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Hughes v. Accretive Health, Inc.

United States District Court, N.D. Illinois, Eastern Division

September 25, 2014

TIFFANY M. HUGHES, individually and on behalf of all others similarly situated, Plaintiff,
v.
ACCRETIVE HEALTH, INC., MARY A. TOLAN, JOHN T. STATON, and JAMES M. BOLOTIN, Defendants.

MEMORANDUM ORDER & OPINION

JOAN B. GOTTSCHALL, District Judge.

Accretive Health, Inc. is a Delaware corporation that offers revenue-cycle management service to healthcare providers. Lead plaintiff Pressure Controls, Inc. alleges securities fraud against Accretive and three former executives (CEO Mary Tolan, CFO John Staton, and Controller James Bolotin) under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j); SEC Rule 10b-5, 17 C.F.R. 240.10b-5; and Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). Specifically, Pressure Controls alleges that Accretive made material misrepresentations and omissions regarding its revenue and earnings, revenue recognition policies and practices, and certifications attesting to financial statements and internal controls.

Now before the court is the defendants' motion to dismiss for failure to state a claim upon which relief can be granted. For the reasons discussed below, the motion is granted.

I. BACKGROUND

The court accepts all well-pleaded allegations in the amended complaint as true for purposes of the motion to dismiss. See, e.g., Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618 (7th Cir. 2007).

A. Accretive's Operations

Accretive is a publicly traded corporation that helps healthcare providers manage their revenue cycle operations, including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections. As of May 3, 2010, Accretive provided revenue cycle management service to 22 customers representing 59 hospitals and $13.6 billion in annual net patient revenue. Accretive's initial public offering took place in May 2010.

Most of Accretive's revenue comes from a small number of customers, especially large, multi-hospital systems. Accretive entered into master services agreements with these systems and managed service contracts with each hospital within the system. The contracts laid out the services that Accretive would provide, along with the applicable fees. If a hospital wanted Accretive to provide additional services, the parties would execute an addendum to the managed service contract.

Almost 90% of Accretive's revenue comes from net services revenue, consisting primarily of base fees and incentive fees. Base fees come from managing customers' revenue-cycle operations. The managed service contracts allowed Accretive to adjust its base fee due to changes in the scope of services that it provided. Incentive fees depended on the improvement of net revenue yield attributable to Accretive's efforts. Generally, Accretive's contracts with its clients required that net revenue be measured using the "best possible metric" as described in Accretive's prospectus:

Through the use of our proprietary technologies and methodologies, we precisely calculate each customer's improvement in net revenue yield. This calculation compares the customer's actual cash collections for a given instance of care to the maximum potential cash receipts that the customer should have received from the instance of care, which we refer to as the best possible net compliant revenue. We aggregate these calculations for all instances of care and compare the result to the aggregate calculation for the year before we began to provide our services to the customer. We receive a share of each customer's improvement in net revenue yield.

(Am. Compl. ¶ 30, ECF No. 54.) The managed service contracts allowed Accretive to adjust incentive fees based on net revenue yield improvements that each customer received throughout the life of the contract. Although base fees represent over 80% of quarterly revenue, they account for a smaller share of operating profit because a large portion of those revenues are reimbursements for the costs of revenue-cycle operations.

From the second quarter of 2010 (the first quarter after Accretive's initial public offering) through the third quarter of 2012, Accretive reported ten straight quarters of earnings growth as measured by non-GAAP adjusted diluted earnings per share. During the same period, Accretive met the market's consensus earnings per share expectations in eight of the ten quarters. Accretive reported net services revenue year-on-year growth for every quarter in 2011 and 2012.

B. Disclosures

On March 8, 2013, Accretive filed a Form 8-K with the Securities & Exchange Commission disclosing that it would restate its historical financial statements for a period of nine quarters, from the second quarter of 2010 through the third quarter of 2012. On November 13, 2013, the Company stated that its restatement investigation had "concluded that the timing of revenue recognition under a significant number of its revenue cycle management agreements was incorrect" and that "correcting the timing of revenue recognition will... reflect deferred timing of revenue recognition leading to an increase in deferred revenue or other liabilities reported in prior periods... [and] increases in revenue in future periods." (Am. Compl. ¶ 33, ECF No. 54.) In an investor call on the same day, Accretive disclosed that it was reviewing its contractual activities for the previous five years.

C. Alleged Misstatements

Pressure Controls alleges that Accretive charged artificially inflated fees throughout the class period based on statements ...


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