Davita Complaint

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO
Civil Action No. 09-cv-02175-WJ M-KMT CASE RESTRICTED
LEVEL 2 RESTRICTED
UNITED STATES OF AMERICA, ex rel. DAVID BARBETTA,
Plaintiff,
v.
DAVITA, INC., and
TOTAL RENAL CARE, INC.,
Defendants.
_____________________________________________________________________
UNITED STATES' COMPLAINT IN INTERVENTION
_____________________________________________________________________
1. The United States brings this action to recover treble damages and civil penalties
under theFalse Claims Act, 31 U.S.C. 3729-33, (FCA), as well as for damages and other
monetary relief under common law and equity against the defendants DaVitaHealthCare
Partners, Inc.,
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and Total Renal Care, Inc. (together "DaVita") for the submission of false or
fraudulent claims to federal health care programs.
I. PRELIMINARY STATEMENT
2. DaVita is a dialysis company presently headquartered in Denver, Colorado.
Starting onapproximately March 1, 2005, throughFebruary 1, 2014, DaVita illegally expanded
its dialysis business through a practice of entering into joint ventures with physicians, usually
nephrologists, who were financially induced by DaVita to be the joint venture's primary referral

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In November 2012, DaVita, Inc., changed its name to DaVita Healthcare Partners, Inc.
Case 1:09-cv-02175-WJM *SEALED* Document 68 (Ex Parte) Filed 10/22/14 USDC
Colorado Page 1 of 51
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sourcesfor dialysis patients. DaVita selected physicians as joint venture partners based on the
expectation that they would be the referral source for the substantial majority of the end-stage
renal disease patients treated at the DaVita joint venture dialysis center. DaVita valuedthe
potential referring physician partners based on the number of patients theywould bring the new
DaVita joint ventures.
3. DaVita knewthat inducing thesereferring physicians into joint venture
relationshipsviolated the Anti-Kickback Statute(AKS), 42 U.S.C. 1320a-7b(b). The AKS
prohibits offering any sort of remunerationto referral sources when one purpose is to induce the
referral of patients for services billed to a Federal health care program(defined at 42 U.S.C.
1320a-7b(f)). At all relevant times, DaVitahad knowledge of and failed to abide bysignificant
government guidance that warned against the exact joint venture transactionbehavior in which
DaVita engaged.
4. Billing Federal health care programs for dialysis services provided to patients
who werereferred to a DaVita joint ventureclinic by physicians with an inappropriatefinancial
interest in the joint ventureviolatesthe AKS. As a result, DaVita also violated the FCA every
time it submitted such claims to a federal health care program for payment.
II. THE PARTIES
5. The United States brings this action on behalf of the U.S. Department of Health
and Human Services ("HHS") and the Centers for Medicare and Medicaid Services ("CMS"),
which administers thefederal health care programs, Medicare and Medicaid, and the U.S.
Department of Defense, TRICARE Management Activity.
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6. This is the United States' Complaint as to the claims inwhich it has intervened in
Civil Action No. 09-cv-02175-WJ M-KMT (D. Colo.).
7. Defendant DaVitaHealthCare Partners, Inc. (f/k/a DaVita, Inc.), is a Delaware
corporation with its corporate headquarters located in Denver, Colorado. DaVita provides
dialysis services to patients suffering from chronic kidney failure, also known as end-stage renal
disease or ESRD.
8. Defendant Total Renal Care, Inc. ("TRC") is a California corporation and a
wholly-owned subsidiary of DaVita. DaVita uses TRC and other subsidiaries to buy, sell and
hold interests in various dialysis centers and dialysis-related joint ventures.
III. JURISDICTION AND VENUE
9. This Court has subject matter jurisdiction under 28 U.S.C. 1331 and 1345,
because DaVita transacts business in this district and has its corporate headquarters in this
district.
10. Venue is proper in the District of Colorado under 31 U.S.C. 3732, 28 U.S.C.
1391(b) and (c), and 28 U.S.C. 1395, because DaVita transacts business in this District.
IV. BACKGROUND ON DIALYSIS
11. Chronic kidney disease is a progressive disease, which ultimately destroys the
kidney's ability to process and clean blood. The loss of kidney function is normally irreversible.
End Stage Renal Disease (ESRD) is the stage of advanced kidney impairment that requires
either continued dialysis treatments or a kidney transplant to sustain life. Dialysis treatment is
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the removal of toxins, fluids and salt from the blood of ESRD patients by artificial means.
According to the United States Renal Data System, there were approximately415,000 ESRD
dialysis patients in the United Statesat the end of 2010.
12. Patients suffering from ESRD generally require dialysis at least three times per
week for the rest of their lives. Because each dialysis session lasts for several hours, and is
required several times a week, dialysis patients usually seek treatment at centersgeographically
near where they live.
13. Since 1972, the federal government has provided universal payment coverage for
dialysis treatments under the Medicare ESRD program, regardless of age or financial
circumstances. Under this system, Congress establishes Medicare rates for dialysis treatments,
related supplies, lab tests and medications. Other Government-funded health care programs and
private insurance plans also routinely provide coverage for dialysis, either separately or in
combination with a patient's Medicare coverage.
14. As of December 31, 2013, DaVita owned, operatedand/or provided
administrative services through 2,074outpatient dialysis centers located in 44states and the
District of Columbia, serving approximately 163,000patients, which is roughly more than a third
of theentireESRD populationof the United States.
15. For the year ended December 31, 2012, approximately 90% of DaVitas dialysis
patients were under government-based programs, with approximately 79% of its dialysis patients
under Medicare and Medicare-assigned plans.
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V. THE FEDERAL HEALTH CARE PROGRAMS
A. Medicare
16. Medicare is a federally-funded health insurance program primarily benefitting the
elderly, but also benefitting patients with ESRD. The program pays for the costs of certain
health care services and items for eligible beneficiaries based on age, disability or affliction with
ESRD. Medicare was created in 1965 when Title XVIII of the Social Security Act was adopted.
17. The Medicare program has four parts: Part A, Part B, Part C and Part D. The
relevant partsin thiscase are Medicare Parts A and B. Medicare Part A, the Basic Plan of
Hospital Insurance, covers the cost of inpatient hospital services and post-hospital nursing
facility care. Medicare Part B, the Voluntary Supplemental Insurance Plan, covers the cost of
services performed by physicians and certain other health care providers, if the services are
medically necessary and directly and personally provided by the provider.
18. The Medicareprogramprovides benefits for all patients with ESRD. Individuals
who are otherwise ineligible for Medicare become eligible when they develop ESRD. Medicare
Part B covers dialysis services provided in outpatient clinics.
19. The Medicare program is administered through the Department of Health and
Human Services, Centers for Medicare and Medicaid Services.
B. Medicaid
20. Medicaid was also createdin 1965 under Title XIX of the Social Security Act.
Medicaid is a joint federal-state program that provides health care benefits for certain groups,
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primarily the poor and disabled. Each state administers a state Medicaid program and receives
funding from the federal government, known as federal financial participation, based upon a
formula set forth in the federal Medicaid statute. Thus, under Title XIX of the Social Security
Act, 42 U.S.C. 1396 et seq., federal money is distributed to the states, which in turn provide
certain medical services to the poor.
21. Before the beginning of each quarter, each state submits to CMS an estimate of its
Medicaid funding needs for the quarter. CMS reviews and adjusts the quarterly estimate as
necessary, and determines the amount of federal funding the state will bepermitted to draw
down as the state actually incurs expenditures during the quarter (for example, as provider claims
are presented for payment). After the end of each quarter, the state submits to CMS a final
expenditure report, which provides the basis for adjustment to quarterly federal funding.
C. TRICARE
22. TRICARE, administered by the United States Department of Defense, is a health
care program for individualsand dependents affiliated with the armed forces.
23. Collectively these programsreferred to in Section V will be referred to in this
complaint as the Federal health care programs.
VI. ANTI-KICKBACK STATUTE AND FALSE CLAIMS ACT
24. The False Claims Act (FCA) establishes liability to the United States for an
individual who, or entity that, knowingly presents, or causes to be presented, a false or
fraudulent claim for payment or approval, 31 U.S.C. 3729(a)(1)(A); or knowingly makes,
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uses, or causes to be made or used, a false record or statement material to a false or fraudulent
claim, 31 U.S.C. 3729(a)(1)(B).
2
Knowingly is defined to include not just actual
knowledge, but also reckless disregard and deliberate ignorance. 31 U.S.C. 3729(b)(1). No
proof of specific intent to defraud is required. Id.
25. The Anti-Kickback Statute or AKS prohibits anyindividual or entity from
soliciting, receiving, offering, or paying any remunerationtoinduce or reward any person for
referring, recommending or arranging for the purchase of any item or service for which payment
may be made under a Federal health care program. 42 U.S.C. 1320a-7b(b).
26. The AKS prohibition applies toany remuneration (including any kickback,
bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind. 42 U.S.C.
1320a-7b(b)(1) & (b)(2). In addition to the more obvious types of remuneration (e.g. cash
payments, gifts, free vacations, etc.), theAKS also prohibits less direct forms of remuneration
such as providing an opportunity toa referring physician tobuy into a joint venture, particularly
under economic terms that make the investment extremely advantageous, or investment
arrangements where the referring physicianhas a substantial financial interest in referring his or
her patients to the joint venture.
27. Court cases clarified, prior to DaVita's joint venture activity at issue in this case,
that if "one purpose" of the transaction with the referring physician is to induce referrals of
patients for services, the AKS has been violated. United States v. Greber, 760 F.2d 68 (3dCir.
1985). The "one purpose" rule has been reiterated through the years by many courts. The Ninth

2
In May 2009, the False Claims Act was amended pursuant to Public Law 111-21, the Fraud
Enforcement and Recovery Act of 2009 (FERA). Section 3729(a)(1)(A) was formerly Section
3729(a)(1), andSection 3729(a)(1)(B) was formerly Section 3729(a)(2).
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Circuit, where DaVita was formerly headquartered, adopted the rule in 1989. United States v.
Kats, 871 F.2d 105 (9thCir. 1989). The Fifth Circuit affirmed the one purpose rule in 1998.
United States v. Davis, 132 F.3d 1092 (5th Cir. 1998). The Tenth Circuit, where DaVita
relocated its headquarters in 2010, reiterated the "one purpose" rule in United States v.
McClatchey, 217 F.3d 823 (10thCir. 2000). The Seventh Circuit was the most recent circuit
court to affirm the "one purpose" rule, in United States v. Borrasi, 639 F.3d 774 (7thCir. 2011).
No circuit court has rejected this rule.
28. This legal prohibition against using any kind of remuneration toinducepatient
referrals arose out of congressional concern that such kickbacks to those who can influence
health care decisions would result in goods or services being provided in response to economic
self-interest rather than untainted medical judgment concerning the needs of the patient. This
corruption of medical judgment can result in goods or services being provided that are medically
unnecessary, of poor quality, or even harmful to a vulnerable patient population. As stated by
theUnited States Department of Health and Human Services, Office of Inspector General
(HHS-OIG), the AKS "seeks to ensure that referrals will be based on sound medical judgment
and that health care professionals will compete for business based on quality and convenience,
instead of paying for referrals." OIG Advisory OpinionNo. 12-06, OIG, 7(May 25, 2012),
http:oig.hhs.gov/fraud/docs/advisoryopinions/2012/AdvOpn12-06.pdf (emphasis added).
29. To protect the Medicare and Medicaid programs, Congress first enacted, and then
strengthened through a series of amendments, the prohibition against paying kickbacks in any
form. After the statutes enactment in 1972, Congress strengthened the AKSin 1977 and 1987
to ensure that kickbacks masquerading as legitimate business transactionsdid not evade its reach.
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See Social Security Amendments of 1972, Pub. L. No. 92-603, 242(b) and (c), 86 Stat. 1329,
1419-20 (1972), Medicare-Medicaid Anti-Fraud and Abuse Amendmentsof 1977, Pub. L. No.
95-142, 91 Stat. 1175 (1977); Medicare and Medicaid Patient andProgram Protection Act of
1987, Pub. L. No. 100-93, 100 Stat. 680 (1987).
30. In the Patient Protection and Affordable Care Act of 2010 ("PPACA"), Pub. L.
No. 111-148, 6402(f), 124 Stat. 119, 759 (2010), codified at 42 U.S.C. 1320a-7b(g),
Congress amended the AKS to state explicitly that "a claim that includes items or services
resulting from a violation of this section constitutes a false or fraudulent claim for purposes of
[the False Claims Act]."
31. According to the legislative history of the PPACA, this amendment to the AKS
was intended to clarify "that all claims resulting from illegal kickbacks are considered false
claims for purposes of civil action under the False Claims Act . . ." 155 Cong. Rec. S10854
(daily ed. Dec. 21, 2010).
32. The PPACA thus confirms that at all times relevant to Davitas conduct,
compliance with the AKS is a condition of payment under the Federal health care programs.
VII. THE GOVERNMENT HAS PROVIDED GUIDANCE TO PREVENT PROVIDERS
FROM VIOLATING THE ANTI-KICKBACK STATUTE
33. HHS-OIG issuesregulations and guidance interpreting the AKS. To assist
DaVitaand other providersinunderstandingwhat business transactions with physicians may
violate the AKS, HHS-OIG hasprovided detailed guidance for those who want to engage in
legitimate joint ventures that do not violate the AKS.
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34. Congress enacted amechanism for providing specific guidance to the health care
industry to help providers determine what business transactions, including joint ventures, may be
at risk of violating the AKS. 42 U.S.C. 1320a-7d(b); see also 42 C.F.R. pt. 1008. Providers
may seek an advisory opinion from HHS-OIG, describing the proposed transaction and obtaining
advice.
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These advisoryopinions are then publishedon HHS-OIGs websiteso that all providers
may benefit from the guidance. In numerous advisory opinions, HHS-OIG has consistently
informed the health care industry that a violation of the AKS will result where one purpose of a
businesstransaction isto providephysicianswith remuneration to induce referrals of patients for
services.
35. In one of the first advisory opinions it issued, Advisory Opinion 97-5, HHS-OIG
provided guidance to parties contemplating entering into a joint venture. In this opinion, HHS-
OIG confirmed that the AKS is violated "where onepurpose of the remuneration is to obtain
money for the referral of services or to induce further referrals." Advisory Opinion No. 97-5,
OIG, 4 (Oct. 6, 1997), http://oig.hhs.gov/fraud/docs/advisoryopinions/1997/ao97_5.pdf., citing
United States v. Kats, 871 F.2d 105 (9thCir. 1989) and United States v. Greber, 760 F.2d 68 (3d
Cir. 1985).
36. HHS-OIG also warned that joint ventureswith potential referral sourcesraise
special concerns. In particular, it warned that "the major concern is that the profit distributions
to investors in the joint venture, who are also referral sources to the joint venture, may
potentially represent remuneration for those referrals." Advisory Opinion No. 97-5, at 7.

3
On February 19, 1997, HHS-OIG published Interim Final Rules on the issuance of Advisory Opinions
as required by HIPAA. 62 Fed. Reg. 7335, 7350-7360 (Feb. 19, 1997); see also 42 C.F.R. pt. 1008.
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Becauseof this:
even in situations where each party's return is proportionate with its investment, the mere
opportunity to invest (and consequently receive profit distributions) may in certain
circumstances constitute illegal remuneration if offered in exchangefor past or future
referrals. Such situations may include arrangements where one or several investors in a
joint venture control a sufficiently large stream of referrals to make the venture's financial
success highly likely, or where one investor has an established track record with similar
ventures or the financial investment required is so small that the investors have little or
no real risk.
Id. at 10 (emphasis added).
37. HHS-OIG warned healthcare providers that it had long-standing concerns about
arrangements, such as joint ventures, between those in a position to refer business and those
furnishing items or services for which Medicare or Medicaid pays, especially when all or most of
the business of the joint venture is derived from one or more of the joint venturers. See OIG
Special Fraud Alert, Joint Venture Arrangements (1989), republished at 59 Fed. Reg. 65,372
(Dec. 19, 1994).
38. This Special Fraud Alert, whichHHS-OIG initially issued directly to health care
providers in 1989 and subsequently published in the Federal Register in 1994, had a section
entitled "Suspect J oint Ventures: What to Look For." This section warned that the following
features relevant to DaVita's joint venturearrangements mayviolate the AKS:
Investors are chosen because they are in a position to make referrals.
Physicians who are expected to make a large number of referrals may be offered a
greater investment opportunity in the joint venture than those anticipated to make
fewer referrals. . . .
Investors may be required to divest their ownership interest if they cease to
practice in the service area, for example, if they move, become disabled or retire.
Investment interests may be nontransferable. . . .
The amount of capital invested by the physician may be disproportionately small
and the returns on the investment may be disproportionately large when compared
to a typical investment in a new business enterprise. . . .
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Investors may be paid extraordinary returns on the investment in comparison with
the risk involved, often well over 50 to 100 percent per year.
39. In OIG Advisory Opinion No. 98-19, the following guidance was provided:
Health care joint ventures in which investors are also sources of referrals or
suppliers of items or services to the joint venture raise many questions under the
anti-kickback statute. In 1989, the OIG issued a Special Fraud Alert specifically
discussing joint venture arrangement that may violate the anti-kickback statute.
In general, joint ventures between physicians and hospitals in which they practice
may be suspect, because distributions from the joint ventures may be disguised
remuneration paid in return for referrals.
OIG Advisory Opinion No. 98-19, OIG, 6 (Dec. 14, 1998).
http://oig.hhs.gov/fraud/docs/advisoryopinions/1998/ao98_19.htm.
40. In a March 16, 1999published letter responding to an inquiry about whether
nephrologists owning a home dialysis supply company would violate the AKS, the Chief of
HHS-OIGs Industry Guidance Branch warned:
Substantial ownership by investors who are in a position to refer patients to the
joint venture isan indicator of a suspect joint venture because such ownership
increases the likelihood that one of the joint venture's purposes is to control a
stream of referrals and compensate the referring investorsindirectly for their
referrals. Other factors that could indicate potentially unlawful activity include an
investor in a position to refer business receiving a disproportionate return on his
or her investment, and participation in the joint venture by an on-going entity that
is already engaged in the sameline of business as the joint venture.
Nephrologist, Home Dialysis Supplies J oint Venture, OIG, 1 (Mar. 16, 1999).
https://oig.hhs.gov/fraud/docs/safeharborregulations/k2.htm.
In general, health care joint ventures in which investors are also sources of
referrals or suppliers of items or services to the joint venture raise many questions
under the anti-kickback statute. ... With respect to joint ventures, one major
concern is that the profit distributions to investors in the joint venture who are
also referral sources to the joint venture may potentially represent remuneration
for those referrals.
Id. at 2.
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41. "[HHS-OIG] has also stated on numerous occasions its view that the opportunity
for a referring physician to earn a profit, including through an investment in an entity for which
he or she generates business, could constitute an illegal inducement under the anti-kickback
statute." OIG Advisory Opinion No. 12-06, OIG, 7-8(May 25, 2012).
http://oig.hhs.gov/fraud/docs/advisoryopinions/1012/AdvOpn 12-06.pdf.
42. Because joint ventures with referral sources could so obviously violate the AKS,
HHS-OIG created a "safe harbor" for providers that believe they havelegitimate business
reasons for investing in entities to which theyrefer but that want to avoid violating the AKS.
The safe harbor ispublished in the federal regulationsat 42 C.F.R. 1001.952(a).
43. The investment interests "safe harbor" is narrowly tailored to prevent improper
economic inducements from being disguised as legitimate investment mechanisms. As HHS-
OIG explained: "With respect to joint ventures, the major concern is that the profit distributions
to investors in the joint venture, who are also referral sources to the joint venture, may
potentially represent remuneration for those referrals." Advisory Opinion 97-5, at 7.
44. An entity whose activity otherwise would be covered by the broad, remedial
language of the AKS is exempted from liability through the "safe harbor" only if that entity's
investment interests and conduct meet all of the applicable standards set forth in the safe harbors.
42 C.F.R. 1001.952(a). Subsection 1001.952(a)(2) lists four safe harbor requirements that are
particularly relevant in the present case:
(i) No more than 40 percent of the value of the investment interest of each
class of investment interests may be held in the previous fiscal year or previous 12
monthperiod by investors who are in a position to make or influence referrals to,
furnish items or services to, or otherwise generate business for the entity; . . .
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(ii) The terms on which an investment interest is offered to an investor who is
in a position to make or influencereferrals to, furnish items or services to, or
otherwise generate business for the entity must not be related to the previous or
expected volume of referrals, items or services furnished, or the amount of
business otherwise generated from that investor to the entity; . . .
(v) No more than 40 percent of the entity's gross revenue related to the
furnishing of health care items and services in the previous fiscal year or previous
12 month period may come from referrals or business otherwise generated from
investors; . . . and
(viii) The amount of payment to an investor in return for the investment interest
must be directly proportional to the amount of the capital investment (including
the fair market value of any pre-operational servicesrendered) of that investor.
42 C.F.R. 1001.952(a)(2)(i), (iii), (vi), (viii).
None of the DaVita joint ventures subject to this complaint satisfies all of these
requirements.
45. One way in which DaVita's joint venture transactions with physicians uniformly
failed to comply with the safe harbor provisionswas that DaVita would only offer joint ventures
to physicians who could and would refer substantially more than 40% of the patients needed to
make the joint ventures profitable.
46. The investment terms DaVita offered to referring physiciansalsofailed to meet
the safe harbor requirement that transactions not be based on the previous or expected volume
of referrals, items or services furnished, or the amount of business otherwise generated fromthe
investor to the entity." 42 C.F.R. 1001.952(a)(2)(iii).
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VIII. DAVITA'S JOINT VENTURES PROVIDED REMUNERATION TO
INDUCE PATIENT REFERRALS
47. DaVita's Compliance Handbook from the 2004 to 2006 time period
acknowledged much of the HHS-OIG guidance discussedabove focusing on the prohibition
against seeking referring physicians as joint venture partners because of their ability to refer
patients and then providing exclusive economic incentives to them to induce referralsof those
patients to DaVita. The DaVita Compliance Handbook also recommended ensuring that joint
ventures qualified for safe harbor protection whenever possible toavoid violating the AKS.
48. An excerpt of DaVitas Compliance Handbook, which is pictured below, correctly
warned that Prohibited Conduct under the AKS included remuneration in cash or in kind
(anything of value), to any person, in return for referring patients whose care is reimbursed by
government programs.
DaVita Compliance Handbook.
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49. This Compliance Handbook was in existence duringDaVita's acquisition of
GambroHealthcare(Gambro), a dialysis company. DaVita agreed to acquire Gambros
dialysis businesson December 7, 2004, just five days after Gambro settled a False Claims Act
casewith the United States, in part, for violating the AKS in some of its joint ventures with
referring physicians. Gambro paid more than $350,000,000 in criminal fines and civil penalties
to the United Statesto settle allegations of fraud. The United States publicallyexplained the
basis for that settlement onDecember 2, 2004: "Gambro also violated the Anti-Kickback Act by
entering into joint venture relationships with physician partners. Again, Gambro's contractual
dealings were premised upon the number and volume of anticipated patient referrals.
Department of J ustice, Gambro Healthcare Agrees to Pay Over $350 Million to Resolve Civil &
Criminal Allegations in Medicare Fraud Case (Dec. 2, 2004).
http://www.justice.gov/opa/pr/2004/December/04_civ_774.htm. As part of the global
settlement, Gambro entered into a Corporate Integrity Agreement (CIA) with HHS-OIGthat
was intended to prevent further violationsof the False Claims Act, including the submission of
claims tainted by unlawful remuneration offered or provided by Gambro in violation of the AKS.
50. As the new owner of Gambro, DaVita inherited both theobligation toensure that
Gambrodissolve theillegal joint ventures as well astheobligationtoensure that its new
subsidiarycompliedwith theCIA with HHS-OIGto prevent future violations of the AKS. These
obligationsput DaVita on heightened notice that entering into joint ventures with referring
physicians to capture patient referrals violated the AKS.
51. Despite HHS-OIG's repeated warnings concerning joint ventures with referring
physicians, Gambro's violations of the AKS and the False Claims Act, and DaVita's obligations
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to dissolve Gambros illegal joint ventures and operate its Gambro subsidiary in accordance with
the terms of the CIA, DaVita put an extraordinary emphasis on expanding its business through
the use of joint ventures with referring physicians. As explained byDaVita's CEO Kent Thiry
"we [DaVita] already do more joint-venture dialysis centers with doctors than anyone else in
America, by far. And that has been true for a long, long time." First Quarter Earnings
Conference Call (May 02, 2012).
52. DaVita's joint venture business model isfundamentally dependent on its
relationship with physicians who refer patients to its dialysis centers. Most important wereits
relationships with the few key physicians who are responsible for a major share of thepatients
treated at eachcenter. DaVita explained this dynamic succinctly in its 2010 annual report filed
with the Securities and Exchange Commission as follows:
As is typical in the dialysis industry, one or a few physicians, including the outpatient
dialysis center's medical director, usually account for all or a significant portion of an
outpatient dialysis center's patient base. If a significant number of physicians, including
an outpatient dialysis center's medical director, were to cease referring patients to our
outpatient dialysis centers, our business could be adversely affected.
53. Rather than generatingbusiness by simply demonstrating superior quality of
clinical services and patient careor providing more convenient care options, DaVita sought out
physicians and provided them an economic inducement to ensure that physician/partnerswould
use their considerable influence over their patients to provide referrals. DaVita routinely entered
into joint ventures with these physicians, selling them undervalued shares of existing DaVita
dialysis centers(partial divestitures), buying over-valued shares of physician-owned dialysis
centers(partial acquisitions), or engaging in both activities in a paired transactionwhich was
a joint venture formed by both buying and selling partial interests. Such deals aligned physician
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economic interests with DaVita, ensuring that physicians would direct client referrals to those
centers where the physicians shared profits.
54. One DaVita manager explained that DaVita's Mergers and Acquisitions
department, known within DaVita as "Deal Depot, which was the corporate group tasked with
pursing joint ventures withreferringphysicians, used these deals to funnel "a bag of money" to
the physicians.
IX. DAVITA TARGETED REFERRING PHYSICIANS FOR EXCLUSIVE
OPPORTUNITIES TO ENTER INTO JOINT VENTURES
A. DaVita Targeted Potential Physician Partners Based on Their Ability to
Refer a Substantial Number of Patients.
55. DaVitaoffered joint ventureopportunities to physicians if they had referred
substantial numbers of patients to DaVita centers in the past, or werein a position to do so in the
future.
56. DaVita did not offer joint venture partnerships to physiciansto raise capital. In
fact, during most of the time period at issue, DaVita often had substantial reserves of capital to
invest. DaVitaalso did not offer joint venture opportunities to physicians who did not have an
established practice with patients whocould be referred for dialysis treatment. Further, DaVita
would only offer to partner with physicians within a small geographic radius, usually a 30 mile
radius, of the physicians practice and patient base. A joint venture outside of this geographical
location would severely limit the physicians ability to get his or her patients to use the joint
venture dialysis center and, therefore, was not valuable to DaVita.
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57. To ensure that a potential physician partner could refer a sufficient number of
dialysis patients, DaVita developed datathat provided it with detailed information concerning
the location of each ESRD patient and that patients physician. This analysisenabled DaVita to
determine the potential value of partneringwith anyparticular physician with substantial
precision.
58. As anexample, DaVita violated the AKS by offering a joint venture opportunity
to a physician group in Florida. DaVita calledthisthe IMS/St. Cloud transaction. Years
earlier, Internal Medicine Specialists (IMS) had been a joint venture partner with Gambro, but
had been required to sell its minority position to Gambro as part of the 2004 settlement with the
United States for violation of the AKS. Despite this background, after DaVitaassumed control
of Gambros dialysis centers, DaVita sought to enter into a joint ventureagreement withthis
physician group. DaVitadetermined which dialysis centers that it would offer a partnership in
based on itsdetailed analysis of how many patients IMS did or could refer to thecenters. After
having done this analysis, DaVita offered IMS a paired joint venture transaction in which DaVita
would acquire an interest inanexistingIMSdialysiscenter and simultaneously sell thesame
physicians interests in several DaVita centers, resulting in a cashand working capital payment of
over $3.1 millionbenefiting IMS.
59. DaVitas overall approachrequired that the IMS/St. Cloud physicians be ready,
willing and able torefer patients to aspecific DaVita center as a prerequisite toDaVita offering a
business relationshipat any particular location. If the physicians could not refer patients, then
DaVita had no reason to offer a joint venture. The value of the IMS/St. Cloudtransaction was
basedon the value of the patientsthat the physicians could refer to the new DaVita joint venture.
20

60. To ensure that the IMS physicians would be able to provide patient referrals,
DaVita tracked and located the IMS physicians patients with precision as shown by internal
DaVita documents.
61. The following excerpt from aninternal DaVita powerpoint describing the IMS
deal shows the precision with which DaVita tracked the potential physician partners patients
and patient locations:
21

62. As shown above, in areas where the targeted IMSphysicianshadpatients, DaVita
decided to offer ajoint venture. In other locations where the IMS physicians did not have
patients, no joint venture opportunities were offered by DaVita to the physicians.
63. Internal DaVita presentationsregarding IMS referenced twoDaVitacenters
(Winter Haven and Lake Wales) that werenot offered as potential joint venture centers because
the IMS physicians did not have anypatientsthat they could refer in the area:
22

As stated in this document, two dialysis centers were excluded from the analysis due to their
lack of IMS patients.
B. DaVita Ranked and Selected Winning Physician Practices as Joint
Venture Partners.
64. In selecting physicians for potential joint venture partnerships, Deal Depot also
defined what DaVitaconsidered to be a "winning practice." The definitionof a winning practice,
which made an attractive joint venture partner, had nothing to do with quality of care or
physician expertise. Instead, it focused exclusively on the potential for patient referral growth.
On a scale of 1 to 5, with 5 being the best potential for joint venture partnership, DaVita had the
following descriptions:
1=Not growing(senior physicians only), 2=Not growing (mixof mostly senior/some
young physicians), 3=Moderate growth (not aggressive), 4=Solid growth (could
become aggressive), and 5=Comprehensive understanding of the market direction
(young and vibrant practice).
23

65. In the case of at least one transaction, DaVitadescribed the fact that the
physicians were young and in debt as a positive factor. Such physicianscould be counted on to
maximize their personal economic return by referring patients to DaVita.
66. DaVitas standard Regional Director Summary of Due Diligence Assessments
form for joint venture transactions hada specific section entitled Physician Relations
Assessment that requires information on the physicians Referral Patterns. Before concluding
a deal, DaVita explicitly evaluated the physicians total number of patients and their ability to
refer thosepatients:
24

X. DAVITAS JOINT VENTURES WITH REFERRING PHYSICIANS PROVIDED
REMUNERATION BASED ON THE VALUE OF POTENTIAL PATIENT REFERRALS
67. Internal Deal Depot documents make it clear that DaVita specifically valued and
negotiated for patients when deciding which physicians to offer joint venture partnerships to, and
how much money to provide the referring physicians to entice them to enter into the joint venture
partnership.
68. DaVita's Code of Conduct stated that an example of prohibited conduct under the
AKS was the "payment of any money in exchange for patient referrals." Yet, business
documents used by the Deal Depot made it clear that in many joint venturetransactions with
referring physicians, DaVita valued the deal based on the patients the physicians were expected
to refer. By doing so, DaVita knowingly violated its own code of conduct, as well as the
AKS.
69. For example, a Closed Deal list for YTD 2008 quantified the price DaVita paid
per patient for certainacquisitionsof physician-owned dialysis centers:
25

70. Price per patient was a metric used in transaction documents for multiple
transactions, including theIMS/St. Cloud joint venture:
XI. DAVITA MANIPULATED JOINT VENTURE VALUATIONS TO HIDE
KICKBACKS
71. In legitimate business transactions, participants ordinarily try to sell their goods
and services for as much as possible, and buy goods and services as cheaply as possible (i.e. Buy
Low/Sell High). DaVitas approach when negotiating withpotential or actual referring
physicians was the reverse. To ensure patient referrals, DaVita deliberately paidmore than
market value for dialysis centers it bought from physicians, but regularly soldinterests in
existing DaVita dialysis centers to physiciansat cut-rate, below market prices.
72. Because such a Buy High/Sell Low business strategy obviously indicates a
kickback to physicians to induce referrals, DaVita masked its strategy by manipulating the
financial models it ordinarily used for its own analysts and for its outside appraisers to calculate
the value of dialysis centers.
26

73. DaVita personnel in its Deal Depot, under direct orders from the Vice Presidents
and other managers in charge of the department, manipulated the valuation process with both ad
hoc adjustments to various financial models, and through the application of non-standard even
illogical (from an accounting point of view) formulas and algorithms. Operational costs and
income estimates could be raised or lowered depending on the desired value outcome. Some of
the value factors that DaVitas Deal Depot used to manipulate values were flexible assumptions
about the future compensation level that might be paid by private insurersfor dialysis, the
number of high paying private insurance patients a facility might have, changes in labor costs,
changes in general and administrative (G&A) expenses, and the estimated expense per
treatment.
74. Some of the non-standard algorithms DaVita used to game its projections
tendedto decrease the projected value of a dialysis center. Others generally hadthe opposite
effect, increasing the projected value of a center. When DaVita partially divested interests in its
dialysiscenters to physicians, it usedthe algorithms that decreasedthe value of the centers, thus
decreasing the purchase price to physiciansandallowing the physicians to buy a valuable,
income-producing asset at an unrealistically low price. Conversely, in buyingan interest in an
existing physician-owneddialysis center, DaVita tendedto use only the algorithms and
assumptions that increase the value of centers, thus increasing the price paid to thepotential
physicianjoint venture partner. The manipulative application of these algorithms, as standard
practice, led to the overvaluing of the centers DaVita bought, and the systematic undervaluing of
the centers it sold.
27

75. The primary mechanism DaVita used to depress the value of centers DaVita
partially divested to physicians was the application of a financial algorithm known internally at
DaVita as HIPPER compression. HIPPER compression was based on anassumption that all
private insurance companies that insure a small but valuable number of patientswill substantially
reduce their compensation to DaVitaat a defined point in time, typically three years after the
date of the transaction. Since this HIPPER compression assumption was speculativeand
arbitrary, it providedDaVita with a powerful tool, in its valuation methodology, to depress its
estimate of the economic value of any centers it wantedto partially divest to potential referring
physiciansto form a joint venture and, thereby, obtain their patient referrals. In addition to this
structural machination, DaVita routinely manipulatedits financial models by using artificial and
unreasonable values for expected costs or other key financial indicators. The final result wasa
valuation methodology that was so flexible that DaVita could justify any value it wanted. This
in turn allowed DaVitato provide remuneration to physicians under the cover of a supposedly
legitimate business transaction.
76. DaVitas Deal Depot selectively used assumptions that would allow it to establish
nearly any value it needed to justify transactions it had already decided were in DaVita's interest.
That many of these assumptions had no basis in reality was clearly understood by DaVitas Deal
Depot personnel. Even DaVitas Chief Financial Officer understood HIPPER compression to be
a fiction. Internally, he wrote: If all our private pay compresses to 750 without increases in the
lower rate biz or mcare . . . we are out of business. In other words this is not a realistic
assumption. E-mail from Chief Financial Officer, DaVita, Inc., (May 20, 2009).
28

77. In many joint venture transactions, DaVitas Deal Depot flexibly manipulated
economic assumptions simply to justify the price required to induce thephysicianto enter into
partnership with DaVita. The numerous manipulations and their inconsistent use demonstrated
that for many transactions the real value was simply the value of the referrals from the physician.
78. DaVitasDeal Depot personnel understood that there was no business integrity to
the valuation modeling and that it was only being used as window dressing to hide the real
purpose: securing patient referrals from physicians through joint ventures. In a J uly 24, 2009
email, DaVitasVice President of Special Projects, wrote to a departing Deal Depot member:
Sorry to hear you are leaving us, but do wish you the best. I was hopeful before you
leave you, or you and Queenie, can give us a list of the most common things one could do
with the model to make sure it passes the COC [Cash-on-Cash] and IRR [Internal
Rate of Return] hurdles. As we redesign the model I would like to be mindful of these.
79. In this same e-mail string theVice President of Finance responded: Bryan you
mean gaming to model, right? To which the Vice President of Special Projectsreplied: I do.
Thanks Chet.
80. DaVita management understood that these manipulations undercut any validity
that the valuation modeling might have had. As a result DaVitawas able to selectively use these
numerous value manipulations, whichallowed it toeffectively back into the valuation level it
needed to secure its relationship withthereferringphysicians while simultaneously creating a
phony justification for the valueof the joint venture, no matter how low or high.
29

A. Valuation Manipulations in Partial Divestitures.
81. Partial divestiture transactions were joint ventures formed by DaVita divesting
an ownership interest in one of its existing, wholly-owned dialysis centers to areferring
physician. Divesting substantial interests in existing, profitable dialysis centers does not make
business sense for a company in the dialysis business that is attempting to grow and capture an
even larger share of the market. In many instances the only demonstrablebusiness advantage of
divesting to a physician is toensurepatient referrals from the physician.
82. As an example, in the Wauseon partial divestiture in Ohio in November 2008,
DaVita sold additional shares of a center to an existing joint venture physician referral source.
By using HIPPER compression, DaVita drove down the value of its own asset by more than
50%, from approximately $4.0 million to $1.7 million. This artificially low value was contrary
to normal business practices and only made senseas an effort to secure patient referrals from the
physician referral source by providing otherwise unwarranted remuneration.
B. Valuation Manipulations in Paired Transactions.
83. In paired transactions DaVita would acquire an interest in a physician-owned
center while simultaneously selling an interest inanexisting DaVita-ownedcenter to these same
physicians. The lack of integrity in DaVitas economic valuations was most clearly
demonstrated in these paired transactions.
84. To ensure a favorable return to the physicians, DaVita would use its valuation
manipulations to increase the value of the physician-owned center and then frequently use
dramatically different economic assumptions to reduce the value of the DaVita-owned center.
30

85. EBITDA is an accounting convention representing Earnings Before Interest,
Taxes, Depreciation and Amortization. DaVita used EBITDA as a metric to value dialysis
centers. EBITDA represents a measure of a centers earnings. One way DaVita gaugedthe
value of centers is by using a multiple of annual EBITDA. The higher the multiple, the more the
buyer is paying for a particular stream of profits.
86. Analysis of EBITDA values comparing DaVita center interests partially divested
and physician center interests acquired by DaVita confirms DaVitas value manipulations
leading to a buy high/sell low strategy used to gain referrals. DaVita repeatedly assigned lower
EBITDA values to DaVita-owned centers it was partially divesting than to physician-owned
centers DaVita was buying.
C. The Valuation Manipulations Resulted in Physician Joint Venture Partners
Receiving Unreasonable Rates of Return on Investment.
87. The result of these valuation manipulationsinevitablywas that the severe
undervaluation of the dialysis centers in divestitures and overvaluation in acquisitionsallowed a
disproportionatereturnto thereferringphysicians. As a result of DaVitas valuation
manipulations, the physicianswere able in several instances to get pre-taxannual returns on
investment exceeding 100%. In other words, DaVita provided these referral source physicians
with a joint venture deal where the physicians recouped their entire investment in one year.
Income for each subsequent year was pure profit provided that the physicians continued to
keep the DaVita dialysis center making money byreferringtheir patients to the joint venture.
31

XII. LOCKING THE PHYSICIANS IN TO ENSURE PATIENT REFERRALS
A. DaVita Offered Joint Ventures to Physicians Whose Medical Directorship
Covenant Not to Compete Was Expiring
88. Further evidencethat some of DaVita's joint ventures were intended to secure
patient referrals was DaVita's use of potential competition "hotspots" to determine appropriate
targets for joint venture partnerships.
89. Internally at DaVita, a hotspot was a name for a competitive situation in which
DaVita risked losing a prime relationship with a physician group to a DaVita competitor.
Hotspots frequently involved a DaVita dialysis center where the current Medical Director, a
physician,
4
was both a significant source of patient referral for DaVita and had signed a
covenant-not-to-compete with DaVita that was nearing expiration. Physicians who invested in
joint ventures with DaVita were required to sign covenants-not-to-compete. Because DaVita
believed the covenant-not-to-compete was a significant barrier to the physician referring patients
to DaVitas competitors or establishing his or her own dialysis center, it was important for
DaVita to ensure the referral of patients by requiring that Medical Directors who were offered
the opportunity to enter into joint venture arrangements that were economically advantageous to
those Medical Directors, also had to sign a non-compete covenant.
90. DaVitas Deal Depot tracked all of these hotspots on what it called a dashboard.
When these physicians were successfully enticed into joint ventures relationships and had signed
new covenants-not-to-compete, Deal Depot quantified its success in terms of the number of

4
Every dialysis center is required by regulation to have a physician Medical Director to ensure the quality
of the dialysis treatments. 42 C.F.R. 494.150. DaVita compensatedphysician Medical Directors but
also requiredthem to sign a Medical Directorship agreement that includes a covenant-not-to-compete. In
dialysis centers wholly owned by DaVita, the majority of the patients are referred to the center by the
Medical Director.
32

patients saved and revenue saved under the assumption that had the covenant-not-to-
compete expired, the physician would have referred his or her patients to a competitor.
B. Binding Referral Source Physicians with Non-Competition, Non-Solicitation
And Non-Disparagement Clauses.
91. Having selected physicianswho could refer patients, and then having enticed
those physiciansto partner with DaVita inadialysis joint venture, DaVita then took steps to lock
the physicians into the deal and insertedprovisions in the agreement that made it substantially
more difficult for the physician toleave the joint venture, compete with DaVita in any way, or
enter into any transactions with DaVita competitors.
92. In a December 22, 1992letter, the Associate General Counsel to HHS, Inspector
General Division, cautioned that "payment for covenants not to compete" where there is a
continuing relationship of referrals would raise the question of compliance with the AKS. In
some cases, payments for non-competition agreements unlawfully compensate a physician for
steering patients for federally-funded medical care or services. Letter from D. McCarty
Thornton, Associate General Counsel, Inspector General Division, to T. J . Sullivan, Technical
Assistant, Office of the Associate Chief Counsel, Internal Revenue Service (Dec. 22, 1992).
http://oig.hhs.gov/fraud/docs/safeharborregulations/acquisistion122292.htm.
93. In an April 2003 Special Advisory Bulletin, HHS-OIG also cited concerns about
joint ventures that "result in either practical or legal exclusivity for the Manager/Supplier through
inclusion of non-competition provisions or restrictions on access. While the contract terms of
these arrangements may appear to place the Owner at a financial risk, the Owner's actual
business risk is minimal because of the Owner's abilityto influence substantial referrals to the
33

new business." Special Advisory Bulletin: Contractual J oint Ventures, OIG, 3 (Apr. 2003).
http://oig.hhs.gov/fraud/docs/alertsandbulletins/042303SABJ ointVentures.pdf.
94. Despite this guidance, DaVita's joint venture agreements routinely included non-
competition provisions and other restrictions on its referring physician partners.
95. The April 2003 Special Advisory Bulletin also warned that indicia of a suspect
contractual joint venturea joint venture that could violate the AKS include a "captive
referral base" where the newly-created business predominately or exclusively serves the Owner's
existing patient base (or patients under the control or influence of the Owner). Id. at 5-6.
96. DaVita's joint ventures had thesesuspect indicia. DaVita's "Non-Competition and
Non-Solicitation" clauses for its joint ventureswere for the life of the agreement and included an
extensionfor a period of time after the agreement ended (i.e., a"tail"), usually around five years.
During this "restricted period" the physician partner could not "directly or indirectly, own any
interest in, lease, operate or extend credit to, any Competitor, or otherwise participate with or be
employed or retained by (e.g. as an employee, medical director, contractor, or consultant to, for
or with) any Competitor." As a result of these contractual restrictions, DaVita effectively
established its own joint ventures as the exclusive option for each physician partner to refer
patients.
97. Further, many of DaVitas joint ventures required physician partners to agreenot
to induce any patient to go to any other competing dialysis center as follows:
The Members [other than DaVita] further agree that, during the Restricted Period, they
will not, directly or indirectly (i) induce any customer of Company or LLC Manager
(either individually or in the aggregate) to patronize any competing dialysis facility; (ii)
34

request or advise any patient or customer of Company or LLC Manager to withdraw,
curtail or cancel such person's business with Company or LLC Manager, (iii) enter into
any contract (whether for sale of such Member's medical practice or otherwise), the
purpose or result of which would benefit such Member if any customer of Company or
LLC Manager were to withdraw, curtail, or cancel such customer's business with
Company or LLC Manager; (iv) solicit, induce or encourage any physician affiliated with
Company or LLC Manager or other Person employed by the Company or LLC Manager
to curtail or terminate such Person's affiliation or employment; or (v) disclose to any
other Person the names or addresses of any customer of Company or LLC Manager,
either individually or collectively.
This language effectively restrictedthe free exercise of a physicians medical judgment
for the benefit of his or her patients, which is one of the things Congress enacted the AKS to
prevent.
98. Some of the joint venture agreements also contained a "non-disparagement"
clause that preventedphysician joint venturepartners from "criticizing, denigrating or
disparaging Company[DaVita] or Center."
99. The critical role these non-competition agreements, and their corresponding
implicit guarantee of referrals, playedinDaVitas joint venture transactions with referring
physiciansis illustrated in aJ uly 25, 2008 email exchange between a DaVita Transaction
Director, and the DivisionVice President, concerning a deal in the Klamath Falls region of
Oregon. DaVita was buying a dialysis center, Sky Lakes Dialysis, and contemplating hiring as
medical directors a group of physicians (Renal Care Consultants or "RCC"). RCC themselves
owned a separate group of dialysis centers. The RCC physicians were also responsible for a
substantial portion of the referrals to the Sky Lakescenter. The Division Transaction Director
asked the Division Vice President:
35

Do you want us to proceed with the acquisition in the event RCC sells their centers to
FMC [a DaVita competitor] or some other competitor (whether or not RCC is the Sky
Lakes medical director)?
Our concernis being able to close the Sky Lakes acquisition prior to knowing if RCC
will sell to us or FMC. If you two are comfortable closing the Sky Lakes acquisition as
long as RCC is the medical director (and is bound by a reasonable non-compete clause),
we will push both Sky Lakes and RCC for a quick resolution to this issue. If we aren't
willing to close Sky Lakes until we know whether or not we're buying RCC's centers,
we'll need to delay the Sky Lakes close (thereby potentially putting the deal in jeopardy)
until we have closure on RCC.
100. The Division Vice President responded:
I am less concerned about whether or not RCC sells its centers to us or not. The
important thing is that they sign a 10-year MDA with a 25 mile non-compete around
Klamath Falls. If they will not sign that agreement, then we are wasting our time and
money. All the patients in Klamath Falls are theirs. Without the agreement and non-
compete, they will simply build [a center of their own] and move their referrals to the
center and we will be left with nothing. Call me if you want to discuss. I will not
approve closing without RCC signing an MDA.
7-25- 2008email re: Klamath Falls. (Emphasis added).
101. A central value to DaVita in these joint ventures with physician partners was the
covenant-not-to-compete andother binding clauses that DaVita used to effectivelylockin patient
referralsfrom their physician partners to DaVita centers.
C. Joinder Provisions Ensured Additional Patient Referrals.
102. Because the referral of patients from the physician's practice was key to DaVita's
underlying economic assumptions and reasons for entering into joint ventures, it was important
that all physicians in the practice, even physicians who were not partners to the joint venture, be
bound by the non-competition and non-solicitation agreements contained variously in the joint
venture's medical directorship agreement, management agreement or purchase agreement.
Therefore, junior physicians practicing with more established physicianswererequired by their
36

employer to sign non-competition, non-solicitation agreements benefiting DaVita, whether or not
they were actually partners tothe joint venture.
103. DaVita placed real economic value on these "joinders." For instance, an e-mail
from an employeein DaVita's Deal Depot authorized increasing an offer to physicians in
Klamath Falls, Oregon up to $3.5 million if all four physicians in the practice signed joinder
agreements. E-mail to Transaction Director, DaVita, Inc. (Oct. 8, 2006).
D. Non-Transferability Clauses Ensure Patient Referrals
104. Another feature of some of DaVita's joint venturesis that the physicians interests
inthe joint ventureswerenon-transferable. HHS-OIG has noted that one indication that a joint
venture may violate the AKS is if the investment interest is non-transferable. OIG Special Fraud
Alert, Joint Venture Arrangements (1989), republished at 59 Fed. Reg. 65,372 (Dec. 19, 1994).
Although DaVita could sell its interest in the joint venture, the physician partner could not. This
was a strong indication that the physician's ability to refer, which was unique to the physician
and could not be duplicated by other potential investors, was the real purpose behind the
partnership.
105. Added to the non-transferability clause were provisions, usuallyincluded in an
accompanying Medical Directorship Agreement, whichprohibited the physician from selling or
terminatinghis or her medical practice. Because the physician partner's medical practice was the
source of patient referrals, termination or sale of that practice would prevent the physician from
being the partner that DaVita wanted a partner who could, and did, refer patients to the joint
venture.
37

XIII. EXAMPLES WHERE DAVITA PROVIDED A KICKBACK THOUGH A JOINT
VENTURE TRANSACTION
A. IMS/St. Cloud, Florida Transaction. (South Central Florida Dialysis
Partners, LLC)
106. An example of a transaction where DaVita both bought and sold shares of dialysis
centers in the same general market, to the same physicians, and at the same time, was the St.
Cloud transaction in Florida in August 2007. In this transaction, DaVita: (1) bought a 60%
interest in Nephrology Consultants Dialysis Center from its physician-owners; (2) sold a 40%
interest in three existing DaVita dialysis centers in the same area to the same physician group;
and (3) created a joint-venture with that physician group, which included ownership in 4 dialysis
centers: Celebration Dialysis, in Celebration, Florida; Hunters Creek Dialysis and Hunters Creek
at Home, in Orlando, Florida; Kissimmee Dialysis, in Kissimmee, Florida; and St. Cloud
Dialysis, in St. Cloud, Florida.
107. In an internal document titled Hotspot Resolution Proposal, IMS is described by
DaVita personnel as a former joint venture partner with Gambro that was required to sell its
minority position to Gambro as part of part of Gambros Settlement Agreement with the United
States. As part of Gambros unwinding settlement with IMS, Gambro allowed IMS a carve
out from its non-competition agreement which then allowed IMS to open its own dialysis center
in St. Cloud, Florida.
108. IMS then questioned the legitimacy of its Medical Directorship agreements and
covenants-not-to-compete with Gambro that were acquired by DaVita when DaVita purchased
Gambro. Without these covenants-not-to-compete, DaVita feared that the physicians would
cease referring their patients to DaVita dialysis centers.
38

109. DaVitas solution was to offer to buy a majority position in IMSs independent
St. Cloud dialysis center as a paired transaction with allowing these physicians to buy a 40%
ownership interest in three DaVita-owned dialysis centers which were selected by determining
how many patients the IMS physicians had who lived close to the DaVita dialysis centers. As
part of these transactions the IMS physicians would sign new covenants-not-to-compete,
effectively locking in the patient referrals.
110. DaVita originally offered to buy the St. Cloud center from the physicians for $3.1
million. IMS informed DaVita that it wanted $7 million to do the deal. DaVita rapidly agreed to
more than double itsoriginal offer to $6.6 millionbased on the same economic data. To reach
this figure, DaVita had to place more than twice the value on the physicians existing center than
it placed on its own dialysis center. This was a classic example of DaVita buying high and
selling low, which was contrary to ordinary business practice but consistent with paying
remuneration to physicians to induce referrals in violation of the AKS.
111. DaVita executed this transactionby forming a joint venture named South Central
Florida Dialysis Partners, LLC, because, according to the Executive Summary of the deal
analysis, the deal would: "Further align our [DaVitas] interests with Internal Medicine
Specialists (IMS), a leading physician group in Orlando with medical directorships . . . at 10
Orlando-area DaVita dialysis centers." In other words, the center was owned by an influential
physiciangroup which was responsible for a substantial portion of the referrals to ten existing
DaVita dialysis centers.
112. A comparison of financial performance data for the center DaVita bought and one
of the three centers it sold shows that the centershad comparable profits. The center DaVita sold
39

earned$1.16 million, versus $1.05 million earned by theIMS-ownedcenter DaVita bought. The
center DaVita sold was also larger, serving 154 patients, versus 126 patients serviced by theIMS
center.
113. Notwithstanding the comparable features of the two centers, DaVita attributed a
much higher value to the center it bought into. DaVita valued the center it bought intoat
$5,975,000. In contrast, DaVita valued the three centers it partially divestedonly at $3,075,000
total ($1,025,000 each).
114. To justify the inflated price for the center it bought, DaVita gamed the valuations
by simply increasing the expected revenue per treatment from $246 to $268 for the center it
purchased. DaVita also used artificially low figures for bad debt ($4.91 per treatment versus the
average in that region of $9.20) and G&A expenses ($13.50 per treatment versus the average in
that region of $22.62).
115. Even after DaVita gamed the profitability of the financial model for the center it
bought, that center was still only slightly more profitable on a per-treatment basis than one of the
centers it sold still far from justifying the highly inflated purchase price.
116. As a result of these unwarranted value manipulations, DaVitasjoint venture offer
to the physicians constituted remuneration to the physiciansprohibited by the AKS. The
physiciansthenreferred patients to DaVita for dialysis services that were billedby DaVitato the
Federal health care programs starting on August 1, 2007, in violation of the FCA.
40

B. Columbus Ohio Transaction (Columbus-RNA-DaVita, LLC)
117. A joint venture inColumbus, Ohio, providesanother example of the different
prices DaVita assigned to similar dialysis centers in the same market. In 2005, Gambro had
ended its joint venture with RNA physician groupin Columbus, Ohio, by buyingtheir entire
interest in the dialysis centers. Gambro valued the joint venture centers at $27 million when it
paid these physicians for their interest to terminate the joint venture pursuant to the settlement
with the United States. Three years later, despite the fact that these dialysiscenters had grown
and were more profitable, DaVita, which had acquired the dialysis centers from Gambro, used its
value modeling manipulations to value them at a mere $6.5 million. Thus, these referring
physicians were allowed to buy back into these dialysis centers at an absurdly low price. It is
clear that this opportunity and price were available to these physicians only because of their
ability to refer dialysis patients. The resulting joint venture, Columbus-RNA-DaVita, Inc.,
included three dialysis centers: Columbus Dialysis, in Columbus, Ohio; Columbus East
Dialysis, also in Columbus; and Columbus Downtown Dialysis, also in Columbus.
118. This transaction was so absurd from a business standpoint that aDaVita Deal
Depot employee forwarded the analysis showing Gambros 2005 buyout valuation of $27
million, growth in revenues and then DaVitas 2008 partial divestiture valuation of $6.5 million,
to another Deal Depot employee with the simple statement, "fyi - lol" (for your information -
laugh out loud).
119. As a result of these unwarranted value manipulations DaVitas joint venture offer
to the physicians constituted AKS-prohibited remuneration to the physicians. The physicians
41

then referred patients to DaVita for dialysis services that were billed by DaVita to the Federal
health care programs starting on March 1, 2008, in violation of the FCA.
C. Rocky Mountain Dialysis / Mountain West Dialysis Transaction (Mountain
West Dialysis Services, LLC)
120. Another example of DaVita's use of illegal remunerationmasked as joint ventures
to respond to a "competitive hot spot" i.e., the risk of loss of business to a competitor -
occurred in Denver, Colorado in J une 2008. This transaction, in which DaVita bought and sold
centers in the same geographic market at the same time, is particularly revealing of DaVita's goal
to funnel cash and other illegal remuneration to referring physicians.
121. In the spring of 2008, aphysician practicecalled Western Nephrologythat had
Medical Directorship agreements with DaVitaterminated its relationship with DaVita and
moved forward with plans to build (and send its patients to) new dialysis centers in a joint
venture with a different dialysis company. Prior to that time Western Nephrology was
responsible for a substantial portion of thepatient referrals to DaVita's dialysis centers on the
west side of Denver.
122. To replace that business and maintain its market share, DaVita approached
Denver Nephrology, the physician practice that provided most of the referrals to DaVita's
dialysis centers on the east side of Denver, to see if it would be interested in expanding to the
west side of Denver. At that time, DaVita and Denver Nephrologywere co-owners of Rocky
Mountain Dialysis, a joint venture that ran three dialysis centers on Denver's east side.
123. At that timeDenver Nephrologydid not have any offices on the west side of
Denver. Denver Nephrologywas interested in DaVita's proposal, but did not want to commit the
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capital to open the necessary new offices across town. In order to entice Denver Nephrology
into a relationship with DaVita it was necessaryto provide money for Denver Nephrologyto
open new offices, and cover any losses the offices would experience. To do thisDaVita
proposed a transaction that would provideboth an immediate cash infusionto Denver
Nephrology, and an ongoing share of the profits from DaVita's west-side dialysis centers.
DaVita and Denver Nephrologyentered into a deal where DaVita: (1) bought the remaining49%
of Denver Nephrologys shares of Rocky Mountain Dialysis for almost $19 million and (2) sold
Denver Nephrologya 49% interest in joint ventures containing eight of DaVita's dialysis centers
on the west side of Denver, for $1.9 million.
124. Although the centers were all in the same city/geographic region, the price paid
for the two types of transactions (purchase versus sale) were starkly different. On average,
DaVita valued the centers it bought at approximately $13 million each(100% value of the
centers), but only valued the centers it sold at approximately $635,000 each(100% value).
These price differentials reflect the impact of HIPPER compression and other ad hoc
manipulations DaVita used to fit the transaction into its Buy High/Sell Lowkickback strategy.
125. To reach these values, DaVita had to engage in a number of unfounded and
illegitimate valuation manipulations. When DaVita first began analyzing this potential deal, the
Transaction Director approached a Deal Depot staff member and asked him to produce an
analysis of the projected value of the three centers in the Rocky Mountain joint venture using
DaVita's standard assumptions. Thispreliminary model projected that the three centersDaVita
needed to buy from Denver Nephrologywere collectively worth $21.1 million.
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126. Because this was not enough money to close the deal with Denver Nephrology,
the Transaction Director directed that HIPPER compressionbe offset with other assumptions.
Accordingly, the model was gamed as follows: the effect of HIPPER Compression was offset
arbitrarily by increasing the expected revenue per treatment from $299 to $315; operating costs
were arbitrarily reduced by decreasing the expected bad debt from $14.29 per treatment to only
$7.88, and expected G&A costs were reduced from $23.04 to $13.50.
127. The Transaction Director then told the Deal Depot staff member that theSenior
Vice President of Corporate Development hadrequested a table showing the projected value for
the centers that would result if the model was further manipulated to reflect various EBITDA
multiples and growth rates.
128. DaVitaultimatelymovedforwardwith the deal, but with an increased value for
theRocky Mountain joint venture of $39.5 million. To reach this value, Deal Depot
management "gamed" the model even further, increasing the "terminal value" from $25 million
to $29 million, and slashingDaVitasrequiredpre-taxinternal rate of return on its investment in
the transaction (IRR) for itself from16.7% to 3.5%.
129. Near the time the transaction was set to close, Deal Depot's management sought a
third-party opinion to reflect that the approximate $39 million price for these three centers was
fair market value. This was unusual because typically Deal Depot only sought fair-market-value
opinions on the value of centers it was selling. Rather than use Deal Depot's usual valuation
firm, they gave the task to a newfirm. Thenew firm's analysis did not support DaVita's desired
$39 million price. Instead, even using the doctored financial data provided by DaVita, this new
firm reported that fair market value for the three centers was no more than $30 million. When
44

the valuation firmorally reported its findings, DaVita ordered the company not to produce a
written report of its findings. DaVita then consummated the deal based on its inflated $39
million price. DaVita managers told Relator that DaVita paid the new valuation firm thousands
of dollars for its unwritten services that DaVita ended up not using in the deal.
130. Despite thevaluationgaming employed to inflate the purchase price of centers
bought from referring physicians, no such favorable manipulations were made when valuing the
eight centers DaVita sold to Denver Nephrology. Instead, projected revenuesfor the DaVita
dialysis centers were dramatically depressed using HIPPER compression. As a result, the prices
charged to the physicians for these centers were barely at the value of the hard assets of the
centers.
131. The specific dialysis centers included in the Mountain West Dialysis Services,
LLC joint venture are: Lakewood Crossing Dialysis, in Lakewood, Colorado; Longmont
Dialysis Center, in Longmont, Colorado; Lakewood Dialysis Center and Lakewood at Home, in
Lakewood, Colorado; Thornton Dialysis Center, in Thornton, Colorado; Boulder Dialysis
Center, in Boulder, Colorado; Arvada Dialysis Center, in Arvada, Colorado; and Mile High
Home Dialysis PD, in Lakewood, Colorado.
132. It was key to DaVita to manipulateits valuation models to get to dollar figures
that sufficiently induced the physicians to sign covenants-not-to-compete and lock up current and
future referrals. The manipulations of the value confirm that DaVitas valuation process lacked
any integrity and could be used to justify any value that DaVita needed to entice referring
physicians to enter into joint ventures with it. Ultimately the only purpose it served was as
complicated window-dressing to give the joint venture transactions an appearance of legitimacy.
45

133. As a result of DaVitas offering remuneration to the physicians in the form of the
joint venture, the physicians referred patients to DaVita for dialysis services that were billed to
the Federal health care programs starting J une 1, 2008, in violation of the FCA.
134. In the examples above of joint venture transactions, as well as other transactions,
the kickbacks provided to physicians are further evidenced by the extraordinarily high returns on
the physicians investments in the joint ventures. Such returns approximately range from 120%
to 220% or more within two years from the initial investment. When compared to returns
expected from a typical investment in a new enterprise, or even when compared to the expected
returns on investment for dialysis centers, the physicians returns on investment in the joint
ventures with DaVita were disproportionately large. Such returns evidencenot only the
immediate kickback received upon the creation of the joint venture, but also the ongoing stream
of kickbacks in the form of distributions of profits from the centers.
135. In addition to the joint ventures discussed above, there were other DaVita joint
venture transactions that specifically illustrate this pattern of targeting referral physicians,
providing remuneration to them in the form of advantageous economic returns, and then locking
the physicians into the deal with contract terms. These other transactions include:
a. Llano Dialysis , LLC (East Bay) a joint venture consisting of four dialysis
centers:
Oakland Peritoneal Dialysis Center and Oakland Peritoneal At Home, in
Oakland, California;
Vallejo Dialysis, in Vallejo, California;
San Pablo Dialysis, in San Pablo, California;
46

El Cerrito Dialysis, in El Cerrito, California.
b. University Dialysis Center, LLC, a joint venture consisting of one dialysis center:
University Dialysis Center, in Sacramento, California.
c. Shadow Dialysis, LLC, a joint venture consisting of one dialysis center:
Antelope Dialysis Center, in Citrus Heights, California.
d. Doves Dialysis, LLC, a joint venture consisting of one dialysis center:
Carmel Mountain Dialysis, in San Diego, California.
e. Animas Dialysis, LLC, a joint venture consisting of two dialysis centers:
Doctors Dialysis of East Los Angeles, in Los Angeles, California;
Doctors Dialysis Center of Montebello, in Montebello, California.
f. Bright Dialysis, LLC, a joint venture consisting of one dialysis center:
Bright Dialysis, in Fort Pierce, Florida.
g. Central Kentucky Dialysis Centers, LLC, a joint venture consisting of one dialysis
center:
Woodland Dialysis Center, in Elizabethtown, Kentucky.
h. Wauseon Dialysis, LLC, a joint venture consisting of one dialysis center:
Wauseon Dialysis Center, in Wauseon, Ohio.
136. Each of these above-listed transactions combinedDaVitaspattern of targeting
referral source physicians, providing an unrealistically advantageous joint venture offer to the
physicians, providing physician-partners with immediate remuneration as well as a continuous
47

stream of remuneration in terms of extraordinarily highrates of returnon their investment, and
then locking the physicians into the deal with contractual clauses including covenants-not-to-
compete.
137. As a result of DaVitas offering remuneration to the physicians in the form of
joint ventures, the physicians referred patients to DaVita for dialysis services that were billed to
the Federal health care programsby DaVitain violation of the FCA.
COUNT I: FALSE CLAIMS ACT (PRESENTMENT OF FALSE CLAIMS)
138. The United States hereby incorporates by reference the documents and exhibits
attached, recited or referencedin the Relators Complaint in this matter.
139. The United States re-alleges the preceding paragraphs as if fullyset forth herein.
140. The United States seeks relief against DaVita under Section 3729(a)(1) of the
False Claims Act, 31 U.S.C. 3729(a)(1) (2006) and, as amended, 31 U.S.C. 3729(a)(1)(A).
141. As a result of DaVitas payment of remuneration to induce physician joint venture
partners to refer their ESRD patients to the joint venture in violation of thefederal Anti-
Kickback Statute, 42 U.S.C. 1320a-7b(b)(2), the claims for payment submitted to the Federal
health care programs were false and fraudulent because they were tainted by the kickbacks and,
therefore, were ineligible for payment. Accordingly, DaVita knowingly cause to be presented
false or fraudulent claims for payment or approval in violation of the False Claims Act, 31
U.S.C. 3729(a)(1)(2006), and, as amended, 31 U.S.C. 3729(a)(1)(A).
48

142. By reason of the false or fraudulent claims, the United States has sustained
damages in a substantial amount to be determined at trial, and is entitled to treble damages plus a
civil penalty for each violation.
COUNT II: FALSE CLAIMS ACT (FALSE STATEMENTS)
143. The United States re-alleges the preceding paragraphs as if fully set forth herein.
144. The United States seeks relief against DaVita under the False Claims Act, 31
U.S.C. 3729(a)(1)(B) and former 31 U.S.C. 3729(a)(2). 147. As a result of DaVitas
kickbacks to induce doctors to refer patients in violation of the federal Anti-Kickback Statute, 42
U.S.C. 1320a-7b(b)(2), DaVita knowingly caused the joint ventures to make false records or
statementsthat were material to false or fraudulent claims for payment submitted to federal
health care programs. The false records or statements were the joint ventures false certifications
and representations of full compliance with all federal and state laws and regulations prohibiting
fraudulent and false reporting, including, but not limited to the Anti-Kickback Statute, 42 U.S.C.
1320a-7b.
145. By reason of these false records or statements, the United States has sustained
damages in a substantial amount to be determined at trial, and is entitled to treble damages plus
civil penalties for each violation.
COUNT III: UNJUST ENRICHMENT/DISGORGEMENT
146. The United States re-alleges the preceding paragraphs as if fully set forth herein.
49

147. As a consequence of the acts set forth above, DaVita was unjustly enriched and
received illegal profits. The United States conferred benefits upon DaVita, DaVita knew of and
appreciated these benefits, and DaVitas retention of these benefits under the circumstances
would be unjust as a result of its conduct.
148. The United States therefore claims the recovery of all monies by which DaVita
has been unjustly enriched and has illegally profited, in an amount to be determined, which in
equity should bepaid to the United States.
PRAYER FOR RELIEF
WHEREFORE, the United States seeks against DaVita the following:
1. On Counts One and Two under the False Claims Act, the amount of the United
States damages, trebled as required by law, and such civil penalties as are required by law,
together with all such further relief as may be just and proper.
2. On Count Three for unjust enrichment/disgorgement, the damages sustained
and/or amounts by which DaVita was unjustly enriched or obtained illegally, plus interest, costs,
and expenses, and all such further relief as may be just and proper.
DEMAND FOR JURY TRIAL
The United States demands a jury trial in this case.
51

CERTIFICATE OF SERVICE
I hereby certify that on October 22, 2014, I electronically filed the foregoing using the
CM/ECF system, which will cause a copy of the foregoing to be e-mailed to the following:
Eric R. Havian
erh@pcsf.com
Phillips & Cohen LLP
Jessica T. Moore
jtm@pcsf.com
Phillips & Cohen LLP
Counsel for Relator
s/ Edwin G. Winstead
Edwin G. Winstead

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IN THE UNITED STATES DISTRICT COURT

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