UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Transcription

1 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 1 of 141 PageID #:412 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION LINDA WONG, Individually and on Behalf of ) All Others Similarly Situated, ) ) Plaintiff, ) ) vs. ) ) ACCRETIVE HEALTH, INC., et al., ) ) Defendants. ) ) No. 1:12-cv CLASS ACTION Judge Sharon Johnson Coleman Magistrate Judge Arlander Keys DEMAND FOR JURY TRIAL LEAD PLAINTIFF S CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

2 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 2 of 141 PageID #:413 TABLE OF CONTENTS Page I. SUMMARY OF THE ACTION...1 II. JURISDICTION AND VENUE...10 III. THE PARTIES...11 IV. CLASS ACTION ALLEGATIONS...12 V. CONFIDENTIAL SOURCES...14 VI. SUBSTANTIVE ALLEGATIONS...16 A. The Company and its Businesses...16 B. Accretive s Contracts with Fairview Accretive s Revenue Cycle Operations Agreement Accretive s QTCC...21 C. Accretive s Standard Practices Violated the AG Agreement and Applicable Laws During the Class Period Accretive s Failure to Register as a Debt Collector Accretive s Failure to Protect Patient Information Accretive s High Pressure Collection Tactics Accretive s Focus on Collecting Prior Balances at the Front End of NewTreatment Accretive s Collections Prior to Service Were Based on Estimate and Occurred at Patient Bedsides Accretive s Tracking of Employee Collections Accretive s Use of Patient Access and Stop Lists to Increase Collections Accretive s Threats to Report Patients to Credit Reporting Agencies...39 D. Accretive Knew Throughout the Class Period that the Company Repeatedly Violated the AG Agreement i -

3 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 3 of 141 PageID #:414 Page 1. Accretive Was Acting Pursuant to Standard Business Practices Accretive Was Repeatedly Warned By Fairview that Its Standard Practices Were Illegal The Minnesota Department of Commerce Took Action In Response to Accretive s Improper Conduct The Minnesota Attorney General Sued Accretive Resulting in Accretive Making a $2,490,400 Payment and Agreeing to Be Banned from Doing Business in Minnesota for Six Years The Minnesota Department of Health Issued Findings Related to Accretive s Improper Conduct...50 E. Additional Information Related to Defendants Scienter Accretive Hosted Town Hall Meetings at Fairview Tolan s Presence at Monthly Site Reviews Made Her Further Aware of the Falsity of Defendants Class Period Statements Defendants Used Chalk Talks to Monitor Progress Towards Daily Targets Defendants Received Copies of Presentations Regarding Accretive s Programs at Fairview Defendants Efforts to Mislead Those Investigating Accretive...59 VII. DEFENDANTS MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD...63 A. The November 10, 2010 Press Release...64 B. The November 11, 2010 Press Release and Conference Call...66 C. The Third Quarter Q...70 D. The March 2, 2011 Press Release and Conference Call...72 E. The K...76 F. The May 11, 2011 Press Release and Conference Call ii -

4 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 4 of 141 PageID #:415 Page G. The First Quarter Q...85 H. The June 8, 2011 Conference Call...87 I. The August 10, 2011 Conference Call...89 J. The Second Quarter Q...91 K. The September 26, 2011 Article...92 L. The November 9, 2011 Press Release and Conference Call...93 M. The Third Quarter Q...97 N. The January 19, 2012 Minnesota Attorney General Lawsuit...98 O. The February 3, 2012 Cease-and-Desist Order...98 P. The February 29, 2012 Press Release and Conference Call...99 Q. The K R. March 29, K VIII. THE TRUTH IS FULLY REVEALED A. The April 24, 2012 AG Compliance Review B. The April 27, 2012 Press Release IX. ACCRETIVE S CLASS PERIOD RISK FACTORS WERE MATERIALLY FALSE AND MISLEADING X. ADDITIONAL SCIENTER ALLEGATIONS XI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE XII. LOSS CAUSATION XIII. NO SAFE HARBOR XIV. COUNT I: FOR VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS iii -

5 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 5 of 141 PageID #:416 Page XV. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS XVI. JURY TRIAL DEMANDED iv -

6 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 6 of 141 PageID #:417 By and through its undersigned counsel, Lead Plaintiff Indiana State Police Benefit System ( Lead Plaintiff ) alleges the following against defendants Accretive Health, Inc. ( Accretive or the Company ), Chief Executive Officer ( CEO ) Mary A. Tolan ( Tolan ), and Chief Financial Officer ( CFO ) John T. Staton ( Staton ) (collectively, Defendants ), upon personal knowledge as to those allegations concerning Lead Plaintiff and, as to all other matters, upon investigation of counsel, which included, without limitation: review and analysis of public filings made by Accretive and other related parties and non-parties with the Securities and Exchange Commission ( SEC ); review and analysis of press releases and other publications disseminated by certain of the Defendants and other related non-parties; review of news articles and shareholder communications; review of other publicly available information concerning Accretive, the other Defendants, and related non-parties; interviews with factual sources, including individuals formerly employed by Accretive and other industry participants; review of the Minnesota Attorney General s and the Minnesota Department of Health s reports, complaints, and pleadings concerning Accretive; review of the Minnesota Department of Health s findings regarding Accretive; review of a U.S. Senate hearing regarding Accretive; and review of certain Accretive internal s and documents. Lead Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. I. SUMMARY OF THE ACTION 1. This is a federal securities class action on behalf of a class of all persons or entities who purchased Accretive common stock between November 10, 2010 and April 27, 2012, inclusive ( Class Period ), seeking to pursue remedies under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 ( Exchange Act ), as amended by the Private Securities Litigation Reform Act of 1995 and Rule 10b-5 promulgated thereunder (17 C.F.R b-5)

7 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 7 of 141 PageID #: Among other things, Accretive enters into revenue management contracts with hospital and physician groups, selling itself as being able to effectively and efficiently manage and thereby improve their collections from patients. Basically, Accretive seeks to increase a not-forprofit healthcare providers collections by taking over collections and engaging in substantially more aggressive behavior. However, during the Class Period, Defendants engaged in a fraudulent scheme to artificially inflate the price of Accretive common stock by concealing that its overly aggressive collection practices undertaken with respect to its critical Revenue Cycle Operations ( RCA ) and Quality and Total Cost of Care ( QTCC ) contracts with Fairview Health Services ( Fairview ) were both illegal and in violation of its contracts with Fairview. During the Class Period, Accretive repeatedly touted its compliance with the contracts and all applicable laws, pointing to the success of its five-year RCA with Fairview, for which it attributed approximately 12% of its annual revenue. In addition, Accretive s QTCC with Fairview was the first of its kind, and Accretive s ability to successfully execute that contract was of paramount importance to both the market and Accretive s ability to attract additional contracts and generate additional revenue. 3. The truth about Accretive s illegal practices and breaches of its contracts with Fairview was revealed towards the end of the Class Period in a series of events, including when: (i) Fairview canceled its contracts with Accretive well short of their five-year term; (ii) Accretive announced that it would lose millions in revenue as a result of the cancellation; (iii) the Minnesota Attorney General filed a lawsuit against Accretive for its improper conduct and violation of multiple laws; (iv) United States Senator Al Franken called a special hearing to investigate Accretive s improper conduct; (v) Accretive entered into a settlement with the Minnesota Attorney General under which it agreed to make a payment of nearly $2.5 million and, more significantly, to cease all operations in Minnesota for six-years; and (vi) the Minnesota Department of Health announced its - 2 -

8 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 8 of 141 PageID #:419 findings that Accretive s collection practices violated the law and harassed patients, which news articles reported squared with the allegations in the Minnesota Attorney General s complaint. As a result of this massive scandal, shareholders lost hundreds of millions of dollars as the price of Accretive common stock collapsed from over $30 a share during the Class Period to less than $10 per share. 4. Fairview, one of Accretive s most important customers, began working with Accretive in early Prior to that, however, Fairview had hired other collection companies to handle its revenue cycle operations with disastrous results for Fairview. Accordingly, in 2007, Fairview was forced to sign an agreement with the Minnesota Attorney General, which was approved by the District Court, Second Judicial Circuit, Ramsey County, Minnesota on May 22, 2007 ( AG Agreement ). Because of Fairview s prior revenue collection violations, the AG Agreement specifically established collection requirements and required Fairview to establish a detailed collection policy. Of most importance were the AG Agreement s terms that: (i) prevented Fairview from collecting debt from a patient unless the applicable insurance company had been billed first and given the opportunity to pay the claim; (ii) required Fairview to offer a reasonable payment plan to patients who expressed an inability to pay in one payment; and (iii) stated that patients could not be reported to a credit reporting agency for failure to pay a bill. Additionally, in accordance with the AG Agreement, Fairview was prevented from delegating authority or responsibility for its debt collection activities. As a condition to the RCA and QTCC contracts, Accretive was required to maintain compliance with the AG Agreement. As set forth below, Accretive, through its standard business practices, knowingly and systematically violated the AG Agreement even though Defendants were aware of its restrictions, putting its relationship with Fairview, as well as the revenue from that relationship, at risk

9 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 9 of 141 PageID #: In addition to complying with the terms of its contract with Fairview, Accretive had to comply with various state and federal health privacy, consumer protection, and debt collection laws. For example, those contracts and laws precluded Accretive from engaging in illegal or harassing debt collection practices with regard to patients, from discouraging patients from seeking emergency care based on ability to pay, from threatening to report patients to a credit reporting agency for failure to pay, and required Accretive to protect sensitive patient data from not only loss, but unnecessary disclosure to employees for whom it was not necessary to perform their job. 6. Accretive, however, failed to follow these requirements and instead applied its standard business practices and mandated that Fairview employees follow those practices at risk of being fired. Accretive s overly aggressive collection efforts included threatening to report patients to credit reporting agencies for failure to pay, confronting patients in emergency rooms and at their bedsides, seeking payment prior to receiving full care based on estimated costs prior to billing insurance, and engaging in conduct that deterred patients from seeking emergency care, such as scripts that instructed employees to tell emergency room patients awaiting care to go to their cars and get a checkbook prior to receiving treatment. All of these practices and more violated Accretive s contracts with Fairview and applicable laws. These practices were neither arbitrary nor the random acts of a few employees, but were the standard, mandated collection practices widely known and approved within Accretive. In short, these overly aggressive, bullying, and offensive methods were simply how Accretive did business, which internal documents described as the Accretive Secret Sauce, adding the equally offensive remarks Check out our ASS and You ve never seen ASS like ours. 7. In addition, Accretive failed to timely and properly register as a licensed debt collector and failed to take the necessary steps to encrypt patient data, which was revealed when an - 4 -

10 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 10 of 141 PageID #:421 unencrypted laptop was stolen from an employee and sensitive data for thousands of patients was exposed. These actions led Fairview to privately warn Accretive of its violations of its contracts. 8. Notwithstanding these clear violations of law and its contracts with Fairview, Defendants repeatedly made false and misleading statements during the Class Period to assure investors that its critical contracts with Fairview were progressing nicely, would be long term sources of substantial revenues, and that Accretive was in full compliance with the contracts and all applicable laws. Defendants failed to disclose that Accretive s bullying collection practices from vulnerable patients, its unlicensed debt collections, and its failure to employ sufficient measures to secure sensitive patient data were in clear violation of its contracts and applicable laws and placed the Company at substantial risk of cancellation of those contracts and that it had repeatedly received such warnings from Fairview. For example, Defendants stated: (i) Accretive s five-year definitive agreement with Fairview would have a significant impact on Fairview s ability to deliver... a better patient experience : (ii) we assume full responsibility for the management and cost of a customer s revenue cycle ; (iii) the QTCC contract with Fairview is progressing nicely ; (iv) [w]e devote significant efforts, through training of personnel and monitoring, to establish and maintain compliance with all regulatory requirements that we believe are applicable to our business ; and (v) [d]ata and information regarding our customers patients is encrypted. 9. The backdrop to this action starts in March 2010, when Accretive signed the RCA contract with Fairview. Through the RCA, Accretive was to take over Fairview s management of its revenue cycle operations, which included patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections. To implement its services, the Company assumed full responsibility for the management and cost of Fairview s revenue cycle by, among other things, supplementing Fairview s existing staff with purportedly - 5 -

11 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 11 of 141 PageID #:422 seasoned Accretive personnel. In so doing, Accretive required both its employees and Fairview s to implement and utilize Accretive s overly aggressive bullying standard collection practices. Adding fuel to the fire, Accretive rewarded top performers with prizes and threatened low performers with potential job loss by sharing collection results among employees despite being warned by Fairview that such practices were not permissible. 10. However, while managing Fairview s revenue cycle, it was critical for Accretive to comply with all terms of the AG Agreement. The RCA contract was extremely important to Accretive since, as Defendants reported during the Class Period, Accretive generated approximately 12% of its annual revenue from its RCA contract with Fairview. 11. Beyond the revenue of the RCA, the relationship with Fairview was of major significance to Accretive s business. Back in December of 2009, Accretive also began negotiating with Fairview, seeking to develop and implement a new program that emphasized cost savings. After multiple meetings with Fairview, the Company agreed to focus on cost savings and quality of care, developing the moniker Quality and Total Cost of Care to appease Fairview. 12. On November 10, 2010, the first day of the Class Period, Accretive publicly announced its inaugural QTCC contract with Fairview. At this point in time, Defendants had specific knowledge of the existence of the AG Agreement and the fact that Fairview was bound to comply with its terms in performing the RCA and QTCC contracts. Defendants also knew there was a symbiotic relationship between Accretive s ability to successfully execute the RCA and its ability to both secure and perform the QTCC. Put simply, if Accretive could not perform the RCA in a manner consistent with the AG Agreement a critical component of how Fairview had to conduct its business its QTCC would also be at risk of termination as there would be no incentive for Fairview to retain Accretive to perform the QTCC

12 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 12 of 141 PageID #: The QTCC was the first of its kind. Accretive s ability to successfully execute that contract was of paramount importance to both Defendants and investors as it represented a potentially new, lucrative source of revenues. Defendants touted the QTCC program as the future direction of the manner in which healthcare services will be delivered in the United States. Defendants emphasized that the QTCC was a technology and services platform provider to assist healthcare providers to provide higher quality health care, at a lower total cost of care, for the patients served by Fairview s employed and affiliated physicians. 14. At the time Defendants made these and other statements to the market, they knew or recklessly disregarded that Accretive was operating in blatant disregard for the terms and conditions of the AG Agreement and Fairview contracts. For example, Accretive emphasized the use of preservice collections from patients who had yet to receive treatment and whose insurance had not been billed for their treatment. In fact, Accretive s standard practices focused on debt collections at all points of service during a patient s stay at Fairview. If a Fairview patient was unable to pay in accordance with Accretive s collection goals at the front end, the Company would harass the patient through improper letters that threatened to report them to credit agencies, instead of working with the patient on a payment plan. 15. On multiple occasions Accretive was told by Fairview that its overly aggressive and bullying debt collection practices were in violation of the AG Agreement. More specifically, Accretive was given copies of Fairview s May 5, 2011 and December 30, 2011 audit reports detailing the Company s poor customer satisfaction, inappropriate handling of accounts, potential regulatory violations, and noncompliance with multiple statutory standards. Defendants, however, failed to inform the market of these audit reports or of the Company s deteriorating relationship with Fairview that resulted from Accretive s repeated failure to comply with the AG Agreement and - 7 -

13 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 13 of 141 PageID #:424 Fairview contracts. Defendants omitted this information as well as their failure to comply with debt collection licensing and patient data security requirements from their Class Period statements. 16. Slowly, the truth began to be revealed. On November 9, 2011, Accretive announced during its third quarter 2011 earnings release that a Company laptop had been stolen in July Defendants, however, omitted details surrounding the data breach, and, as a result, the market failed to appreciate the extent of the problem. In fact, the Company continued to emphasize that data security issues is one that is of utmost importance and concern and stated that Accretive has taken a series of steps to ensure that we never have another breach in our future. 17. On the heels of the data security breach associated with the Company s stolen laptop, on January 19, 2012, the Minnesota Attorney General filed a lawsuit against Accretive alleging that the Company violated health privacy laws, debt collection laws, and consumer protection laws. As a result of an investigation, it was determined that the stolen laptop had been unencrypted and contained medical records of 23,500 patients. Defendants never disclosed this information to the market during the Class Period. 18. Defendants fraud on the investing public, in concealing its overly aggressive collection methods which were illegal and in violation of its contracts with Fairview, unraveled quickly with three partial disclosures, occurring in less than a month, that caused investor losses. On March 29, 2012, the Company filed a Form 8-K with the SEC announcing that, in response to the Minnesota Attorney General s lawsuit, the Company was losing a substantial portion of its revenue as it agreed to terminate the RCA and no longer collect debts on Fairview s behalf, thus transitioning its revenue cycle management operations back to Fairview. As a result of the cancellation of its RCA contract, Accretive announced that it expected its fiscal 2012 revenue to be negatively impacted by $62 million to $68 million

14 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 14 of 141 PageID #: In response, the price of Accretive common stock fell $4.46 per share to close at $19.60 per share on March 29, 2012, a one-day decline of nearly 19%, on heavy trading volume. 20. Then, on April 24, 2012, the Minnesota Attorney General released a scathing sixvolume report detailing myriad aggressive and illegal practices that Accretive engaged in, including, but not limited to, serial, knowing violations of the AG Agreement. These violations included unlicensed debt collection activities, bedside demands for payment from patients in the emergency room, cancer wards and delivery rooms, and a host of other activities that inappropriately placed Fairview s assets at risk and materially threatened Fairview s status as a charitable organization Contrary to Defendants consistently false statements regarding compliance throughout the Class Period, ( i.e., [w]e devote significant efforts, through training of personnel and monitoring, to establish and maintain compliance with all regulatory requirements that we believe are applicable to our business and the services we offer ), the April 24, 2012 disclosure revealed that the Company s practices violated not only the AG Agreement s critical strictures, but also numerous federal and state laws. The AG Compliance Review further revealed that Defendants were well 1 See State of Minnesota Office of the Attorney General, Compliance Review of Fairview Health Services Management Contracts with Accretive Health, Inc., Volume 1: The Accretive Management Contract, at 3 (Apr. 2012), attached hereto as Exhibit A ; State of Minnesota Office of the Attorney General, Compliance Review of Fairview Health Services Management Contracts with Accretive Health, Inc., Volume 2: Culture Wars, at 1 (Apr. 2012), attached hereto as Exhibit B ; State of Minnesota Office of the Attorney General, Compliance Review of Fairview Health Services Management Contracts with Accretive Health, Inc., Volume 3: The Attorney General Agreement, at 1 (Apr. 2012), attached hereto as Exhibit C ; State of Minnesota Office of the Attorney General, Compliance Review of Fairview Health Services Management Contracts with Accretive Health, Inc., Volume 4: Privacy Violations, at 1 (Apr. 2012), attached hereto as Exhibit D ; State of Minnesota Office of the Attorney General, Compliance Review of Fairview Health Services Management Contracts with Accretive Health, Inc., Volume 5: Violations of Federal and State Debt Collection Laws at (Apr. 2012), attached hereto as Exhibit E ; State of Minnesota Office of the Attorney General, Compliance Review of Fairview Health Services Management Contracts with Accretive Health, Inc., Volume 6: Compliance Issues (Apr. 2012), attached hereto as Exhibit F (collectively, the AG Compliance Review )

15 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 15 of 141 PageID #:426 aware throughout the Class Period that Accretive s ongoing misconduct expressly violated the AG Agreement and threatened, from the outset, the viability of Accretive s all-important QTCC contract. 22. On this partial disclosure of Accretive s true business practices, the price of Accretive common stock collapsed $7.63 per share to close at $10.86 per share on April 24, 2012, a one-day decline of more than 41%, on heavy trading volume of more than 9 million shares traded. 23. Then, on April 27, 2012, the last day of the Class Period, it was reported that Fairview was evaluating cutting all ties with Accretive by cancelling the QTCC. As a result of this additional partial disclosure, the price of Accretive common stock fell again, declining another 11% per share, to close at $9.33 per share on April 27, After the market closed on April 27, 2012, investors worst fears were realized when Accretive issued an after-hours press release announcing that Fairview cancelled the QTCC, thus terminating the entirety of Accretive s relationship with Fairview. 24. As a result of Defendants false and misleading statements and failure to disclose highly material information to the market during the Class Period, the price of Accretive common stock was artificially inflated, reaching a Class Period high of $30.80 per share on August 1, When the truth about the Company s financial condition and future business prospects was revealed, that artificial inflation was removed and the price of Accretive common stock dropped 70% from its Class Period high, causing real economic loss to investors who purchased the stock during the Class Period. II. JURISDICTION AND VENUE 25. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa, and 28 U.S.C Venue is proper in the Judicial District pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa, and 28 U.S.C. 1391(b). In addition, the causes of action asserted herein occurred

16 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 16 of 141 PageID #:427 and/or accrued, among other places, in this District. At all times relevant to this action, Accretive was headquartered in this District, and many of the acts and transactions alleged herein occurred in substantial part in this District. 27. In connection with the acts, conduct, and other wrongs alleged in this Complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the United States mails, interstate telephone communications, and the facilities of the national securities markets. III. THE PARTIES 28. Lead Plaintiff Indiana State Police Benefit System purchased Accretive common stock during the Class Period, as set forth in the certification previously filed with the Court and incorporated by reference herein, and suffered damages when the revelations described herein reached the market and the artificial inflation was removed from the price of Accretive common stock. 29. Defendant Accretive is a provider of services intended to help healthcare providers generate improvements in their operating margins and healthcare quality while also improving patient, physician, and staff satisfaction. The Company is incorporated in Delaware and maintains its principal executive offices at 401 North Michigan Avenue, Suite 2700, Chicago, Illinois The Company s stock is listed on the New York Stock Exchange ( NYSE ) and trades under the ticker symbol All. 30. Defendant Tolan founded Accretive. Tolan is, and at all relevant times was, the Company s CEO, President, and a Director. 31. Defendant Staton is, and at all relevant times was, the Company s CFO

17 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 17 of 141 PageID #: Throughout the Class Period, Tolan and Staton ( Individual Defendants ) were responsible for ensuring the accuracy of Accretive s public filings and other public statements, and they both personally attested to and certified the accuracy of Accretive s financial statements. IV. CLASS ACTION ALLEGATIONS 33. Lead Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a Class consisting of all those who purchased Accretive common stock during the Class Period. Excluded from the Class are Defendants, the officers and directors of the Company, 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. 34. Because Accretive has millions of shares outstanding, and because the Company s shares were actively traded on the NYSE, members of the Class are so numerous that joinder of all members is impracticable. According to Accretive s SEC filings, as of March 29, 2012 (shortly before the close of the Class Period), Accretive had approximately 98.8 million shares of common stock outstanding. While the exact number of Class members can only be determined by appropriate discovery, Lead Plaintiff believes that Class members number at least in the thousands and that they are geographically dispersed. 35. Lead Plaintiff s claims are typical of the claims of the members of the Class because Lead Plaintiff and all of the Class members sustained damages arising out of Defendants wrongful conduct complained of herein. 36. Lead Plaintiff will fairly and adequately protect the interests of the Class members and has retained counsel experienced and competent in class actions and securities fraud litigation. Lead Plaintiff has no interests that are contrary to or in conflict with the members of the Class it seeks to represent

18 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 18 of 141 PageID #: A class action is superior to all other available methods for the fair and efficient adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the damages suffered by individual members of the Class may be relatively small, the expense and burden of individual litigation make it impossible for the members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. 38. Questions of law and fact common to the members of the Class predominate over any questions that may affect only individual members, in that Defendants acted on grounds generally applicable to the entire Class. Among the questions of law and fact common to the Class are: (a) (b) whether Defendants violated the federal securities laws as alleged herein; whether Defendants publicly disseminated press releases and statements during the Class Period omitted and/or misrepresented material facts; (c) whether Defendants breached any duty to convey material facts or to correct material facts previously disseminated; (d) whether Defendants participated in and pursued the fraudulent scheme or course of business complained of; (e) whether Defendants acted willfully, with knowledge or severe recklessness, in omitting and/or misrepresenting material facts; (f) whether the market prices of Accretive common stock during the Class Period were artificially inflated due to the material nondisclosures and/or misrepresentations complained of herein; and

19 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 19 of 141 PageID #:430 (g) whether the members of the Class sustained damages as a result of the decline in value of Accretive s stock when the truth was revealed and the artificial inflation came out and, if so, what is the appropriate measure of damages. V. CONFIDENTIAL SOURCES 39. Lead Plaintiff makes the allegations herein, concerning the falsity of Defendants statements and the scienter of the Individual Defendants, based upon the investigation undertaken by Lead Plaintiff s counsel, which investigation included analysis of publicly available news articles and reports, public filings, securities analysts reports and advisories about Accretive, interviews of former employees of Accretive, press releases and other public statements issued by the Company, and media reports about the Company. Lead Plaintiff s investigation also included analysis of the AG Compliance Review and the exhibits referenced therein, which included explicit reference to internal communications between Fairview and Accretive, including s, PowerPoint presentations and audit reports detailing the Company s knowledge of its violations of the AG Agreement and repeated violations of federal and state laws. 40. The allegations made herein are supported by the knowledge of four confidential witnesses ( CWs ). These CWs include former employees of Accretive and Fairview who were employed during the Class Period and provided facts from various departments of both companies. As detailed below, the CWs each served in positions at Accretive and Fairview that provided them with access to the information they are alleged to possess. 41. Confidential Witness #1 ( CW 1 ) was employed by Accretive as Manager of Operations from July 2006 until she/he resigned in August As Manager of Operations, CW 1 spent five days a week working at the Fairview office building on Stinson Boulevard in Minneapolis, Minnesota. CW 1 was primarily responsible for the University of Minnesota Medical Center. CW 1 also worked with the other five primary hospitals in the Fairview Health System. CW 1 reported to

20 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 20 of 141 PageID #:431 Vice President Andrew Crook ( Crook ) and Vice President Peter Van Riper ( Van Riper ). Crook and Van Riper, in turn, reported to CEO Tolan and had dotted line reporting to the Senior Vice President. CW 1 worked on revenue cycle projects with a specific focus on the uninsured population. CW 1 s duties included screening uninsured patients for potential funding sources and converting uninsured patients into paying customers. As such, CW 1 has information regarding Accretive s revenue cycle management at Fairview, including the Company s aggressive collection efforts at Fairview, the change in culture at Fairview once Accretive s collection practices were adopted, Tolan s knowledge of the numbers and involvement at monthly site reviews, and the Company s failure to properly protect patient information resulting in violations of the standards for the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ), as amended by the Health Information Technology for Economic and Clinical Health Act ( HITECH ) 42. Confidential Witness #2 ( CW 2 ) was employed by Fairview as a Financial Services Center Employee prior to the arrival of Accretive until approximately mid-july 2011 when CW 2 left on medical leave. CW 2 s duties included collecting past-due balances and co-pays from patients. CW 2 has information regarding Accretive s policies involving its improper pre-collection efforts at Fairview, which resulted in patient complaints. 43. Confidential Witness #3 ( CW 3 ) was employed by Accretive as a Manager of Physician Revenue Cycle at Fairview from June 2010 until September 2011, when she/he became the Senior Operations Lead at North Memorial Hospital, a position she/he held until February While at Fairview, CW 3 reported to Crook. As Senior Operations Lead at North Memorial Hospital, CW 3 reported to Martha Petkovich. CW 3 s duties included overseeing Fairview s business office responsible for professional fee billing and dealing with appeals of denials and the

21 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 21 of 141 PageID #:432 review of old accounts. Among other things, CW 3 has information regarding the Company s focus on numbers, instead of compliance. 44. Confidential Witness #4 ( CW 4 ) was employed by Accretive and worked at a variety of hospital sites from May 2009 until the end of June CW 4 was initially a Manager and was later promoted to Senior Manager located at Fairview. CW 4 worked specifically on Accretive s contracts with Fairview from approximately July 2010 until July 2011, when she/he was transferred to another health system. CW 4 reported to Van Riper and Crook. CW 4 s responsibilities included front end cycle operations at the University of Minnesota Medical Center and later all of Fairview. Front end revenue cycle operations included patient collections, prior balance collections, and the [c]ost of [q]uality side of it. As such, CW 4 has information regarding Accretive s lack of compliance, Emergency Medical Treatment and Active Labor Act ( EMTALA ) violations, Tolan s involvement at Fairview site reviews, and Tolan s focus on and knowledge of collection targets. VI. SUBSTANTIVE ALLEGATIONS A. The Company and its Businesses 45. Accretive was founded in 2003 and provides three basic services to not-for-profit healthcare providers: Revenue Cycle Management, QTCC Services, and Physician Advisory Services. 2 Only the first two are relevant to this lawsuit. Through Revenue Cycle Management, Accretive attempts to maximize collections from insurance, third-party payors, and patients. Through QTCC, Accretive purports to work with patients and care providers to get the right care 2 Physician Advisory Services involves working with hospitals to improve patient management and healthcare

22 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 22 of 141 PageID #:433 to improve overall health to result in fewer hospitalizations and minimize costs of emergency room visits and hospital stays. Accretive went public in June Of importance to this action are the Company s RCA and the QTCC contracts with Fairview. As set forth above, the RCA contract with Fairview accounted for approximately 12% of Accretive s revenues, and its QTCC contract, which was the first of its kind, was labeled by Defendants as the future direction of the manner in which healthcare services will be delivered in the United States. B. Accretive s Contracts with Fairview 47. Fairview is a non-profit, academic health system headquartered in Minneapolis, Minnesota. Fairview owns ten hospitals that indirectly or directly employ 2,500 physicians at its clinics, including Fairview Physician Associates and the University of Minnesota physician group. According to Fairview s Code of Conduct, Fairview s standards of conduct require it to provide high quality patient care, honor patients rights, protect confidentiality, follow all laws, manage referrals ethically, protect Fairview information and assets, manage conflicts of interest, nurture a healthy work environment, and represent Fairview honestly and ethically. See Fairview Code of Conduct at 5, attached hereto as Exhibit G In 2005, the Minnesota Attorney General conducted a compliance review of Fairview. AG Compliance Review, Vol. 3 at 1. During the review, it was discovered that collection activities at Fairview were not consistent with the mission and responsibilities of a Minnesota charitable organization. Id. Specifically, the compliance review found numerous problems with deficiencies in Fairview s collection activities, billings activities for uninsured patients, and the administration of 3 Any and all emphasis included in the attached exhibits ( i.e., highlighting, bold, and italics) was not added by counsel for Lead Plaintiff. The attached exhibits are true and correct copies of those voluntarily produced by the Minnesota Attorney General to counsel for Lead Plaintiff

23 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 23 of 141 PageID #:434 charity care. Id. For that reason, and in an effort to avoid litigation, in 2005, Fairview entered into a two-year remedial agreement with the Minnesota Attorney General, which was filed with the Ramsey County District Court as a Consent Judgment. Id. By the end of 2005, all 125 non-profit hospitals in Minnesota executed similar agreements with the Minnesota Attorney General relating to their debt collection, charity care, and uninsured billing practices. Id. Fairview, along with all other Minnesota hospitals, renewed the attorney general agreements in 2007 for an additional five years. Id. 49. In accordance with the AG Agreement, Fairview was required to adhere to multiple collection requirements and establish a detailed collection policy. Id. In sum, the AG Agreement reflects a standard of commercial reasonableness for the collection conduct of a non-profit hospital. Id. at 2. The AG Agreement imposed multiple restrictions on Fairview including the following, which are quoted directly from the AG Compliance Review: 4 1. The hospital cannot collect debt from a patient unless the applicable insurance company has first been billed and given an opportunity to pay the claim and there is a reasonable basis to believe the patient owes the bill. (Ex. 1, 17(a) and (b).) 2. The hospital must offer a reasonable payment plan to patients who express an inability to pay the full amount in one payment. ( Id., 17(c).) 3. The patient must be given a reasonable opportunity to submit an application for charity care. (Id., 17(d).) 4. The hospital employees empowered to carry out the above functions must be so designated by the Board of Directors. ( Id., 18.) 5. A hospital employee must authorize any individual garnishment proceeding and make sure that the above steps have been met. ( Id., 10.) 6. The CEO (id., 15) and board of directors ( id., 38) of the hospital must determine on an annual basis whether to renew a debt collection agency contract, and 4 Exhibit citations included in the following list of standards were included in the AG Compliance Review

24 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 24 of 141 PageID #:435 may only do so if the agency has complied with the Attorney General Agreement and the mission of the hospital. 7. Contracts with debt collection agencies must be in writing and must require the agency to operate in compliance with the Attorney General Agreement. ( Id., 16.) 8. Contingency fee arrangements with collection agencies are permitted only if the hospital has established sufficient controls to monitor the collection agency. ( Id., 21.) 9. The hospital must require its collection agency to log all complaints made by patients, and failure to do so may result in termination of the agency s contract. ( Id., 22.) 10. The hospital must require its collection agency to forward all patients who object to the collections activity to the hospital and must include a disclosure notice of this right in all of its bills and collection letters. ( Id., 24, 26.) 11. The hospital must advise patients of their right to contact the Attorney General if they encounter any problems with billings or the collection agency. ( Id., 26.) 12. The hospital must train outside collectors on the principles of the hospital s charity-care policy. (Id., 25.) 13. Patients may not be reported to a credit reporting agency for failure to pay a bill. (Id., 27.) 14. The collector must cease collection efforts if the patient states that: 1) she doesn t owe the bill; 2) a third party payer is obligated to pay the bill, or 3) a patient needs documentation of the bill. (Id., 30.) 15. The hospital may not refer debt to a collection agency if the patient has made payments in accordance with a payment plan agreed to by the hospital. ( Id., 19.) 16. The hospital must suspend all collection activity if a patient submits a charitycare application until the application has been processed and the patient notified of the decision. (Id., 20.) 17. The hospital board of directors must adopt a zero tolerance policy for false, deceptive, or misleading collections conduct. (Id., 37(a).) AG Compliance Review, Vol 3. at The RCA required Accretive and its employees to be aware of and comply with the terms of the AG Agreement

25 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 25 of 141 PageID #: Accretive s Revenue Cycle Operations Agreement 51. On March 29, 2010, Accretive entered into the RCA with Fairview. Accretive s revenue cycle management services offers healthcare providers, such as Fairview, services to improve patient registration, insurance and benefit verification, and collections. In order to implement these services under the RCA, Accretive assumed full responsibility for the management and cost of Fairview s revenue cycle and supplemented Fairview s staff with Accretive personnel whom Defendants represented as having significant experience. 52. In 2011, roughly 95% of Accretive s revenue and net income stemmed from its revenue cycle management services segment. More specifically, in 2011, Accretive generated approximately $826 million in revenue from revenue cycle agreements, with about 12%, or $100 million, attributed to Accretive s RCA with Fairview. See AG Compliance Review, Vol. 1 at 3. Fairview shared in 25% of the cost savings and expected to realize an estimated $1.3 million in 2011 as a result of measures such as increased process efficiency, deployment of productivity standards and reporting, and technology enhancements. See Fairview Health Services Accretive Partnership Update Summary dated December 2011 at 5, a true and correct copy of the relevant portions of which are attached hereto as Exhibit H. 53. Accretive s revenue cycle management services spanned Fairview s entire revenue cycle, from initial patient contact to billing collections. See Accretive s K at 13. According to Accretive, these services improve its clients revenue collections from insurance, third-party payors, and patients. Id. In accordance with the RCA, Fairview delegate[d] to Accretive the authority to manage all day-to-day aspects of the revenue cycle operations. AG Compliance Review, Vol. 1 at 4. For example, Fairview delegated management authority to Accretive with respect to patient scheduling, preregistration, eligibility verification, patient registration, authorization, admitting, coding, transcription, medical record retention, chart analysis, billing,

26 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 26 of 141 PageID #:437 secondary billing, underpayment review, denial management, third-party collections, collection of dormant receivables, lost charge capture, and analytical support. Id. 54. In Accretive s K it also admitted that [u]nder our contracts with customers, we directly manage our customers employees engaged in activities we have contracted to manage for our customers. Accretive was able to fire an employee or determine whether a departing employee would be replaced. AG Compliance Review, Vol. 1 at 7. Additionally, if Fairview failed to consult with Accretive prior to making hiring decisions, the Company would charge extra base fees to Fairview. Id. For example, in 2011, Accretive advised Fairview that it would charge an additional $3 million in base fees as a result of Fairview s failure to obtain prior approval to hire more than 20 mental health and home and other health care employees. Id. More specifically, Accretive earned its profits in part, by controlling Fairview s hiring, down-sizing Fairview staff, and out-sourcing Fairview s personnel to Accretive s operations in India. AG Compliance Review, Vol. 1 at 8. In short, Accretive controlled all aspects of Fairview s revenue cycle. 55. As a result of this control, Accretive exposed Fairview to considerable regulatory review, which the Company acknowledged in its May 20, 2010 prospectus. Id. For this reason, the RCA was subject to termination if Accretive s actions jeopardized Fairview s non-profit status or if applicable laws and regulations were not being followed. Id. 2. Accretive s QTCC 56. On November 9, 2010, Fairview entered into the QTCC. AG Compliance Review, Vol. 1. at 9. Accretive announced the inaugural QTCC with Fairview in a press release the next day. Id. Introduced in 2010, Accretive s QTCC service was designed to manage risk evaluation and other policies to enable healthcare providers to more effectively manage the health of a defined patient population by identifying those individuals who are most likely to experience an adverse health event and find ways to reduce the risk and length of required hospitalizations. According to

27 Case: 1:12-cv Document #: 33 Filed: 10/12/12 Page 27 of 141 PageID #:438 Accretive, this data allows providers to focus greater efforts on managing these at-risk patients while reducing healthcare costs. See Accretive s K at During the Class Period, Accretive s only QTCC customer was Fairview. Defendants, however, touted the QTCC program as the future direction of the manner in which healthcare services will be delivered in the United States. See K at Prior to the QTCC, Fairview expressed concern that the Company s approach[] emphasizes cost savings and that not as much attention [was] paid to the issues of quality. See Fairview Accretive Health Partnership Meeting Notes, a portion of which is attached hereto as Exhibit I. For example, during a partnership meeting on December 9, 2009, which Tolan attended, it was determined by Accretive that, in order to convince Fairview to sign up for Accretive s QTCC service, Accretive should, in discussion and written materials, always link cost and quality. See id. ( avoid time consuming sidetracking, [a]t all times, in both discussions and written materials, quality and cost should be linked and any discussion of cost should always be conjoined with quality ). As a result of the December 9, 2009 meeting, the Quality and Total Cost of Care program name was created. AG Compliance Review, Vol. 1 at On January 18, 2011, Accretive presented the QTCC program to Fairview. AG Compliance Review, Vol. 1 at 14. Accretive projected a potential reduction of $482 million in treatment costs by Id. Tolan claimed during the August 2011 investor conference that Accretive s QTCC program would reduce health care treatments costs by 25% over a three-year period. Id. at As with Accretive s RCA with Fairview, Fairview could terminate its QTCC contract for a number of reasons, including if Accretive was sanctioned or under investigation by a