Cohen Milstein represents Delaware County Employees’ Retirement Fund and Chester County Employees’ Retirement System in a derivative action against members of the Board of Directors and management of Universal Health Services (“UHS”) (NYSE: UHS) for breach of fiduciary duty in their improper and illegal management of the company.  UHS is one of the nation’s largest healthcare management companies. The case was filed on June 30, 2017 in the Delaware Court of Chancery.

Case Background

Plaintiffs allege that since 2010, UHS engaged in improper billing practices that have violated federal laws and exposed the company to significant enterprise risk, and that nominal Defendant UHS’ directors and officers breached their fiduciary duties of care and loyalty for failures in overseeing UHS’ operations and compliance with applicable laws and regulations pertaining to its billing practices for mental health patients, and breached their fiduciary duties of care and loyalty in connection with the federal securities disclosure violations.

Investigative reporting uncovered widespread fraudulent coding practices by UHS. Specifically, on December 7, 2016, an investigative report, “Intake: Locked on the Psych Ward,” published by Buzzfeed.com, cited interviews with 175 current or former members, 18 UHS executives, 120 patients, government investigators and other experts, as well as review of internal documents. Intake exposed UHS’s illegal coding practices of “over-coding” patient conditions, thereby UHS defrauded Medicare, Medicaid and private insurance. Those practices expose UHS to liability under the False Claims Act (FCA), the Stark Act and other federal statutes.  Intake also set forth statistical evidence of UHS’s psychiatric coding practices as compared to other industry participants. Specifically, the report indicated that UHS engaged in widespread practice of involuntarily commitment of psychiatric patients. Similarly, this conduct has exposed UHS to liability for violating federal laws and the involuntary commitment statutes of the state in which it operates facilities. The reported misconduct of UHS at the direction of Defendants is consistent with Plaintiffs’ examination of UHS’s internal, non-public books and records.

In the wake of Buzzfeed.com’s investigative report, UHS lost nearly 20% of its market value in a matter of days. A federal securities action was initiated on December 9, 2016, and Senator Charles E. Grassley of Iowa and Chairman of the Committee on the Judiciary demanded information from government agencies with ongoing investigations into UHS.

On May 23, 2017 Buzzfeed.com published a follow-up investigative report, entitled "The FBI and defense Department are Investigating America’s Biggest Psychiatric Hospital Chain,” revealing that the Department of Defense is also scrutinizing UHS’s billings into Tricare, the insurance plan for active military and their families.  Also in May 2017 at a UHS stockholder meeting, the New York City Comptroller’s office, representing pension funds that own more than $25 million in UHS stock, cited the ongoing investigations into UHS as reason for it to abandon its stockholders voting system.

UHS is a highly regulated entity. It’s Board and officers are well aware of the requirements and regulations applicable to the UHS core business. UHS is also controlled principally by Defendant Alan B. Miller, CEO of UHS, who controls 83.2% of UHS’s voting power and holds board nomination power. The Board’s “Compliance Committee” includes Alan Miller’s son, Marc D. Miller, and other insiders, whom, plaintiffs allege, along with the “Audit Committee,” failed to abide by their own compliance and auditing controls, ignoring red flags and redacting questionable information from records.

Plaintiffs further allege that even after the Buzzfeed.com publication of Intake, Board minutes revealed Defendants continued to ignore the root of the problems cited by Intake.

Case Name: Delaware County Employees’ Retirement Fund, et al. v. Universal Health Services, Inc., Case No. 2017-04575-JTL, Court of Chancery of the State of Delaware