropriate patient admissions that were billed to Medicare. According to CW 19, the

HIM department coded the patient files and then sent the files to the Barrow Regional Patient

Financial Services Department, which then billed Medicare directly. CW 19 also received

RAC letters demonstrating that Medicare was billed for inappropriate patient admissions or

procedures and demanding refunds for the improper billing. 9 According to CW 19, the RAC

letters, which she/he received “quite often,” stated that Barrow Regional “had not followed

inpatient admitting criteria.” CW 19 stated that she/he was responsible for investigating why

the patients were considered inappropriate for admission and that many of the patients were

patients who complained of chest pain and were given various tests, such as blood tests and

x-rays, that came back negative.

92. CW 5 stated that when cardiac patients arrived at the hospital, EKGs and

other tests were performed and often came back as normal, but, the patients were admitted as

observation or inpatient in order to “boost up” the hospital’s census. CW 1 confirmed this

9 RAC is an acronym for “recovery audit contractor” representing an audit of health care providers on behalf of Medicare and Medicaid to ensure health care providers are not overbilling Medicare and Medicaid.

- 33 -


practice stating that EKGs and cardiac enzyme tests would be performed. The tests would

often come back as normal and the patient would be kept overnight to make sure everything

was okay. The doctor would then write up their orders as inpatient status even though those

patients did not meet the criteria.

93. Similarly, Alford stated that during January and February 2010, 70%-80% of

1-day inpatient stays for Medicare patients did not meet inpatient criteria. The majority of

these patients were cardiac patients who normally would receive outpatient procedures, but

they stayed overnight and were billed at inpatient rates.

94. According to CW 15, “Every patient was admitted on an inpatient basis.”

CW 15 explained that patients could have been brought in under observation and then

admitted as inpatients as need be, but that patients were being admitted directly as inpatients.

95. Citing a specific example of HMA improperly and unnecessarily admitting

Medicare patients to inpatient status, CW 1 recalled that in or around February 21, 2011, a

dialysis patient, who was healthy enough to be living at home carrying out day-to-day

activities, was referred to the Emergency Department from a dialysis center when they

discovered her/his graft was clotted. According to CW 1, the patient, who was on Medicare,

was admitted to inpatient status with a clotted AV graft, but the procedure could have been

performed on an outpatient basis, and therefore, at most the patient should have been in

observation status. On or about the same day, CW 1 noted that another Medicare patient was

admitted to inpatient status with chest pain, and chronic atrial fibrillation. CW 1 stated that

the patient had an “otherwise stable baseline,” all tests came back negative and the atrial

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fibrillation was managed with medication. According to CW 1, under these circumstances,

observation and not inpatient status was appropriate.

96. CW 11 also provided examples of patients who were inappropriately admitted

from the Emergency Department. According to CW 11, Twin Rivers saw quite a bit of these

inappropriate admissions. The hospital admitted patients “with nothing wrong with them.”

97. In order to further boost inpatient admissions numbers, HMA had a policy of

considering elderly patients as “automatic” inpatients. CW 1 witnessed the automatic

inpatient policy first-hand and stated that Ken Ward (“Ward”), Dallas Regional COO,

reviewed the list of Emergency Department visits with Vickie Boyd, the Director of HIM,

and Resource Management. To that end, CW 1 attended a meeting in Ward’s office where

presenting symptoms and treatments received were discussed. CW 1 recalled Ward

discussing a case involving a 65 year-old patient who had visited the hospital in the middle

of the summer not feeling well. The patient was released after receiving intravenous fluid

and Ward questioned why the patient had not been admitted because the patient was 65

years-old and on Medicare.

98. CW 6 also stated that elderly patients were considered “automatic inpatient.”

Because of this policy, CW 6 stated that the Emergency Department director at Dallas

Regional visited local nursing homes to solicit business in order to raise the inpatient census

at the hospital. The director even made arrangements with ambulance companies to provide

transportation for the nursing home patients to Dallas Regional. Alford confirmed that at

daily “ER” meetings, the administration stated that if a patient over the age of 65 visits the

Emergency Department with chest pain, that is an automatic inpatient admission. In addition

- 35 -


to the administration, these meetings were attended by CW 1, the nursing staff, and

physicians.

99. CW 9 also confirmed there was a focus within the Company on admitting

patients over age 65, because they were Medicare patients. Similarly, according to CW 10,

there was a focus on admitting patients over age 65 and these patients received special

attention in the admissions process.

100. CW 16 stated when anyone over the age of 65 who came into the Emergency

Department, even for a cut finger, a hospitalist had to be called. According to CW 16, the

Emergency Department Director, Baker, referred to the policy as “J.T. Barnhart policy” and

it was used as a way to increase insured admissions.

101. In addition to improperly admitting patients who arrived via the Emergency

Department, either to observation or inpatient status, HMA also improperly admitted patients

who arrived at the hospital for scheduled visits. For example, CW 3 stated that at Sebastian

River, approximately five patients per week who were scheduled for procedures at the

hospital, mostly cardiac/angioplasty patients, were incorrectly scheduled as inpatient instead

of outpatient. According to CW 3, angioplasty patients often left the hospital the same day

or within 24 hours just as outpatients did, and should have been coded as outpatients or same

day treatment, not as inpatients. The patients were coded as inpatients, however, because the

HIM department and physicians stated that the status was determined based on the type of

care, not the amount of time the patient spent in the hospital. According to CW 3, the

physicians’ definition of inpatient status would not meet guidelines set by the CMS.

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1. Data Demonstrates the Material Impact on Admissions Generated by Defendants’ Medicare Fraud

102. Objective data from two independent sources demonstrates that Defendants’

scheme to increase earnings through Medicare fraud had its intended effect. CtW Investment

Group (“CtW”) performed a detailed analysis of HMA hospitals’ emergency room admission

rates based on HMA’s own Medicare billing data, and determined that in 2009 alone, HMA

generated $40 million in excess Medicare billing as a result of inexplicably high admission

rates. In addition, CRT conducted its own detailed and extensive analysis of HMA’s

Medicare billing data and determined that in the period after management changed at HMA

(i.e. , after Newsome became CEO), increasing inpatient admissions and decreasing

observation admissions caused HMA to have “a statistically highly significant increase” in

HMA’s Medicare earnings. Both CtW’s and CRT’s data conclusions corroborate both the

existence and impact of Defendants’ fraud.

(a) The CtW Letters

103. During the Class Period, as set forth in correspondence dated November 16,

2011 from Richard W. Clayton III (“Clayton”), the Research Director at CtW Investment

Group (“CtW”), to Kent P. Dauten (“Dauten”), Chairman of HMA’s Audit Committee,

HMA admission rates began far exceeding those that could be explained by patient acuity or

hospital geography (the “November 16, 2011 Letter”). 10 A true and correct copy of the

November 16, 2011 Letter is attached hereto as Exhibit D . In follow-up correspondence

10 CtW is an investment group that works with pension funds sponsored by affiliates of Change to Win - a federation of unions representing over six million members – to enhance long-term shareholder value through active ownership.

- 37 -


dated January 17, 2012, Clayton, on behalf of CtW, again wrote Dauten and HMA (the

“January 17, 2012 Letter”). A true and correct copy of the January 17, 2012 Letter is

attached hereto as Exhibit E .

104. HMA hospitals owned and operated as joint ventures with physicians

exhibited markedly high excess Emergency Department admissions. In 2009 alone, data

indicated HMA’s excess admissions generated $40 million in exorbitant Medicare billing –

equivalent to roughly 25% of HMA’s 2009 net income. At the same time HMA was

experiencing an increase in admission rates, hospitals nationwide experienced an average

decrease of 3% in Emergency Department admission rates.

105. As set forth in the November 16, 2011 Letter, of HMA’s 52 hospitals that had

at least 250 Emergency Department admissions and a positive number of outpatient-only

encounters in the Emergency Department in a given fiscal year, nearly two-thirds, or 34, of

these facilities experienced an increase in Emergency Department admission rates from fiscal

year 2008 to 2009. In calculating the hospital’s Emergency Department admission rate, CtW

divided the observed total of Emergency Department admissions within a given fiscal year

by its corresponding total of Emergency Department encounters for that year. Emergency

Department encounters included those patients who visited the Emergency Department and

were admitted as inpatients to the hospital as well as those patients who visited the

Emergency Department and were discharged without being admitted as inpatients.

106. CtW also completed a detailed analysis comparing HMA’s admission rates to

nationally-based expectations. The analysis revealed startling results demonstrating the

impact of Defendants’ fraud. Specifically, the analysis revealed that in 2009, 42 HMA

- 38 -


hospitals exceeded their expected admission rates, given their particular patient case mixes

and locations. Moreover, ranking each hospital according to the percent by which it

exceeded or fell below expected rates, 27 HMA hospitals placed at the 80th percentile or

above nationally in 2009. This represented an alarming increase of nearly 70% compared to

2008, in which only 16 HMA hospitals were at or above the 80th national percentile. Put

simply, Defendants’ fraud of improperly increasing patient admissions when not medically

necessary caused a sea change in HMA hospital admission rates.

107. In undertaking the analysis, CtW calculated the hospitals’ expected

Emergency Department admission rates by first calculating the national average rate by

fiscal year for each combination of the following patient and hospital based characteristics:

patient age, patient sex, patient primary diagnosis, and hospital rural or otherwise

designations. Thereafter, these national rates were multiplied by the corresponding number

of Emergency Department encounters at each qualifying hospital within the given

characteristic combination group; providing the number of expected Emergency Department

admissions for that group. To determine the overall number of expected Emergency

Department admissions at a hospital, the expected Emergency Department admissions total

for all applicable groups were aggregated for the given fiscal year. The analysis provided

two totals for the facility – the total number of expected Emergency Department admissions

and the actual number of Emergency Department admissions. These numbers were then

compared based on the percentage by which the actual number of admissions exceeded or

fell below the expected Emergency Department admission totals.

- 39 -


108. Considering that the difference in Medicare reimbursement between an

inpatient stay and in outpatient observation visit can amount to approximately $5,000 per

claim, applying this amount to HMA’s nearly 8,000 likely excess admissions in 2009 would

result in approximately $40 million in reimbursements, which represents nearly 25% of

HMA’s fiscal year 2009 profit. Applied to all of HMA’s improper and excessive admissions

observed at HMA facilities during the Class Period, the overpayment would exceed $40

million. Because, as HMA Treasurer and Vice President Meek admitted above, the increases

in Medicare emergency admissions could not be explained by increases in patient acuity, the

excess Medicare billing went directly to HMA’s bottom line.

109. Moreover, a high percentage of HMA’s excess Medicare admissions were

concentrated in HMA’s joint venture hospitals. As reiterated throughout the Class Period,

establishing joint ventures with physicians was an integral component of HMA’s physician

recruitment and retention strategy – one of the Company’s key initiatives implemented in

2008. In the joint venture scenario, physicians buy an interest in the hospital, becoming an

owner and investor in the hospital and thereby having a stake in the hospitals’ admissions

and profit. As of March of 2010, HMA had established joint ventures with approximately

600 physician investors.

110. Further, in its third quarter 2011 Form 10-Q, filed on October 25, 2011, HMA

identified 28 joint venture hospitals. Out of HMA’s 28 joint venture hospitals, CtW’s

analysis set forth in the November 16, 2011 Letter, showed 19 – or 68% – exhibited

Medicare emergency admission rates materially above expectations in 2009. See Exhibit D.

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111. On December 12, 2011, Dauten, on behalf of HMA, responded to the

November 16, 2011 Letter. 11 Notably, Dauten, who copied HMA’s Board of Directors on

his response, did not deny CtW’s contentions. Dauten did, however, state “HMA has

retained outside special counsel with considerable expertise and experience and is devoting

significant resources to responding to the subpoenas and to investigating certain of its

business practices related to them.” Dauten further stated that HMA’s Board of Directors

met with and had received status reports from outside special counsel and that the full Board

would directly monitor outside special counsel’s work.

(a) The CRT Report

112. On December 3, 2012, a day after the 60 Minutes Segment aired, the 161

page CRT Report was published, analyzing HMA’s admissions rates before, during and after

the Class Period and describing in detail how HMA’s admission rates changed dramatically

after Newsome took over as HMA’s CEO in 2008, as well as how these changes led directly

to higher earnings at HMA hospitals. See Exhibit B.

113. More specifically, CRT utilized Medicare data and a sophisticated statistical

analysis to examine HMA’s admission, observation and EBITDA metrics from 2006 through

2010. CRT then compared HMA hospitals owned over the 2006 to 2010 period to

comparable local competitors in the same states where HMA operates. CRT concluded that

HMA had a statistically significant “‘short stay’ and an ‘observation’ rate problem, i.e., high

short stays and low observation rates” when compared to local competitors and state-by-state

11 Attached hereto as Exhibit F is a true and correct copy of the December 12, 2011 letter from Dauten to CtW.

- 41 -


for-profit peers. The change began to manifest when Newsome became HMA’s CEO in

2008 and intensified in 2009 and 2010. Not surprisingly, the increase in inpatient short stays

resulted in higher Medicare earnings for the Company. The CRT Report conclusions include

the following:

64% of HMA markets had LOWER observation rates over the 2006-2010 period (lower observation rates are ‘bad’); 53% of HMA markets had HIGHER short stay rates over the 2006-2010 period (higher short stay rates are ‘bad’); and 38% of HMA markets had BOTH lower observation AND higher short stay rates over that same period (the combination is ‘worse’). CRT Report at 1.

• Our data clearly shows not only were HMA’s observations lower/short stays higher, but that significant change happened in 2008/2009. Id.

• On a case-mix adjusted basis, HMA’s hospitals had a statistically significantly HIGHER rate of admission of Medicare patients who came through the ER as a percent of all Medicare heads in the beds in all years. Id.

• Our most troubling finding: at precisely the same time as obs rates and short stays went in the ‘wrong’ direction, there was a statistically highly significant increase in HMA’s hospital level EBITDA. Id.

• Summing it up: We have connected the dots between troubling admit patterns and profits at the local HMA hospitals at PRECISELY the same time, i.e., in the period AFTER management changed at HMA. Id.

114. The CRT Report also corroborates CtW’s conclusions that HMA’s joint

venture hospitals exhibited suspicious admission rates during the Class Period. For example,

at East Georgia Regional Medical Center, an HMA joint venture hospital facility, there was a

dramatic increase in Emergency Department admission rates, as compared to its peers, which

coincided with Newsome’s 2008 arrival at HMA.

- 42 -


East Georgia Medicare ER Admit Rate 28.0%

26.0%

24.0%

22.0%

20.0%

18.0%

16.0%

14.0%

12.0%

10.0%

East Georgia Regional

Medical Center JV

2008

—11—Emanuel Medical

Center

Burke Medical Center

2006 2007 2008 2009 2010

Sources: AHD custom dataset and CRT Capital Group LLC estimates

115. At several other hospitals, observation rates declined while the hospital was

affiliated as a joint venture with HMA, and then rose dramatically once the joint venture with

HMA was over. See , e.g., Lake Norman, NC facility, Id. at 19, Midwest Regional. Id. at 22,

Pasco Regional. Id. Inpatient rates at HMA’s joint venture with Summit Hospital showed a

noticeable increase, as compared to its peer hospital, starting in 2008 as well.

Summit MedicareShort Stay Rate 40.

15 101

5%

5fl1flhit m edical C enter IV 2N7~

12/31 1i ho s pital sort Smith

20IJ6 2O07 aOIJE: 200 9 aOliJ

Summit Medicare 1-Day Stay Rate

1F.0 14.0% 1.0; 5r1r1 it e di ca 10.0

- JV -200

riry Ho s p i ta l Fort M% Smith

4.0%

0.0 006 7007 MN 2009 M10

“By 2010, its short stays as a percentage of total Medicare inpatient cases reached an

astounding 37% , nearly double the rate of Mercy Forth Smith’s 19.8%, the next closest

- 43 -


hospital...Summit was one of the hospitals mentioned in the 60 Minutes segment.” CRT

Report at 7.

116. CRT also analyzed the hospitals that were the subject of Meyer’s report. In a

section of the CRT Report entitled “A focus on the Meyer Hospitals: We See Why Dallas

Regional, Physicals Regional and Durant Could Be Problematic,” the CRT Report confirmed

what Meyer detailed in his memorandum disclosing the existence of the Medicare fraud and

in his qui tam complaint against HMA—observation rates are “very” low and short stay/1

Day Stay Rates (or inpatient rates) are higher than the comparable hospitals in the area. Id.

at 4-6.

117. Finally, the CRT Report makes a very salient point regarding an important

change in Medicare rules in 2008. “In 2008, CMS broadened the scope of ‘observation’

status to include ALL diagnoses. Prior to 2008, CMS limited the use of observation status to

just three conditions (heart failure, heart attack, pneumonia)...Therefore, we would expect

there to be an underlying upward trend in OBS RATE in 2008 through 2010 .12 A flat or

declining OBS rate after this 2008 expansion in applicability would make us very suspicious

that some other trend was at work at that hospital.” Id. at 13. HMA’s admission rates were

the opposite--consisting of lowering observation rates and increasing inpatient admissions.

So, not only were HMA’s admission rates inconsistent with its peer hospitals, they were

inconsistent with Medicare policy as well.

12 CMS is an acronym for Centers for Medicare and Medicaid Services.

- 44 -


2. HMA Pressured Physicians to Admit Patients and Increase Patients’ Length of Hospital Stay

118. HMA physicians were pressured to follow the fraudulent inpatient policies

and meet admissions quotas. For example, CW 4 recalled physicians were pressured by

HMA’s corporate office to increase patients’ length of stay to meet census requirements.

According to CW 4, HMA had specific census numbers that Dallas Regional had to meet or

the hospital would lose proportional funding from the government at approximately $1.2

million per year.

119. According to CW 9, there was a general pressure to increase admissions

across the board and physicians were encouraged to increase testing to find reasons to admit

patients. CW 8 confirmed the growing pressure from HMA to admit patients whenever

possible. As an example, CW 8 stated that around the end of 2009, HMA initiated daily

meetings that she/he attended as the Emergency Department medical director, along with

administrators and the nursing staff, aimed at increasing hospital admissions. During the

meetings, attendees reviewed Emergency Department medical records from the previous

day, with the goal of finding patients who the administrators believed should have been

admitted to the hospital. Prior to instituting the daily meetings, CW 8 and her/his colleagues

had been meeting once a month or once a quarter or on an informal basis to discuss whether

certain patients should have been admitted to the hospital. Further, CW 8 stated if the

admission rate fell significantly below approximately 20-22%, on even one day, the

administrators became unhappy and put pressure on him/her to keep admissions up.

120. CW 10 also confirmed the relentless pressure she/he felt from HMA

administration to admit a greater number of patients through the Emergency Department.

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According to CW 10, there was a culture of requiring more admissions at HMA. Non-

physician administrators were telling physicians how to practice medicine and putting

pressure on nursing staff to increase admissions as well. Similarly, CW 17 stated there was

“a pattern of pressure by HMA” to admit patients. According to CW 17, HMA

administration was pressuring all physicians, including the Emergency Department

physicians, to increase admissions, to avoid discharging patients and to prevent patient

transfers even when the transfers were medically necessary. CW 17 added that most of the

patients at the hospital were on Medicare.

121. According to CW 16, HMA administration continuously demanded

physicians admit patients who did not need to be admitted and prevented physicians from

discharging or transferring patients from the hospital whenever possible. In fact, CW 16

stated that J.T. Barnhart called Lytollis whenever the census was low and in turn, Lytollis

would instruct CW 16 and the other hospitalists to call the Emergency Department every

hour to “[r]ound up some patients, see if they have anything available to increase the

census.” CW 16 stated that she/he was asked to admit patients inappropriately on an

inpatient basis, but CW 16 refused to do so. In addition to experiencing this pressure

firsthand, CW 16 was told by a colleague who was an Emergency Department physician that

administration was strongly pressuring Emergency Department physicians to do “whatever”

they had to do to “get admissions up.”

122. While working in the Emergency Department at Stringfellow Memorial, CW

5 heard the Stringfellow Memorial CEO, John Gallagher, tell Dr. David Lee Smith that the

Emergency Department census was low and Dr. Smith needed to admit more patients.

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According to CW 5, Dr. Smith stated that he would not admit inappropriate patients and that

shortly thereafter, Dr. Smith resigned from HMA.

123. CW 6 also stated that when the inpatient census was getting low, more

inappropriate patients would be admitted to the hospital. Conversely, CW 6 noticed that

when the census was high, fewer questionable patients were taken into observation.

124. CW 11 also stated there was a “concerted effort to admit patients” from the

Emergency Department and that the hospital “was trying to keep the census up.” According

to CW 11, every time the nurses discharged a patient, another was waiting in the Emergency

Department to replace them. The hospital would “push ‘em out” and “get ‘em in all day

long.”

125. CW 13 also stated “there was a push to admit more patients.” According to

CW 13, the push to admit more patients began when HMA acquired Shands Regional. CW

13 stated that prior to HMA’s acquisition, the hospital had approximately three patients per

day admitted to the hospital from the Emergency Department, but after HMA took over,

Shands Regional admitted approximately eight to ten patients from the Emergency

Department per day. CW 13 also noted that the hospital’s census was generally about 12-16

patients on any given day before HMA’s acquisition, but that after HMA took over, “all 25

beds were always full.” According to CW 13, the change in admissions was a “big culture

shock.” Importantly, CW 13 noted the patients being admitted from the Emergency

Department were patients who would never have been admitted prior to HMA’s acquisition.

CW 13 stated, “It was bad.”

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126. CW 14 confirmed that HMA had a policy of requiring that inpatient

admissions go up and observation patients go down and that there was pressure from HMA

to keep their hospital census up. According to CW 14, this policy came directly from Hilton,

who is the Vice President of Operations Finance for HMA and who visited Barrow Regional

from HMA’s corporate headquarters in Florida.

127. According to CW 18, Jamestown Regional had admissions “quotas” and the

“bottom line was that there were admissions that didn’t need to be.” CW 18 also explained

that when she/he began working for HMA in 2008, the Company had goal of admitting 16%

of patients aged 65 or older from the Emergency Department as inpatients, but that during

her/his employment, the Company increased the goal to a 20% admit rate for patients 65 or

older. CW 18 stated that the quotas for inpatient admissions and the pressure to admit

patients “came down from Division Presidents.”

128. The pressure to admit more patients is also detailed in the Hamby Complaint

which describes HMA’s policy “to pressure physicians to increase their admissions statistics

if they fell below a certain percentage rate or quota set by HMA, without regard to the

physician’s independent medical judgment or established average admission rates for the

hospital population.”

129. Hamby further commented on HMA’s admissions percentage rate or quota

during the Hamby Deposition, stating:

[P]rimarily one of the things that I had was the problem with observation beds versus full admits. Observation beds versus full admits. We were not allowed or was not -- looked down upon if we put a patient in an observation bed instead of a full admission. They got a lot less money. I actually had a discussion with the former CFO, who was terminated, about that problem with a rather loud discussion in the emergency room regarding that. The

- 48 -


pressure to call physicians if the patient was over the age of 65 -- the pressure to call the physician, the primary physician of the patients who are over the age of 65 regardless of the acuity or the assessment. And having to reach a certain percentage of that...Then the - - the admission rate percentage, the benchmark in regards to over the -- they’re different benchmarks, you know, over the age 65, there was a higher percentage requirement of admissions.

130. During the Hamby Deposition, Hamby also described the frustration of

Summit physicians in “having to see and discharge all of the frivolously admitted patients.”

In addition, he elaborated on the pressure to meet admission benchmarks received from

Summit’s then CEO Pam Tahan, stating:

Yeah. Pam Tahan [CEO from August 2007 – October 2011] admits there is a percentage, regardless of acuity, regardless of whether or not the patient requires it or not, there’s a percentage that we have to meet. She admits that. In fact, she wrote a letter I understand to Britt Reynolds” [Division President HMA from December 2008 – December 2011].

3. HMA Used Pro-MED Software to Generate Reports Discussed During Daily Meetings Focusing on the Need to Admit More Patients as Inpatients as Mandated by “HMA Corporate”

131. Describing the Company’s extensive reporting systems, during an analyst

meeting day on March 25, 2010, Putter, the division president, spoke about HMA’s “flash

meetings,” stating in part:

The ER Extra program also gives us tools to review how we did the day before. We have our dashboard report that the Pro-MED system will spit out -- spit out, will report generate, that we review on a daily basis the first meeting of the day, called a Flash meeting, which I will give a little example of.

We have our Flash meeting which includes a CEO, the physician who is on duty, the CNO, the CFO, the head of the emergency department, and anyone else we feel is necessary. We review this dashboard. It tells us how long our patients were in the day before, how long it will take them to get to the floor. How did this physician do? Was there anything else going on we need to work on?

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It gives us to [sic] an opportunity -- it identifies opportunities to improve today, right now. And not only do we have -- not only do we identify these opportunities, we correct them that day. Anything that is identified on the Flash meeting from today needs to be addressed so it doesn’t happen tomorrow. Is there an issue of buying a piece of machinery that you may not resolve today for tomorrow? Maybe, but we could probably get one from somewhere else very quickly, especially if there is a lot of things going on that may require the piece of equipment now.

So it enables us to address these very quickly, real-time, on time so that we can treat our patient in the best manner possible. More efficient, better outcomes, patient satisfaction, more visits.

132. Confidential witnesses confirmed the use of HMA flash meetings at Company

hospitals to discuss patient status and boost patient admissions. At Dallas Regional, for

example, daily flash meetings were attended by CEO Davis, COO Ward (who later became

CEO after Davis left in July 2010), and CFO and Compliance Officer Nick Geer (“Geer”),

and Chief Nursing Officer Broome, as well as administration and case management

employees. Both CW 1 and Alford attended these daily meetings and stated that the purpose

of the meetings was supposed to be to facilitate the discharge of patients, but that the

majority of time was spent discussing decreasing observation numbers and increasing

inpatient admissions.

133. The focus on decreasing observations and increasing admissions was

mandated by HMA’s corporate office. According to CW 1, corporate wanted to see the

observation numbers at zero. Alford also recalled Davis stating that “observations have to be

low” according to “corporate policy.” Alford was also told by her supervisor, Broome, that

Davis said “we need to move the patients up to inpatient.” Broome and Davis both told

Alford directly that “corporate did not like observations.” In fact, Davis told Alford that

Dallas Regional’s Division President Ann Barnhart (“Barnhart”) as “coming down like a ton

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of bricks” on the inpatient versus observation status. Alford discussed corporate pressure to

keep observations down to zero and the need to increase inpatients with the Director of Case

Management at Midwest Regional Medical Center in Midwest City, Oklahoma. The

Director of Case Management informed Alford that she observed similar patterns occurring

at her hospital with respect to patients being improperly admitted as inpatients.

134. CW 16 also attributed the reported policy of inappropriately admitting

patients to HMA’s corporate administration, specifically naming hospital CEO J.T. Barnhart,

who worked with Medical Director Lamp, Group Manager Lyotills, and the Medical

Director of the Emergency Department Dr. Norm Baker. CW 16 was told by Lyotills that

J.T. Barnhart “got his marching orders every morning from corporate.” In fact, CW 16

stated that Medical Director Lamp forced CW 16 to make upgrades to patient status to

inpatient rather than observation status.

135. CW 1 was also told by Davis that the policy to admit inpatients and

“minimize observation[s]” was coming from “corporate.” According to CW 1, local

administration, which included Davis, made it clear to Resource Management that there were

to be no patients under observation.

136. CW 9 also attended daily morning meetings to review cases presented to the

hospital the previous day in order to determine why certain patients had not been admitted to

the hospital. CW 9 stated that she/he was told “the admission rate needs to increase.”

According to CW 9, HMA imposed a 20% quota for admissions in the Emergency

Department and physicians who admitted more patients than others were scheduled to work

more hours in the Emergency Department.

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137. CW 18 stated the Company’s Pro-MED software generated a daily report that

showed the percentage of patients admitted from the Emergency Department by patient age

groups. CW 18 and other nurses from the Jackson Regional Emergency Department met

daily with hospital administrators, including the hospital CEO, Anthony, to review “all of the

elderly cases for patients that were not admitted” to the hospital. According to CW 18, the

medical staff was asked “everyday” to justify why patients were not admitted.

138. CW 10 also participated in the daily flash meetings every morning where

she/he was required to review all of the cases in the Emergency Department with hospital

administrators and provide detailed explanations to justify why patients were discharged

against the decision of Pro-MED software. According to CW 10, the CEO of Dallas

Regional wanted the hospital admissions rate to be 22%, but CW 10 stated that admissions

rate could not be achieved legally. CW 10 stated the hospital administration was doing

things that were “not legal, it’s wrong.”

139. CW 12 also attended daily meetings at 11 a.m. at Physician’s Regional during

which physicians and hospital administrators pressured hospital personnel to admit patients.

In addition, Physician’s Regional had a physician advisor on staff that was in charge of

persuading physicians “to admit patients even if they didn’t meet Interqual standards.” 13

140. The Hamby Complaint demonstrates the manner in which HMA used the

Company’s Pro-Med software system to monitor physicians’ admissions rates and pressure

13 Interqual is a technology system developed and described by McKesson as evidence-based clinical decision support used to make the most appropriate care management decisions.

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physicians to admit more patients, or else “face embarrassment in the next flash meeting.”

Hamby Complaint at ¶21. HMA’s Pro-Med software was “designed to maximize the billable

services provided to every patient who visits a hospital emergency room.” Id. at ¶12. In

fact, the Pro-Med software “directs emergency room nurses to order medical tests before a

physician has the opportunity to evaluate a patient, thereby removing a physician’s medical

judgment from the decision process.” Id. at ¶13. Thus use of the Pro-Med software was

“one of HMA’s methods for pressuring physicians to admit more patients.” Id. at ¶19.

Indeed, HMA would “print a list of emergency room patients who were sent home despite a

Pro-MED recommendation of admission, and then require an automatic review of the

patient’s chart and a written explanation from the physician for the patients who were sent

home.” Id. HMA even employed registered nurses as Emergency Department Directors and

Case Managers to monitor the Pro-MED reports to identify potential admissions sent home

and to confront physicians for missing possible admissions in an “overt attempt to coerce the

physician into complying with Pro-MED system recommendations.” Id. at ¶21. Hamby

alleges that he was terminated for not meeting benchmark admission percentages set by

HMA.

141. CW 16 attended HMA’s daily flash meetings at Clearview Regional, which

took place in the Emergency Department every morning at 7:30 a.m. CW 16 stated that

hospital CEO J.T. Barnhart attended the meetings 50% of the time, especially if the census

was low, but if Barnhart was not present, then either the CFO or COO would attend the

meeting in J.T. Barnhart’s place. The daily flash meetings were also attended by Chief

Nursing Officer Sharon Queen, the case management staff, and hospitalists. According to

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CW 16, the goal of the meetings was to increase the admission of insured patients and get rid

of patients who did not have insurance. CW 16 stated that during the meetings, the census

was discussed, including patients who were on observation and were upgraded to inpatient

status and patients who were supposed to be transferred, but were not, regardless of medical

need. According to CW 16, if the census was low, J.T. Barnhart would state “[w]e need to

admit whatever you can. Fill the beds.” CW 16 further advised that during these flash

meetings Barnhart stated there were to be no observations and that both Barnhart and the

COO made it clear during flash meetings that observations were to be low, inpatients were to

be high and that observation patients were to be upgraded to inpatient status.

142. As an example of HMA’s corporate mandated pressure to meet admissions

quotas, Alford stated that between June 24, 2010 and June 29, 2010, Barnhart, Dallas

Regional’s Division President, sent daily emails to Dallas Regional case managers, including

Alford, insisting that a patient who had been under observation for 4 to 5 days be admitted as

inpatient. In response, the case managers compiled daily data on the patient and responded

that the patient did not meet inpatient criteria, refusing to make the transfer. Barnhart,

without reviewing the patient’s file or speaking with the case managers replied that “since

the patient has been on observation for 4 to 5 days, of course he was eligible to be inpatient.”

According to Alford, the patient went home the same day Barnhart sent the email insisting

on the patient being admitted to inpatient status. CW 1 corroborated this account, recalled

Barnhart had emailed Alford about a patient on observation and instructed Alford to get the

patient entered as an inpatient even though the patient did not meet inpatient criteria.

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143. Alford confirmed receipt of an email from Barnhart on June 28, 2010,

requiring the patient who was admitted as observation be admitted as inpatient simply

because the patient was in observation for a few days.

144. In addition to attending daily meetings, CW 18 also participated in monthly or

quarterly meetings that took place by conference call for HMA’s Southeast Division. The

meetings were run by Lynn West, an Emergency Department Liaison based in Naples,

Florida. During the meetings, which were attended by all of the Emergency Room Directors

and Division personnel, each Emergency Department Director was asked to review the

Dashboard Report, generated by Pro-MED, which showed reporting metrics, including the

admissions rates. According to CW 18, if the Emergency Department failed to meet the

“percentage of admissions,” the Emergency Department Director was questioned as to why

the goal was not met and was required to explain what was being done to improve the

admissions rates.

D. Daily Reports Were Circulated in HMA Hospitals Documenting the Number of Observation Patients

145. In addition to the daily flash meetings held at HMA hospitals, HMA sent

daily reports via email to every HMA hospital. According to CW 1 and Alford, the reports

were compiled on a spreadsheet and contained patient observation information, including the

number of observations versus inpatient admissions, as well as patient account numbers and

bill rates. CW 1 indicated that every patient that was held in observation for a twenty four

hour period was “flagged” in the report and highlighted in yellow. CW 1 and Alford

reviewed these daily reports each morning. After reading the reports, CW 1 reported back to

HMA corporate if the patient was still in observation and not admitted as inpatient.

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146. According to CW 1, in addition to the daily reports, there was a binder in the

Emergency Department at Dallas Regional containing metrics, written on one piece of paper

located in the front of the binder, provided by HMA’s corporate office. The metrics included

the percentages of how many admissions should occur in the Emergency Department and the

percentage of admissions for patients over 65 years of age visiting the Emergency

Department. CW 1 noted that one of the metrics mandated that for every 100 Emergency

Department visits, there should be 25 inpatient admissions. CW 1 stated that these metrics

were also used at the daily flash meetings.

E. Red Flags Regarding Improper Patient Admissions Reported Within JIMA Were Ignored

147. During the Class Period, HMA’s then-Director of Compliance, Meyer, was

tasked with auditing certain HMA subsidiary hospitals for compliance with applicable

federal and state laws and internal policies. Meyer was also responsible for working with

those hospitals to develop corrective action plans to ensure compliance, performing due

diligence on HMA’s acquisitions and joint ventures, conducting compliance training, and

overseeing Divisional Compliance Officers assigned to facilitate and monitor compliance

criteria at certain HMA subsidiary hospitals.

148. In January 2010, Meyer began monitoring activity at certain HMA hospitals

and uncovered serious compliance issues at the facilities involving fraudulent Medicare

billing practices. During the first half of 2010, Meyer raised concerns within HMA

regarding his findings. Specifically, Meyer warned that several HMA hospitals secured

higher government payments from the Medicare program for the elderly and disabled by

submitting fraudulent billing to Medicare through the improper admission of patients as

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inpatients, even though such patients clearly did not meet the standards for inpatient

admission. Instead of putting a stop to the fraudulent Medicare billing practices, Meyer’s

warnings were simply ignored. Moreover, HMA did not disclose its Medicare billing

scheme to the market.

149. During repeat visits to the HMA hospitals he had oversight responsibility for,

Meyer determined the fraudulent billing practices were ongoing in an “open , notorious and

widespread” manner. After the egregious compliance concerns raised by Meyer went

unaddressed and uncorrected by the Company, and after uncovering additional evidence of

intentional fraudulent activities, Meyer advised his supervisor in mid-August 2010 that he

was going to prepare a detailed memoranda for review by HMA’s top management and

Board of Directors, outlining HMA’s serious fraudulent activity. According to Meyer, his

supervisor required him to involve HMA’s in-house legal counsel, and he was directed to

edit and water-down his memoranda before they were finalized. For example, Meyer was

ordered to characterize the illegal billing as "inaccurate" rather than as "inappropriate."

Moreover, Meyer’s characterization of the conduct of an HMA hospital as an intentional

effort to bolster hospital revenue by submission of inappropriate bills to Medicare was

eliminated from an initial draft. 14 Meyer was also prohibited from listing HMA’s CEO as a

recipient of the memoranda. Meyer was even specifically instructed by HMA’s general

counsel to destroy the drafts of his memoranda. However, Meyer did not destroy the drafts,

14 Despite being ordered to remove Newsome’s name as a recipient of the memoranda, Meyer stated in the 60 Minutes Segment that he personally reported his findings of Medicare fraud directly to Newsome. See ¶184.

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and, instead kept them. Those drafts included the edits mandated by his supervisor and

HMA’s attorneys.

150. Meyer finalized and submitted his extensive memoranda to his superiors on

August 19, 2010, outlining the serious and material fraudulent activity at HMA hospitals.

Meyer also revealed that a physician at one of HMA’s hospitals referred to the problem as a

“metastatic malignancy” that had encroached upon HMA’s entire system.

151. Throughout his employment with HMA, and at all relevant times, Meyer

reported to Matt Tormey (“Tormey”), HMA’s Vice President of Compliance and Security.

As stated by Dauten, HMA’s Audit Committee Chairman, in correspondence dated February

13, 2012, Tormey has held a “direct reporting line to the board [of directors] through the

audit committee and also to the CEO” and “has complete and direct access to our board and

audit committee” since he joined the Company in 2000.15 Therefore, when Meyer reported

serious concerns to Tormey, Tormey had a direct line to the Company’s Board and its CEO,

Newsome. This line of reporting from Meyer to the Defendants is further confirmed by

HMA’s 2010 10-K which provides, in pertinent part:

Our compliance program consists of a Code of Business Conduct and Ethics, written guidance (including compliance policies), a training and education process, an audit process, anonymous reporting mechanisms and an investigative process. Day-to-day leadership of our compliance program is provided by our vice president of compliance who reports directly to our chief executive officer. Our vice president of compliance also provides quarterly reports to the audit committee of our board of directors, as well as regular reports to our corporate compliance committee, which consists of our chief executive officer, chief financial officer and general counsel.

15 A true and correct copy of the February 13, 2012 letter is attached hereto as Exhibit G .

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152. In addition to reporting HMA’s fraudulent billing practices to his superiors,

Meyer personally met with and reported HMA’s fraudulent billing practices directly to

Newsome, “face-to-face.” See ¶184.

153. Rather than addressing the systemic fraudulent admissions policies detailed in

Meyer’s August 19, 2010 memorandum, HMA took immediate steps to remove Meyer from

having oversight responsibilities with the hospitals identified in his memoranda.

Subsequently, HMA took further steps to change Meyer’s job responsibilities altogether to

further limit his contact with HMA hospitals and to eliminate his compliance audit function,

allowing him only to engage in compliance training and due diligence for potential hospital

acquisitions. Meyer was shielded from any information regarding investigation and follow-

up, with respect to the serious fraudulent activity he had uncovered and reported. On

September 6, 2011, Meyer sent an email to his employer at HMA stating “[I]t is my intent

that the right thing be done in this investigation.” Meyer was fired that afternoon.

154. After his termination from HMA for threatening to expose Defendants’

ongoing fraud, on October 19, 2011, Meyer filed a whistleblower action against HMA

pursuant to Florida’s Private Sector Whistle-Blower’s Act, Fla. Stat. §§448.101 et seq . 16 In

his action, Meyer alleged he was fired in retaliation for uncovering, reporting, and

demanding that HMA rectify systemic billing fraud at four HMA owned and operated

16 Meyer amended his action by filing an amended complaint on November 18, 2011. The allegations regarding Meyer’s discovery and reporting of HMA’s fraudulent billing practices detailed herein were set forth by Meyer in his amended complaint and in his Combined Response of Plaintiff/Counter-Defendant, Paul Meyer, To Defendant/Counter-Plaintiffs’ (1) Motion to Determine Confidentiality of Court Records and (2) Motion for the Immediate Return of Privileged Information and for Disqualification of Plaintiffs’ Counsel, filed in his whistle-blower action.

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facilities. More specifically, Meyer alleged that these facilities had a policy of improperly

admitting elderly and disabled patients as inpatients rather than assigning them to outpatient

observation in violation of Medicare standards for inpatient treatment, resulting in

“fraudulent billing” to Medicare. Meyer further alleged that, in an effort to boost Company

profits, several HMA hospitals had won higher government payments from the Medicare

program for the elderly and disabled, in part by “the submission of fraudulent billing to

Medicare through the improper admission of patients as inpatients even though such patients

clearly did not meet the standards for inpatient admission.” 17

155. Meyer’s concerns echo the independently corroborating accounts of numerous

former HMA employees who also sounded the alarm as witnesses to HMA’s fraudulent

Medicare billing and admission practices. For example, Alford expressed concern over the

pressure to increase inpatient numbers to Geer, a CFO at Dallas Regional. CW 1 commented

directly to Davis, Dallas Regional’s CEO, that the increase in inpatient admissions at the cost

of minimizing observation admissions was fraudulent. CW 1 also told Davis, during a flash

meeting held in March of 2010 in Davis’ office, that the “zero observation status is

unrealistic and was completely impossible.” According to CW 1, after that meeting, she/he

was no longer invited to attend the daily meetings by Davis.

156. CW 1 was so concerned about the Company’s inappropriate inpatient

admissions that she/he called the HMA ethics hotline twice. First, in mid summer 2010, CW

17 During his appearance on the 60 Minutes Segment, Meyer provided further details regarding his allegations against HMA. The statements Meyer made in the 60 Minutes Segment are detailed below. See ¶¶184-186.

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1 filed an internal ethical complaint and in response she/he was contacted by Meyer who

traveled to Mesquite, Texas to meet with CW 1. CW 1 and Meyer discussed the allegations

in detail, including specifically the inappropriate billing of observation patients as inpatients

with HMA corporate “encouragement.” According to CW 1, the fraudulent inpatient orders

continued unabated after this inquiry.

157. Thereafter, on February 23, 2011, after being told by Ward, Dallas Regional’s

CFO and COO, that HMA’s corporate office wanted zero observations, CW 1 called the

ethics hotline to report the lack of change since CW 1’s first report. In response, CW 1 was

interviewed by a compliance officer from HMA corporate office, but at the conclusion of the

interview, CW 1 was simply told she/he needed to communicate better with her/his

supervisor.

158. When CW 1 noticed little had changed at HMA regarding its billing practices

after her/his second ethical report, CW 1 contacted the HHS. As a result, special agents from

HHS and OIG met with CW 1 in Dallas, Texas, focusing on “DRGs” – a term referring to a

patient’s diagnosis related group – specifically those that include major surgery and a

lengthy hospital stay. 18

159. Similarly, in July 2010, Alford submitted an online complaint to CMS via its

website, detailing: (1) the unrealistically low number of observation patients at Dallas

Regional; (2) two cases where patients were admitted longer than medically necessary in

18 Each patient admitted for care is assigned to a DRG based on his or her primary admitting diagnosis and, pursuant to Medicare, the fixed payment amount per inpatient discharge is established based on each DRG. Every DRG is assigned a payment rate based on the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis.

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order to maximize the highest Medicare reimbursement; (3) the lack of CMS admission

criteria being applied to any case; and (4) that 80% of one-day admissions did not meet

criteria, among other things. In response, Alford was interviewed by the OIG and the HHS.

160. CW 19 was also concerned about the inappropriate billing of Medicare

patients and brought the billing practices to the attention of Whipkey, the CFO of Barrow

Regional, on “numerous occasions” and “warned him” that the inappropriate Medicare

billing could get the hospital into legal trouble. In response, Whipkey told CW 19 that he

would “take care of it,” but CW 19 was not aware of any action taken by Whipkey. CW 19

also filed a complaint with the OIG and JCAHO about the improper billing of Medicare

patients, but she/he did not hear back from either organization. 19 Eventually, CW 19 left

Barrow Regional because she/he did not want to jeopardize her/his credentials due to the

hospital’s inappropriate admission of patients and submission of bills to Medicare for those

patients.

161. CW 11 stated that “nurses would complain to the doctors” about the high

number of patients being admitted from the Emergency Department and, in response, the

physicians simply told them “we need to make the money.”

F. HMA Employees Were Terminated for Reporting or Complaining about Fraudulent Billing Practices

162. Meyer was not the only HMA employee to be fired for raising concerns that

HMA was operating a systemic fraud. CW 6 stated that when nurses complained to

19 JCAHO is an abbreviation for the Joint Commission on Accreditation of Healthcare Organizations.

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physicians about the number of patients admitted, they were terminated. CW 4 also stated

that the Emergency Department physicians who were placed by a private group were

pressured by HMA’s corporate office to meet census admission requirements and that when

the physicians refused to increase the average length of stay at the hospital, they were

replaced by physicians from a new private physician placement group named Apollo.

163. CW 16 was routinely called to the Emergency Department at Clearview

Regional to take admissions, and stated that she/he got in trouble with hospital

administration whenever she/he pushed back on inappropriate admissions. According to CW

16, after a few months of working at Clearview Regional, it became clear that she/he could

not refuse inappropriate admissions. CW 16 believed that HMA’s admission policies were

illegal, but that “people feared losing their jobs” for not complying with HMA’s admissions

policies.

164. In fact, Alford was terminated by HMA after changing admissions

procedures, which increased the number of observation patients at Dallas Regional. When

Alford began working at Dallas Regional, she noticed exceptionally low numbers of

observation patients in the hospital. According to Alford, while the national average of

observation patients at hospitals was between 15%-20%, Dallas Regional had only 2

observation patients out of 130 beds.

165. But, for Alford, increasing observation caused trouble with Dallas Regional

senior management. There was growing contentiousness towards Alford and the staff once

the number of observations increased. Davis put pressure on Dallas Regional’s

administration which then put pressure on Alford to decrease observations. Alford also

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received pressure from the divisional CEO, Ann Barnhart. Alford was told she was

terminated for failing to accomplish a particular task, but she believes the reason for the

termination was her refusal to increase observation numbers.

G. HMA Hired Accretive Health to Review its Patient Cases and Put Pressure Upon HMA Physicians to Admit More Inpatients

166. Accretive Health (“Accretive”) describes itself as a provider of services that

help healthcare providers generate sustainable improvements in their operating margins and

healthcare quality while also improving patient, physician and staff satisfaction. 20 In or

around May or June of 2011, as another means of boosting its inpatient admissions and

revenue, HMA hired Accretive to review its patient cases and put pressure on HMA

physicians to admit observation patients into the hospital as inpatients, paying Accretive

approximately $210 for every file reviewed.

167. According to CW 7, the directive to send cases to Accretive came directly

from the Company CFO and CEO in response to an acceleration in the rise in observation

cases in all HMA hospitals system-wide. HMA hired Accretive specifically to generate

more inpatient admissions. CW 7 stated Accretive’s “whole job” was to get HMA “more

inpatients. That’s what they are hired for.”

20 Accretive has been under investigation by the Minnesota Attorney General Lori Swanson (“Swanson”), since approximately July 2010, for unlawful debt collection practices. On January 19, the State of Minnesota initiated litigation against Accretive for violation of Minnesota’s debt collection statutes and consumer protection laws, among other violations. See State of Minnesota v. Accretive Health, Inc ., Case No. 12:cv-145 (D. Minn. Jan. 19, 2012). In an April 24, 2012 CBS news report, Swanson characterized Accretive as a culture driven by sales instead of providing a sanctuary for the sick. “ MN’s AG Releases Scathing Report On Accretive Health Inc. ” Narr. by John Lauritsen. CBS News. (CBS television broadcast Apr. 24, 2012).

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168. Early on in the process of HMA using Accretive to generate inpatient

admissions, there was confusion among HMA divisional and corporate employees as to

which cases should be sent to Accretive for review, and at one point HMA was sending all

cases to Accretive. Eventually, however, CW 7 told her/his case managers that if they could

convert their observation patients to inpatients, those cases should not be sent to Accretive.

As a result, HMA determined that only Medicare cases and possible surgery patients who

were not admitted as inpatients should be sent to Accretive for review and potential

conversion to inpatient status.

169. With that mandate, HMA hospitals were sending Accretive cases involving

Medicare patients admitted to observation when HMA administration could not convince its

physicians to change the patient’s status to inpatient. Accretive physicians would review the

cases with Accretive’s database, which was supposed to mimic the Medicare database,

determine the appropriate setting for the patient and, if the determination was inpatient

status, Accretive physicians would call HMA physicians in order to attempt to convince

them to admit the patient as an inpatient. The turnaround time for Accretive’s review of each

patient’s case was approximately 24 hours.

170. Because HMA was intent on converting as many observation cases to

inpatient cases as possible, CW 7 stated that HMA also hired one of Accretive’s competitors

and sent patient cases to it in order to compare which company converted more observation

patients to inpatients over a specific period of time. HMA reviewed the conversion statistics

on a daily basis, keeping a running tab each month so that the Company could determine

whether Accretive or its competitor converted the most cases. In other words, HMA tracked

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whether Accretive or its competitor took the most observation cases and converted them to

inpatient admissions by calling physicians and convincing them to convert observation

patients to inpatient patients.

171. HMA paid Accretive approximately $210 for each case file it “reviewed,”

with the goal of increasing inpatient admissions and obtaining higher Medicare

reimbursement. According to CW 7, if Accretive could take 30 to 35% of the cases sent to it

and make them inpatients, the Company would earn three to five thousand dollars more per

case and HMA would be “getting a nice return” on its “investment.”

172. CW 16 experienced pressure from an outside consulting service paid by HMA

to evaluate medical records and find a way to upgrade the patient from observation to

inpatient status or maintain as many patients as possible on inpatient status. According to

CW 16, outside physicians from the service called the hospitalists, and frequently called CW

16, with recommendations for various studies and unnecessary tests in order to keep the

patient in the hospital on inpatient status longer or to upgrade the patient from observation to

inpatient status. CW 16 stated that she/he stopped taking calls from these outside physicians.

H. Defendants Had Extensive Knowledge of HMA’s Admissions Numbers

173. In addition to reports prepared by HMA’s corporate office and the daily flash

meetings attended by HMA’s corporate employees, according to the Individual Defendants

themselves, they and other members of HMA management had direct control over, access to,

and extensive knowledge of each HMA hospitals’ admissions numbers.

174. HMA provided its staff with extensive training on Emergency Department

procedures, including the policy for admitting patients. In fact, during HMA’s October 27,

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2009, conference call discussing the Company’s third quarter financial results and operations

Newsome stated, in pertinent part:

We have significant opportunity for improvement in the emergency rooms, because it takes time. My experience it’s not a one year opportunity. We continue to train our staff. We continue to working [sic] with medical staff throughout -- I mentioned a meeting we had with key leaders throughout the Company, a big portion of that meeting dealt with the emergency room and how physicians throughout the organization can help us in that process. We are getting great feed back. And so the ER opportunities is [sic] still there, we will see that going forward. When you tie it to the other strategies together it paints good picture for us.

175. Newsome further discussed the Company’s successful results with respect to

the Emergency Department initiatives at the Credit Suisse Healthcare Conference on

November 12, 2009, during which he stated, in pertinent part: “if you look at these three

initiatives I said back in October that the emergency room would give us the result fastest;

and it has. There is no question about it. We measure it. We know where we are. ”

176. During the same conference, Newsome again confirmed the Company’s and

his personal knowledge of HMA’s Emergency Department metrics when he stated, in

pertinent part: “I know from the metrics where we are, and I know where we can go. So

there is opportunity there.”

177. Similarly, during a March 3, 2010 conference call, Curry attributed the

Company’s strong admissions numbers to HMA’s threefold initiatives and confirmed Curry

and Newsome’s strong involvement in the calculations, stating in pertinent part:

So, 2009 was a year that was a strong year for us performance-wise, a strong year for us in terms of implementing the strategies, the three-fold initiatives that we have. In addition to that, we spent the year redeveloping our cost control mechanisms that we had in place in the past, which the Company had grown away from. We now have centralized financial controls in a decentralized operating environment that allows us -- or allows me, in

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particular, to sit in my office and monitor very, very closely all of our major cost areas, and be able to pick up the phone and call individual hospital CEOs and say, hey, what’s going on?

Because we have guidelines now established for each facility. They know what they are; we know what they are. If they are having difficulty hitting them, then they get a phone call. You could say, we’re all over them like a cheap suit, I guess, because the way these guidelines are what we know we need to have in place to achieve the objectives that we have.

* * *

This is a ground-up calculation that we’ve done based on, frankly, me and Gary as well, and others, sitting through every single hospital presentation for their market plan for the next year, and how they were going to achieve their profit plans. So, this isn’t something that we dreamed up in Naples. This is something that’s built from the ground up.

178. Newsome participated in an analyst meeting day on March 25, 2010, during

which he spoke about the cohesive aspects of HMA’s organization and culture, stating in

pertinent part:

But if you look at the culture of the Company as we go forward it is all about accountability. It is looking throughout the organization and leveraging the knowledge that we have across a system, rather than letting independent hospitals function on their own, and sometime to their own demise.

179. Putter also spoke at the March 25, 2010 analyst meeting day conference and

commented on the Company’s documentation systems, and the corporate access to

information at all times, stating in pertinent part:

Okay, we have a patient that has been admitted, have a bed assigned, but they are still in the emergency department. So we are able to monitor that anywhere. Right now every CEO in our hospitals has on their computer the ability to pull up this presentation board. In fact, in the administrative suite so that all these COOs, CNOs, they have the board so they can see at any time. It is very important.

On top of that I am able to pull up any of my hospitals anywhere that I have my laptop or in my office to see what is going on.

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In addition, Gary or Kelly can pull up any of our hospitals to give a snapshot and say, hey, CEO, I see you’re having a backlog in your hospital, is there something I can do to help you? Now normally it only takes one or two calls from Gary, and that is all the help we ever need.

180. On November 10, 2010, at the Credit Suisse Group Healthcare Conference,

Curry also spoke about HMA’s hand’s-on management style and the Individual Defendants’

constant access to information regarding all of HMA’s facilities, stating in pertinent part:

I’ll tell you something else, which is unusual for us, is that myself, I spend about 35% of my time in our facilities , which is pretty unusual, really, I understand from as compared to other companies. Now Gary spends more time than that in our facilities, because that’s where the action is. That’s where what’s going on is all about and by being there, we have a direct understanding of what’s taking place in that market, so we’re very hands-on managers. We can do that through our centralized reporting system and then through our direct visiting with those facilities and we think it’s very, very important to be connected.

181. As demonstrated above and throughout the Class Period, the Individual

Defendants were more than just executives, they were hands-on corporate representatives

who actively managed HMA’s business, down to the individual hospital admission level, on

a day-to-day basis. As a result they had intimate personal knowledge of the Company’s

operational performance and the reasons behind that performance. In short, the Individual

Defendants knew exactly what drove HMA’s revenue, because they conceived of and

implemented the very policies that did so, including the implementation of admissions

quotas. The Company’s extensive reporting systems further bolstered the Individual

Defendants’ knowledge and understanding of the true reasons behind the Company’s

improved financial performance and future business prospects during the Class Period.

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I. The Information and Documents Revealed During the 60 Minutes Segment Corroborates Lead Plaintiffs’ Allegations

182. As set forth above, on December 2, 2012, CBS aired the 60 Minutes Segment

focusing on HMA’s admissions and billing practices, particularly with regard to revenues

generated from Medicare. The information revealed in the 60 Minutes Segment aptly sums

up and corroborates Lead Plaintiffs’ allegations demonstrating Defendants’ fraudulent

conduct. More specifically, the 60 Minutes Segment described HMA as thriving by “ buying

small, struggling hospitals in non-urban areas, turning them into profit centers by filling

empty beds” and “aggressively pursu[ing]” a business strategy of admitting more patients in

order to make more money. According to the 60 Minutes Segment, “HMA relentlessly

pressured its doctors to admit more and more patients -- regardless of medical need -- in

order to increase revenues. 21

183. The 60 Minutes Segment provided additional corroborating details describing

how HMA pressured its physicians and staff to admit patients in order to generate higher

Medicare revenue, set quotas for admissions, and customized its Pro-MED computer system

in order to justify admission of more patients, echoing what various confidential witnesses

said, as set forth throughout this Complaint.

184. During the 60 Minutes Segment, Meyer, HMA’s former Director of

Compliance, revealed that he had uncovered serious compliance issues at HMA facilities

21 According to the 60 Minutes Segment, the information presented resulted from inquiries conducted over a period of more than a year with “more than 100 current and former employees.”

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involving fraudulent Medicare billing practices, which he reported directly to Newsome.

According to Meyer,

I made sure that I spoke with the CEO face-to-face about this, that something is really, really wrong, and it’s got to be addressed. I had indicated that if its not addressed by you all, then I’ll have to handle getting it addressed by the government. [emphasis added]

185. In addition to reporting his concerns directly to Newsome, Meyer indicated

that he wrote up his findings in three memos to HMA’s top management. As described in

the 60 Minutes Segment, “HMA’s corporate attorneys heavily edited his reports and

instructed him to destroy the original version of his memos, but he never did.” Meyer further

stated “I felt it was evidence. These people are changing my write-up of what I found,

softening it up, excising out things, labeling it as attorney/client privilege when it wasn’t.

And I felt certain they’re trying to cover this up.”

186. In addition, Meyer stated that based on his experience, HMA’s policies were

“based on profit,” and that he reached that conclusion in 2010 after hearing complaints from

emergency room doctors, case workers and hospital administrators. According to Meyer,

doctors were pressured to fill beds with people who did not need to be admitted to the

hospital. After auditing four hospitals in Texas, Florida and Oklahoma, Meyer concluded

that “HMA had intentionally billed Medicare and Medicaid for hundreds of thousand of

dollars in inappropriate hospital stays that did not meet government standards for admission

or reimbursement.” According to Meyer, “submitting bills to the government for the

admission of patients” who “didn’t meet the appropriate prescribed criteria for admission and

for the hospitals to bill Medicare for the admissions” is Medicare fraud. As a former FBI

fraud examiner, he was well qualified to identify Defendants’ fraud.

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187. The 60 Minutes Segment also included interviews with former HMA

physicians including Cliff Cloonan (“Cloonan”), Rankin, and Hamby, as well as Alford, a

Case Management Director in an HMA hospital in Mesquite, Texas. All of these former

HMA employees, who worked in different areas of the country, reported that HMA

pressured physicians to improperly admit more patients.

188. Cloonan, a retired Colonel who spent 21 years as an Army doctor before

joining the Carlisle Regional Medical Center in Pennsylvania as the assistant emergency

room director, revealed that he was told by HMA and its Emergency Room staffing

contractor, EmCare, that if he didn’t start admitting more patients to the hospital, he would

lose his job. According to Cloonan, he was required to admit 20% of the hospital’s

emergency room patients. Cloonan stated “[m]y department chief said, we will admit 20

percent of our patients or somebody’s going to get fired.” According to Cloonan, admitting

a percentage of patients is fraudulent because it is not based on medical requirements, but on

an “arbitrary number” and the only way to meet the arbitrary percentage was to “admit

patients that don’t need to be admitted.”

189. Similarly, Rankin, who worked in the Carlisle Regional Medical Center in

Pennsylvania, revealed that he was told by HMA and its Emergency Room staffing

contractor, EmCare, that if he didn’t start admitting more patients to the hospital, he would

lose his job. Rankin also confirmed HMA required an admission rate out of the emergency

department of 20% and that “for patients 65 and over, the benchmark was 50%.” Rankin

also confirmed that the pressure to admit more patients was institutionalized at HMA and

was a “well thought out plan” relating to how HMA controlled emergency room physicians.

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190. Hamby, who was fired for not meeting HMA’s admission targets, confirmed

that the admissions targets at HMA were originally 15%, but HMA tried to boost the target

to 20%. Hamby called the targets “coercion to commit fraud.”

191. Alford, who was director of case management at the HMA hospital in

Mesquite, Texas, where she oversaw the auditing of patient records and signed off on the

accuracy of bills sent to Medicare and Medicaid, also described HMA’s practice of

pressuring doctors to admit more patients. During the 60 Minutes Segment, Alford

described HMA’s practice to “admit more patients, keep them longer” and stated that

“Money was the chief motivator.”

192. The 60 Minutes Segment also summarized HMA’s use of the Pro-MED

system to control physicians and increase patient admissions stating that “doctors, nurses,

emergency room directors and hospital administrators told us that HMA customized the

program to automatically order an extensive battery of tests -- many of them unnecessary --

as soon as a patient walked into the emergency room.” The 60 Minutes Segment also

described how “Pro-MED generated printed reports . . . . evaluating each doctor’s

performance and productivity. . . . . [T]he doctors who hit corporate admissions goals

received praise from company managers. Those who didn’t knew it.”

193. These allegations were supported by Cloonan, who stated “[t]he primary

purpose of the scorecard was to track how you were doing in terms of revenue generation

based on number of tests ordered and number of patients admitted to the hospital.”

According to Rankin, Pro-MED “has nothing to do with patient safety and patient care. It has

everything to do with generating revenues.”

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194. The 60 Minutes Segment also described how the Pro-MED system intervened

in physicians medical decisions to send a patient home instead of admitting the patient.

According to Hamby, “[t]he minute I hit “Home”, it says, “Qual Check,” and prompted a

warning stating “[t]his patient meets criteria for admission. Do you want to override?”

Cloonan then described how administrators, who were not physicians and never went to

medical school, would then tell the physician how the physician should care for the patient.

According to Hamby, meeting with the administrators after he would override the system

“was like being called to the principal’s office.”

195. The 60 Minutes Segment also featured an interview with Alan Levine

(“Levine”), HMA’s executive vice president, who was presented with documents described

as representing physicians’ performance reviews from the HMA hospital in Durant,

Oklahoma, which clearly provided a column showing an admissions goal of 20%.

196. In addition to the document showing a 20% admissions goal, the 60 Minutes

Segment described how the description of HMA’s practices were demonstrated in “many of

the thousands of documents” examined, including the following quotes from emails shown

during the program:

“Only 14 admits so far!!!!!!! Act accordingly....”

. “Every time a 65 year old or older comes in, I am already thinking, do they have some condition I can admit them for?”

. “We are under constant scutiny[sic]].”

. “I will be blunt... I have been told to replace you if your numbers do not improve.”

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197. Finally, the 60 Minutes Segment showed video testimony from John Vollmer,

(“Vollmer”), a former Executive Vice President of HMA, who testified, that HMA’s

aggressive admission policies came directly from Newsome. In particular, Vollmer stated

that he told HMA that its admissions practices were “wrong” and that HMA can’t “beat up

doctors and administrators” over the admissions rates in order “to increase your revenue for

the facility.”

J. HMA’s Fraudulent Financial Reporting

198. During the Class Period, Defendants falsely represented that HMA’s financial

statements were presented in conformity with Generally Accepted Accounting Principles

(“GAAP”). The issuance of financial statements in conformity with GAAP is a basic,

fundamental obligation of publicly traded companies. As set forth in Rule 4-01(a) of

Regulation S-X, “[f]inancial statements filed with the [SEC] which are not prepared in

accordance with [GAAP] will be presumed to be misleading or inaccurate. . .” 17 C.F.R.

§210.4-01(a)(1).

199. As detailed herein, Defendants perpetrated a fraud on innocent investors by

failing to disclose that HMA’s reported operating results during the Class Period were the

product of a deliberately orchestrated scheme to unlawfully overbill Medicare. In so doing,

Defendants presented HMA’s financial statements in violation of GAAP and materially

inflated its reported operating results, and accordingly, the price of the Company’s stock,

during the Class Period. In addition, HMA’s financial statements during the Class Period

were presented in violation of GAAP because they failed to disclose that the wrongful

conduct alleged herein created and subjected the Company to a substantial financial and legal

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liability to the federal government, which omission also materially inflated the price of

HMA’s stock during the Class Period

1. HMA’s Revenues and Earnings Were Materially and Artificially Inflated

200. Generally, revenue from providing services should be recognized when it is

both earned and realized or realizable. Revenue from the rendering of services is considered

earned and realized or realizable only if all of the following criteria are met: (1) persuasive

evidence of an arrangement exists; (2) services have been rendered; (3) the seller’s price to

the buyer is fixed or determinable; and (4) collectability is reasonably assured. See , e.g. ,

Accounting Standards Codification (“ASC”) 605.

201. HMA’s recognition and reporting of revenue on its unlawful Medicare billing

practices violated the following criteria (as such criteria are generally contemplated) of

revenue recognition under GAAP: (1) persuasive evidence of an agreement did not exist; (2)

the revenues were not fixed and determinable; (3) the collectability of such revenues was not

reasonably assured.

202. Plaintiffs estimate that HMA’s unlawful Medicare billing practices caused the

Company’s fiscal 2009, 2010 and 2011 revenues to be overstated by approximately $40

million, $44.3 million and $50.3 million, respectively and its 2009 - 2011 pre-tax income to

be overstated between approximately 5% - 10%.

203. As noted in the SEC’s Staff Accounting Bulletin No. 99, the alleged

undisclosed conduct, here unlawful Medicare billing, may well render even a quantitatively

small misstatement material, stating, in part:

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the staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for example those pursuant to actions to “manage” earnings, are immaterial. While the intent of management does not render a misstatement material, it may provide significant evidence of materiality. The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to “manage” reported earnings. In that instance, it presumably has done so believing that the resulting amounts and trends would be significant to users of the registrant’s financial statements. The staff believes that investors generally would regard as significant a management practice to over- or under-state earnings up to an amount just short of a percentage threshold in order to “manage” earnings. Investors presumably also would regard as significant an accounting practice that, in essence, rendered all earnings figures subject to a management-directed margin of misstatement.

204. In addition, HMA’s Form 10-K for the year ended December 31, 2009, which

was signed by Defendants Newsome and Curry, disclosed the following, in part, with respect

to its policy of revenue recognition:

The Company records gross patient service charges on the accrual basis in the period that the services are rendered. Net revenue represents gross patient service charges less provisions for contractual adjustments. Approximately 41%, 40% and 41% of net revenue during the years ended December 31, 2009, 2008 and 2007, respectively, related to services rendered to patients covered by Medicare and various state Medicaid programs. Payments for services rendered to patients covered by these programs are generally less than billed charges and, therefore, provisions for contractual adjustments are made to reduce patient charges to the estimated cash receipts based on each program’s principles of payment/reimbursement (i.e., either prospectively determined or retrospectively determined costs). Final settlements under these programs are subject to administrative review and audit and, accordingly, the Company periodically provides reserves for the adjustments that may ultimately result therefrom. Such adjustments were not material to the Company’s consolidated operations during the years presented herein. Laws, rules and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, estimates recorded in the consolidated financial statements and disclosed in the accompanying notes may change in the future and such changes in estimates, if any, will be recorded in the Company’s operating results in the period they are identified by management. Revenue and receivables from government programs are significant to the Company’s operations; however,

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management does not believe that there are substantive credit risks associated with such programs. There are no other concentrations of revenue or accounts receivable with any individual payor that subject the Company to significant credit or other risks.

Estimates for contractual allowances under managed care health plans are primarily based on the payment terms of contractual arrangements, such as predetermined rates per diagnosis, per diem rates or discounted fee for service rates.

Net revenue is presented net of provisions for contractual adjustments and uninsured patient discounts. The Company’s provisions for contractual adjustments were approximately $12,840 million, $11,377 million and $10,091 million during the years ended December 31, 2009, 2008 and 2007, respectively. In the ordinary course of business, the Company provides services to patients who are financially unable to pay for their care. Accounts characterized as charity and indigent care are not recognized in net revenue. The Company maintains a uniform policy whereby patient account balances are characterized as charity and indigent care only if the patient meets certain percentages of the federal poverty level guidelines. Local hospital personnel and the Company’s collection agencies pursue payments on accounts receivable from patients who do not meet such criteria. Management monitors the levels of charity and indigent care provided by the Company’s hospitals and other health care facilities and the procedures employed to identify and account for those patients.

The Company discounts its gross charges to uninsured patients for non-elective procedures by 60% or more. During the years ended December 31, 2009, 2008 and 2007, the Company recorded approximately $657.2 million, $579.7 million and $540.2 million, respectively, of uninsured self-pay patient revenue discounts. In addition to such uninsured patient discounts, foregone charges for charity and indigent care patient services (based on established rates) aggregated $80.2 million, $81.2 million and $70.2 million during the years ended December 31, 2009, 2008 and 2007, respectively.

The presentation of costs and expenses does not differentiate between costs of revenue and other costs because substantially all of the Company’s costs and expenses are related to providing health care services. Furthermore, management believes that the natural classification of expenses is a more meaningful presentation of the Company’s operations.

205. These representations, which were repeated in all material respects during the

balance of the Class Period, were materially false and misleading because they failed to

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disclose that HMA employed improper stratagems to wrongfully overbill Medicare and

improperly recognize revenue therefrom.

2. HMA’s Undisclosed Contingent Liabilities

206. GAAP requires that financial statements disclose contingencies when it is at

least reasonably possible ( e.g. , a greater than slight chance) that a loss may have been

incurred. The disclosure shall indicate the nature of the contingency and shall give an

estimate of the possible loss, a range of loss, or state that such an estimate cannot be made.

See , e.g. , ASC 405.

207. Contingencies are existing uncertainties that may have financial impact,

depending on future events. Loss contingencies are those that may result in the incurrence of

a liability or the impairment of an asset. Examples of loss contingencies include adverse

litigation, a breach of contract or law, disputes with rate-setting authorities and threats of

expropriation. Id.

208. The SEC considers the disclosure of loss contingencies of such importance to

an informed investment decision that it issued Article 10-01 of Regulation S-X [17 C.F.R.

§210.10-01(5)], which provides that disclosures in interim period financial statements may

be abbreviated and need not duplicate the disclosures contained in the most recent audited

financial statements, except that “where material contingencies exist, disclosure of such

matters shall be provided even though a significant change since year end may not have

occurred.”

209. In addition, GAAP requires that financial statements disclose the significant

risks and uncertainties associated with an entity’s business. See , e.g. , ASC 275.

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210. In violation of the above note provisions of GAAP, HMA’s financial

statements during the Class Period improperly failed to disclose that it engaged in illegal

practices which subjected the Company to potential civil and criminal liability under the U.S.

False Claims Act.

211. Indeed, HMA’s improper Medicare billing practices during the Class Period

may well subject it to substantial financial and legal liabilities and damages totaling in the

hundreds of millions of dollars. In fact, HMA’s wrongful conduct may even subject it to

being excluded from participating in Medicare altogether, which could threaten the

Company’s financial well being and viability.

212. Accordingly, during the Class Period HMA’s financial statements were

presented in violation of GAAP and its financial results were materially inflated. In failing

to file financial statements which conformed to the requirements of GAAP with the SEC,

HMA repeatedly disseminated financial statements that were presumptively false and

misleading.

213. Defendants have continued their deceptive financial reporting by failing to

restate HMA’s Class Period financial statements to correct its violations of GAAP alleged

herein. See , e.g. , ASC 250.

214. As a result of the foregoing, Defendants breached their trust to investors, put

the Company’s assets at risk and violated the provisions of Section 13 of the Exchange Act,

which provide:

Every issuer which has a class of securities registered pursuant to Section 12 of this title and every issuer which is required to file reports pursuant to Section 15(d) of this title shall - -

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A. make and keep books, records, and accounts, which, in reasonable

detail, accurately and fairly reflect the transactions and dispositions of the assets of the

issuer; and

B. devise and maintain a system of internal accounting controls sufficient

to provide reasonable assurances that - -

(i) transactions are executed in accordance with management’s

general or specific authorization;

(ii) transactions are recorded as necessary (a) to permit preparation

of financial statements in conformity with generally accepted accounting principles or any

other criteria applicable to such statements, and (b) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with

management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the

existing assets at reasonable intervals and appropriate action is taken with respect to any

differences.

VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 22

A. The July 27, 2009 Press Release and Conference Call

215. On July 27, 2009, the first day of the Class Period, HMA issued a press

release reporting its financial results for its second quarter 2009. The press release stated in

part:

22 Plaintiffs have bolded and italicized the statements which they contend are false and misleading.

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For the quarter, HMA reported net revenue of $1,155.5 million. . . . During the second quarter, income from continuing operations was $39.3 million and net income attributable to HMA’s common stockholders was $32.6 million, or $0.13 per diluted share . Excluding certain gains on sales of assets, diluted earnings per share increased 44.4% as compared to $0.09 per diluted share for the same quarter a year ago. . . .

For continuing operations, compared to the prior year’s second quarter, net revenue increased 4.5%, admissions increased 5.1%, adjusted admissions (reflecting total admissions adjusted for outpatient volume) increased 4.7% , emergency room visits increased 5.6% and surgeries declined 1.0%. . . Hospital net revenue per adjusted admission increased 1.1% compared to the same quarter a year ago .

“We are very pleased with our strong results for the second quarter of 2009 which we believe reflect our diligence in implementing initiatives to improve emergency room operations, physician recruitment and service development ,” said Gary D. Newsome, HMA’s President and Chief Executive Officer. “ We believe the patient volume growth that HMA experienced in the second quarter is a direct result of our focus on improving quality and providing the best hospital experiences we can for our patients and physicians. We remain encouraged about the prospects for additional improvement during the remainder of 2009 .”

216. In the press release, “HMA also reported that it has increased its full fiscal

year 2009 diluted EPS from continuing operations objective range from between $0.37

and $0.45 to be between $0.45 and $0.49. HMA’s updated EPS objective is based on a net

revenue objective range of $4.55 to $4.65 billion, and an admissions increase for the full

year of between 2% and 3%. ” The press release further provided:

“By improving our hospital operations, we have been able to generate stronger EBITDA and solid cash flow, and we continue to deleverage HMA’s balance sheet,” added Mr. Newsome. “As a result of HMA’s financial results through the first six months of 2009, and our belief that we can continue to improve operations for the remainder of the year, we have increased our annual EPS objective to better reflect our expectations. ”

217. Following issuance of the press release, on July 28, 2009, after the market

closed, HMA hosted a conference call to discuss its second quarter 2009 financial results and

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operations. Newsome and Farnham participated in the call on behalf of the Company.

During the call, Newsome omitted material information as he touted the Company’s

improved revenue and increase in admissions stating, in part:

On the volume side, hospital admissions increased 5.1%, emergency room visits increased 5.6%, and adjusted admissions grew 4.7% during the second quarter compared to the prior year. We certainly believe that the successful implementation of our operating initiatives is having a very positive impact on our patient volume.

* * *

The emergency room operation improvements really helped to drive some of the volume and increases we experienced this quarter .

*

With typically 50% to 60% of our admissions for HMA and the Hospital industry coming from the ER , you can understand why it is so important to provide a high quality experience for our patients.

218. During the question and answer portion of the call, Farnham misled the

market concerning the reasons behind the Company’s rise in inpatient admissions and stated,

in part:

[I]t is good for us to look where our net revenue came from this quarter compared to a year ago. . . But if you took the net revenue that we reported and the breakdown between inpatient and outpatient, given the supplemental data, you can see that inpatient revenue was up about 8%. So we had a pretty good inpatient revenue increase from our admissions increase .

*

Having said all that, I am comfortable with our net revenue and our current pricing, and I can say that by looking at the steady increase we have had in our net revenue per adjusted admissions sequentially over the last couple of quarters, just taking our reported revenue, divided by adjusted admissions, it was 8,508 for this quarter. First quarter was 8,447, and then for the third and fourth quarters last year, it was in the mid-8,300s. So sequentially over the last several quarters, we have seen a continued increase in pricing .

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219. Newsome also misled the market regarding admissions and admissions

growth, stating in part:

The great thing is in our admissions that we are getting collectively throughout the Company, is that we are seeing increases in all payor classes, and so that tells us that we are doing an excellent job in managing appropriately the process, the admissions through our emergency room. Because that’s one of the key drivers in the quarter. So we feel like we can continue because the process we have put in place is just in its infancy.

220. Further discussing admissions growth in a response to questioning from a

Bank of America Securities-Merrill Lynch analyst, Newsome responded, in part:

Obviously the ER initiative, as I mentioned late last year, would give us the best results early on in terms of our volume growth, and we continue to see that, and we still have opportunity in our emergency room to refine that process and even perform better.

221. In response to a question from a Goldman Sachs analyst regarding industry

discussions that some not-for-profit systems were talking about reclassifying observation

cases in order to comply with upcoming RAC audits, Newsome stated in part:

We are aggressively managing appropriately according to our understanding of RAC audits. We feel we are in compliance with those regulations .

222. Newsome further commented on the improved Emergency Department

metrics as well as Emergency Department training as being significant drivers in the

Company’s growth stating, in pertinent part:

Really, the significant driver of our volume growth for the quarter, there is no question about it, we have had increases in ER visits. We have had improvement in other ER metrics which drive admissions into our hospitals, and that is still in its infancy, but we still have a lot of opportunity to do that. I think it is important to note that, while a lot of the volume increases came through the emergency room, it is across all payor classes, so we are seeing our ER execute well in a way that they haven’t done so over the last several years. Because of the focus we are putting there, the training, the tools we put in place it is driving admissions.

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223. The highlighted representations above were materially false and misleading

for the following reasons:

• The projected increase in admissions could not be explained by legitimate factors, patient acuity, or geographic variations. Rather, the increase was dependent on Defendants’ fraudulent inpatient admissions practices that not only made Defendants’ statements materially false, but constituted Medicare fraud.

• HMA’s ability to improve on operations for the remainder of the year necessarily depended on Defendants’ ability to continue executing their fraudulent scheme, and the omission of this key fact rendered Defendants’ statements so incomplete as to mislead.

• HMA’s revenue growth was not the result of the Company’s implementation of initiatives to improve emergency room operations, physician recruitment or service development, but was instead the result of excessive Medicare reimbursements obtained by inappropriately admitting patients who did not meet Medicare regulations for admission. Defendants achieved these inappropriate admissions by setting quotas for admissions, increasing pressure on physicians to admit Medicare patients who did not meet admission criteria, and using the Company’s Pro-MED software to flag patients who could be improperly admitted. ¶¶83, 118- 146, 187-197.

• Defendants knew the driving force behind HMA’s patient volume growth was the Company’s practice of mandating the inappropriate and fraudulent admission of inpatients who should have been admitted to the hospital as observation patients or observation patients that should not have been admitted to the hospital at all. See ¶¶84-101, 145-161, 173- 181. This Company sponsored pattern and practice resulted in a material change in HMA’s hospital admission rates and generated an estimated $40 million in inappropriate Medicare billing in 2009 alone. HMA’s improper admissions are further reflected in the fact that in 2009, 42 HMA hospitals exceeded their expected admission rates given their particular patient case mixes and locations. In addition, data indicates that after Newsome became HMA’s CEO, HMA had lower observation rates and higher admission rates than its peer groups. See ¶¶9, 21, 102- 117.

• Defendants knew HMA was not in compliance with Medicare regulations because it had imposed a quota or percentage rate for the admission of patients and mandated the admission of inpatients even when not

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medically necessary. See ¶¶84-101, 118, 127-129, 136, 140, 142, 144, 146, 183, 188.

As set forth in ¶¶198-214, supra, HMA’s financial reporting throughout the Class Period was made in violation of GAAP, thus materially misleading the market as to the Company’s reported financial condition and financial outlook.

• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and admissions numbers, as well as HMA’s future business prospects.

224. In response to Defendants’ false and misleading statements, the price of HMA

common stock rose $0.29 per share, or more than 5%, from a closing price of $5.51 on July

27, 2009, to close at $5.80 on July 28, 2009, on heavy trading volume of more than 17

million shares traded. The following day, July 29, 2009, the stock rose an additional 6% to

close at $6.15 per share.

B. The Second Quarter 2009 10-Q

225. On August 6, 2009, HMA filed its quarterly report on Form 10-Q for the

quarter ended June 30, 2009, which confirmed and repeated the Company’s previously

announced financial results, was signed by Newsome and Farnham, and contained required

Sarbanes-Oxley certifications (“SOX”) signed by Newsome and Farnham stating that the

Form 10-Q did not include any material misrepresentations (the “Second Quarter 2009 10-

Q”). The Second Quarter 2009 10-Q stated in part:

During the three months ended June 30, 2009, which we refer to as the 2009 Three Month Period, we experienced net revenue growth over the three months ended June 30, 2008 , which we refer to as the 2008 Three Month Period, of approximately 4.5%. Such growth primarily resulted from: (i) increased admissions and emergency room visits; (ii) favorable case mix trends; and (iii) improvements in reimbursement rates .

•

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*

As a result, recent company-wide investments to enhance and upgrade our emergency room clinical systems contributed, in large part, to the meaningful gains in emergency room visits and hospital admissions during the 2009 Three Month Period. We believe that our strategic initiatives, coupled with resourceful streamlined corporate oversight and centralized support, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions .

226. The statements referenced in ¶225 were each materially false and misleading

when made for reasons set forth in ¶223. They were also materially false and misleading

when made for the following additional reasons:

Defendants’ statements linking revenue growth to increased admissions (and attributing them to “strategic initiatives, coupled with resourceful streamlined corporate oversight and centralized support) omitted material facts, including that HMA was inappropriately and fraudulently admitting patients as inpatients pursuant to the Company mandate (a) focusing on all patients over 65 being admitted to the hospital as inpatients, as described by CW 1, CW 6, CW 8, CW 9, CW 10, CW 16, CW 18, and Alford; (b) emphasizing that all patients complaining of chest pain be admitted to the hospital as detailed by CW 1, CW 5, CW 6, CW 8, CW 16, CW 19, and Alford; and (c) decreasing or eliminating observations and increasing inpatients as described by CW 1, CW 7, CW 14, CW 16, and Alford.

C. The September 14, 2009 and September 30, 2009 Conferences

227. On September 14, 2009, HMA participated in the Morgan Stanley Global

Healthcare Conference. During the conference, John Merriwether (“Merriwether”) HMA’s

Vice President of Financial Relations, made false and misleading statements on behalf of the

Company, stating in part:

So we have really focused since that time on three main initiatives. We have an ER initiative, physician recruiting, and service development expansion. The ER initiative was started with a software and a hardware

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upgrade, which we completed on March 31 at the end of the first quarter for all of our hospitals. And it was really a focus on improved emergency room operations, from the minute that the patient walks in the door to discharge, either discharge home or admission into the hospital, with the focus being the best disposition for that patient.

* * *

And we have done a better job of the proper disposition of the patient, which has really resulted in higher quality of care, lower risk and more admissions to the Company.

* * *

So we have seen tremendous improvement in our volumes. We were -- our inpatient volumes were up 5.1% in the second quarter. And we’ve got a lot of gas left in the tank going forward into the latter part here of 2009 and into 2010.

228. On September 30, 2009, HMA participated in the Deutsche Bank Securities

Leveraged Finance Conference during which Farnham made false and misleading statements

on behalf of the Company, stating in part:

In the emergency room area -- and this has always been Gary’s passion -- it’s about improving the entire emergency room process. We basically have a clinical guidelines-driven ER patient system which measures performance at every point of the patient’s stay, from the time they first walk in and see the first nurse to the time they either leave the hospital and go home or are admitted to the hospital.

* * *

We are able to have higher throughput, better quality, higher patient satisfactions, and usually end up admitting more patients to the hospital than we otherwise would have. So very focused on that, and this is one of the three initiatives that we have already seen the most benefit from.

229. The statements referenced in ¶¶227-228 were each materially false and

misleading when made for reasons set forth in ¶223. They were also materially false and

misleading when made for the following additional reasons:

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HMA’s increase in admissions was not the result of the Company doing a better job with the proper disposition of its patients, or its clinical driven guidelines, but was instead the result of the Company’s mandate to admit more patients to inpatient status even when not medically necessary in order to maximize Medicare reimbursements.

D. The October 27, 2009 Press Release and Conference Call

230. On October 27, 2009, HMA issued a press release reporting its financial

results for its third quarter 2009 ended September 30, 2009. The press release stated in part:

For the quarter, HMA reported net revenue of $1,121.9 million and earnings before interest, income taxes, depreciation and amortization, gains on sales of assets, gains and losses on the early extinguishment of debt, and write-offs of deferred financing costs (“EBITDA”) of $158.0 million. During the third quarter, income from continuing operations was $31.3 million and net income attributable to HMA’s common stockholders was $25.4 million, or $0.10 per diluted share. Excluding certain gains on sales of assets, and as shown in the tables accompanying this press release, diluted earnings per share increased 66.7% as compared to $0.06 per diluted share for the same quarter a year ago. . . .

For continuing operations, compared to the prior year’s third quarter, net revenue increased 5.8%, admissions increased 5.4%, adjusted admissions (reflecting total admissions adjusted for outpatient volume) increased 7.0%, emergency room visits increased 12.9% and surgeries declined 0.2%. Operating EBITDA for the third quarter was $180.1 million, or 16.1% of net revenue, compared to $158.6 million, or 15.0% of net revenue, for the same quarter in the prior year, marking a 13.6% increase..

“Our growth in patient volumes and operating earnings continued during the third quarter, as we benefited from the successful implementation of our proven operating strategies that focus on emergency room operations, physician recruitment and service development,” said Gary D. Newsome, HMA’s President and Chief Executive Officer. “We are in the relatively early stages of implementation of these three key operating initiatives, and we have additional opportunities going forward for the remainder of2009 and throughout 2010.”

231. Following issuance of the press release on October 27, 2009, HMA hosted a

conference call to discuss its third quarter financial results and operations, with Newsome

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and Farnham participating on behalf of the Company. During the call, Newsome stated in

part:

Looking at our patient statistics, hospital admissions increased 5.4%. Emergency room visits increased 12.9%. And adjusted admissions grew 7% during the third quarter, compared to prior year. It is becoming even more readily apparent these results stem from the successful implementation of our operating initiatives.

232. Commenting on the Emergency Department strategy to drive growth and the

opportunity for continued growth in admissions, Newsome stated in part:

What is great about this whole process, while we had measurable improvement in our emergency rooms, and our admissions through the emergency rooms, a lot of the admissions are fueled by ER volume growth, visit growth. But the good news is we are still early in this game. We have significant opportunity for improvement in the emergency rooms, because it takes time. My experience it’s not a one year opportunity. We continue to train our staff. We continue to working with medical staff throughout – I mentioned a meeting we had with key leaders throughout the Company, a big portion of that meeting dealt with the emergency room and how physicians throughout the organization can help us in that process. We are getting great feed back. And so the ER opportunities is still there, we will see that going forward. When you tie it to the other strategies together it paints good picture for us.




Defendants’ “work” with medical staff concerning the Emergency Department was, in reality, pressuring the medical staff to increase the admission of patients who arrived at the hospitals through the Emergency Department, as supported by the collective allegations attributed to CW 1, CW 5, CW 7, CW 8, CW 9, CW 10, CW 16, CW 17, and Alford.

The “measurable improvement” in admissions through the Emergency Department was illusory. The true “fuel” behind these

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swollen admissions was Defendants’ systemic fraudulent practices, detailed by numerous CWs throughout this Complaint.

E. The November 3, 2009 Conference

234. On November 3, 2009, HMA participated in the Oppenheimer & Co.

Healthcare Conference where Farnham continued to mislead the market regarding the

reasons behind the Company’s positive financial performance, linking it to HMA’s

initiatives and stating in part:

With regard to ER operations, that involves improving the entire ER process. We utilize a clinical guideline-driven ER patient system, where we measure every part of that patient’s stay, from the time they walk in the door, until the time they’re either sent home or admitted to the hospital. The result of that process is improved patient flow, better quality care in the delivery of that care, and also higher patient satisfaction, and also additional admissions.




• HMA’s clinical guideline-driven Emergency Department patient system resulted in increased admissions because, as supported by the collective accounts of numerous CWs, the Company mandated its Emergency Department physicians and nurses admit Medicare patients to the hospital as inpatients even when not medically necessary.

F. The Third Quarter 2009 10-Q

236. On November 5, 2009, HMA filed its quarterly report on Form 10-Q for the

quarter ending September 30, 2009, which confirmed the previously announced financial

results, was signed by Newsome and Farnham, and contained SOX certifications signed by

Newsome and Farnham (the “Third Quarter 2009 10-Q”). Discussing the Company’s plans

for growth, the Third Quarter 2009 10-Q stated in part:

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During the three months ended September 30, 2009, which we refer to as the 2009 Three Month Period, we experienced net revenue growth over the three months ended September 30, 2008, which we refer to as the 2008 Three Month Period, of approximately 5.8%. Such growth primarily resulted from increased admissions and emergency room visits and improvements in reimbursement rates.

*

As a result, recent company-wide investments to enhance and upgrade our emergency room clinical systems contributed, in large part, to the growth in emergency room visits and hospital admissions during the 2009 Three Month Period. We believe that our strategic initiatives, coupled with appropriate corporate oversight and centralized support, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.


when made for reasons set forth in ¶223.

G. The November 12, 2009, November 18, 2009, and December 3, 2009 Conferences

238. On November 12, 2009, Newsome and Farnham participated in the Credit

Suisse Healthcare Conference on behalf of the Company. During the call, Newsome stated

in part:

As we have done that we have improved quality, reduced risk. We have a more appropriate patient disposition. We follow the patient from presentation to disposition, whether that’s admission, discharge, or transfer. And through that process we are able to drive higher quality, lower risk, and better performance overall.

The result of that is a lot of increased patient satisfaction, physician satisfaction, as well as lower length of stay, which drives volume. Volume drives admissions. We’ve had as I said significant success as a result of that.

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*


Admissions growth overall, 5.4% in the quarter, 3.4% year-to-date through the third quarter. I think it’s significant to report that we have led the peer group for four consecutive quarters in terms of volume growth admissions. Adjusted admissions, up 7% in the quarter, about 3.9% year-to-date.

239. Discussing the sustainability of HMA’s growth, Newsome stated in part:

So with all that being said, the volume opportunity for us I think is real. We can continue to grow our volumes in 2010 as we execute on these.

We’ve had quite a success over the last couple of quarters, over 5% increase in admissions. Is that sustainable? There is a question mark at that level. But can we grow 2%, 3%? Absolutely.

240. On November 18, 2009, Farnham participated in the Lazard Capital

Healthcare Conference on behalf of the Company, where he stated in part:

And so it really is a process that Gary likes to say that we are in the first quarter of the football game on, but really takes a good two or three years to optimize. But the result of all that is improvement with regard to reduced risks. The most appropriate disposition of the patient and also, as I said, improved quality, patient satisfaction and also additional admissions as well.

*

With regard to admissions, we have led our peer group with regard to admissions over the last four quarters. Our admissions were up 5.4% for the quarter and are up 3.4% year-to-date. The same is true with adjusted admissions. Adjusted admissions were up 7% for the quarter and 3.9% year-to-date.

241. Re-emphasizing the comments he made on November 18, 2009, on December

3, 2009, Farnham, along with Joe Meek, HMA’s Vice President and Treasurer, where he

stated in part:

Over on the admissions side, HMA really has led the peer group in our volume growth over the last four quarters. Our admission growth in the third quarter was 5.4%. Year-to-date through the nine months our admissions are up 3.4%. A similar story with regard to adjusted admissions. For the third quarter adjusted admissions were up 7.0% and year-to-date up 3.9%.

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HMA failed to inform investors that the reason it led its peer group in volume growth in admissions could not be legitimately explained. Rather, it was because HMA fraudulently admitted patients to the hospital as inpatients when not medically necessary in order to maximize admission growth and Medicare reimbursements.

H. The January 12, 2010 Press Release

243. On January 12, 2010, HMA filed a press release announcing its financial

results for the fourth quarter ended December 31, 2009. The press release announced that

Curry was appointed Executive Vice President and CFO effective January 12, 2010, and that

Farnham would continue as Senior Vice President of Finance and an officer of the Company,

functioning as the Company’s principal accounting officer. The press release also stated in

part:

Health Management Associates, Inc. (NYSE: HMA) announced today that for the fourth quarter ended December 31, 2009, the Company expects to report net revenue from continuing operations of approximately $1.2 billion , provision for doubtful accounts from continuing operations as a percentage of net revenue of between 12.3% and 12.6%, earnings before interest, income taxes, depreciation and amortization, and gains on sales of assets (“EBITDA”) of between $167 and $170 million, and earnings per diluted share (“EPS”) from continuing operations of between $0.11 and $0.12 . Admissions from Health Management’s continuing same-hospital operations for the fourth quarter increased approximately 1.5% compared to the prior year’s fourth quarter .

For the year ended December 31, 2009, Health Management expects to report net revenue from continuing operations of approximately $4.6 billion, provision for doubtful accounts from continuing operations as a percentage of net revenue of between 12.3% and 12.4%, and EPS from continuing operations, excluding certain gains, of between $0.49 and $0.50.

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* * *

“There continues to be more opportunity in our operating strategies,” added Newsome. “We continue to see significant improvement in volumes from our emergency room operations, and we are beginning to see some tangible results from our physician recruitment gains. By expanding our market services in 2010, and continuing our disciplined cost control efforts, we believe operating results can continue to improve. We remain excited about the prospects for 2010.”


common stock rose $0.47 per share, or more than 6%, from a closing price of $7.51 on

January 12, 2010, to close at $7.98 per share on January 13, 2010.


when made for reasons set forth in ¶223 and the factual detail contained throughout this

Complaint. In addition, as set forth in ¶¶147-154, 184-186, supra, beginning in January

2010, Meyer, HMA’s then Director of Compliance, sounded warning bells within the

Company regarding fraudulent Medicare billing practices at HMA hospitals. Specifically,

Meyer reported to his superiors at HMA, that several HMA hospitals secured higher

Medicare payments by improperly admitting patients as inpatients even though such patients

clearly did not meet the standards for inpatient admission. Meyer’s also reported his

findings directly to Newsome. See ¶¶152, 184. The Company and Defendants did not

address Meyer’s specific warnings and did not disclose this material information to the

market. By omitting key facts, Defendants’ Class Period statements were so incomplete as

to mislead investors.

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I. The February 8, 2010 Conference

246. On February 8, 2010, Newsome and Curry participated in the UBS Global

Healthcare Services Conference on behalf of the Company. After boasting about the

company’s “outstanding year” in 2009, Newsome discussed the Company’s Emergency

Department initiatives and stated in part:

This is key for us, because it is the front door of the hospital. HMA, like most of the industry, 50%, 60%, 70% of the admissions come through the emergency room. And I can’t overemphasize how critical this is in driving business into our hospitals and doing it the right way. It is the absolute right thing to do for all the right reasons, because it reduces risk. As these patients come into our hospitals there are processes that we have in place.

We have a more appropriate disposition whether the patient is discharged, admitted or transferred appropriately, and obviously improved quality and patient satisfaction. This is critical as we look at the emergency room initiative as we go forward.

*

Through the third quarter of September 30 of 2009 emergency room visits and in quarter 12.9%, and year-to-date 5.1%. Needless to say outstanding results. Admissions generally throughout the facilities in the third quarter are 5.4%, and year-to-date through the third quarter of 9/30/09, 3.4% growth.

We have led the peer group for four consecutive quarters in admissions growth. And this is truly as a result of our emergency room initiatives first, to a lesser extent, our physician recruitment, because it takes time, and then the market service development. The next area -- well adjusted admissions first, 7% growth in the third quarter and 3.9% overall for the year through the third quarter.


common stock rose $0.25 per share, or 3.77%, from a closing price of $6.64 on February 8,

2010, to close at $6.89 per share on February 9, 2010.

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HMA led the peer group in admissions growth not because of Emergency Department initiatives, but instead because of HMA’s mandate to inappropriately and fraudulently admit Medicare patients as inpatients regardless of medical necessity and in violation of Medicare regulations.

As evidenced by Meyer’s investigation and reporting of inappropriate Medicare billing, Defendants knew the Company’s admissions growth was not the result of the appropriate disposition of patients, but instead was the result of the inappropriate admission of Medicare patients. See ¶¶148-154, 184-186.

J. The February 22, 2010 Press Release and February 23, 2010 Conference Call

249. On February 22, 2010, HMA issued a press release announcing its financial

results for the fourth quarter 2009 and year ended December 31, 2009. The press release

stated in part:

For the quarter, Health Management reported net revenue of $1,198.8 million and earnings before interest, income taxes, depreciation and amortization, and gains on sales of assets (“EBITDA”) of $170.8 million. During the fourth quarter, income from continuing operations was $36.6 million and net income attributable to Health Management’s common stockholders was $34.1 million, or $0.14 per diluted share . Excluding certain gains and losses on sales of assets, gains on early extinguishment of debt, and investment impairment, as shown in the tables accompanying this press release, diluted earnings per share from continuing operations increased 71.4% to $0.12 as compared to $0.07 per diluted share for the same quarter a year ago . . . .

For continuing operations at hospitals owned and operated by Health Management for one year or more, referred to as same hospital continuing operations, compared to the prior year’s fourth quarter, net revenue increased 7.9%, admissions increased 1.5%, adjusted admissions (reflecting total admissions adjusted for outpatient volume) increased 3.9%,

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emergency room visits increased 6.4% and surgeries increased 0.5%. Same hospital net revenue per adjusted admission grew 3.9% while same hospital EBITDA from continuing operations for the fourth quarter increased 14.9% to $200.3 million, or 17.0% of net revenue, compared to $174.3 million, or 16.0% of net revenue, for the same quarter in the prior year.

“We are very pleased with our strong finish to 2009. We exceeded our expectations, and believe we lead our peer group in same hospital admissions growth throughout the year,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “Our performance in 2009 underscored our commitment to three key areas: emergency room operations, physician recruitment and market service development, and we expect additional opportunities for improvement in these areas throughout 2010. As we enter the new year, we will continue our disciplined operating approach, leverage our leadership strengths, and seek to further increase the value of our company through acquisitions.”

* * *

For the year ended December 31, 2009, Health Management reported net revenue of $4,617.1 million and EBITDA of $679.4 million. Likewise, income from continuing operations for the year was $159.4 million and income from continuing operations, excluding certain gains on sales of assets, gains on early extinguishment of debt, and investment impairment attributable to Health Management’s common stockholders was $123.7 million, or $0.50 per diluted share, a 42.9% increase compared to $0.35 per diluted share for the year ended December 31, 2008.

250. Following the issuance of the press release, on February 23, 2010, HMA

hosted a conference call to discuss its fourth quarter 2009 financial results and operations,

with Newsome, Farnham and Curry participating in the call on behalf of the Company.

During the call, Newsome boasted about the Company’s continued admissions growth,

stating in part:

The progress we made during 2009 exceeded the expectations we had at the beginning of the year, and we believe we still have opportunities for improvement ahead of us in 2010. From a business building perspective, we again improved our same hospital patient volumes with admissions increases of 1.5%, emergency room visit increases of 6.4%, adjusted admissions growing 3.9%, and surgeries growing 0.5% during the fourth

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quarter, compared to the same period a year ago. Our focus on three key operating initiatives, worked on all year long, has helped us lead the publicly-traded hospital group in same hospital admissions growth for 2009. We continue to evaluate the income statement for areas of cost savings, while we improve our emergency room operations, position recruitment and retention, and market service development . Based on my experience and discipline, operating approach like ours can generate sustainable operating earnings growth going forward.

I may sound like a broken record, but ensuring the best disposition of our emergency room patients, whether that is an admission or a discharge, will remain the top priority.

251. During the question and answer portion of the call, Newsome continued to

mislead the market, stating in part:

We still have upside opportunities to do the right things. And as we grow our volumes in the emergency room. And, we’ll have a better chance to have the appropriate disposition now because of the tools we have in place, the training that we’ve done. And it’s a risk avoidance tool, it’s a patient satisfier, and it’s a physician satisfier. And we will grow volumes in our emergency room because it’s become a choice place to go for emergency care, because of length of stay being reduced and other factors. So early in the game on the emergency room.

252. During the call, Curry commented on the Company’s Medicare growth stating

that the Company had “pretty modest Medicare growth. ”


misleading when made for reasons set forth in ¶223 and the factual detail contained

throughout this Complaint.

K. The 2009 10-K

254. On February 25, 2010, HMA filed its year-end results for the fiscal year

December 31, 2009, with the SEC on Form 10-K, which confirmed the Company’s financial

results set forth in the February 22, 2010 press release, was signed by Newsome and Curry,

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among others, and contained required SOX certifications (the “2009 10-K”). The 2009 10-K

provided, in relevant part:

Furthermore, we continue to invest significant resources in physician recruitment and retention, emergency room operations and capital projects. As a result, recent company-wide investments to upgrade our emergency room clinical systems contributed, in large part, to the growth in emergency room visits and hospital admissions during the 2009 Calendar Year. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions. We also believe that continually improving our existing operations provides us with a solid foundation to leverage as we consider potential acquisitions and joint ventures in 2010 and beyond.

We have also taken the steps that we believe are necessary to achieve industry leadership in clinical quality. Our vision is to be the highest rated health care provider of any hospital system in the country, as measured by Medicare. With our knowledgeable and experienced clinical affairs leadership to support this critical quality initiative, we measure the appropriate performance objectives, increase accountability for achieving those objectives and recognize the leaders whose quality indicators and clinical outcomes demonstrate improvement. Our efforts are now paying off. As most recently reported by the Centers for Medicare & Medicaid Services (“CMS”), all four of our core measure care areas have dramatically improved since the commencement of our clinical quality initiatives.

255. The 2009 10-K also described HMA’s compliance program, stating:

Our compliance program, which includes our Code of Business Conduct and Ethics, covers our employees, officers (including our chief executive officer, chief financial officer and persons performing similar functions) and directors. Our compliance program contains standards designed to promote honest and ethical conduct and compliance with all applicable laws, rules and regulations. As part of this program, we provide ethics and compliance training when an employee or officer is hired and when a new director is elected or appointed. Thereafter, our employees, officers and directors receive annual ethics and compliance training. The program requires and is designed to encourage the reporting, without fear of retaliation, of suspected illegal or ethical violations . Our compliance program is

- 100 -


periodically updated to, among other things, comply with changes in applicable laws, rules and regulations.

256. Addressing regulatory issues, the 2009 10-K stated in part, “ we believe that

we are in material compliance with all applicable laws and regulations . . .” Discussing

anti-kickback rules, the 2009 10-K also stated in part:

We systematically review our operations on a regular basis and believe that we are in compliance with anti-kickback laws, the Stark law and similar state statutes. When evaluating joint ventures or other collaborative relationships with physicians, we consider the scope and effect of these statutes and seek to structure the arrangements in full compliance with their provisions. We also maintain a company-wide compliance program to monitor and promote our continued compliance with these and other statutory prohibitions and requirements. Nevertheless, if it is determined that any of our practices or operations violate the anti-kickback laws, the Stark law or similar state statutes, we could become subject to civil and criminal penalties, including exclusion from Medicare, Medicaid and other federal and state health care programs that significantly contribute to our revenue. . . .




Defendants knew, based, in part, on the information Meyer’s provided to his superiors, that the Company was not in compliance with all applicable laws and regulations, nor was it in compliance with anti-kickback laws, the Stark law and similar state statutes, but was instead fraudulently billing Medicare for the admission of patients who did not meet Medicare’s standards of admission based on their clinical condition. See ¶¶148-154, 184-186.

HMA’s compliance program does not require and is not designed to encourage the reporting of suspected illegal or ethical violations, but instead ignores the reporting of such violations, as supported by the collective allegations of CW 1, CW 11, CW 19 and Alford; and even, in some instances, results in termination of employees who report such violations, as supported by the allegations of CW 6 and Alford.

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L. The March 9, 2010, March 10, 2010, March 23, 2010 Conference, and the March 25, 2010 Analyst Meeting

258. On March 9, 2010, Newsome and Farnham participated in the Raymond

James Institutional Investors Conference on behalf of the Company, where Newsome stated

in part:

The ER, being truly the front door of the hospital and driving, in many cases, 50%, 60% of the admissions into the hospital, we have to hit on all cylinders. And it’s a process that not only involves the emergency room - it’s throughout the whole organization because you can have bottlenecks and imaging and laboratory processes and getting patients to the floor as they get admitted.

* * *

And of course, as you do that, you’ll see the admission increases throughout the organization - fourth quarter, 1.5, and in the -- for the year, 2.9%. We led the peer for 2009 in terms of volume in admissions for the year. As that translates to adjusted admissions for the fourth quarter, 3.9, and for the year, 3.9% - great year for us. In a very challenging economic environment, we were able to grow our volumes and be great stewards of our resources driving results.

259. Farnham reiterated the Company’s financial results and also commented on

admissions growth stating:

These are some of the objectives that we all saw announced in conjunction with our fourth quarter and 2009 results. For 2010, we’re looking at admissions growth of about 1 to 2%. Probably, adjusted admissions will be higher than that. Net revenue we think will be in the $5,075,000,000 to $5,150,000,000, which would be a 10 to 11.5% increase over 2009 numbers.

260. Later in the call, Newsome commented that “we still feel very confident

about our guidance in terms of admissions.”

261. On March 10, 2010, Curry and Farnham participated in the Cowen and

Company Healthcare Conference on behalf of the Company. During the call, Curry stated in

part:

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Now it’s great because two-thirds or roughly two out of three of the people that come in to one of our hospitals as an admission come through the ER.

Also, you can see this in this number here, where the admissions increase year over year, we led our industry. It’s 1.5% in the fourth quarter and up 2.9% on a same-store continuing ops basis. You can also see it in our adjusted admissions increase, where you can see year over year, both for the fourth quarter and for the year, we were up 3.9% on a same-hospital continuing operations basis. So the results bear out the strategy.

262. Farnham also made false and misleading statements regarding the Company’s

admissions objectives stating, in pertinent part:

Just to talk a few minutes about our objectives that we released in the first week of 2010. Admissions, our objective here is between 1% and 2% for the year. Adjusted admissions will obviously be higher than that. Net revenue, we are forecasting, $5.075 billion to $5.150 billion. Based on 2009’s net revenue, that’s an increase of between 10% and 11.5% in net revenue.

* * *

So that’s our objectives for 2010. In summary, as really Kelly discussed earlier, our operating initiatives that are designed really to generate top-line growth and volume increases, coupled with our cost controls and some acquisition opportunities as well, we feel very confident that we can deliver on our objectives for 2010, and that those same initiatives and cost controls should continue in future years as well .

263. On March 23, 2010, Newsome and Curry participated in the Barclays Capital

Global Healthcare Conference on behalf of the Company. During the call, Newsome largely

repeated statements made during the March 10, 2010 conference. Specifically, Newsome

stated in part:

Our admissions throughout the system grew 1.5% in the fourth quarter and for the year, leading the peer group for 2009, 2.9% growth in admissions for 2009 over 2008.

And, of course, the emergency room was key for that growth in 2009. But as we travel throughout the year, and then especially in the fourth quarter, we had results from our physician recruitment efforts, which is our next

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initiative. We’ll have our adjusted admissions to share with you, 3.9% growth over prior year.

* * *

And again, as I mentioned, the emergency room, early in the year in 2009, was driving most of our growth in admissions. In latter part of the year, I said throughout the year, that we would begin to get the results from our physician recruitment, and we did in the fourth quarter. You can see those results in our outpatient surgeries and other areas as they grew; again, focusing on the key drivers.

264. Newsome also failed to inform the market that system assessments made in

determining whether a patient should be admitted were being used to pressure physicians to

admit patients, stating:

And within each category that we measure, we also have cues and systems that will help the clinicians determine if the patient needs additional testing; ifthe patient is a candidate for admission versus other level ofcare or treatment.

265. March 25, 2010, HMA held an analyst meeting attended by Newsome and

Curry, as well as other HMA representatives. During the analyst meeting, Defendants

continued to make false and misleading statements regarding the Company’s admissions and

guidance numbers. For example, Newsome stated, “ We fully expect to be able to hit our

guidance numbers both from admissions, revenues, all the way down the line .”

Continuing, Newsome also stated, “ I think if you look at our growth model with quality and

volumes focusing our key initiatives will all drive the volume source .”

266. During the meeting, Putter, a Division President, commented on the

Company’s Emergency Department documentation stating in part:

Documentation. The great thing -- one of the great things about ER Extra and our Pro-MED documentation system – software system is it is all electronic. Now all of the information that is gathered on this patient, and

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that the nurse document and the physician documents goes into the Pro-MED system. What does that do for us?

All that information now gives us the ability to give the most appropriate coding for our coder, so that we can draw up the most appropriate bill. So that we can get paid the most appropriately for what we give. So it really helps in documenting, because in healthcare if it is not documented, you didn’t do it. So it really provides an excellent tool for documenting. In fact, before that record is ever closed, it is complete. So there is no -- you don’t have to worry about going to the physician, please, we forgot to document it. Not only does it help on coding for us, it helps with the coding on a physician, because now when the physicians bill, their billers have all the information as provided by the Pro-MED system.




The cues and systems HMA put in place to help clinicians determine whether patients required additional testing and were candidates for admission were, in reality, systems designed to increase admissions patient admission even when not medically necessary. See ¶¶131- 144.

HMA did not use the Pro-MED system to give the Company the most appropriate coding, but instead used and manipulated the Pro-MED system to require the admission of patients even when not medically necessary in order to obtain excessive Medicare reimbursements. See ¶¶83, 140, 183, 192-194.

M. The April 26, 2010 Press Release and the April 27, 2010 Conference Call

268. On April 26, 2010, HMA issued a press release announcing its consolidated

financial results for its first quarter ended March 31, 2010, and increasing the Company’s

annual diluted EPS objective. The press release stated in part:

For the quarter, Health Management reported net revenue of $1,285.0 million and earnings before interest, income taxes, depreciation and amortization, and certain other items (“Adjusted EBITDA”) of $196.3

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million. During the first quarter, income from continuing operations was $53.4 million and net income attributable to Health Management’s common stockholders was $46.9 million, or $0.19 per diluted share. Excluding certain gains and losses on sales of assets and gains on early extinguishment of debt, as shown in the tables accompanying this press release, diluted earnings per share from continuing operations increased 26.7% to $0.19 as compared to $0.15 per diluted share for the same quarter a year ago. . . .

On a consolidated basis, net revenue from continuing operations increased 10.3%, admissions from continuing operations grew 4.5%, and adjusted admissions from continuing operations grew 8.3% in the first quarter as compared to the same quarter a year ago. In addition, total Adjusted EBITDA from continuing operations for the first quarter increased 8.6% to $196.3 million.

For continuing operations at hospitals owned and operated by Health Management for one year or more, referred to as same hospital continuing operations, compared to the prior year’s first quarter, Adjusted EBITDA from continuing operations increased 7.4% to $227.2 million, or 18.7% of net revenue. This compared to $211.6 million, or 18.2% of net revenue, for the same quarter in the prior year.

“Our hospital operations have certainly improved since we initiated our operating strategy, and we believe that the outstanding results we are generating are a direct result,” added Mr. Newsome. “We believe we are still in the early stages of realizing the benefits of our focus on emergency room operations, physician recruitment and market service development. Based on our results during the first quarter of 2010 and the prospects for additional operating improvements, we have increased our annual diluted EPS objective to better reflect our expectations.”

269. On April 27, 2010, HMA hosted a conference call to discuss its first quarter

2010 financial results and operations, with Newsome, Curry and Farnham participating.

During the call, Curry reiterated the Company’s first quarter 2010 financial results and

addressed admissions stating in part:

“For same hospital continuing operations, compared to the prior year’s first quarter, net revenue increased 4.4% and net revenue per adjusted admission grew 1.3%.”

- 106 -


270. Later in the call, Newsome spoke about the Company’s financial results and

raised guidance, stating:

We are very pleased with the results for the first quarter and our start to 2010. On January 12, 2010, we’ve established our objectives for 2010, with diluted EPS expected to be between $0.53 and $0.58 for the year. Given our reported results for the first quarter and our belief that additional opportunities exist through the remainder of the year, we are raising our 2010 annual diluted EPS objective to be between $0.56 and $0.61. We believe that’s achievable by maintaining our focus on disciplined cost containment and our three operating initiatives; the emergency room operations, physician recruitment and retention, and market service development.


common stock rose 5%, or $0.44 per share, to close at $9.09 on April 27, 2010.




N. The May 3, 2010 Conference

273. On May 3, 2010, Newsome and Curry participated in the Deutsche Bank

Securities Health Care Conference on behalf of the Company, with Newsome stating in part:

We have focused on three key areas and I’ve talked about this now for a long time and the first of those is the emergency room initiative. We’ve really focused on getting everything in process, getting our tool enhanced and the technology and equipment in place as it should be. Training our staff throughout the organization, training our physicians, our other clinical personnel in the emergency room, really deploying a systematic approach to the emergency room and looking at ER Extra, which we have also as part of our experience for our patients in the emergency room. We have had outstanding results. It’s really driven a lot of our growth over the last several quarters, in addition to the others, but this has really improved quality, improved patient satisfaction experience, lower risk, everything that you want to happen in your emergency room. It will help us continue to drive volumes and continue to drive admissions to our emergency room.

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Because it truly is the front door of the hospital and that’s true for us and everyone else in the industry.

As you can see, our adjusted admissions for the quarter up 3.1%, again an outstanding result .

*

As you can see that as a result of our market service development, our physician recruitment, and our ER initiative, consolidated volumes increased handsomely in the first quarter, 4.5% and surgeries up 9.4%. By any metric is an outstanding result.


when made for reasons set forth in ¶223 and the factual detail contained throughout this

Complaint.

O. The First Quarter 2010 10-Q

275. On May 5, 2010, HMA filed its quarterly report on Form 10-Q for the quarter

ended March 31, 2010, which confirmed the Company’s previously announced financial

results, was signed by Newsome and Curry, and contained required SOX certifications (the

“First Quarter 2010 10-Q”). The First Quarter 2010 10-Q stated in part:

As a result of our growth in net revenue, income from operations increased approximately $13.0 million, or 10.7%, during the 2010 Three Month Period.

276. The First Quarter 2010 10-Q also set forth several false and misleading

statements about the Company’s increased admissions, stating in part:

Our recent company-wide investments to upgrade our emergency room clinical systems contributed, in large part, to the growth in emergency room visits and hospital admissions that we experienced during 2009. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions .

- 108 -





P. The May 11, 2010, May 20, 2010, May 27, 2010, June 16, 2010, and June 24, 2010 Conferences

278. May 11, 2010, Newsome, Curry and Farnham participated in the Bank of

America Merrill Lynch Healthcare Conference on behalf of the Company. During the

conference, Newsome made false and misleading statements regarding the Company’s

admissions, stating in part:

You can see our adjusted admissions, continuing operations in the first quarter up 3.1%. Outstanding in this environment by any comparison.

* * *

As you can see, as a result of some of these things, our ER initiative, our physician recruitment, our market service development strategies, consolidated admissions for the first quarter up 4.5% and consolidated surgeries up 9.4%. Outstanding results in the environment that we have in healthcare today.

279. On May 20, 2010, Curry and Farnham participated in the Robert W. Baird

Growth Stock Conference. During the call, Farnham stated, in part:

So off to a very good start to the year. And really just to wrap up, the operating initiatives that Kelly talked about will help -- should help drive topline performance, both as a result of our volume increases and the results in revenue increases to the topline . That, coupled with continued discipline on our operating costs, should help to drive our growth in 2010 and beyond that .

280. On May 27, 2010, Curry and Farnham participated on behalf of HMA in the

Citi Global Healthcare Conference. During the call, Curry continued to mislead the market

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regarding HMA’s admissions numbers and the reasons behind HMA’s admissions growth,

stating in part:

We are doing it through our three major initiatives. That’s emergency room operations, physician recruiting and market service development. And that will translate to higher quality, increased volumes, greater earnings.

* * *

So we are -- with our objective of 1% to 2%, we are still comfortable with that. If it turns out we need to adjust it, we will, but we are still thinking that objective is very valid on the year.

281. On June 16, 2010, Curry and Farnham participated in the Goldman Sachs

Global Healthcare Conference on behalf of the Company. During the conference, Curry

reiterated the false and misleading statements he made during the May 27, 2010 conference.

282. On June 24, 2010, Farnham participated in the Wells Fargo Securities

Healthcare Conference on behalf of the Company. During the call, Farnham made false and

misleading statements regarding the disposition of patients stating in part:

And so, at every point during that patient’s stay, the physician has the best information in the most timely manner so that, at the end of what is hopefully between a two- and a two-and-a-half-hour stay, we will have the most appropriate disposition of that patient, which is to either send home or admitted into the hospital. And it improves patient satisfactions. It’s a higher quality of care with regard to the outcome and also with regard to risk management.

283. Farnham also discussed HMA’s focus on the Company’s three operating

initiatives, stating in part:

Just to summarize, the three initiatives that I talked about briefly that we have in place should help to drive top line growth. And that, in conjunction with disciplined cost controls that you’ve seen us exhibit over the last year, should result in improved operational results in 2010 and beyond .

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284. When responding to a question regarding the ER EXTRA program, Farnham

reiterated that the Company utilized its Emergency Department programs to ensure the “most

appropriate disposition for the patient” and also stated that such efforts would cause “ a bump

in the number of admissions, the admit rate that we’ll have .”

285. The statements referenced in ¶¶278-280 and 282-283 were each materially

false and misleading when made for reasons set forth in ¶223. They were also materially

false and misleading when made for the following additional reasons:

• Defendants failed to inform investors that the reason the Company’s Emergency Department programs resulted in “a bump in the number of admissions” was not because HMA was determined to ensure the “most appropriate disposition for the patient,” but because HMA was determined to admit as many patients to the hospital as inpatients regardless of medical necessity.

Q. The July 26, 2010 Press Release and July 27, 2010 Conference Call

286. On July 26, 2010, HMA issued a press release announcing its financial results

for its second quarter ended June 30, 2010, and reiterating its anticipated EPS for 2010. The

press release stated in part:

For the quarter, Health Management reported net revenue of $1,247.8 million and earnings before interest, income taxes, depreciation and amortization, and certain other items (“Adjusted EBITDA”) of $182.5 million. During the second quarter, income from continuing operations was $45.7 million and net income attributable to Health Management’s common stockholders was $39.7 million, or $0.16 per diluted share, a 23.1% increase as compared to $0.13 for the same quarter a year ago . . . .

On a consolidated basis, net revenue from continuing operations increased 10.3%, admissions from continuing operations grew 5.0%, and adjusted admissions from continuing operations grew 9.6% in the second quarter as compared to the same quarter a year ago. In addition, consolidated Adjusted EBITDA for the second quarter increased 7.5% to $182.5 million compared to the same quarter a year ago.

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For continuing operations at hospitals owned and operated by Health Management for one year or more, referred to as same hospital continuing operations, compared to the prior year’s second quarter, Adjusted EBITDA increased 6.5% to $210.0 million, representing 17.8% of net revenue. This compares to $197.2 million, or 17.4% of net revenue, for the same quarter in the prior year.

“We are pleased with the continued successful execution of our operating strategy which has generated another quarter of outstanding financial results,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “We have maintained our disciplined cost controls while continuing to see progress with our emergency room operational improvements, physician recruitment and market service development. While we continue to expand same hospital margins, our acquisition pipeline remains active, and we believe our growth opportunities will continue. Last quarter we raised our annual diluted EPS objective for 2010 to be between $0.56 and $0.61, and we are now reiterating that annual objective.”

287. The following day, on July 27, 2010, HMA hosted a conference call to

discuss its second quarter 2010 financial results and operations, with Newsome, Curry and

Farnham participating in the call on behalf of the Company. Newsome discussed the

Company’s second quarter 2010 results and admissions, stating in part:

For continuing operations at hospitals, we have owned and operated for one year or more referred to as same hospital continuing operations compared to the prior year’s second quarter, admissions declined 0.6%, which is a good number in light of our 5.1% admission growth in the comparable period a year ago, and the challenging economy.

Same-hospital adjusted admissions increased 3.7%. ER business declined 0.6% and surgeries increased 4.4%. Same-hospital adjusted EBITDA from continuing operations for the second quarter increased 6.5% to $210 million, or 17.8% of net revenue compared to $197.2 million, or 17.4% of net revenue for the same quarter in the prior year.

288. Newsome also provided additional commentary on the Company’s expected

annual same-hospital admissions growth, which was lowered, stating in part:

We believe patient visits are being delayed as a result of these financial dilemmas. Based on our belief that this trend may continue and our

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reported volumes thus far through the six months of 2010, we’re expecting our annual same-hospital admissions growth to be closer to 1% .

289. As the call continued, Curry expanded on expected admissions numbers,

stating in part:

Well, we did -- our guidance was 1% to 2%. We’re saying we’re going to be closer to 1%. And that really -- we had even in the second quarter a very difficult comp. It’s 5.4% increase in the -- 5.3% -- and from that standpoint it’s a big hurdle for us, but even that being said, we have seen some trends. We look at the data. We know what type of cases we’re seeing, where we have growth, and where we don’t have growth. And it’s really in those cases where people can delay their care. And at some point in time, that will have to come back into the system. The delay of these type of cases that we see in reality are not things that are truly elective. They are just delayable. And from that standpoint, they will come back into existence at some point in time, whether it’s this year or next. But what’s great about our story is that we feel very confident on staying the course on our three key initiatives. And we see that driving results. We’re still early in the game on those three initiatives.

*

So frankly, we think that relative to the comp that we have, we think we had a very strong admissions quarter, in light of the economy, et cetera, and we’re not concerned about going forward because, as Gary mentioned, our initiatives, we continue to refine those, continue to develop them, continue to see progress on them. People continue to push big wins over the line and that’s what delivers results.

290. When questioned as to the driving force behind the Company’s business,

Newsome focused on JiMA’s initiatives, stating in part:

I think one thing you have to realize is our initiatives, where we’re focusing on these key initiatives is really driving business as well. And you can’t get lost in the fact that as we gain market share, we’re going to grow our volumes and these targeted initiatives will and have allowed us to grow market share in our hospitals, and from that standpoint, then as -- just think about it. As the economy improves and when it improves, people begin to utilize, well, we have hospitals in the southeast in more aggressive way. We’re going to be very well positioned as we go forward.

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common stock rose $0.14 per share, or 2%, from a closing price of $7 on July 26, 2010, to

close at $7.14 per share on July 27, 2010.




R. The Second Quarter 2010 10-Q


quarter ended June 30, 2010, which confirmed the Company’s previously announced

financial results, was signed by Gary S. Bryant, HMA’s Vice President, Controller (Principal

Accounting Officer), and contained required SOX certifications signed by Newsome and

Curry (the “Second Quarter 2010 10-Q”). The Second Quarter 2010 10-Q stated in part:

Our company-wide investments to upgrade our emergency room clinical systems contributed, in large part, to the growth in emergency room visits and hospital admissions that we experienced during 2009. For 2010, we are implementing ER ExtraTM, which is our new emergency room operational initiative that is designed to reduce patient wait times, enhance patient satisfaction and improve the quality and scope of patient assessments. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.




• HMA was not focused on improving the scope and quality of patient assessments, but was instead focused on increasing patient admissions,

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utilizing and manipulating patient assessments to admit as many patients as possible even when not medically necessary.

S. The September 14, 2010 and October 6, 2010 Conferences

295. On September 14, 2010, Newsome participated in the Morgan Stanley Global

Healthcare Conference on behalf of the Company, where he discussed HMA’s admissions

numbers and the driving force behind those admissions, stating in part:

We are well into developing our programs and processes in the emergency room to reduce risk, improve quality, and drive volume in admissions to our hospitals. It’s still early in the game, still have a lot of opportunity there.

296. On October 6, 2010, Farnham and Meek participated in the Deutsche Bank

Securities Inc. Leveraged Finance Conference on behalf of the Company, where Farnham

attributed the Company’s hospital admissions to its Emergency Department operations,

stating in part:

Emergency room operations are critically important. If you don’t know, I will tell you that -- and this is true of any hospital -- about two thirds of a hospital’s admissions come through the emergency room. And so that really makes the emergency room the front door of the hospital. And in the emergency room, the focus is all on process. And we focus on every part of that patient’s experience and the process so that at the end of their 2 to 2 1/2 hour stay, which is our goal and our -- what we are experiencing, which is much shorter than the industry as a whole – but at the end of that 2 to 2 1/2 hour experience, we have the most appropriate disposition of that patient.

They are either sent home or admitted to the hospital. We have an electronic tool that we use which, basically, is an electronic charting system that has preapproved testing guidelines built into it, and that we measure the progress of that patient each step of the way while they are there. And so, as I said, at the end of that 2 to 2 1/2 hour time period, we make the most appropriate disposition of the patient.

297. Later in the conference, Farnham again reiterated the importance of the

Company’s Emergency Department operations stating, in pertinent part:

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Why the movement in ER, given as an initiative? Well, yes. It’s a two-edged sword there. I mentioned that two thirds of any hospitals admissions generally come through the emergency room. So that is really the front door of the hospital. If two thirds of our admissions are coming through the emergency room, then you know, it’s critical to focus on all the processes that are involved in that emergency room and make sure we have all of those processes in place to make the most appropriate disposition of the patient.

298. Meek also attributed the Company’s growth to the Company’s initiatives

stating, in pertinent part:

This final slide illustrates how our three strategies -- emergency room operations, physician recruitment, and market service development -- along with good cost controls have and will continue to drive volumes, quality, and operating earnings. That will obviously result in growth.



misleading when made because, as set forth in ¶¶15, 149-154, 185, supra, on August 19,

2010, Meyer circulated a detailed memorandum to his superiors describing ongoing

Medicare fraud related to improper patient admissions occurring at certain of the Company’s

hospitals. Defendants, however, continued to omit any disclosure of the Company’s

Medicare fraud, Meyer’s concerns, or Meyer’s detailed memorandum. In addition, CW 1,

CW 19, and Alford also reported the inappropriate admission of patients as inpatients to their

superiors at HMA, yet HMA intentionally ignored these reports.

T. The October 27, 2010 Press Release and October 28, 2010 Conference Call

300. On October 27, 2010, HMA filed a press release announcing its financial

results for the third quarter ending September 30, 2010. The press release reiterated the

Company’s EPS objective, and stated in part:

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For the quarter, Health Management reported net revenue of $1,270.7 million and earnings before interest, income taxes, depreciation and amortization, and certain other items (“Adjusted EBITDA”) of $171.2 million. During the third quarter, income from continuing operations was $39.9 million and net income attributable to Health Management’s common stockholders was $35.3 million, or $0.14 per diluted share, a 40.0% increase as compared to $0.10 for the same quarter a year ago . . . .

For continuing operations, revenue increased 13.3%, admissions grew 4.9%, and adjusted admissions grew 8.4% in the third quarter as compared to the same quarter a year ago. In addition, Adjusted EBITDA for the third quarter increased 8.4% to $171.2 million compared to the same quarter a year ago.

For continuing operations at hospitals owned and operated by Health Management for one year or more, referred to as same hospital continuing operations, compared to the prior year’s third quarter, Adjusted EBITDA increased 9.6% to $197.5 million, representing 16.7% of net revenue. This compares to $180.1 million, or 16.1% of net revenue, for the same quarter in the prior year. Due to declines in uninsured admissions, H1N1 cases, and births, admissions from same hospital continuing operations for the third quarter were 3.0% lower than the same period a year ago, and adjusted admissions were 0.3% behind the prior year’s third quarter. This compares to increases in 2009 of 5.4% in admissions and 7.0% in adjusted admissions for the same period a year ago. In addition, third quarter same hospital net revenue increased $57.6 million, or 5.1%, to $1,179.5 million from $1,121.9 million. This increase is supported by a 5.5% increase in same hospital surgeries for the quarter.

“We are pleased with the continued successful execution of our operating strategy which has generated another quarter of outstanding financial results,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “We have maintained our disciplined cost controls while continuing to see progress with our emergency room operational improvements, physician recruitment and market service development. While we continue to expand same hospital margins, our acquisition pipeline remains active, and we believe our growth opportunities will continue. Last quarter we raised our annual diluted EPS objective for 2010 to be between $0.56 and $0.61, and we are now reiterating that annual objective.”

301. Following the issuance of the press release, on October 28, 2010, HMA

hosted a conference call with Newsome, Curry and Farnham participating on behalf of the

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Company. During the call, Newsome misled investors by boasting about continued

admissions growth, stating in part:

For continuing operations of the hospitals we have owned and operated for one year or more, referred to as same hospital continuing operations, compared to the prior year’s third quarter, admissions declined 3%, primarily as a result of a decline in uninsured admissions, H1N1-related illnesses and births. Recall that Health Management led the publicly traded hospital group by a wide margin in the third quarter of last year with a 5.4% increase in same hospital admissions.

302. Newsome summarized his comments regarding the Company’s admissions,

stating in part:

For the first time in a long time, the number of same hospital uninsured admissions as a percentage of total admissions declined in the third quarter and that is an encouraging sign.


common stock rose $0.47 per share, or 6.43%, from a closing price of $7.31 on October 27,

2010, to close at $7.78 per share on October 28, 2010.


misleading when made for reasons set forth in ¶223.

U. The November 2, 2010 Conference

305. On November 2, 2010, Farnham participated in the Oppenheimer & Co.

Healthcare Conference on behalf of the Company, where he discussed the Company’s

disposition of Emergency Department patients, reiterating that the Company had processes in

place to ensure “we have made the most appropriate disposition for that patient .”

Continuing, Farnham stated:

The doctor will have all the information that he or she needs to send the patient home with the appropriate prescription or admit the patient if they

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need to be admitted. The results of this process is, as I said, the most appropriate disposition of the patient, but it results in more throughput and higher patient satisfaction. And if we are making the most appropriate disposition for the patient, it also reduces risk, as well.




• HMA did not focus on making the most appropriate disposition for its patients or admitting patients who needed to be admitted, but instead mandated the admission of as many inpatients as possible, regardless of medical necessity.

V. The Third Quarter 2009 10-Q

307. On November 3, 2010, HMA filed its quarterly report on Form 10-Q for the

quarter ended September 30, 2010, which confirmed the Company’s previously announced

financial results, was signed by Bryant, and contained SOX certifications signed by

Newsome and Curry (the “Third Quarter 2009 10-Q”). The Third Quarter 2009 10-Q stated

in part:

We believe that our company-wide investments to upgrade our emergency room clinical systems contributed, in large part, to the growth in emergency room visits and hospital admissions that we experienced during 2009. For 2010, we are implementing ER ExtraTM, which is our new emergency room operational initiative that is designed to reduce patient wait times, enhance patient satisfaction and improve the quality and scope of patient assessments. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.

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• HMA’s executive management oversight, while driving revenues, was anything but appropriate. Instead, such oversight focused on the company-wide goal of increasing patient admissions, which, in turn, improperly increased Medicare reimbursements.

W. The November 10, 2010, November 16, 2010, November 17, 2010, January 11, 2011 and February 8, 2011 Conferences

309. On November 10, 2010, Curry participated in the Credit Suisse Group

Healthcare Conference on behalf of the Company, during which he stated in part:

Our ER, our adjusted admissions as a Company, are up 8.4% in the third quarter, is an indication of the success of the strategy.

* * *

So our initiatives, emergency rooms, physician recruiting, market service development, matched with quality, volumes produced in operating and earnings, which results in growth and part and parcel to all that is up in the right-hand corner, our “Getting 2 Great” logo. That’s about culture change within our organization that we kicked off earlier this year. It’s a program that Gary, frankly, put together for our Company.

310. On November 16, 2010, Farnham participated in the LCM Annual Healthcare

Conference on behalf of the Company, where he reiterated that the Company’s operating

initiatives were the driving forcing behind the Company’s growth, stating in part:

For the last two years we have been focused on three operating initiatives to drive top-line growth. The initiatives coincide with Gary Newsome coming back to the Company. He has been back at the Company two years in September. Gary has spent his entire career in operations, so from the time he came back to the Company he established three operating initiatives.

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The first is emergency room operations and this is really all about process . We do utilize a tool in our ERs. It’s basically an electronic charting system that utilizes preapproved testing guidelines based upon the patient coming in, being triaged and their description of what is wrong with them. But in using this tool during the patient’s stay in conjunction with improved documentation and better training, both on the physicians and all clinicians as well, the goal is to -- within two to two and a half hours have the most appropriate disposition of the patient, which means they are either sent home or they are admitted to the hospital.

And if the process works in a very streamlined fashion, the way it’s intended to, it results in improved throughput, higher satisfactions on the part of the patient. And if it is the most appropriate disposition of the patient , it speaks to higher quality and also less risk.

311. On January 11, 2011, Newsome participated in the JP Morgan Healthcare

Conference on behalf of the Company, where he stated HMA “ expect[ed] to return to a

positive admission growth in 2011 .” Then, on February 08, 2011, Curry participated in the

UBS Global Healthcare Services Conference where he stated “ [w]e expect admission growth

to be from 0% to 2% .”


misleading when made for reasons set forth in ¶223.

X. The February 16, 2011 Press Release

313. On February 16, 2011, HMA issued a press release announcing its

consolidated financial results for the fourth quarter and year ended December 31, 2010. The

press release stated in part:

Key metrics from continuing operations for the fourth quarter (all percentage changes compare the fourth quarter of 2010 to the fourth quarter of 2009 unless otherwise noted) include:

Diluted earnings per share (“EPS”) increased 23.1% to $0.16;

Revenue increased 14.1% to $1,352.1 million;

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• Income From Continuing Operations increased 26.0% to $46.4 million;

~ Adjusted EBITDA increased 9.6% to $186.5 million;

. Admissions increased 8.3% while adjusted admissions increased 12.6%;

• Same hospital net revenue increased 2.1% to $1,209.7 million;

• Same hospital Adjusted EBITDA increased 5.0% to $209.6 million, resulting in a 40 basis point improvement in margin, to 17.3%;

. Same hospital surgeries increased 5.2% percent; and

• Same hospital admissions declined 3.1% while same hospital adjusted admissions increased 0.1%.

* * *

For continuing operations at hospitals owned and operated by Health Management for one year or more, referred to as same hospital continuing operations, net revenue increased $25.1 million or 2.1% to $1,209.7 million compared to the prior year’s fourth quarter. Adjusted EBITDA from same hospital continuing operations grew 5.0% to $209.6 million, representing 17.3% of net revenue, as compared to $199.6 million and 16.9% of net revenue for the same quarter a year ago. A 5.2% increase in same hospital surgeries contributed to this net revenue and Adjusted EBITDA growth. Primarily due to declines in uninsured admissions and H1N1 flu cases, admissions from same hospital continuing operations were 3.1% lower than the same period a year ago and adjusted admissions were essentially flat compared to the prior year’s fourth quarter. This compares to increases of 1.6% in admissions and 4.0% in adjusted admissions from same hospital continuing operations for the fourth quarter ended December 31, 2009.

“We are very pleased to report another great quarter which exceeded our expectations and contributed to a record setting year for Health Management in 2010,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “ We strongly believe that our continued and relentless focus on cost discipline, emergency room operations, physician recruitment and market service development were the key factors that enabled us to achieve another year of outstanding results . Heading into 2011, we plan to continue our disciplined approach to hospital acquisitions and joint ventures , and remain what we believe to be the only pure player in the non-urban sector.”

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* * *

For continuing operations, Health Management reported net revenue of $5,115.0 million and Adjusted EBITDA of $734.9 million for the year ended December 31, 2010, a 12.2% and 8.3% increase, respectively, compared to the prior year. Income from continuing operations for the year grew 15.6% to $186.0 million and EPS from continuing operations grew 18.2% to $0.65 compared to the year ended December 31, 2009.

Health Management also reiterated its 2011 earnings objective of income from continuing operations attributable to Health Management Associates, Inc. of between $0.72 and $0.76 per diluted share. This objective range does not include any benefit from potential 2011 acquisitions.

“We believe that our operational initiatives and cost controls will continue to help us improve our operating results in 2011.”



Y. The 2010 10-K

315. On February 24, 2011, HMA filed its year-end results for the fiscal year

December 31, 2010 with the SEC on Form 10-K, which confirmed the Company’s financial

results in the February 16, 2011 press release, was signed by Newsome and Curry, among

others, and contained required SOX certifications (the “2010 10-K”). The 2010 10-K

provided, in relevant part:

Furthermore, we are investing significant resources in physician recruitment and retention (primary care physicians and specialists), emergency room operations, replacement hospital construction and other capital projects. For example, we continue to implement ER Extra®, which is our new emergency room operational initiative that is designed to reduce patient wait times, enhance patient satisfaction and improve the quality and scope of patient assessments. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.

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*

Net revenue per adjusted admission increased approximately 2.1% during the 2010 Calendar Year as compared to the 2009 Calendar Year. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers, partially offset by the unfavorable movement in our payor mix during the 2010 Calendar Year.

316. The 2010 10-K also described HMA’s compliance program, stating:

Our compliance program consists of a Code of Business Conduct and Ethics, written guidance (including compliance policies), a training and education process, an audit process, anonymous reporting mechanisms and an investigative process. Day-to-day leadership of our compliance program is provided by our vice president of compliance who reports directly to our chief executive officer. Our vice president of compliance also provides quarterly reports to the audit committee of our board of directors, as well as regular reports to our corporate compliance committee, which consists of our chief executive officer, chief financial officer and general counsel .

317. Addressing regulatory issues, the 2010 10-K stated in part, “We closely

monitor our billing and other health care practices to maintain compliance with prevailing

industry interpretations of applicable laws and regulations and we believe that our

practices are consistent with those in our industry and in material compliance with all

applicable laws and regulations.” Discussing anti-kickback rules, the 2010 10-K also stated

in part:

We systematically review our operations on a regular basis and believe that we are in compliance with anti-kickback laws, the Stark law and similar state statutes. When evaluating collaborative relationships with physicians, we consider the scope and effect of these statutes and seek to structure the arrangements in full compliance with their provisions. We also maintain a company-wide compliance program to monitor and promote our continued compliance with these and other statutory prohibitions and requirements. Nevertheless, if it is determined that any of our practices or operations violate the anti-kickback laws, the Stark law or similar state statutes, we could become subject to civil and criminal penalties, including exclusion

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from Medicare, Medicaid and other federal and state health care programs that contribute significantly to our revenue. . . .




Contrary to Defendants statements, HMA knew it was not in material compliance with anti-kickback laws, the Stark law and similar state statutes, and that its practices were not in compliance with billing and healthcare practices because Meyer reported his discovery of HMA’s fraudulent Medicare billing practices directly to Newsome, face-to-face, and to his superiors. See ¶¶149-150, 152, 184-185. In addition, as described in HMA’s Code of Business Conduct and Ethics, and by Dauten, HMA’s Vice President of Compliance and Security, Defendants’ Audit Committee, Board of Directors and CEO had a direct line of communication with Meyer’s supervisor and would have received Meyer’s August 19, 2010 Memorandum detailing HMA’s fraudulent billing practices. See ¶151.

Z. The March 2, 2011 Conference

319. On March 2, 2011, Curry participated in the RBC Capital Markets Healthcare

Conference on behalf of HMA, during which he confirmed the Company’s guidance, stating

“in our guidance or objectives, we’ve said that we expected 0% to 2%, and that’s where

we’re at .” At the March 16, 2011 Barclays Capital Global Healthcare conference, Newsome

stated, “ We expect to return to a positive admission growth in 2011 .”



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AA. The April 25, 2011 Press Release and April 26, 2011 Conference Call

321. On April 25, 2011, HMA filed a press release announcing its financial results

for the first quarter ended March 31, 2011. The press release announced the Company was

increasing its 2011 EPS objective and stated in part:

Key metrics from continuing operations for the first quarter (all percentage changes compare the first quarter of 2011 to the first quarter of 2010 unless otherwise noted) include:

~ Diluted earnings per share (“EPS”) increased 15.8% to $0.22;

. Revenue increased 12.7% to $1,433.6 million;

~ Income from continuing operations increased 16.4% to $62.7 million;

~ Adjusted EBITDA increased 9.3% to $214.4 million;




• Same hospital surgeries increased 0.5%; and

• Same hospital admissions and adjusted admissions declined 3.9% and 0.3%, respectively.

For continuing operations at hospitals operated by Health Management for one year or more, referred to as same hospital continuing operations, net revenue increased $61.2 million or 4.8% to $1,333.0 million compared to the prior year’s first quarter. Adjusted EBITDA from same hospital continuing operations grew 6.3% to $243.4 million, representing 18.3% of net revenue, as compared to $229.0 million and 18.0% of net revenue for the same quarter a year ago. A 0.5% increase in same hospital surgeries contributed to this net revenue and Adjusted EBITDA growth. Admissions from same hospital continuing operations in the first quarter were affected by declines in uninsured admissions and weather-related disruptions to a

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greater degree than during the same period a year ago, contributing to a 3.9% decline, while same hospital adjusted admissions were essentially flat, at -0.3%, compared to the prior year’s first quarter.

“We are very pleased to report another great quarter,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “ We will continue to focus on the initiatives we believe continue to significantly contribute to our outstanding results , including cost discipline, emergency room operations, physician recruitment and market service development . We believe our catalyst for growth continues to be our acquisition and partnership opportunities, as evidenced by our recent announcement to partner with the existing physician owners at Tri-Lakes Medical Center in Batesville, Mississippi. We plan to continue our disciplined approach to hospital acquisitions and joint ventures.”

* * *

Health Management is increasing its diluted EPS objective range for fiscal year 2011 to be between $0.74 and $0.78 from between $0.72 and $0.76, and Health Management expects 2011 same hospital admissions growth to be between -1% and 1%.

* * *

“We believe that our disciplined approach to controlling costs and the successful implementation of our operational initiatives will continue to result in improvement of our operating results in 2011 and that our first quarter results validate our approach. . . “ added Newsome.

322. On April 26, 2011, HMA hosted a conference call to discuss its first quarter

2010 financial results, with Newsome, Curry and Farnham participating. During the call,

Newsome stated:

We believe our objectives are achievable by maintaining our focus and discipline on cost containment and our 3 operating initiatives. The ER operations, physician recruitment, and market service development. The results we have reported in the first quarter of 2011 are a direct result of the tremendous efforts of our hospital associates, the divisional leaders, home office associates and our dedicated medical staffs.

323. During the question and answer portion of the call, Newsome commented on

the Company’s admission process, stating in part:

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Adam [Feinstein, Barclays Analyst], 2.5 years ago or more than 2.5, I guess October of 2008, as I announced our initiatives, I talked a lot about the emergency room and how we were focused on process. And how that process really is the key to drive volume into our emergency rooms.

* * *

The tools we have in place are really assets that the clinicians, both the nursing personnel and the physicians use just in the management of the patients and the process. As far as the decision to make an admission, that truly is the physician. It’s in concert with the ER physician and the attending physician that the ER physician consults with. And from an internal perspective, our case management process is really helps the physician when there’s questions about the admissions process, whether a patient meets criteria or not.

And we use the standardized InterQual systems throughout our hospitals, which most hospitals use as far as that decision tree. And doctors really don’t walk around with an InterQual book because it’s quite thick and quite comprehensive. Doctors are making decisions based on their clinical judgment and that’s what you want doctors to do.

324. In response to a question regarding whether any of HMA’s hospitals were out

of line with the industry average with regard to “short stays” for patients, Farnham stated in

part:

There’s always going to be certain variability in any types of statistical analysis along the line. We’re very comfortable with our processes. We’re very comfortable with where we are in terms of physicians’ involvement and the fact that we use the industry-recognized standard in terms of InterQual in our case management process. So we have a lot of comfort there. And size of facility too can affect that.




Although the decision to admit patients was the physician’s, HMA put pressure on physicians to admit more patients as inpatients and avoid admitting patients for observation as supported by numerous

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confidential witnesses. Further, according to CW 7 and CW 16, HMA used its case managers and Accretive to review of patient cases and exert influence on physicians to admit more patients as inpatients. See ¶¶166-172.

BB. The First Quarter 2011 10-Q

326. On May 4, 2011, HMA filed its quarterly report on Form 10-Q for the quarter

ending March 31, 2011, which confirmed the financial results announced in the April 25,

2011 press release, was signed by Bryant, and contained required SOX certifications signed

by Newsome and Curry (the “First Quarter 2011 10-Q”). The First Quarter 2011 10-Q stated

in part:

We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.

* * *

We have also taken steps that we believe are necessary to achieve industry leadership in clinical quality. Our vision is to be the highest rated health care provider of any hospital system in the country, as measured by Medicare . With our knowledgeable and experienced clinical affairs leadership supporting this critical quality initiative, we measure key performance objectives, increase accountability for achieving those objectives and recognize the leaders whose quality indicators and clinical outcomes demonstrate improvement. As most recently reported by the Centers for Medicare and Medicaid Services, all four of our core measure care areas have dramatically improved since the commencement of our clinical quality initiatives and we now rank second in core measures amongst for-profit hospital systems.



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CC. The May 12, 2011 and June 6, 2011 Conferences

328. On May 12, 2011, Newsome and Curry participated in the Bank of America

Merrill Lynch Healthcare Conference on behalf of HMA. During the call, Newsome stated

in part:

Just to recap some of our objectives for 2011, we have our admissions objective to minus 1% to 1%. I will talk a little bit about admissions a little later in a couple slides. And you can see that this hasn’t changed, other than that one number, from our beginning guidance. Well -- that’s not true - - our range now is from $0.74 to $0.78.

Our focus is the emergency room operations, which truly is the front door of the hospital. We see more patients there; I think around 1.4 million ER visits in 2010. We have about 3.5 million patient encounters altogether, including admissions and outpatient. So this is important for us, to perform well there and to grow those visits in our emergency room through superior performance compared to our competitors.

* * *

And all this will drive volume, all this will drive operating earnings, and I think that is important for everyone to understand who have interest in our Company. We are focusing on the right things, we’re delivering on the right areas and it is an exciting time to be in health care, where companies like us, who are high-quality, efficient operators that have a vision and a plan, will be successful.

329. As set forth in ¶¶12-13, supra, on May 16, 2011, HMA received, but did not

disclose, a subpoena from the OIG related to “physician referrals as well as ownership and

management at [HMA’s] whole-hospital physician joint ventures, among other items.”

330. June 06, 2011, HMA participated in the Jefferies & Co. Global Healthcare

Conference, during which Curry stated in part:

Our objectives, again, I won’t read them all, but the two that I will highlight are the minus 1% to plus 1% admissions guidance that we changed too based on what we are seeing in the market. And we still see some judicious -- continued judiciousness on the part of those who are insured and who seek health care on an inpatient basis. They don’t want to be away from work that

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long, so they can continue to be very judicious. We also an increased our overall earnings guidance to $0.74 to $0.78, which is reflective of the improved performance that we continue to experience.

331. The statements referenced in ¶¶328 and 330 were each materially false and



Contrary to Defendants’ statements, it was not the Company’s superior performance or the focus on delivery of the right things that contributed to HMA’s success, but was instead the Company’s focus on increasing patient admissions regardless of medical necessity that grew the Company’s admissions and earnings.

In addition, HMA omitted any mention of the May 16, 2011 OIG subpoena, thus further misleading investors rather than revealing the truth behind HMA’s business practices and future business prospects.

DD. The July 27, 2011 Press Release and July 28, 2011 Conference Call

332. On July 27, 2011, HMA filed a press release announcing its financial results

for the second quarter ended June 30, 2011. The press release stated, in part:

Key metrics from continuing operations for the second quarter (all percentage changes compare the second quarter of 2011 to the second quarter of 2010) include:

~ Diluted earnings per share (“EPS”) increased 25.0% to $0.20;



. Adjusted EBITDA increased 12.3% to $203.8 million;



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Same hospital net revenue per adjusted admission increased 7.3%;

Same hospital Adjusted EBITDA increased 5.8% to $225.5 million, resulting in a 30 basis point improvement in margin, to 17.6% ; and

Same hospital surgeries increased 0.1%.

*

For continuing operations at hospitals operated by Health Management for one year or more, referred to as same hospital operations, net revenue increased $51.6 million or 4.2% to $1,281.6 million compared to the prior year’s second quarter. Adjusted EBITDA from same hospital operations grew 5.8% to $225.5 million, representing 17.6% of net revenue, as compared to $213.2 million and 17.3% of net revenue for the same quarter a year ago. Declines in uninsured admissions and births, as well as weather-related disruptions, contributed to a 6.4% decline in admissions from same hospital continuing operations in the second quarter and a decline of 2.9% in same hospital adjusted admissions when compared to the prior year’s second quarter. For comparison purposes, Health Management led the publicly traded hospital group in the second quarter a year ago with same hospital adjusted admissions growth of 3.7%.

“We are very pleased to report another solid quarter,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “There are a number of exciting things taking place at Health Management, and we remain focused on the fundamentals – effective cost controls, emergency room operations, physician recruitment and market service development. We continue to believe that over the foreseeable future the acquisition and partnership pipeline represents a tremendous growth opportunity for us. We continue to review partnership opportunities with community hospitals in non-urban and midsize markets, and we will remain disciplined in our acquisition approach.”

*

Health Management is increasing its diluted EPS from continuing operations objective range for fiscal year 2011 to be between $0.76 and $0.80 from between $0.74 and $0.78, and also expects 2011 same hospital admissions to be flat to down 2% compared to 2010 same hospital admissions.

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333. Following issuance of the press release, on July 28, 2011, HMA hosted a

conference call to discuss its second quarter 2011 financial results and operations, with

Newsome, Curry and Farnham participating. During the call, Newsome stated in part:

Likewise our ER and physician recruitment initiatives continue to be the right strategies for our markets as we seek to build market share. We will not take our eye off the ball with these three initiatives.

* * *

We believe our results indicate we are being successful in those endevours. While these operating initiatives continue to achieve success and contribute to our solid results, our greatest opportunity for growth remains the partnership opportunities we are seeing.

* * *

While we are encouraged by the fourth consecutive quarter of declining same-hospital uninsured admissions as a percentage of total admissions, we continue to believe that this prolonged environment of uncertainty is heavily influencing the level of care Americans are seeking. As we have said before, it is our continued belief that patients are currently not seeking treatment for illnesses that in better economic times would have brought them to our hospitals. As a result, we are updating our 2011 same-hospital admission growth objective to range between flat and down 2%.

We believe our objectives are achievable and are maintaining our focus and discipline on cost containment. And again, as we are focused and this continued story, we’re focusing on our three operating initiatives; which is our ER operations, as we grow our visit volume; physician recruitment to meet the market need in each of our markets; and market service development to expand the scope and level of service offerings in each market.

334. In response to a question on the “significant decline” in volumes being

experienced by the Company, Farnham stated, in part:

[W]e had a real significant growth last year in this quarter of 3.7% in adjusted admissions. And when we clear away all the rubbish that clouded our numbers, we were down 1.3%, which is frankly well in line with what you’re seeing elsewhere in the market. If you take it over a 2-year average, it’s absolutely what you would expect to see.

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That’s why we can be confident about what we expect to see in the future, given that we’re not going to have the same kind of weather disruptions and that sort of thing.

335. Despite receiving a subpoena on July 21, 2011 regarding the Company’s use

of Pro-MED software, the Defendants omitted any disclosure of the subpoena in response to

a direct question regarding the Company’s conversion of Pro-MED to MEDHOST.

Specifically, Newsome made the following false statement that omitted material information

regarding the OIG subpoena:

[A]ctually we’ve started rolling that out. We’ve had our first lot go live in the last week. And that’s just the beginning. Of course, it will flow throughout the system over next several months.

* * *

The data is – it’s a very data-rich system. If you look at the reason why we selected the change and to go with MedHost, is really physician driven. We have a committee of physicians led by a Chief Medical Officer that really, over the last year or so has been looking at -- how do we improve the usability of the electronic system in our emergency room?

And quite frankly they came to the conclusion that we needed to look at, in concert with our new Chief Information Officer, we need to look at alternatives. Many of the alternatives for ER are fairly new, quite frankly. So, after looking at several systems, the physicians, they chose the MedHost system, and it’s very user friendly and data-rich.

336. The representations highlighted above were materially false and misleading

for the reasons stated in ¶¶332-335. As set forth in ¶12, supra, on July 21, 2011, HMA

received, but did not disclose in either the July 27, 2011 press release or the July 28, 2011

conference call, a second subpoena from the OIG. The July 21, 2011 subpoena sought

information regarding HMA’s “emergency room management including the use of Pro-MED

software.” Moreover, Defendants still had not disclosed HMA’s receipt of the May 16, 2011

OIG subpoena.

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EE. The Second Quarter 2011 10-Q


quarter ending June 30, 2011, which confirmed the previously announced financial results,

was signed by Bryant, and contained required SOX certifications signed by Newsome and

Curry (the “Second Quarter 2011 10-Q”). The Second Quarter 10-Q disclosed, for the first

time, the two OIG subpoenas, stating:

Health Management and certain of its subsidiaries have also received subpoenas from the U.S. Department of Health and Human Services, Office of Inspector General on May 16, 2011 and on July 21, 2011. The May subpoena requested information on our physician referrals as well as ownership and management at our whole-hospital physician joint ventures, among other items. The July subpoena requested information on emergency room management including the use of Pro-MED software. We are cooperating with the government and are in the process of responding to the subpoenas. These matters are in their early stages and we are unable to determine the potential impact, if any, that will result from the investigations.

338. The Second Quarter 2011 10-Q also stated:




340. Disclosure of the OIG subpoenas caused two Wall Street analysts to

downgrade HMA stock, with one issuing a report on August 4, 2011, entitled: “How Can We

Believe You Now, HMA? Failure to Disclose July OIG Pro-MED Subpoena with Earnings

Crushes our Confidence.” Although disclosure of the OIG subpoenas revealed a portion of

the Company’s true financial condition and future business prospects, indicating that two of

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the Company’s three critical corporate strategies were now the subject of regulatory scrutiny,

the market had no idea of how deep Defendants’ fraud ran. Indeed, despite the surprisingly

negative news, the market remained unaware of the fraud repeatedly brought to Defendants’

attention by Meyer. As a result, although the market did respond to the news that the

Company received OIG subpoenas on May 16, 2011 and July 21, 2011, the market’s

negative reaction was both swift and muted. The price of HMA stock fell by $0.80 per

share, or 9.1%, from a closing price of $8.77 on August 3, 2011, to close at $7.97 per share

on August 4, 2011 on unusually high trading volume. But for Defendants’ ongoing fraud,

false statements, and material nondisclosures, the price of HMA stock would have fallen

significantly more.

FF. The September 14, 2011 and October 12, 2011 Conferences

341. On September 14, 2011, Newsome participated in the Morgan Stanley Global

Healthcare Conference on behalf of HMA, wherein he made false and misleading statements

concerning the Company’s admission of patients, stating in part:

I think on a flip side, on the volume side, we are seeing less of the very low acuity admission come through. The physicians are saying, they are doing less of the let’s put you in the hospital for a couple days, and run some tests and make sure everything is okay and that sort of thing. We are not seeing those admissions. And so by definition if the rest of the bucket stays kind of normalized, and we are not seeing those very low acuity, we are seeing our acuity increase.

342. On October 12, 2011, Farnham participated in the Deutsche Bank Securities

Inc. Leveraged Finance Conference on behalf of HMA. During the call Farnham commented

on the Company’s 2011 objectives and stated, in part:

At the end of the second quarter we changed our admission growth objective down to minus 2% to zero, which is a reflection of where we were

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through the first half ofthe year and where we thought we might be for the full year. Given where we were the first half of the year, this would imply that we expected some improvement in the second half of the year.

If nothing else, we do have some easier comps the last half of the year. But with the continued success of our operating initiatives that I will mention in a minute, combined with the easier comps, we do expect to have better volumes the last half of the year than we did the first half of the year.

The better volumes the last half of the year compared to the prior year and our ability to control costs also led us to change our EPS objective. We changed the objective for the second time this year at the end of the second quarter.

It was $0.74 to a $0.78. We changed it to $0.76 to $0.80, reflecting our confidence in our book of business and our ability to control our costs.

* * *

Finally, that is basically our operating initiatives -- emergency room operations, physician recruitment, and market service development. We believe that we can improve quality as we have shown. We can improve volumes overall in our markets, taking into consideration inpatient and outpatient, and grow operating earnings as we have over the last couple of years with our same hospital operations and also layering in acquisitions as well.



throughout this Complaint. As set forth in ¶154, supra, on October 19, 2011, Meyer filed a

lawsuit alleging wrongful termination against HMA in Florida’s Seventeenth Judicial Circuit

in Broward County. Meyer’s complaint alleged that he was fired in retaliation for

demanding that HMA rectify systemic Medicare billing fraud at four HMA-owned and

operated facilities in Oklahoma, Florida, and Texas. Specifically, Meyer alleged that he had,

beginning in January 2010, in his capacity as Director of Compliance: (1) visited a number

of HMA facilities to monitor compliance with Medicare regulations; (2) uncovered serious

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compliance issues at four HMA facilities relating to improper admission of patients as

inpatients; (3) reported these violations to his superiors within HMA; (4) determined that by

August 19, 2010, no meaningful action had been taken to rectify the fraudulent billing

practices; and (5) documented his findings in memoranda to his superiors. According to

Meyer’s complaint, rather than take corrective action, HMA changed Meyer’s role within the

Company, eliminating his compliance audit role and insulating relevant information from

him. When Meyer made clear that he intended to inform regulatory authorities if HMA did

not take meaningful steps toward compliance, stating in an email that “it [was his] intent that

the right thing [be] done in this investigation, HMA fired Meyer. Further, as reported in the

60 Minutes Segment, Meyer reported his findings of HMA’s fraudulent billing practices

directly to Newsome, “face-to-face.” Defendants, however, disclosed none of these facts to

the market.

GG. The October 24, 2011 Press Release, the October 25, 2011 Conference Call, and the Third Quarter 2011 10-Q

344. Despite the OIG subpoenas and Meyer’s whistleblower suit, the Defendants

persisted in their misrepresentations regarding HMA’s business and continued to omit any

disclosure of the fraud uncovered and reported to Defendants in January 2010. On October

24, 2011, HMA announced its consolidated financial results for the third quarter ended

September 30, 2011 with a press release that stated in part:

Key metrics from continuing operations for the third quarter (all percentage changes compare the third quarter of 2011 to the third quarter of 2010) include:

Diluted earnings per share (“EPS”) increased 21.4% to $0.17. Excluding certain acquisition and government investigation related expenses, as further described below and as shown in the tables

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accompanying this press release, diluted earnings per share from continuing operations increased 35.7% to $0.19 as compared to $0.14 per diluted share for the same quarter a year ago;



~ Adjusted EBITDA increased 14.9% to $195.5 million. Adjusted EBITDA excludes approximately $9.3 million, or $0.02 per diluted share, of acquisition and government investigation related expenses;



• Same hospital net revenue per adjusted admission increased 3.8%;


• Same hospital surgeries increased 0.2%, and

• Same hospital adjusted admissions increased 0.8%.

* * *

For continuing operations at hospitals operated by Health Management for one year or more, referred to as same hospital operations, net revenue increased $58.6 million or, 4.7%, to $1,309.0 million compared to the prior year’s third quarter. Adjusted EBITDA from same hospital operations grew 7.6% to $216.6 million, representing 16.5% of net revenue , as compared to $201.2 million and 16.1%, respectively, for the same quarter a year ago. Declines in uninsured admissions contributed to a 1.8% decline in admissions from same hospital continuing operations in the third quarter. Continued strong outpatient services contributed to a nearly 1% increase in same hospital adjusted admissions compared to the same period a year ago.

“Continued adherence to our proven operating initiatives and disciplined cost controls generated another solid quarter of EPS growth in excess of 20%,” said Gary D. Newsome, Health Management’s President and Chief Executive Officer. “We are pleased with the progress we are making in our

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emergency room operations, physician recruitment and market service development at both our same-hospital and recently acquired facilities, and we continue to attract considerable interest from hospitals seeking a partner to help navigate a turbulent operating environment while adhering to a patient-centered culture.”

345. On October 25, 2011, HMA hosted a conference call to discuss the

Company’s earnings and financial condition, with Newsome, Curry, and Farnham

participating. During the call, Newsome reiterated the Company’s projected EPS guidance,

stating:

We believe we continue to have opportunities to improve our operations in a really tough economy, and we are affirming our 2011 annual diluted EPS objective of between $0.76 and $0.80 for the year, or roughly a 20% increase in 2011 diluted EPS compared to 2010. We continue to believe our objectives are achievable by maintaining our focus and discipline on cost containment and our 3 operating strategies, which is the emergency room operations, which is truly the front door to the hospitals, our physician recruitment as we develop plans as we expand services there, this is tied very nicely with our market service development initiatives throughout all of our markets.

346. When questioned on whether the Company had any update on the two OIG

subpoenas, Curry stated, without mentioning the Meyer whistleblower action or Meyer’s

August 19, 2010 memorandum:

Yes, well, not really. I mean what we did, we’re releasing the 10-Q today and there’s a-- we did expand our write up with respect to that. But the reality is there’s no more information to tell you then what we’ve already been saying, we-- basically what we’ve been doing and what our-- what was the total of $4.5 million of the $9.3 million which was related to legal expense, was the cost of copying. That’s what we’re doing right now is we’re copying.

347. Later in the call, Curry answered a question regarding how the government

investigations would impact the Company’s financial guidance, and stated:

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Well, actually, the way we’re looking at it, Kevin, I mean there is-- I mean, you can decide if this makes sense to you or not of course, but the way we’re looking at it is that the meaningful use more than offsets our acquisitions costs that are related to bringing on this number 1 largest acquisition we’ve ever had, restructuring related costs. And the -- with respect to the legal costs, that’s something we expect to go on for some period of time . We don’t know exactly how long, so that’s really included in our guidance and for when we do guidance for the next year, will also include it .

348. On October 25, 2011, HMA filed its quarterly report on Form 10-Q for the

quarter ended September 30, 2011, which confirmed the Company’s previously announced

financial results, was signed by Bryant, and contained the required SOX certifications signed

by Newsome and Curry (the “Third Quarter 2011 10-Q”). The Third Quarter 2011 10-Q

stated:


349. The Company’s Third Quarter 2011 10-Q also contained a section entitled

“Commitments and Contingencies,” in which the Company set forth details surrounding

(among other things) material litigation, disputes, and regulatory matters that may affect the

Company. This section omitted any mention of Meyer, Meyer’s investigation – which was

disclosed to Defendants in January 2010 and on August 19, 2010 - Meyer’s termination,

Meyer’s lawsuit against the Company, or any of the then-existing details of HMA’s ongoing

Medicare billing fraud uncovered by Meyer and known to Defendants. Similarly, in the

Third Quarter 2011 10-Q’s discussion of “Legal Proceedings,” Defendants again omitted any

mention of the foregoing, or any of the facts detailed in ¶¶148-154, supra.

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350. The Third Quarter 2011 10-Q did provide limited additional information

concerning the OIG subpoenas, stating they “may relate to investigations of alleged

violations of the Anti-Kickback Statute and the False Claims Act [and that] the subpoenas

may have been served under the qui tam provisions of the False Claims Act.”




• Contrary to Curry’s statement that there was really no more information to disclose about the OIG subpoenas than what was already said, Defendants were aware of the details of both the Meyer August 19, , 2011 memorandum and Meyer’s lawsuit, both of which indicated the Company was in violation of the very matters at the heart of the OIG subpoenas. See ¶¶15, 149-154, 185.

• Defendants failed to inform investors that the reason HMA expected the government investigation to go on for a long period of time was because Defendants knew the Company had been fraudulently billing Medicare and that Meyer had filed a complaint against the Company, which would embroil HMA in litigation for the foreseeable future.

• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and admissions numbers, as well as HMA’s future business prospects.

352. The additional information regarding the OIG subpoenas revealed another

small portion of the Company’s true financial condition and future business prospects,

indicating that the OIG subpoenas might be related to violations of the Anti-Kickback

Statute and the False Claims Act and could have been prompted by a whistle-blower

complaint. HMA, however, in order to offset and minimize the impact of this additional

information, omitted any mention of the specifics of the whistle-blower’s complaint,

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downplayed the significance of the OIG subpoenas, and continued to mislead the market by

failing to reveal the truth. As a result, the market still did not learn and fully appreciate the

magnitude and impact of the fraud repeatedly brought to Defendants’ attention by Meyer.

HH. The November 10, 2011, December 1, 2011, and December 14, 2011 Conferences

353. On November 10, 2011, Farnham participated in the Credit Suisse Healthcare

Conference on behalf of the Company, with Farnham stating in part:

Our goal is to treat the patient and have the most appropriate disposition of that patient, which is either send the patient home or admit the patient in about a two hour period. On average we’re at about two hours and 20 min company-wide. But focusing on process there improves outcomes, care and it’s a better risk profile as well. So a big focus on the emergency room for us.

354. On December 1, 2011, Farnham participated in the Bank of America Merrill

Lynch Leveraged Finance Conference on behalf of HMA. During the call, Farnham again

made false and misleading statements regarding the Company’s admissions stating, in

pertinent part:

Emergency room operations are very critical for any hospital and that’s true at HMA. About 60% to 65% of our admissions come through the emergency room , so it’s really the front door of the hospital. And so it’s extremely important to work on process and have a very efficient emergency room focused on outcomes. And hopefully at the end of a two hour stay in the emergency room we’ll have the most appropriate disposition of the patient which is either send that patient home or admit the patient. And what we have found is that really having a more efficient ER really requires a more efficient hospital overall. And so extremely important to have a very well-run ER operation.




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II. The January 9, 2012 Press Release

356. On January 9, 2012, HMA issued a press release announcing its financial

results for the fourth quarter and year ended December 31, 2011. The press release provided,

in pertinent part:

From continuing operations for the fourth quarter, Health Management expects to report net revenue of approximately $1.58 billion, Adjusted EBITDA of between $231 and $236 million, and diluted earnings per share (“EPS”) attributable to Health Management Associates, Inc. of between $0.25 and $0.26, excluding certain writes-offs of deferred debt issuance costs, Tennova restructuring charges, and interest rate swap accounting, as shown in the table accompanying this press release. Included in these results is approximately $38 to $39 million, or $0.09 per diluted share, of reductions in expense related to Medicare/Medicaid HCIT meaningful use reimbursement offset by approximately $4 to $6 million, or $0.01 per diluted share, of incremental legal and investigation related expenses incurred during the quarter. Adjusted EBITDA is not a GAAP measure and footnote 1 to the 2012 Objective Range Table below contains disclaimers and other important information regarding how Health Management defines and uses Adjusted EBITDA. From continuing same hospital operations, compared to the prior year’s fourth quarter, Health Management expects surgeries to increase 0.5% to 1.0%, adjusted admissions to decline 1.0% to 1.5%, and admissions to decline 3.5% to 4.0%.

From continuing operations for the year ended December 31, 2011, Health Management expects to report net revenue of approximately $5.8 billion, and diluted EPS attributable to Health Management Associates, Inc., excluding write-offs of deferred debt issuance costs, swap accounting, and certain restructuring, acquisition and investigation costs of between $0.85 and $0.86.

“We are very pleased with the preliminary results for the year ended December 31, 2011, as we produced strong results during a difficult operating environment by continuing to focus on our operating initiatives, applied disciplined cost controls and successfully partnered with not-for-profit hospitals in attractive markets,” said Gary Newsome, President and Chief Executive Officer of Health Management. “Preliminary results indicate a 15% to 16% increase in Adjusted EBITDA and a 30% to 32% increase in diluted EPS compared to the year ended December 31, 2010. Even after excluding the benefit of the HCIT meaningful use reimbursement, Adjusted EBITDA increased 10% to 11% and diluted EPS grew 15% to 16%. ”

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*

During 2011, Health Management’s Pulse System was certified compliant in accordance with the applicable hospital certification criteria adopted by the Secretary of Health and Human Services, and Health Management hospitals qualified for funding under the American Recovery and Reinvestment Act. As a result, in 2011, Health Management hospitals received approximately $1.8 million of Medicare/Medicaid HCIT reimbursement in the third quarter ended September 30, 2011 and approximately $39 million of Medicare/Medicaid HCIT reimbursement in the fourth quarter ended December 31, 2011. Based on current 2012 attestation schedules and cost report year ends for the remainder of its hospitals, Health Management expects to receive approximately $90 to $120 million of Medicare/Medicaid HCIT reimbursement during the year ending December 31, 2012, the bulk of which is expected to be received in the third and fourth quarters of 2012.

“We believe we continue to have considerable operating opportunity available at both our same facility and acquisition hospitals,” added Newsome. “We will continue to manage our costs based on the volume and acuity of the patients we serve, as we seek to improve our operations by adhering to our proven operating initiatives. Based on the partnership opportunities we are currently reviewing, we are confident that the pipeline of partnership opportunities will remain very active, and we remain excited about Health Management’s growth prospects in 2012.”

357. Also on January 9, 2012, Skolnick, from CRT, issued a scalding report on

HMA stating that the Company’s former Director of Compliance, Meyer, had filed a lawsuit

against the HMA for violation of Florida’s Private Sector Whistleblower’s Act. The report

described Meyer as a thirty-year veteran of the FBI who had been supervisor of the Bureau’s

health care fraud unit based in Miami, Florida. The CRT analyst report described how

Meyer’s lawsuit claimed he was unlawfully terminated after uncovering serious Medicare

fraud at several HMA facilities.

358. As a result of the January 9, 2012 disclosure, the price of HMA dropped

approximately 7%, from a closing price of $7.49 on January 6, 2012 to a closing price of

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$6.96 on January 9, 2012, the next trading day. This decline eviscerated more than $134.6

million in HMA’s market capitalization in a single day.

359. The very next day, January 10, 2012, Newsome and Curry participated in the

JP Morgan Global Healthcare Conference on behalf of the Company. During the call,

Newsome announced that HMA’s general counsel, Timothy Parry, had resigned effective

immediately. With regard to the resignation and Meyer’s complaint, Newsome stated, in

pertinent part:

Obviously, there were some news in our 8-K as well as some reports that came out regarding an event, a termination of an employee back in September of 2011. And emphatically I just want to make it very clear that Tim Parry’s resignation from the Company, as our General Counsel is no way connected to the wrongful termination lawsuit that we received in October of 2011.

And in fact, as you look at these wrongful lawsuits a wrongful termination lawsuit is something that probably we’ve all experienced somewhere in our career. In reality, this individual had proprietary information that he refused to present to us and return to us in his personal possession as part of the gathering process, the subpoenas that we had talked about earlier in the year, the May and July subpoenas. And because of that we didn’t have a choice. We’re still in the process of trying to understand the nature of that documentation as a process that has been [tragically] delivered to the government and to our attorneys and we’re in a process of reviewing that.

I think it’s very -- you have to understand that Tim’s decision to resign from the Company had nothing to do, no connection whatsoever. We have -- our compliance program is excellent. We’ve tweaked it over the years, our Compliance Director, as he sits today and since 1998 or 1999, himself is also a retired FBI agent. So from that standpoint, we feel very comfortable in our processes and just want to reiterate, no connection whatsoever.

360. Thereafter, Newsome announced a decline in admissions growth stating, in

pertinent part:

Objectives for 2012, you can see our admission growth, minus 2% to flat. This is truly just admissions, it’s not adjusted admissions. Obviously, if you

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include our great growth in our outpatient business that we’ve had throughout 2011 and we feel very comfortable, great outpatient growth going forward in 2012. Adjusted admissions will be favorable and positive as we go forward.

361. On this news, shares of HMA common stock dropped 13%, or $0.91, to close

at $6.05 on January 10, 2012, on extremely unusual trading volume of more than 68 million

shares traded.

VIII. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING HMA’S BUSINESS CONDUCT AND ETHICS

362. During the Class Period, HMA repeatedly discussed the Company’s

commitment to its ethical conduct. For example, the Company’s Form 10-K cited to HMA’s

“Compliance Program” as set forth in ¶¶255-256 and ¶¶316-317 above, which included

HMA’s published “Code of Business Conduct and Ethics,” (the “Code”). The Code

contained a host of false and misleading statements designed to mislead the market. 23 For

example, the Code states: “Our Code—along with our Company policies and procedures,

our Guiding Principles and the law—sets the foundation for us to be ethical leaders. More

than that, it demonstrates to our valued stakeholders our commitment to doing the right

thing.” The Code also provides, in pertinent part:

• We will ensure that admissions, transfers and discharges are medically appropriate and in accordance with all legal requirements.

• We submit bills only for goods and services that are medically necessary, actually provided and documented in the patients medical records.

• We will not knowingly submit for payment or reimbursement a claim we know to be false, fraudulent or fictitious.

23 HMA made similar comments regarding the Code in its 10-K’s for the years 2010 and 2011.

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• We will assign diagnostic, procedural and billing codes that accurately reflect the services that were provided. Upcoding, unbundling or any other means of artificially enhancing reimbursement is unlawful and strictly prohibited.

• We comply with all laws and regulations related to government cost reports.

. We [c]omply with the False Claims Act.

363. As recognized by Defendants in the Code, the business conduct, ethics and

integrity of HMA and its management are material to investors. Contrary to statements

made by Defendants during the Class Period, neither HMA nor its management were acting

ethically or with integrity with regard to patient admissions or Medicare billing. Not only

were Defendants in violation of multiple rules and regulations, such as The Stark Law and

The False Claims Act, but they failed to adequately disclose their unethical, fraudulent

business practices to investors.

IX. ADDITIONAL SCIENTER ALLEGATIONS

364. As alleged herein, Defendants acted with scienter in that Defendants knew

that the public documents and statements issued or disseminated in the name of the Company

were materially false and misleading; knew that such statements or documents would be

issued or disseminated to the investing public; and knowingly and substantially participated

or acquiesced in the issuance or dissemination of such statements or documents as primary

violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants,

by virtue of their receipt of information reflecting the true facts regarding HMA, their control

over, and/or receipt and/or modification of HMA’s allegedly materially misleading

misstatements and/or their associations with the Company which made them privy to

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confidential proprietary information concerning HMA, participated in the fraudulent scheme

alleged herein.

365. Defendants knew and/or recklessly disregarded the falsity and misleading

nature of the information that they caused to be disseminated to the investing public. The

ongoing fraudulent scheme described in this complaint could not have been perpetrated over

a substantial period of time, as has occurred, without the knowledge and complicity of the

personnel at the highest level of the Company, including each of the Individual Defendants.

366. The Individual Defendants were intimately involved with all aspects of the

Company’s business, were hands-on managers and were privy to confidential and proprietary

information concerning HMA, its operations, finances, financial condition, and present and

future business prospects. The Individual Defendants also had access to material adverse

non-public information concerning HMA, as discussed in detail below. Because of their

positions with HMA, the Individual Defendants had access to non-public information about

its business practices, finances, enrollment, markets and present and future business

prospects via access to internal corporate documents, conversations and connections with

other corporate officers and employees, attendance at management and board of directors

meetings and committees thereof and via reports and other information provided to them in

connection therewith. Because of their possession of such information, the Individual

Defendants knew or were severely reckless in disregarding the fact that adverse facts

specified herein had not been disclosed to, and were being concealed from (in order to

mislead), the investing public.

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367. Throughout the Class Period, the Individual Defendants were able to, and did,

control the contents of the Company’s SEC filings, reports, press releases, and other public

statements. The Individual Defendants were provided with copies of, reviewed and

approved, and/or signed such filings, reports, releases, and other statements prior to or

shortly after their issuance and had the ability and opportunity to prevent their issuance or to

cause them to be corrected. The Individual Defendants were also able to, and did, directly or

indirectly, control the conduct of HMA’s business, the information contained in its filings

with the SEC, and its public statements. Moreover, the Individual Defendants made or

directed the making of affirmative statements to the investing public, and participated in

meetings, conference calls, and discussions concerning such statements. Each of the

Individual Defendants knew that the adverse facts specified herein had not been disclosed to

and were being concealed from the public, and that the positive representations that were

being made were then false and misleading. As a result, each of the Individual Defendants is

responsible for the accuracy of HMA’s corporate releases detailed herein and is therefore

responsible and liable for the misrepresentations and omissions contained therein.

368. The Individual Defendants are liable as direct participants and co-conspirators

with respect to the wrongs complained of herein. In addition, the Individual Defendants, by

reason of their status as senior executive officers and/or directors, were “controlling persons”

within the meaning of §20 of the Exchange Act and had the power and influence to cause the

Company to engage in the unlawful conduct complained of herein. Because of their

positions of control, the Individual Defendants were able to and did, directly or indirectly,

control the conduct of HMA’s business.

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369. As senior executive officers and/or directors and controlling persons of a

publicly-traded company whose common stock and other securities were, and are, registered

with the SEC pursuant to the Exchange Act, and whose shares traded on NYSE and

governed by the federal securities laws, the Individual Defendants had a duty to disseminate

accurate and truthful information promptly with respect to HMA’s financial condition and

performance, growth, operations, financial statements, business, products, markets,

management, earnings and present and future business prospects, to correct any previously

issued statements that had become materially misleading or untrue, so that the market price

of HMA’s common stock would be based upon truthful and accurate information. The

Individual Defendants’ misrepresentations and omissions during the Class Period violated

these specific requirements and obligations.

370. The Individual Defendants are liable as primary participants in a fraudulent

scheme and wrongful course of business which operated as a fraud or deceit on purchasers of

HMA common stock by disseminating materially false and misleading statements and/or

concealing material adverse facts. The fraudulent scheme employed by the Individual

Defendants was a success, as it: (i) deceived the investing public regarding HMA’s

financials, future business prospects and business; (ii) artificially inflated the price of HMA

common stock; and (iii) caused Lead Plaintiffs and other members of the Class to purchase

HMA common stock at inflated prices and suffer losses when the relevant truth regarding

HMA’s true financial condition was revealed and the artificial inflation was removed from

the price of the stock.

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371. Further, during the Class Period, the Individual Defendants were motivated to

misrepresent the Company’s true financial condition and future business prospects so that

they could artificially increase the price of HMA’s stock. To that end, and in the midst of

orchestrating their fraud, Farnham sold 201,317 shares of HMA stock at artificially inflated

prices, generating proceeds of $2,290,965.

X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

372. At all relevant times, the market for HMA common stock was an efficient

market for the following reasons, among other things:

(a) HMA stock met the requirements for listing, and were listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, HMA filed periodic public reports with the

SEC; and

(c) HMA regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press

releases on the national circuits of major newswire services and through other wide-ranging

public disclosures, such as communications with the financial press and other similar

reporting services.

373. As a result, the market for HMA common stock promptly digested current

information regarding HMA from all publicly available sources and reflected such

information in the price of HMA stock. Under these circumstances, all purchasers of HMA

common stock during the Class Period suffered similar injury through their purchase of

HMA common stock at artificially inflated prices and a presumption of reliance applies.

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XI. LOSS CAUSATION/ECONOMIC LOSS

374. During the Class Period, as detailed herein, Defendants engaged in a scheme

to deceive the market through a course of conduct that artificially inflated the value of HMA

common stock throughout the Class Period. Defendants’ improper admission of Medicare

patients as inpatients, and fraudulent billing to Medicare in order to boost the Company’s

financial results operated as a fraud or deceit on Class Period purchasers of HMA common

stock by misrepresenting the reasons behind the Company’s financials and future business

prospects, including but not limited to, misrepresenting the strength and source of the

Company’s revenues and admissions. By their conduct, Defendants concealed that HMA’s

reported hospital admissions and financial results were artificially inflated throughout the

Class Period.

375. Defendants’ false and misleading statements had their intended effect and

directly and proximately caused, or were a substantial contributing cause of HMA’s common

stock trading at artificially inflated levels, reaching a Class Period high of $11.62 per share

on May 10, 2011.

376. As a result of Defendants’ fraudulent conduct as alleged herein, the prices at

which HMA common stock traded were artificially inflated, at varying levels, throughout the

Class Period. When Lead Plaintiffs and other members of the Class purchased their HMA

common stock, the true value of such common stock was substantially lower than the prices

actually paid by Lead Plaintiffs and the other members of the Class. As a result of their

purchases of HMA common stock during the Class Period at artificially inflated prices, Lead

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Plaintiffs and other members of the Class suffered economic loss, i.e. , damages under federal

securities laws, when such artificial inflation dissipated.

377. For example, at the start of the Class Period, Defendants told investors the

strategy for improving HMA’s financial performance would focus on three operational

initiatives: (1) the Emergency Department; (2) physician recruitment and development; and

(3) market service development. These three initiatives became HMA’s public mantra and

were touted throughout the Class Period in Defendants’ public statements, and the market

was repeatedly told the three initiatives were driving the Company’s seemingly improved

financial results, squarely putting the source of HMA’s revenue at issue to investors.

Defendants, however, failed to disclose how those admissions were achieved. Defendants

were well aware that HMA employed a fraudulent scheme whereby the Company artificially

boosted revenue through improper Emergency Department admissions. This policy included

increased pressure on HMA physicians to admit Medicare patients, the use of the Company’s

Pro-MED software to flag patients that could be improperly admitted, and hiring Accretive

to review patient files and choose patients that could be improperly upgraded in admission

status as inpatients. Based on this scheme, Defendants knew their Class Period statements

omitted facts that concealed material and foreseeable risks. That risk is simply described as

follows: The Company’s admissions and revenues depended on a corporate policy of

increasing admissions in violation of Medicare guidelines and but for the illegal scheme,

HMA’s admissions and revenue would have been lower.

378. In addition, Defendants affirmatively assured investors that HMA was in

compliance with Medicare policies and that HMA’s error rate when audited was minimal.

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Defendants’ efforts were nothing more than further attempts to mislead the market’s

expectations for the Company. To that end, Defendants’ false and misleading statements

maintained and increased the artificial inflation in the price of HMA common stock.

379. As explained herein, these false statements directly or proximately caused, or

were a substantial contributing cause, of the damages and economic loss suffered by Lead

Plaintiffs and other members of the Class, and maintained the artificial inflation in the prices

of HMA common stock throughout the Class Period, until the truth leaked into and was

partially revealed to the market, at which time the prior inflation came out of the stock.

380. As a result of Defendants’ materially false and misleading statements, as well

as the adverse, undisclosed information known to the Defendants, Lead Plaintiffs and other

members of the Class relied, to their detriment, on such statements and documents, and/or

the integrity of the market, in purchasing their HMA common stock at artificially inflated

prices during the Class Period. Had Lead Plaintiffs and the other members of the Class

known the truth, they would not have taken such actions.

381. The first partial revelation of truth came on August 3, 2011, when HMA

revealed in its Second Quarter 2011 10-Q that it received two subpoenas (one on May 16,

2011 and one on July 21, 2011) from the OIG. The subpoenas related to “physician referrals

as well as ownership and management at [HMA’s] whole-hospital physician joint ventures,

among other items” and information regarding HMA’s “emergency room management

including the use of Pro-MED software.”

382. Disclosure of the OIG subpoenas caused two Wall Street analysts to

downgrade HMA stock, with one issuing a report on August 4, 2011, entitled: “How Can We

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Believe You Now, HMA? Failure to Disclose July OIG Pro-MED Subpoena with Earnings

Crushes our Confidence.” Although disclosure of the OIG subpoenas revealed a portion of

the Company’s true financial condition and future business prospects, indicating that two of

the Company’s three critical corporate strategies were now the subject of regulatory scrutiny,

the market had no idea of how deep Defendants’ fraud ran. Indeed, the market remained

unaware of the fraud repeatedly brought to Defendants’ attention by Meyer.

383. As a result, while the market responded to the negative news that the

Company received OIG subpoenas on May 16, 2011 and July 21, 2011, the drop in HMA’s

stock price was diminished by Defendants’ failure to provide full disclosure of their scheme

to submit fraudulent claims to, and receive improper payments from, Medicare. The price of

HMA stock fell by $0.80 per share, or 9.1%, from a closing price of $8.77 on August 3,

2011, to close at $7.97 per share on August 4, 2011, on unusually high trading volume. But

for Defendants’ ongoing fraud, false statements, and material nondisclosures, the price of

HMA stock would have fallen significantly more.

384. On October 25, 2011, HMA provided investors with additional information

about the nature of the OIG subpoenas, but continued to withhold material information

concerning their scheme to inflate revenue received from Medicare. In the Company’s Form

10-Q for the quarter ending September 30, 2011, Defendants stated that the OIG subpoenas

might be related to violations of the Anti-Kickback Statute and the False Claims Act and

could have been prompted by a whistle-blower complaint. Defendants, however, omitted

any mention of the specifics of the Meyer’s whistle-blower’s complaint, or Defendants’

fraud.

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385. On January 9, 2012, equity analyst Skolnick of CRT, provided the market

with specific details regarding Meyer’s lawsuit, including that Meyer first raised egregious

compliance concerns to the Defendants in January 2010, that Meyer wrote an extensive

memorandum further detailing the fraudulent activity and delivered it to his superiors on

August 19, 2010, when Defendants failed to put a stop to HMA’s fraudulent billing

practices, and that HMA took steps to remove Meyer from contact with certain hospitals,

changed his job responsibilities and then fired Meyer on the afternoon of September 6, 2011,

the day he told HMA that he would report the violations to the U.S. Government.

386. As a result of the January 9, 2012 disclosure, the price of HMA dropped

approximately 7%, from a closing price of $7.49 on January 6, 2012, to a closing price of

$6.96 on January 9, 2012, the next trading day. This decline eviscerated more than $134.6

million in HMA’s market capitalization in a single day.

387. The following day, January 10, 2012, the Company disclosed that on January

5, 2012, Timothy R. Parry, Esq., Senior Vice President, General Counsel, and Secretary of

the Company, had abruptly announced his intention to resign “effective immediately.”

388. On this news, shares of HMA common stock dropped 13%, or $0.91, to close

at $6.05 on January 10, 2012, on extremely unusual trading volume of more than 68 million

shares traded.

389. These disclosures were a direct and foreseeable consequence of the

Defendants’ fraud unraveling. Although Defendants did not affirmatively admit to the

particulars of their fraud, they did not have to. The market, which reacted by punishing the

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Company’s stock price, clearly understood there had been new revelations – that HMA’s

financial condition was not as previously (and misleadingly) presented to the market.

390. The timing and magnitude of the decline in HMA common stock negates any

inference that the loss suffered by Lead Plaintiffs and other Class members were caused by

changed market conditions, macroeconomic factors or Company-specific facts unrelated to

the Defendants’ fraudulent conduct. As a result of their purchases of HMA common stock

during the Class Period, Lead Plaintiffs and other members of the Class suffered economic

loss, i.e. , damages, under the federal securities laws when the above-described revelations

reached the market and the artificial inflation was removed.

XII. NO SAFE HARBOR

391. HMA’s verbal “Safe Harbor” warnings accompanying its oral forward-

looking statements (“FLS”) issued during the Class Period were ineffective to shield those

statements from liability.

392. The Defendants are also liable for any false or misleading FLS pleaded

because, at the time each FLS was made, the speaker knew the FLS was false or misleading

and the FLS was authorized and/or approved by an executive officer of HMA who knew that

the FLS was false. None of the historic or present tense statements made by Defendants

were assumptions underlying or relating to any plan, projection or statement of future

economic performance, as they were not stated to be such assumptions underlying or relating

to any projection or statement of future economic performance when made, nor were any of

the projections or forecasts made by Defendants expressly related to or stated to be

dependent on those historic or present tense statements when made.

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XIII. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS

393. Lead Plaintiffs repeat and reallege the allegations set forth above as though

fully set forth herein. This claim is asserted against all Defendants.

394. During the Class Period, HMA and the Individual Defendants carried out a

plan, scheme and course of conduct which was intended to and, throughout the Class Period,

did: (i) deceive the investing public, Lead Plaintiffs and other Class members, as alleged

herein; (ii) artificially inflate and maintain the market price of HMA common stock; and (iii)

cause Lead Plaintiffs and other members of the Class to purchase HMA common stock at

artificially inflated prices. In furtherance of this unlawful scheme, plan and course of

conduct, HMA and the Individual Defendants took the actions set forth herein.

395. These Defendants: (i) employed devices, schemes, and artifices to defraud;

(ii) made untrue statements of material fact and/or omitted to state material facts necessary to

make the statements not misleading; and (iii) engaged in acts, practices, and a course of

business which operated as a fraud and deceit upon the purchasers of the Company’s

common stock in an effort to maintain artificially high market prices for HMA’s common

stock in violation of §10(b) of the Exchange Act and Rule 10b-5. These Defendants are sued

as primary participants in the wrongful and illegal conduct charged herein. The Individual

Defendants are also sued as controlling persons of HMA, as alleged below.

396. In addition to the duties of full disclosure imposed on Defendants as a result

of their making of affirmative statements and reports, or participating in the making of

affirmative statements and reports, to the investing public, they each had a duty to promptly

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disseminate truthful information that would be material to investors in compliance with the

integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R.

§210.01, et seq .) and S-K (17 C.F.R. §229.10, et seq .) and other SEC regulations, including

accurate and truthful information with respect to the Company’s operations, financial

condition, future business prospects, and operational performance, so that the market prices

of Company common stock would be based on truthful, complete and accurate information.

397. HMA and each of the Individual Defendants, individually and in concert,

directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or

of the mails, engaged and participated in a continuous course of conduct to conceal adverse

material information about the business, business practices, performance, operations and

future business prospects of HMA as specified herein.

398. These Defendants each employed devices, schemes and artifices to defraud

while in possession of material adverse non-public information. These Defendants also

engaged in acts, practices, and a course of conduct, as alleged herein, in an effort to assure

investors of HMA’s value, performance, and financial and operational growth. These acts

included the making of, or the participation in the making of, untrue statements of material

facts and omitting to state necessary facts in order to make the statements made about HMA

and its business operations and future business prospects in light of the circumstances under

which they were made, not misleading, as set forth more particularly herein, and engaged in

transactions, practices and a course of business which operated as a fraud and deceit upon the

purchasers of HMA common stock during the Class Period.

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399. Each of the Individual Defendants’ primary liability and controlling person

liability arises from the following facts: (i) each of the Individual Defendants was a high-

level executive and/or director at the Company during the Class Period; (ii) each of the

Individual Defendants, by virtue of her/his responsibilities and activities as a senior

executive officer and/or director of the Company, was privy to and participated in the

creation, development and reporting of the Company’s financial performance, projections

and/or reports; and (iii) each of the Individual Defendants was aware of the Company’s

dissemination of information to the investing public, which each knew or disregarded with

recklessness was materially false and misleading.

400. Each of these Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the truth in

that each failed to ascertain and to disclose such facts, even though such facts were available

to each of them. Such Defendants’ material misrepresentations and/or omissions were done

knowingly or with recklessness and for the purpose and effect of concealing HMA’s

operating condition and future business prospects from the investing public and supporting

the artificially inflated price of its common stock. As demonstrated by Defendants’

misstatements of the Company’s financial condition and performance throughout the Class

Period, each of the Individual Defendants, if he or she did not have actual knowledge of the

misrepresentations and omissions alleged, was reckless in failing to obtain such knowledge

by deliberately refraining from taking those steps necessary to discover whether those

statements were false and misleading.

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401. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market prices of

HMA common stock were artificially inflated, at varying levels, throughout the Class Period.

In ignorance of the fact that market prices of HMA common stock were artificially inflated,

and relying directly or indirectly on the false and misleading statements made by Defendants,

or upon the integrity of the market in which the common stock trades, and/or on the absence

of material adverse information that was known to or disregarded with recklessness by

Defendants but not disclosed in public statements by Defendants during the Class Period,

Lead Plaintiffs and the other members of the Class acquired HMA common stock during the

Class Period at artificially high prices and were damaged thereby, as evidenced by, among

other things, the common stock price declines identified herein that released the artificial

inflation from the price of HMA common stock.

402. At the time of said misrepresentations and omissions, Lead Plaintiffs and

other members of the Class were ignorant of their falsity, and believed them to be true. Had

Lead Plaintiffs and the other members of the Class and the marketplace known of the true

performance, future business prospects and intrinsic value of HMA, which were not

disclosed by Defendants, Lead Plaintiffs and other members of the Class would not have

purchased or otherwise acquired their HMA common stock during the Class Period, or they

would not have done so at artificially inflated prices which they paid.

403. By virtue of the foregoing, HMA and the Individual Defendants have each

violated §10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

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404. As a direct and proximate result of Defendants’ wrongful conduct, Lead

Plaintiffs and the other members of the Class suffered damages in connection with their

respective purchases and sales of the Company’s common stock during the Class Period, as

evidenced by, among other things, the common stock price decline on or about February 11,

2009, that released the artificial inflation from HMA’s common stock.

XIV. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS

405. Lead Plaintiffs repeat and reallege the allegations set forth above as though

fully set forth herein. This claim is asserted against the Individual Defendants.

406. Each of the Individual Defendants acted as a controlling person of HMA

within the meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-

level positions with the Company, participation in and/or awareness of the Company’s

operations and/or intimate knowledge of the Company’s fraudulent financial reporting and

actual performance, each of the Individual Defendants had the power to influence and

control and did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements which Lead

Plaintiffs contend are false and misleading. Each of the Individual Defendants was provided

with or had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by Lead Plaintiffs to be misleading prior to and/or

shortly after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

407. In addition, each of the Individual Defendants had direct involvement in the

day-to-day operations of the Company and, therefore, is presumed to have had the power to

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control or influence the particular transactions giving rise to the securities violations alleged

herein, and exercised the same.

408. As set forth above, HMA and the Individual Defendants each violated §10(b)

and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their

controlling positions, each of the Individual Defendants is liable pursuant to §20(a) of the

Exchange Act. As a direct and proximate result of Defendants’ wrongful conduct, Lead

Plaintiffs and other members of the Class suffered damages in connection with their

purchases of the Company’s common stock during the Class Period when the artificial

inflation was released from HMA common stock, as detailed herein.

WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action and designating

Lead Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil

Procedure;

(b) Awarding compensatory damages in favor of Lead Plaintiffs and the

other Class members against all Defendants, jointly and severally, for all damages sustained

as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest

thereon;

(c) Awarding Lead Plaintiffs and the Class their reasonable costs and

expenses incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

XV. JURY TRIAL DEMANDED

409. Lead Plaintiffs hereby demand a trial by jury.

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DATED: February 25, 2013 ROBBINS GELLER RUDMAN & DOWD LLP

DAVID J. GEORGE Florida Bar No. 0898570 [email protected] ROBERT J. ROBBINS Florida Bar No. 0572233 [email protected] HOLLY KIMMEL Florida Bar No. 0970980 [email protected]

/s/ David J. George DAVID J. GEORGE

120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax)

LABATON SUCHAROW LLP JONATHAN GARDNER MARK S. GOLDMAN CAROL C. VILLEGAS 140 Broadway, 34th Floor New York, NY 10005 Telephone: 212/907-0700 212/818-0477 (fax)

Co-Lead Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on February 25, 2013, a copy of the foregoing was

electronically filed with the Clerk of the Court by using the CM/ECF system, which will

send notification of such filing to the attorneys denoted on the Court’s electronically

generated Notice of Filing.

/s/ David J. George David J. George

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