2015-03-03 - Thompson & DCHSI's Answer & Counterclaims (Mott Case)[2]

RECEIVED Civil Clerk Office

MAR 0 32015 upcIOr Cuurt of the

District ot Coiumbta ashiflgtO1, D.0

!1iIt'1 1 UP] WI 0 I I]

IN THEISUPERIOR 4COURT DISTRICT iIJ1ZEI1mSJi'iHI CivilIDivision

D.C. CHARTERED HEALTH PLAN, INC., (in Rehabilitation),

DISTRICT OF COLUMBIA, a Municipal Corporation, John A. Wilson Building 1350 Pennsylvania Ave, N.W. Washington, D.C. 20004,

Serve: Mayor Muriel Bowser 1350 Pennsylvania Ave., N.W. Room 419 Washington, D.C. 20004

Office of the Attorney General 441 Fourth Street, NW. Suite 600 S Washington, D.C. 20001

Case No. 2013 CA 003752 B Judge: Hon. John M. Mott Calendar No.: II Next Event: none scheduled

CHESTER MCPHERSON, in his official capacity as Rehabilitator of D.C. Chartered Health Plan, Inc. and Commissioner of Department of Insurance, Securities and Banking 810 First Street, N.E, Suite 710 Washington, D.C. 20002,



DANIEL L. WATKINS, individually and in his official capacity as Special Deputy to the Rehabilitator of D.C. Chartered Health Plan, Inc. Department of Insurance, Securities and Banking, 810 First Street, N.E, Suite 710 Washington, D.C. 20002,



Daniel L. Watkins (individually) 1050 K Street, N.W. Suite 400 Washington, D.C. 20001

Daniel L. Watkins (individually) 643 Indiana Street Lawrence, KS 66044-2329

Counterclaim Defendants,

and

WAYNE TURNAGE, individually and in his official capacity as Director of the District of Columbia Department of Health Care Finance 441 Fourth Street, N.W., 9005 Washington, D.C. 20001,



Wayne M. Turnage (individually) 1346 S. Capitol Street, SW, Apt 702 Washington, DC 20003-3586

and

WILLIAM WHITE 946 Westminster St., N.W. Washington, D.C. 20001

and

Serve: The Corporation Trust Company Corporation Trust Center 1209 Orange St. Wilmington, DE 19801

Additional Counterclaim Defendants

t

Defendants Jeffrey E. Thompson ("Mr. Thompson") and D.C. Healthcare Systems, Inc.

("DCHSI") (collectively, "Defendants"), by their undersigned counsel, and pursuant to Sup. Ct.

Civ. R. 8, state as follows as and for their Answer to the Amended Complaint filed by D.C.

Chartered Health Plan, Inc. (in Rehabilitation), by and through William P. White, Commissioner of the District of Columbia Department of Insurance, Securities and Banking, and his Special

Deputy, Daniel L. Watkins (collectively, "Plaintiffs") In response to the correspondingly numbered paragraphs of the Amended Complaint,

Defendants admit, deny, and aver as follows':

Preliminary Statement

1. The allegations in paragraph 1 are a characterization and summary of the

Amended Complaint which speaks for itself. To the extent a response is required, Defendants

deny the allegations in paragraph 1.

Background Chartered's Financial Distress

2. Paragraph 2 consists of legal conclusions to which no response is required. To

the extent a response is required, Defendants deny the allegations in paragraph 2.

3. The allegations in paragraph 3 are legal conclusions and characterizations and

summaries from different alleged sources. To the extent a response is required, Defendants deny

the allegations in paragraph 3.

1 Unless otherwise noted, the capitalized terms in this Answer have the same meanings as in the Amended Complaint.

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the extent a response is required, the provisions and requirements of the D.C. Code referenced in

paragraph 4 speak for themselves, and Defendants deny any factual allegations inconsistent with

those provisions and requirements.


the extent a response is required, the provisions and requirements of the D.C. Code referenced in

paragraph 5 speak for themselves, and Defendants deny any factual allegations inconsistent with

those provisions and requirements.

6. Defendants admit the allegations in paragraph 6.

7. Defendants are without sufficient information or knowledge to admit or deny the

allegations contained in paragraph 7, and therefore deny them.


allegations contained in Paragraph 8, and therefore deny them.

9. As to the first sentence of paragraph 9, Defendants admit only that Chartered's

Board of Directors tried to find a solution to Chartered's financial situation in 2012; Defendants

deny the allegation in the remainder of that sentence. Defendants are without sufficient

information or knowledge to admit or deny the allegations contained in the remaining sentences

of paragraph 9 and, therefore deny them.


remaining allegations contained in Paragraph 10, and therefore deny them.


the extent a response is required, the provisions of the D.C. Code referenced in paragraph 11

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speak for themselves and, Defendants deny any factual allegations inconsistent with those

provisions.

12. Paragraph 12 consists of characterizations and legal conclusions respecting the

Holding Company System Act to which no response is required. To the extent a response is

required, Defendants deny the factual allegations contained in paragraph 12.

13. Paragraph 13 consists of characterizations and legal conclusions to which no

response is required. To the extent a response is required, Defendants deny the factual

allegations contained in paragraph 13

14. Paragraph 14 consists of a legal conclusion to which no response is required. To

the extent a response is required, Defendants state that Holding Company System Act speaks for

itself, and deny any allegations in paragraph 14 to the extent they are inconsistent with the

Holding Company System Act.


the extent a response is required, Defendants state that the Holding Company System Act speaks

for itself, and deny any allegations in paragraph 15 to the extent they are inconsistent with the



the extent a response is required, Defendants state that the Holding Company System Act speaks

for itself, and deny any allegations in paragraph 16 to the extent they are inconsistent with the




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allegations contained in paragraph 18, and therefore deny them. Defendants further state that

what is and is not prohibited under D.C. Code 31-706(a) (1) (E) is a legal conclusion to which

no response is required.

Chartered's Rehabilitation


allegations contained in paragraph 18, and therefore deny them. Defendants further state that the

provisions of the D.C. Code referenced and quoted in paragraph 18 speak for themselves, and

deny any allegations inconsistent with those provisions.


the extent a response is required, Defendants state that Title 31 of the D.C_ Code speaks for

itself, and deny any allegations in paragraph 20 that are inconsistent with Title 31.

21. Paragraph 21 consists of legal conclusions and characterizations to which no

response is required. To the extent a response is required, denied.

22. The Emergency Consent Petition for an Expedited Order of Rehabilitation

referenced in paragraph 5 is a court filing and speaks for itself. Defendants deny any allegations

in paragraph 22 to the extent they are inconsistent with the Emergency Consent Petition.

23. This Court's order respecting the Emergency Consent Petition for an Expedited

Order of Rehabilitation is a court filing and speaks for itself. Defendants deny any allegations in

paragraph 23 to the extent they are inconsistent with actions or orders of this Court respecting the

Emergency Consent Petition.



ri

25. Defendants deny the allegations contained in paragraph 25.

Parties

26. Defendants admit the allegations contained in paragraph 26.



29. Defendants admit the allegations contained in the first sentence of paragraph 29.

Defendants deny the allegations contained in the second sentence of paragraph 29.



the extent a response is required, denied.

Jurisdiction and Venue

32. Paragraph 32 consists of a legal conclusion to which no response is required.

33. Paragraph 33 consists of a legal conclusion to which no response is required.

Statement of Facts

Chartered's Affiliates

34. Paragraph 34 consists of a legal conclusion to which no response is required. In

addition, paragraph 34 contains factual allegations for which Defendants are without sufficient

information or knowledge to admit or deny, and therefore deny them.







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The Cash Transfers


















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50. Paragraph 50 consists of a legal conclusion to which, no response is required. To

the extent a response is required, Defendants state that the Tax Allocation Agreement speaks for

itself, and deny any factual allegations inconsistent with the Tax Allocation Agreement.









55. Defendants deny the allegations in the first sentence of paragraph 55. The second

sentence of paragraph 55 consists of a legal conclusion to which no response is required. To the

extent a response is required, denied.

The Tax Allocation Agreement

56. The Tax Allocation Agreement ("TAA") referenced in paragraph 56 speaks for

itself. Defendants deny any allegations in paragraph 56 to the extent they are inconsistent with

the Tax Allocation Agreement.

57. The TAA referenced in paragraph 57 speaks for itself. Defendants deny any

allegations in paragraph 57 to the extent they are inconsistent with the TAA.

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59. The TAA referenced in paragraph 59 speaks for itself Defendants deny any

allegations in paragraph 597 to the extent they are inconsistent with the TAA. As to the second

sentence of paragraph 59, Defendants are without sufficient information or knowledge to admit

or deny the allegations and, therefore deny them.



61. Defendants admit the Rehabilitator demanded that DCHSI pay Chartered amounts

allegedly owed under the TAA and that DCHSI has not complied. Defendants deny any amounts

are owed under the TAA.

The Asset Pledge and Indemnification Agreement



63. Defendants admit the allegations contained in the first and second sentences of

paragraph 63.


the extent a response is required, Defendants state that the Guaranty and Pledge Agreement

speak for themselves and deny any allegations in paragraph 64 to the extent they are inconsistent

with them.


66. The Indemnification Agreement speaks for itself. Defendants deny any

allegations in paragraph 66 to the extent they are inconsistent with the Indemnification

Agreement.


allegations contained in the second sentence of paragraph 67, and therefore deny them.




allegations contained in 69, and therefore deny them.

70. The Indemnification Agreement speaks for itself. Defendants deny any

allegations in paragraph 70 to the extent they are inconsistent with the Indemnification

Agreement.

Count I Breach of Fiduciary Duty (against Mr, Thompson)

71. Defendants incorporate their responses to paragraphs 1 through 70 as if set forth

fully herein.


the extent a response is required, Defendant Thompson denies the allegations contained in

paragraph 72.

73. Defendant Thompson denies the allegations contained in paragraph 73.


75. Defendant Thompson denies the allegations contained in paragraph 75


a

Count II Unjust Enrichment (against DCIISI)


fully herein.

78. Defendant DCHSI denies the allegations contained in paragraph 78.



the extent a response is required, Defendants deny the allegations contained in paragraph

.1


;r{ II i o 6 t11 ix C sk


fully herein.



the extent a response is required, Defendants deny the allegations contained in paragraph 84.


Count IV Breach of Contract (against DCIISI)


fully herein.


the extent a response is required, Defendant DCHSI denies the allegations contained in

paragraph 87.

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the extent a response is required, Defendants deny the allegations contained in paragraph


Count V Indemnification (against Mr. Thompson)


fully herein.


the extent a response is required, Defendant Thompson denies the allegations contained in

paragraph 91.


Count VI Violation of Statutory Duty to Cooperate Under D.C. Code 31-1305 (2001) (against Mr. Thompson and DCHSI)


fully herein.


the extent a response is required, Defendants deny the allegations in paragraph 94.


WHEREFORE, Defendants pray that judgment be entered in their favor dismissing the Amended Complaint with prejudice, and awarding it further relief as the Court deems just and proper.

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1. The Complaint fails to state a claim upon which relief may be granted as to Count

I (breach of fiduciary duty) because (a) the D.C. Holding Company System Act does not support the asserted claim, (b) Mr. Thompson neither had nor breached any of the alleged fiduciary

duties, (c) none of Mr. Thompson's alleged acts was the proximate cause of harm to Chartered, (d) the alleged transfers were justified and in the best interests of DCHSI and Chartered, and (e) Mr. Thompson managed Chartered appropriately.


II (unjust enrichment) because (a) the D.C. Holding Company System Act does not support the asserted claim, (b) it was not unjust for DCHSI to retain any of the alleged transfers, (c) DCHSI, as Chartered's parent company, was and is entitled to Chartered's assets, (d), none of the alleged

transfers was the proximate cause of damage to Chartered, and (e) any damage to Chartered was proximately caused by the District intentionally underpaying Chartered by using actuarially

unsound rates.


III (conversion) because (a) the D.C. Holding Company System Act does not support the

asserted claim, (b) DCHSI, as Chartered's parent company, was and is entitled to Chartered's assets, and (c) neither Mr. Thompson nor DCHSI unlawfully exercised ownership, dominion, or

control over any assets of Chartered.


IV (breach of contract) because (a) DCHSI did not breach any obligation that it had to Chartered

under the TAA, (b) even if any such breach had occurred (and none did) it would not have been the proximate cause of any damage to Chartered, and (c) any damage to Chartered was

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proximately caused by the District intentionally underpaying Chartered by using actuarially

unsound rates.


V (indemnification) because Special Deputy Watkins promised Mr. Thompson that if he

consented to the rehabilitation of Chartered, the Rehabilitator/Special Deputy Watkins would not

sue him based on the Indemnification Agreement and Mr. Thompson reasonably relied on that

promise to his detriment.


VI (violation of statutory duty to cooperate under D.C. Code 31-1305) because (a) Plaintiff

does not allege any facts showing that Mr. Thompson or DCHSI did not cooperate with the

Rehabilitator in any respect and (b) neither Mr. Thompson nor DCHSI violated any obligation

under D.C. Code 31-1305.

7. Any injuries allegedly suffered by Plaintiffs were not proximately caused by acts or omissions of Defendants. This lack of proximate cause precludes Plaintiffs from prevailing or

recovering on their claims.

8. Plaintiffs' damages, if any, were caused in whole or in part by the actions or

omissions of others, including but not limited to, the District, the D.C. Department of Insurance,

Securities, and Banking ("DISB"), the D.C. Department of Health Care Finance ("DHCF"),

current DISB Commissioner Chester McPherson, former DISB Commissioner White, DHCF

Director Wayne Turnage (and his predecessor), Special Deputy Watkins, and Mercer LLC d/b/a

Mercer Government Human Services Consulting ("Mercer"), who are proportionately or wholly

liable for any such damages.

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9. While Defendants deny liability in full, if Defendants are found liable in any

manner, Defendants aver that Commissioner White, Special Deputy Watkins, DHCF Director

Turnage and his predecessor, and Mercer are contributorily negligent for or a superseding cause

of the injuries alleged. (See Counterclaims 36-48, 69-84, 99-116, which are incorporated herein by reference.)

10. To the extent Plaintiffs' claims depend upon assertions that conflict with the terms

of applicable written agreements or documents, Plaintiffs' claims are barred by the doctrines of

estoppel, consent, waiver, or other applicable doctrines.

11. Plaintiffs' claims are barred by the doctrine of unclean hands.

12. Plaintiffs' claims are barred by the doctrine of promissory estoppel. (See

Counterclaims 64-68, 194-216, which are incorporated herein by reference.)

13. Plaintiffs' claims are barred by the applicable statutes of limitations.

14. Plaintiffs' claims are barred by reason of their misrepresentations and fraudulent

inducement. (See Counterclaims 64-68, 194-216, which are incorporated herein by

reference.) 15. Plaintiffs' claims are barred by reason of the violations of Mr. Thompson's and

DCHSI's rights under the Due Process Clause of the Fifth Amendment. (See Counterclaims

131-40, 159-68, which are incorporated herein by reference.)

16. Plaintiffs' claims are barred by reason of the violations of Mr. Thompson's and

DCHSI's rights under the Takings Clause of the Fifth Amendment. (See Counterclaims 117-

30, 141-58, which are incorporated herein by reference.)

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17. Plaintiffs' claims are barred by reason of the illegal restraint of trade by the

District, Commissioners McPherson and White, Special Deputy Watkins, and Director Turnage

and his predecessor. (See Counterclaims 187-93, which are incorporated herein by reference.)

18. Plaintiffs' claims are barred by the statute of frauds.

19. Plaintiffs' damages, if any, were caused by an illegal conspiracy and policy,

custom and/or practice of the District and its officials and agents to knowingly and intentionally

set actuarially unsound reimbursement rates in violation of applicable laws and in breach of

contracts between Chartered and the District. This conspiracy and policy, custom and/or practice

resulted in underpayments to Chartered in the tens of millions of dollars and artificially forced

Chartered into financial distress. The financial distress manufactured by the District caused

Chartered to default on the Cardinal bank loan and forced it into rehabilitation. (See

Counterclaims J3-5, 7, 9, 16-17, 36-37, 39-48, 99-116, 123, 141-86, 204-09, which are

incorporated herein by reference.)

20. Defendants reserve the right to amend this Answer to the extent that they become

aware of additional relevant facts or defenses, whether through formal discovery or otherwise.

Defendants/Counterclaim Plaintiffs D.C. Healthcare Systems, Inc. ("DCHSI") and

Jeffrey Thompson ("Mr. Thompson"), by and through the undersigned counsel, pursuant to Sup.

Ct. Civ. Rules 12 and 13, respectfully assert counterclaims against the Counterclaim Defendants

and Additional Counterclaim Defendants (collectively, "Counterclaim Defendants"), and state as

follows:

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r, sp sirT i

1. DCHSI is the parent company and sole shareholder of D.C. Chartered Health

Plan, Inc. ("Chartered"), a managed care organization ("MCO") located in the District of

Columbia. Until recently, Chartered had a series of contracts with the government of the District

of Columbia (the "District") to provide healthcare services to well over 100,000 low-income and

disabled District residents.

2. In essence, the District outsources the provision of healthcare services by

contracting with MCOs to administer these functions. The District funds these healthcare

services provided to indigent and vulnerable populations, and pays for the costs of administration

of these programs through contracts with MCOs like Chartered. The contract rates must be

"actuarially sound" to ensure adequate provision and funding for the healthcare services and

costs of administration. Actuarially sound rates reflect, for example, considerations like the

historical actual encounter data and the like. Federal law requires that states (and the District) set

actuarially sound rates. In connection with the contract between the District and Chartered, the

District knowingly and intentionally failed to set actuarially sound rates.

3. Internal District documents written by certain of the Counterclaim Defendants

show that the District's mismanagement of their healthcare programs included a policy, custom,

and/or practice of knowingly and intentionally setting actuarially unsound reimbursement rates

in violation of federal law and in breach of contracts between Chartered and the District. This

policy, custom, and/or practice resulted in underpayments to Chartered of approximately $80

million.

IR

4. The District then used Chartered's financial distress as a pretext to force it into

rehabilitation, seize control of it, dismantle it, and transfer its valuable assets and personnel to a

favored competitor for a significantly reduced value.

5. The custom of setting actuarially unsound reimbursement rates, taken together

with the District's intentional underpayments of Chartered by nearly $80 million, created

Chartered's financial distress and formed the basis for the rehabilitation. The rehabilitation and

Chartered's liquidation are inextricably intertwined in two respects. First, certain Counterclaim

Defendants unlawfully agreed that all of these events would occur. Second, Chartered would not

have been undercapitalized but for the actuarially unsound rates and the intentional

underpayments. The aforementioned events constitute a series of related occurrences resulting in

the instant controversy between and among the parties.

6. Once the District took control of Chartered pursuant to the rehabilitation, the

District (1) liquidated Chartered, (ii) engineered a "settlement" with itself and (iii) sued Mr.

Thompson and DCHSI despite having promised not to do so. With respect to the "settlement,"

the District purported to settle Chartered's claims for underfunding and improper rates; these

claims total at least $80 million. At all times material to the settlement, the District sat on both

sides of the settlement table. The District controlled Chartered and negotiated Chartered's

claims against the District for violating the U.S. Constitution and federal Medicaid laws and

breaching contracts. The settlement was manufactured without a full assessment of Chartered's

claims, without discovery, and without the consent or involvement of DCHSI or Mr. Thompson.

The settlement purportedly resolved claims to which the District, by its own admission, had no

defense.

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7. In a five-year time period, senior District officials engaged in a scheme to take

Chartered from its shareholder. The plan included executive decisions; such as appointment of

the Special Deputy through a sole source process (as compared to competitive bidding required under the APA) or using Chartered's assets and employees to assist another company's efforts to

win the District Medicaid contract (as compared to allowing Chartered as the incumbent to bid on a new contract). The use of unsound rates violated both federal and local law. The repeated

imposition of unsound rates and rate ranges year after year as established by Mercer and

approved by DHCF and Mr. Turnage (and his predecessor), could have only resulted in financial

losses to Chartered. Despite Chartered's long history as a responsible and responsive MCO in

the District, the Rehabilitator conducted a fire sale of Chartered's assets and gave Chartered's

contract to a competitor. The administrative process rehabilitation of an insurer was neither a

transparent government undertaking nor consistent with applicable statutes and regulations. For

example, the Rehabilitator effectively liquidated Chartered in every sense under the guise of a

rehabilitation. This was done in violation of D.C. law and evidences the Rehabilitator's abuse of

discretion and process.

8. Counterclaim Defendants' misconduct (i) violates the Takings and Due Process

Clauses of the Fifth Amendment to the U.S. Constitution, (ii) contravenes federal Medicaid laws, (iii) flouts a D.C. statute forbidding illegal restraints on trade, (iv) constitutes intentional torts

including fraudulent inducement and fraudulent misrepresentation, (v) breaches the contracts

mentioned above, and (vi) has caused injury and damage to Counterclaim Plaintiffs in an amount exceeding $80 million.

9. From 1987 until April 2013, Chartered was one of the Medicaid MCOs in the

District pursuant to a series of contracts between Chartered and the District's Department of

L

Health Care Finance ("DHCF"). Chartered's healthcare business consisted of contracts from one

client: the District. The most recent of these contracts was executed on May 1, 2008, for a five-

year term through one-year options. For simplicity, this Complaint refers to each of these

contracts and the amendments thereto, individually or collectively as applicable in context, as the

"DHCF Contract." Pursuant to the DHCF Contract, Chartered provided healthcare services to

low-income, disabled recipients of assistance under TANF (Temporary Assistance for Needy

Families) and previously uninsured residents of the District under the Medicaid and Alliance

programs.

10. DCHSI has been Chartered's sole shareholder since May 2000. When the District

seized control of Chartered through rehabilitation, the District took DCHSI's largest asset.

11. Mr. Thompson is DCHSI's sole shareholder. Mr. Thompson served as Chairman

of the Board of Directors of Chartered until April 2012, when he was forced to resign. The

underfunded Medicaid and Alliance contracts with the District resulted in undercapitalization of

Chartered that triggered the rehabilitation and Mr. Thompson's ouster.

12. The District is responsible for operating its programs, services, and activities in

conformity with the federal Social Security Act (the "SSA") and related federal and local laws in

its implementation of the Medicaid and Alliance programs. See, e.g., D.C. Code 1-307.02 et

seq. In addition, officials of the District working at subordinate agencies, including but not

limited to the DHCF and the Department of Insurance, Securities and Banking ("DISB"), may not intentionally, willfully, or knowingly violate the constitutional rights of the District's

citizens. Further, the District cannot ignore its legal obligations to comply with its own

regulations in its administrative review of MCOs; handling of insurers and contractors, suppliers,

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and vendors; and appointments, delegations to and employment of third-parties. The District

also has legal obligations to perform its affairs in a fair, open, and transparent manner.

13. Defendant Chester A. McPherson is sued in his official capacity. Mr. McPherson

is the acting Commissioner of DISB. The DISB Commissioner is appointed by the Mayor, with

the advice and consent of the D.C. Council. See D.C. Code 31-104. The DISB Commissioner

has the authority to promulgate rules and regulations for insurers and MCOs in the District. See,

e.g., D.C. Code 31-3402(e)(1). By law, the DISB Commissioner also serves as the

rehabilitator for insurers and MCOs that are in rehabilitation. D.C. Code 31-3420. Defendant

McPherson is the current District official responsible for supervision of both the Special Deputy

and Chartered in rehabilitation.

14. Defendant William P. White, who is sued in his individual capacity, was the

DISB Commissioner from June 2011 to November 2013, and acting DISB Commissioner from

February 2011 to June 2011, and thus was the Rehabilitator by operation of statute from the

beginning of Chartered's rehabilitation until November 2013. Mr. White appointed Daniel

Watkins to serve as Special Deputy to the Rehabilitator in connection with Chartered's

rehabilitation.

15. Defendant Daniel L. Watkins, who is sued individually and in his official

capacity, is an insurance lawyer from Kansas. He was appointed in October 2012 and continues

to serve in that role. Mr. Watkins has a personal financial interest in Chartered and its

rehabilitation. Prior to serving as Special Deputy, Mr. Watkins worked as a consultant to DISB.

In that role, Mr. Watkins was paid to conduct a financial review of Chartered for DISB. This

review formed the basis for DISB's recommendation that Chartered be rehabilitated, his

appointment as Rehabilitator, and the liquidation of Chartered. Upon information and belief, the

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District has already paid Mr. Watkins in excess of $1 million in connection with Chartered's

rehabilitation/liquidation, and he will receive more money from any recovery resulting from the

Rehabilitator's suit against Mr. Thompson and DCHSI.

16. Defendant Wayne Tumage has been the Director of DHCF since February 2011

and is sued individually and in his official capacity. DHCF administers the Medicaid and

Alliance programs. DHCF is the "single state agency" that administers the Medicaid program.

See 42 U.S.C. 1396a (a)(5); D.C. Code 31-3171.13. As Director of DHCF, Mr. Tumage has

been responsible for the oversight, supervision, and control of DHCF operations, and was

ultimately responsible for ensuring that the agency's services complied with federal and local

laws. His predecessor had the same responsibilities. Mr. Tumage, individually, and with Mr.

White and other District officials, repeatedly met with Chartered staff to review, evaluate,

discuss and set rates. Mr. Tumage was also involved in discussions about Chartered's

undercapitalized financial position and options to remedy that situation. Finally, he (and his

predecessor) managed Mercer on rate setting for MCOs, including Chartered.

17. Defendant Mercer LLC, d/b/a Mercer Government Human Services Consulting

("Mercer"), is a Delaware limited liability company headquartered in New York. Mercer

provided DHCF with actuarial rate development, analysis, and rate certification for the Medicaid

and Alliance programs. Mercer, together with the District, established rates that were actuarially

unsound. Mercer has worked with the District, specifically DHCF, on rates for than 10 years and

at all times relevant to this action.

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Jurisdiction and Venue

18. This Court has subject-matter jurisdiction over this case pursuant to D.C. Code

11 -921 and 31-1303. Pursuant to D.C. Code 12-309, a notice-of-claim letter was timely

served on the Mayor of the District on May 30, 2013

19. This Court has personal jurisdiction over Counterclaim Defendants McPherson,

Turnage, White and Watkins pursuant to D.C. Code 13-422 and 13-423(a) because they are

domiciled, work, or have their principal place of business in the District, regularly transact

business in the District, caused tortious injury in the District by acts and omissions in the

District, and regularly solicit and do business in the District.

20. This Court has personal jurisdiction over Defendant Mercer pursuant to 13-

423 (a) because it transacts business in the District, contracts to supply services in the District,

caused tortious injury in the District by acts and omissions in the District, and regularly solicits,

does business, and derives substantial revenue from services rendered in the District.

21. Counterclaim Plaintiffs' claims for violations of their constitutional rights are

stated against the relevant Counterclaim Defendants in their personal and official capacities. For

Commissioner White and Special Deputy Watkins, the term "official capacities" includes their

statutory duties and capacities as Rehabilitator.

22. Across the United States, Medicaid programs provide healthcare services to low-

income children, adults, the elderly, TANF recipients, and persons with disabilities by

implementation of a federally approved state plan, pursuant to Title XIX of the SSA, 42 U.S.C.

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1396, et seq. (Although the District and U.S. territories are not states, for simplicity this

Complaint uses the term "state" to refer to all such jurisdictions as well as actual states.)

23. The local Medicaid program was established by the Medicaid Managed Care

Amendment Act of 1992, effective March 17, 1993 (D.C. Law 9-247). DHCF was created in

2009 and is the successor to the Medical Assistance Administration. DHCF is responsible for

planning, setting polices and requirements, developing and providing program oversight, and

ensuring fiscal accountability to promote an accessible system of quality care for the population

served by the Medicaid program.

B. The Federal Medicaid Program and the District's Participation.

24. The U.S. Department of Health and Human Services ("HHS"), pursuant to SSA's

Title XIX, provides oversight for the states' Medicaid programs throughout the country, jointly

funding state programs. The Centers for Medicare and Medicaid Services ("CMS"), which is

part of HHS, ensures that quality medical services are provided at the state level in compliance

with applicable federal requirements.

25. The state plans are submitted to CMS annually, and indicate the rates for

reimbursement of services provided by MCOs to that state's Medicaid beneficiaries. The state-

developed "capitation rates" are required to be "actuarially sound" and must be certified as such

to the federal government. See 42 U.S.C. 1396b (m) (2) (A) (iii) (requiring that payments to

healthcare providers must be "made on an actuarially sound basis"); 42 C.F.R. 438.6(c) (2) (i)

("All payments under risk contracts and all risk-sharing mechanisms in contracts must be

actuarially sound.") (emphasis added). This is to ensure that there are MCOs willing to provide

the healthcare services in the first instance.

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26. Capitation rates refer to capitation, which is a per-member monthly amount paid

to a healthcare plan (in this case, an MCO) that covers contracted services. Capitation is the

most frequently used methodology to purchase managed care services from MCOs.

27. At all times material hereto, DHCF contracted with Mercer to act as its actuary to

develop "actuarially sound" capitation rates every year. In other proceedings involving

Chartered, the District has admitted in writing that Mercer was responsible for setting, and did

actually set, the capitation rates for Chartered and that the District relied upon Mercer's

statements of actuarial opinions With respect to those rates.

28. The District delegated its statutory duty to certify the soundness of rates to its

actuary, Mercer. The certification is intended to be an assurance that the rates meet the federal

and corresponding state requirements for actuarially sound rates.

29. In providing actuarial services to DHCF, Mercer had ethical duties and

professional responsibilities to seek, obtain, and use complete, accurate, and reliable data when

calculating capitation rates, and to comply with federal and District laws.

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30. DCHSI purchased Chartered out of bankruptcy with the District's approval in

May 2000, thereby acquiring the then-applicable DHCF Contract. Chartered was awarded a

second DHCF contract in 2006.

31. The DHCF Contract required Chartered to provide medical services to over

100,000 District residents monthly. As a result, and in discharging its duties, Chartered

developed a significant provider network incorporating primary, urgent, and emergency

healthcare services. This network gave beneficiaries of Medicaid and Alliance access to an

extensive range of healthcare services.

,KI

32. In 2006, the DHCF Contract consisted only of the Medicaid population. Later, in

2008, the District transferred members from the 100% District-sponsored Alliance program to

Chartered, thereby significantly increasing the number of patients whom Chartered served.

33. The DHCF Contract required the District to set the reimbursement rates at levels

such that the District would pay Chartered (i) 100% of what Chartered was expected to pay

providers plus (ii) a small percentage more. The calculations included money to cover

Chartered's administrative costs, a premium tax, and a small amount for profit (sometimes

referred to as cost of capital).

34. Under the DHCF Contract, if the District imposed additional or changed

conditions in any given year that increased Chartered's costs of providing services, Chartered

was entitled to a retrospective rate adjustment to account for its entire loss experience under the Contracts.

35. The DHCF Contract is a "retrospectively rated" contract. This means that, even if

an actuary (Mercer) certified the rates as sound, if the rates proved unsound, the District was

obligated to pay Chartered the amounts that the District would have paid Chartered if the rates

had been sound in the first instance. ( E.

f ~ I d,.i ~~4 S ~ ~~~ ~ F,~ VC= ~ ? `~ ~ ~4 a e ~ . ~ E ~~` a i, 1 F `~ ~ ~~. \ %'~ i ~ 4' ~~ `` f 1 r ''~ ' 1 ` ~~`

36. For a number of years, beginning prior to 2010 and continuing until at least when

DHCF made its last payment to Chartered (the "Actuarially Unsound Period"), the DHCF

Director (first Director Turnage's predecessor, then Director Turnage) and Mercer agreed that

DHCF would pay Chartered reimbursement rates that were actuarially unsound, which violated

federal Medicaid law and breached the DHCF Contract. As the head of DISB, Commissioner

25

White received regular reports on Chartered's financial condition. Commissioner White knew

from these reports that DHCF was paying Chartered actuarially unsound reimbursement rates_

Mercer, as the District's actuary, was also aware that Chartered was losing money every year on

rates that did not cover the actual costs of the Alliance program members. Despite this

knowledge, Mercer did not adjust its rate setting ranges.

37. By 2011 if not earlier, Commissioner White and Special Deputy Watkins learned

of the agreement between the DHCF Director and Mercer, joined it, and actively encouraged its

execution. Mr. Watkins's role in this scheme predated his appointment as Special Deputy.

Having evaluated Chartered prior to rehabilitation, Mr. Watkins had prior knowledge of

Chartered, its financial distress, and the rate-setting history before his appointment as Special

Deputy. He was first paid by DISB to complete an assessment of the financial condition of

Chartered in 2011. Relying on Mr. Watkins's assessment, DISB determined that Chartered

needed financial intervention and rehabilitation.

38. The DISB Commissioner, by regulation, has the sole authority for the

administrative process of rehabilitation of an insurer. DISB reviews the financial status of

insurers, including Chartered, and determines the method that an insurer must use to remain

financially stable. In the case of DCHSI, Chartered was subjected to an unnecessary

rehabilitation that resulted in the liquidation of Chartered at a fire sale and the transfers

Chartered's assets including its unique status as the longtime incumbent provider for Medicaid

and Alliance to AmeriHealth Mercy ("AmeriHealth"), a politically favored competitor of

DCHSI and Chartered. The rehabilitation resulted in a transfer of vital and necessary medical

services from a local corporation (Chartered) to an out-of-state business (AmeriHealth). This

transfer could not have served, and did not serve, any legitimate District objective. Moreover,

26

had the District adequately funded the programs, as it was legally required to do, no

rehabilitation would have occurred. Indeed, had the District provided only the funds it ultimately

provided in the "settlement," no rehabilitation would have occurred.

39. Throughout the Actuarially Unsound Period, Director Turnage (and his

predecessor) approved actuarially unsound reimbursement rates that he directed Mercer to set for DHCF's payments to Chartered. Director Turnage and his predecessor approved these rates as

part of their and Mercer's unlawful scheme with Commissioner White and Special Deputy

Watkins, knowing that their actions would result in financial losses to Chartered.

40. At all times material hereto, Mercer and DHCF set and certified rates that they

knew were actuarially unsound.

41. Throughout the Actuarially Unsound Period, Director Turnage (and his

predecessor), Mercer, Commissioner White, and Special Deputy Watkins concealed from Mr. Thompson, DCHSI, and Chartered the fact that DHCF was paying Chartered based on

actuarially unsound rates and was thereby causing severe financial injuries to Chartered. 42. In addition to the single underpayment category (774/775 Population Transfers)

described below, the District also underpaid Chartered for seven other significant categories of

claims as to which the District had no defense:

(a) First, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates under the Alliance program from July 2010 through

July 2011. For this "Alliance Claim," the District owes Chartered an additional $9,086,929

(plus interest);

(b) Second, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates for certain dental benefits that DHCF imposed on

27

Chartered, but for which the District did not pay from January 2011 through November

2012. For this "Dental Crown Claim," the District owes Chartered an additional $2.2

million (plus interest);

(c) Third, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates for the Alliance program from August 2011 through

December 2011;

(d) Fourth, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates, not otherwise claimed, for the calendar year that

ended on December 31, 2012, both for the Alliance program (for the full year) and for the

Medicaid program (from May 2012 through the end of the year);

(e) Fifth, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates from January 1, 2013 until the end of the contract

period, April 30, 2013, for both the Alliance program and the Medicaid program;

(f) Sixth, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates prior to the period addressed in the Rehabilitator's

asserted Alliance Claim, i.e., from May 1, 2008 through June 2010 (the `Early Alliance

Retrospective Period"); and

(g) Seventh, the District, through Director Turnage (and his predecessor) and

Mercer, set actuarially unsound rates for the Medicaid program prior to the period from May

1, 2008 through July 31, 2010 (the "Early Medicaid Retrospective Period")

43. These seven categories of underpayments would have entitled Chartered to a

retrospective rate adjustment exceeding $80 million.

28

44. In addition, in 2010, the District unilaterally transferred approximately 23,000

people (the "774 Population" and the "775 Population") from Alliance to Medicaid. The 774

Population consisted of childless adults with incomes at or below 133% of the federal poverty

level. The 775 Population consisted of childless adults with incomes between 133% and 200%

of the federal poverty level. Transferring the 774 and 775 Populations to Medicaid gave persons

in these populations new access to expensive prescription drug coverage, which Alliance did not

provide (but which Chartered was required to provide pursuant to contract).

45. The transfer of the 774 and 775 Populations from Alliance to Medicaid had a

severe adverse financial impact on Chartered. This is because many individuals in those

Populations had chronic illnesses and required very expensive brand-name prescription drugs.

As a result, the pharmacy costs increased significantly for Chartered.

46. Despite the evidence of increased costs to Chartered, the actuarial unsoundness of

the rates, and demands by Mr. Thompson, DCHSI, and Chartered for an equitable adjustment, the District refused to adjust the rates, either retrospectively or prospectively, as required by the DHCF Contract and the Medicaid laws.

47. Upon information and belief, in a 2013 Corrective Action Plan for Chartered,

Commissioner White and Special Deputy Watkins acknowledged that there was "a pattern of

DHCF rates that appear to be actuarially unsound related to the contractual benefits required to

be provided by Chartered." (Emphasis added.)

48. In sum, the District, Director Turnage (and his predecessor), Commissioner

White, and Special Deputy Watkins intentionally deprived DCHSI's business, Chartered, of tens

of millions of dollars of revenue during the three years preceding Chartered's rehabilitation and

caused DCHSI to lose its company (Chartered) and assets.

FA

L.__1j i:mviiii r iziaiairi'iititiio nw'" 49. Counterclaim Defendants decided to assert direct and complete control over

DCHSI's business by way of "rehabilitation" through the Insurers Rehabilitation and Liquidation

Act.

50. Counterclaim Defendants made an unprecedented demand that DCHSI sell

Chartered because Chartered was undercapitalized. A forced sale of Chartered would cover up

the District's failure to properly set rates because the purported basis for the sale was the very

financial pretext that Counterclaim Defendants themselves had caused. Chartered and DCHSI

were not allowed to fully participate in Chartered's sale.

51. Both before and during Chartered's rehabilitation, the District's acts vis -a-vis

Chartered have always been tainted by serious and non-waivable conflicts of interest. These

conflicts underscore the bias and lack of impartiality of the entire rehabilitation process and the

gravity of the District officials' violations of the constitutional, statutory, and common-law rights

of DCHSI and Mr. Thompson. Despite DCHSI's repeated attempts to raise concerns about the

conflicts, the District and DISB turned a blind eye.

52. Pursuant to D.C. Code 31-1405(a), DISB was required to ensure that all persons

involved in examining Chartered, including all consultants, had no conflict of interest relating to,

affiliation with the management of, or pecuniary interest in Chartered.

53. Special Deputy Watkins, who was appointed by then-DISB Commissioner White

and stands in the shoes of the Rehabilitator (current DISB Commissioner McPherson), is an out-

of-town lawyer from Kansas who has day-to-day responsibility for the rehabilitation of

30

Chartered. Special Deputy Watkins has multiple conflicts of interest that make it unethical for

him to be involved in the rehabilitation of Chartered. These conflicts create an appearance of

impropriety. More significantly, there is evidence of inappropriate action by the District.

54. Upon information and belief, Special Deputy Watkins's brother, Robert Watkins,

served as Chartered's Chief Operating Officer ("COO") from December 2007 through September 2011. While serving as Chartered's COO, Robert Watkins was actively involved in

rate-setting, contract negotiations, and pharmacy management. Commissioner White appointed

Daniel Watkins to serve as Special Deputy for the rehabilitation without disclosing the familial

conflict-of-interest to Chartered, DCHSI, or Mr. Thompson.

55. In addition, upon information and belief, during the months leading up to

Chartered's rehabilitation, DISB paid Special Deputy Watkins as a consultant for the purposes of

examining and analyzing Chartered's practices, procedures, and financial condition and

developing a corrective action plan.

56. Both prior to and during the rehabilitation proceeding, Special Deputy Watkins's

duties included reviewing, evaluating, and opining on his brother's work regarding Chartered.

For example, the purported "settlement agreement" between DISB and DHCF (i.e., between the

District and itself) concerns claims arising from the very rate-setting and negotiations in which Robert Watkins was involved as Chartered's COO. This "settlement agreement" is discussed

more fully below.

57. On information and belief, pursuant to an ethics review by the Office of the D.C.

Attorney General (the "OAG"), Special Deputy Watkins's role in Chartered's rehabilitation was

to be "prospective" and was not to include work performed by his brother as a Chartered

31

executive. Instead, by reviewing and analyzing historical and retrospective work, including his

brother's work, Special Deputy Watkins's role has far exceeded the scope allowed by the OAG.

58. Based on Special Deputy Watkins's actual and potential conflicts and the

appearance of impropriety, DCHSI requested that he be recused. Commissioner White refused.

59. In addition to the ethical considerations surrounding Mr. Watkins' appointment,

the manner in which he was hired raises additional concerns and questions. The selection of Mr.

Watkins was not an open process. DISB did not conduct a competitive bidding process to

identify qualified attorneys and did not even advertise the position. Mr. Watkins' selection was a

sole source determination, made and approved by Mr. White in violation of District of Columbia

law.

2. Faegre Baker Daniels, LLP.

60. Another conflict concerns DISB's engagement of the law firm of Faegre Baker

Daniels, LLP ("FBD")

61. Prior to Chartered's rehabilitation, DISB engaged FBD to examine Chartered at

Chartered's expense. At that time, FBD was also representing United Healthcare ("UHC"), a

direct competitor of Chartered that had expressed an interest in acquiring Chartered. UHC was

at all time material hereto a competing MCO with contracts with the District. That is, both

Chartered and UHC had MCO contracts with the District. DCHSI and Chartered were

concerned that UHC would gain a significant competitive advantage if Chartered was no longer

able to continue providing healthcare services for Medicaid and Alliance.

62. Before engaging FBD, DISB never determined whether FBD had any interests

actual or potential adverse to Chartered. DISB was required to do so.

32

63. DCHSI and Chartered both complained to DISD that FBD's engagement and

participation in the examination of Chartered called into question the credibility and impartiality

of the examination and was on its face improper. DISD ignored these complaints.

IL

64. From October 2012 to January 2013, to induce Mr. Thompson and DCHSI to

consent to the rehabilitation of Chartered, Special Deputy Watkins made the following

representations to Mr. Thompson and/or DCHSI's counsel, Stephen I. Glover of the law firm

Gibson, Dunn & Crutcher LLP:

(a) Chartered would bid on the new Medicaid and Alliance contract prior to

the DHCF Contract expiring on March 30, 2013;

(b) The Rehabilitator would consult DCHSI and cooperate with DCHSI

respecting any corporate activity by way of the reorganization or rehabilitation of Chartered;

and

(c) The Rehabilitator promised that, once Chartered was in rehabilitation, the

Rehabilitator would sue neither DCHSI nor Mr. Thompson.

65. In addition, on October 18, 2012, Special Deputy Watkins made the following

representation in a letter to Chartered's President and CEO: "As Rehabilitator, I intend to seek

approval of the extension of Chartered's Medicaid contract."

66. Mr. Thompson relied on these representations when he was deciding whether to

relinquish control of Chartered, and but for those assurances, he would not have consented to the

rehabilitation.

67. None of the representations made by Special Deputy Watkins was true: (1) Counterclaim Defendants had already decided that Chartered would not be allowed to submit a

33

bid to renew its contract with DHCF and that they would give the new contract to AmeriHealth

through an improper process; (2) Counterclaim Defendants had already decided that they would

transfer Chartered's assets to AmeriHealth for far less money than the assets were worth; (3) once consent was induced, Commissioner White and Special Deputy Watkins excluded Mr.

Thompson and DCHSI and denied their repeated requests for pertinent information about the

District's plans for Chartered; and (4) Commissioner White and Special Deputy Watkins had

already decided to, and later did, sue Mr. Thompson and DCSHI for more than $16M arising

from their involvement in running Chartered.

68. Mr. Glover made requests for pertinent information on behalf of Mr. Thompson

and DCHSI during meetings or phone calls with Special Deputy Watkins and his counsel on or

about November 2, 9, 16, 23, and 30, 2012; December 5 and 14, 2012; and January 11, 2013. In

November 2012, Special Deputy Watkins and/or other agents of DISB taking directions from

Special Deputy Watkins repeated his pre-rehabilitation representations to Mr. Glover that

Chartered would bid on the new Medicaid and Alliance contract prior to the DHCF Contract

expiring. That bid never happened. Instead, Chartered's assets and employees were used to

assist AmeriHealth in its bid to win the DC Medicaid contract.

Co The District Never Intended To Rehabilitate Chartered And, In Fact, Improperly Liquidated Chartered.

69. At no time prior to rehabilitation did Director Turnage, Commissioner White,

Special Deputy Watkins, or anyone else acting for the District or one of its agencies inform

Mr. Thompson or DCHSI that Chartered's undercapitalization and financial distress were due to

the District's custom policy, and/or practice of imposing actuarially unsound rates. Director

Turnage, Commissioner White, and Special Deputy Watkins had a duty to disclose this

information, but they instead affirmatively concealed that: (a) for years they were aware that the

34

reimbursement rates were set at actuarially unsound levels; (b) these unsound rates were

responsible for all or virtually all of Chartered's financial distress; and (c) they and Mercer had

themselves participated in setting or had knowledge of the actuarially unsound rates.

70. Commissioner White and Special Deputy Watkins's efforts to rehabilitate

Chartered were a sham designed to cover up (i) their improper liquidation of Chartered and (ii)

the District's scheme to relieve itself of its funding obligations through a forced compromise and

settlement.

71. Commissioner White and Special Deputy Watkins failed to take reasonable or

appropriate steps to reform and revitalize Chartered, as required by statute. For example, the

Rehabilitator failed to pursue claims against the District to the full extent necessary to properly

refund Chartered for the injuries incurred as a result of the District's use of unsound rates.

Instead of pursuing a strategy designed to reform and revitalize Chartered, the Rehabilitator

focused solely on liquidating Chartered in violation of the governing law and in a method and

manner that injured Chartered, DCHSI, and Mr. Thompson.

72. In November 2012, the Rehabilitator retained an investment banker for the

purported purpose of exploring the sale of Chartered. The Rehabilitator excluded Chartered,

DCHSI, and Mr. Thompson from the process of finding and vetting potential purchasers, thereby

ensuring that Chartered would be sold for less than fair market value. The Rehabilitator created

artificial obstacles designed to thwart an open bidding process.

73. Also, the Rehabilitator failed to perform his duties in a reasonable and transparent

fashion, in a manner typical of most DISB rehabilitations and, as mandated by statute. For

example, the Rehabilitator chose to effectively liquidate rather than rehabilitate Chartered even

though the Rehabilitator knew that the District had been underpaying Chartered for years and

35

owed Chartered tens of millions of dollars. Had the Rehabilitator properly valued all of

Chartered's claims against the District, Chartered would have been solvent, would have

remained in business, and would never have been put into rehabilitation.

74. On Friday, November 9, 2012, the Rehabilitator's banker sent a private letter

soliciting interested parties concerning Chartered's "potential acquisition and recapitalization."

The letter indicated that all bids would be binding and that the bidder must support Chartered's

bid for the new DHCF Contract. Responses were due on Wednesday, November 14, 2012 only

3 business days after the letter was sent. Preparing a bid required detailed financial and other

information that could not possibly be collected and assembled so quickly. The due date thus

effectively made it impossible for potential bidders to bid.

75. By late November 2012, the Rehabilitator had abandoned any pretense of trying

to sell Chartered properly. Instead, the Rehabilitator entered into a non-binding letter of intent

with AmeriHealth and agreed to assist AmeriHealth in preparing its RFP and negotiating a

definitive agreement for new rates and a new MCO contract with the District.

76. On November 30, 2012, the Rehabilitator caused Chartered to enter into an

agreement to provide its "resources, assets, and know-how in support of AmeriHealth's bid for

the award of the new DHCF Contract, in exchange for $5 million to be paid if AmeriHealth "is

chosen as a Service Provider under the RFP and commences operations thereunder."

77. On December 1, 2012, the Rehabilitator caused Chartered to enter into a non-

binding letter of intent with AmeriHealth to transfer all of Chartered's operating assets to

AmeriHealth without payment of additional consideration; the $5 million payment required

under the November 30, 2012 letter agreement is the only payment that AmeriHealth ever agreed

to make.

78. The asset transfer included the then-existing DHCF Contract, provider contacts,

Chartered's phone numbers and trade name, computer systems, membership rolls, accounting

records, certain intellectual property rights, furniture, equipment, supplies, machinery, tools,

vehicles, office equipment, claims data, price lists, sales records, and financial and accounting

records in short, all assets necessary to operate Chartered's business.

79. The asset transfer agreement left Chartered with no source of income and no

ability to pay its employees. Further, the agreement impeded Chartered's ability to collect funds

from the District. The transfer was in effect a total liquidation of Chartered.

80. The Rehabilitator offered no evidence setting forth his valuation of Chartered's

business or supporting his bargain-basement sale price of $5 million.

81. Only when the December 3, 2012 bidding deadline for the new DHCF Contract

had passed did the Rehabilitator reveal that Chartered had not been allowed to bid to keep its

contract with the District its only source of income. That is, Chartered was intentionally

excluded from bidding on a new District contract. Instead, the Rehabilitator required Chartered

to commit its full resources to support the bid of AmeriHealth Chartered's politically favored

competitor for that contract.

82. On April 30, 2013, with Chartered's DHCF Contract set to expire at 11:59 p.m.

that day, AmeriHealth and the DHCF entered into a new contract with new rates, effective as of

May 1, 2013.

83. Pursuant to an agreement among Counterclaim Defendants, DHCF awarded the

new contract to AmeriHealth without going through the proper process that the D.C.

procurement laws require. DHCF per Counterclaim Defendants' scheme improperly

awarded the new contract to AmeriHealth.

37

84. In short, within a mere six weeks, the Rehabilitator purportedly assessed the

financial condition of Chartered, determined the spectrum of potential buyers, identified a

preferred buyer, established terms, and negotiated a procedure and sale of Chartered's assets all

while excluding DCHSI and Mr. Thompson. Such a short time frame further evidences the

Rehabilitator's failure to pursue the reformation and revitalization of Chartered and further

evidences that Rehabilitation did not and could not achieve fair market value in its bargain

basement sale of Chartered. Moreover, the District paid approximately $48 million to the

Rehabilitator in an effort to compromise its obligations on fees owed to Chartered. These fees

would have been sufficient to reform and revitalize Chartered.

1.

85. In July 2013, the District, Commissioner White, Special Deputy Watkins, and

DHCF negotiated and "settled" Chartered's $60M-plus claim against the District for

underpayments. Those negotiations and "settlement" were carried out without full discovery,

without DCHSI's consent or involvement, and without a full vetting of all claims and potential

claims that Chartered had against the District.

86. Indeed, months earlier, Commissioner White and Special Deputy Watkins, on

behalf of Chartered, initiated three claims against the District for an equitable adjustment of no less than $62,574,298, plus interests, to compensate Chartered for increased costs for services.

These appeals were discrete and, as Commissioner Watkins and Special Deputy knew, fell well

short of the total equitable adjustment owed Chartered. 87. More specifically, the "settlement agreement" was negotiated only among, and

signed only by, representatives of the District. The District stood in the shoes of Chartered to

force a compromise of its own obligations owed pursuant to federal and state law. That is, all

signatories to the settlement agreement were District representatives. The District signed an

agreement with itself; one of its hands shook the other.

88. Highlighting the one-sided nature of the "settlement agreement," while it

purported to "settle" all of Chartered's claims against the District arising from the Medicaid and

Alliance programs (the "Released Claims"), it reserved the District's right to bring claims against

Chartered, DCHSI, and Mr. Thompson.

89. By forcing the takeover of Chartered, the District buried its underfunding and

artificially reduced its federal and state statutory obligations to $48 million, to be distributed in

two parts. First, $18 million (Part I) would be paid to Chartered upon court approval and

approval by CMS (the Rehabilitator did not disclose the likelihood or expected timing of CMS's

approval). This $18 million would be distributed "in accordance with the Plan of Reorganization

to providers with undisputed Class 3 claims allowed by the Rehabilitator." Second, the

remaining $30 million (Part II) would bypass Chartered altogether and would be paid either (1)

directly to Chartered's providers with undisputed, allowed Class 3 claims or (2) if the Fiscal

Year 2013 District Litigation Fund otherwise first would lapse, to an unnamed third-party

selected by the District, which would hold the funds and pay them to providers, presumably

charging an undisclosed fee out of the Part II settlement fund.

90. The District insisted on using the litigation fund to avoid the open and transparent

approval process of the D.C. Council and to expedite its secret settlement agreement. See D.C.

Code 47-355.02 ("D.C. Anti-Deficiency Act" prohibiting District agencies from making

unauthorized expenditures).

91. The Rehabilitator has conceded that the claims he asserted did not cover all of the

District's debts to Chartered. Yet the Rehabilitator provided no information to assess the nature

39

or value of the unasserted claims. In addition, the Rehabilitator also failed to determine the value

of underpayments due to Chartered and equitable adjustments for new populations. No

consideration was given to the value of the company to its owner, DCHSI and, no reasonable

assessment was made on the value of the accounts receivable owned by Chartered and DCHSI.

92. DCHSI estimates that the District owes Chartered (and thus DCHSI) at least $50

million beyond the $48 million "settlement" payment.

93. As to the claims for retrospective rating, the District had no defense given the

District's determinations that the DHCF Contract is retrospectively rated and that the right to

payment was triggered. The Rehabilitator's waiver of those claims is particularly egregious.

94. The fact that the District purported to "settle" Chartered's claims based upon

actuarially unsound rates for $48 million demonstrates that the claims had and have merit; the

District would not have agreed to pay such a large sum for meritless claims.

95. If the District had paid Chartered even the $48 million from the "settlement,"

Chartered would have been solvent, there would have been no reason for its rehabilitation to

continue, and Mr. Thompson (through DCHSI) would have regained control over Chartered. But

the District did not pay Chartered the $48 million, opting. instead to keep Chartered in an

unnecessary rehabilitation.

E. The Rehabilitator Files Suit.

96. Despite expressly and unambiguously promising not to sue Mr. Thompson or

DCHSI for any reason, including but not limited to, obligations allegedly owed under an existing

indemnification agreement, on May 30, 2012, the Rehabilitator and Special Deputy Watkins

filed suit against Mr. Thompson and DCHSI.

97. As regulator, rehabilitator, and on behalf of Chartered, the Rehabilitator and

Special Deputy Watkins have asserted the following claims against Mr. Thompson and DCHSI:

breach of fiduciary duty, unjust enrichment, conversion, breach of contract, indemnification, and violation of statutory duties in connection with (i) alleged unsupported cash transfers from

Chartered, (ii) alleged unpaid contractual obligations under a tax allocation agreement, and (3) alleged loss of Chartered' s assets that secured a line of credit for DCHSI.

98. Aside from the promise not to sue, the lawsuit is also barred and improper

because the Rehabilitator and Special Deputy Watkins, not Mr. Thompson and DCHSI, actually

caused Chartered to default on the loan that triggered the secured line of credit at issue. Indeed,

had the District, Director Turnage or his predecessor, Commissioner White, and/or Special

Deputy Watkins set and paid actuarially sound rates to Chartered, Chartered would not have

defaulted on the bank loan.

99. The District's own internal documents reflect that it intentionally set actuarially

unsound rates to underpay Chartered facts that the District concealed from Mr. Thompson and

DCHSI.

100. In late 2013, DCHSI received from the District a copy of a consulting actuarial

report prepared by Towers Watson Pennsylvania, Inc., dated June 11, 2013 (the "Towers Watson Report"). A peer of Mercer, Towers Watson is a leading global professional services company

that provides a wide range of highly regarded consulting services, including first-rate actuarial

services. Special Deputy Watkins commissioned the Towers Watson Report. Before DCHSI

41

obtained a copy of the Towers Watson Report, Mr. Thompson and DCHSI were unaware of the

information therein.

101. The Towers Watson Report examined only one of numerous categories of the

District's underpayments to Chartered and breaches of contract. As to just that one category, and as to it only for a limited period of time (the "Observation Period," as defined in the Towers Watson Report), the report determined that the District owed Chartered over $51.5 million.

102. The Towers Watson Report also uncovered that the District and Mercer were

aware of, but ignored, (i) significant information repeatedly provided by Chartered and

(ii) information in the District's possession, both of which evidence a deliberate pattern of

actuarially unsound rate-setting. That illegal rate setting caused the very capital depletion upon

which the District relied to drive Chartered into rehabilitation and to sell it.

103. Towers Watson made a number of important conclusions about the unsound rates

set by DHCF regarding the transfer of the 774 and 775 Populations: (1) Chartered's losses began

to emerge in early 2011 and accumulated to $51.5 million during the Observation Period;

(2) capitation rates in place during the Observation Period for the 774 and 775 Populations were

not actuarially sound; (3) capitation rates in place during the Observation Period for the Legacy Population were not actuarially sound; (4) key contract requirements were not met [by the

District]; and (5) applying actuarially sound capitation retroactively would reduce Chartered's

losses by $47.2 million.

104. Chartered incurred not less than $51.5 million in losses from inadequate

capitation rates set by the District and Mercer during the Observation Period for the 774 and 775

Populations.

42

105. The District and Mercer imposed rates for what Towers Watson referred to as the

"Legacy Population," meaning the population that Chartered served before the 774 and 775

Populations were transferred to the Medicaid program. The rates were unsound.

106. The Towers Watson Report was highly critical of Mercer. By way of example

only, the Report states that "[w]e did not find evidence that Mercer attempted to obtain credible

experience data"; that "Mercer did not disclose the lack of data used to adequately rate the new

Populations as is required when any such unresolved concerns could have a material effect on

the actuarial work product"; and that "[w]e do not see evidence that Mercer performed this

analysis or documented it as required, neither when the new populations were added nor when

Chartered raised concerns about higher costs for the Populations."

107. Of the $21.7 million of losses that Towers Watson found arising from inadequate

capitation rates for the Legacy Population during Towers Watson's observation period, $17.4

million is attributable to the District and Mercer imposing rates below target rates.

108. The rates for the Legacy Population were not actuarially sound because:

(1) capitation rates were imposed by the District; (2) the high degree of uncertainty of the incoming new 774 and 775 Populations meant that a decreased margin in overall rates presented

additional unanticipated risk to Chartered; and (3) Chartered's financial condition as a single-state, mono-line, Medicaid and Alliance MCO reporting adverse experience should have been

considered in setting actuarially sound rates.

109. Had the District applied actuarially sound rates, Chartered would not have

experienced loss.

43

QIL 1

fl la aii,i :Ifc; viii e

110. On February 21, 2013, Special Deputy Watkins sent a letter to O'Linda Fuller,

Contracting Officer in the District's Office of Contracting and Procurement. The letter submits a

claim on behalf of Chartered for over $51 million for the period from August 1, 2010 through

April 30, 2012.

111. The letter provides further evidence that Mercer set actuarially unsound rates.

The letter shows that Mercer excluded high-cost populations to engineer artificially unsound

rates and that it did so in such a brazen manner that District officials including but not limited

to the DHCF Director, Commissioner White, and Special Deputy Watkins must have known of

and approved Mercer's misconduct. Among other things, the letter states:

"It is beyond dispute that the rates ranges developed by Mercer and set by DHCF between August 1, 2010 and April 30, 2012 excluded key base data on utilization and cost regarding the 774 and 775 populations." (Bold font and italics in original.)

As of January 2011, "[t]he 774 and 775 populations were utilizing very expensive HIV medications at five times the rate of the legacy Medicaid population." (Bold font and italics in original.)

"On May 1, 2012 Mercer certified rates for May 1, 2012 through April 30, 2013, reflecting a 7.2% increase overall to current rates plus a new rate cell for adults in the 775 population which reflect a 48.8% increase overall to the current rates.... The creation of separate cells for the 775 population in May 2012 with a 48.8% increase in rate clearly demonstrates that the past rates for this group did not account for its costs in the prior Contract years. . . . [T]he District did not acknowledge or appropriately account for the 774 and 775 transfers except prospectively from May 1, 2012." (Emphasis added.)

C. Director Turnage's Memorandum to the Mayor.

112. At least by April 4, 2011, Director Turnage knew that, as a matter of policy, the

District had been intentionally underpaying Chartered. Director Tumage reported the practice in

an internal memorandum to Mayor Vincent Gray dated April 4, 2011 (the "Turnage

Memorandum"). The Turnage Memorandum reveals that Counterclaim Defendants knew that

setting actuarially unsound rates coupled with the non-payment of fees owed would result in a

material reduction of Chartered's level of risk-based capital, which would place Chartered in the

financial position necessary for a regulatory take-over.

113. That problem was compounded by the fact that DHCF had directed Mercer, the

District's rate-setting actuary, "to set the MCO [Managed Care Organization, e.g., Chartered]

rates for Alliance below the lowest level considered actuarially sound." (Id.)

114. Commissioner Tumage admitted that the goal of the scheme to set low rates was

to use Medicaid funds (70% of which are paid by the federal government) "to offset predicted

Alliance losses." The scheme did not work, and as a result, Chartered was injured in two ways. (Id.) First, because "members with higher health care costs" were transferred into the Medicaid

program, "the expected margins on the Medicaid side have not materialized." Second,

"[Chartered] experienced substantial losses on their Alliance business." (Id.)

115. The Tumage Memorandum makes clear that the rates had been set below

actuarially sound levels as a policy by the District to save money and to attempt to balance the

books on the back of Chartered and, by extension, DCHSI.

116. The Turnage Memorandum states that Mr. Turnage would "meet with Mercer to

discuss the goals for FY 12 rate setting" and that "[d]ata on MCO losses will be examined."

Special Deputy Watkins's letter of February 21, 2013 shows, however, that Mercer continued to

set actuarially unsound rates: "Despite the assurance [in the Turnage Memorandum] that MCO

losses would be examined by Mercer and that it may not be realistic to hold rates flat, Mercer's

July 8, 2011 certification letter set out the following:... Use of base data from MCOs for the

period August 1, 2008 through July 31, 2010 (a two year period prior to 774/775 population

enrollment in Medicaid)." (Bold font and italics in original.) The same certification letter also

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set an "essentially flat rate (less than 1% overall increase) [that] did not reflect the dramatically

increased pharmacy costs of the 774 and 775 populations that Chartered was actually

experiencing, and had communicated to the District." (Id)

COUNT I (42 U.S.C. 1983 Claim Against the District, Commissioner White, Special Deputy

Watkins, and Director Turnage for Taking Chartered's Assets)

117. The allegations in paragraphs 1 through 116 are re-alleged and incorporated

herein by reference.

118. The Takings Clause of the Fifth Amendment to the U.S. Constitution provides:

"[N]or shall private property be taken for public use, without just compensation."

119. At all relevant times, D.C. law authorized Commissioner White to determine all

actions that should be taken on behalf of the District relating to an insurance company that was

undergoing rehabilitation. See, e.g., D.C. Code 31-1312(c) ("The rehabilitator may take such

action as deemed necessary or appropriate to reform and revitalize the insurer."); id 31-

1312(e) ("If the rehabilitator determines that ... transformation of the insurer is appropriate, the

rehabilitator shall prepare a plan to effect the changes. "). Commissioner White was the District's

final policymaker for making such determinations. See id. 31-1312(a), (c).

120. Commissioner White had the powers to appoint and delegate his responsibilities

to a special deputy. See D.C. Code 31-1312(a), (c). Pursuant to these powers, Commissioner

White appointed Special Deputy Watkins and charged him with assessing Chartered's

2015-03-03 - Thompson & DCHSI's Answer & Counterclaims (Mott Case)[2]

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