A federal appeals court has breathed new life into a qui tam action, or whistleblower lawsuit, allegingthat some of the nation's largest health insurers have beensystematically fleecing the government.

In an opinion published Wednesday, the U.S. Court of Appeals forthe Ninth Circuit said that whistleblower James Swoben had made astrong case that major insurers like UnitedHealthcare, HealthCarePartners and Aetna violated the False Claims Act by skewing theirreporting of patient health data to draw bigger governmentpayments.

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Swoben has "adequately alleged that the defendants' [Medicare]certifications were false and stated a cognizable legal theoryunder the False Claims Act," Circuit Judge Raymond Fisherwrote.

The suit was filed in 2009 by Swoben, a former employee of aCalifornia health plan provider called SCAN, as a qui tam actionagainst that company and a host of other insurers that participatein what is called Medicare "Part C" or Medicare Advantage.

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Medicare Advantage allows qualifying patients—who are usually 65or older—to obtain coverage through a private provider rather thandirectly through the government's Centers for Medicare &Medicaid Services, or CMS. In turn, CMS pays a per-enrollee premiumto those private insurers. The premium is calculated using "riskadjustment data," factoring in things like chronic illnesses, whichcauses the dollar amount to go up or down.

Insurers regularly conduct retrospective reviews of the riskdata submitted to CMS. But Swoben alleges that the systems theinsurers have set up are designed only to report those factors thatwould increase payments, and not to catch over reporting errorsthat might cause the payments to go down.

The government intervened and prosecuted claims against SCAN,which was also alleged to have defrauded California's Medi-Calprogram over more than 20 years using different means, but not theother defendants. SCAN settled out of the case in 2012 for roughly$322 million.

The case, which according to Swoben's attorney involves morethan $1 billion in alleged over payments, drew high-octane defensecounsel in the Ninth Circuit—Latham & Watkins forUnitedHealthcare; Gibson, Dunn & Crutcher for Aetna; O'Melveny& Myers for WellPoint Inc.; and Hogan Lovells for HealthCarePartners, which was acquired in 2012 by the dialysis chain DaVitaInc.

Insurers participating in Medicare Advantage are required tocertify the accuracy and completeness of their submissions. "We donot see how a Medicare Advantage contractor who has engaged in"deliberately one-sided reviews "can in good faith certify that itbelieves the resulting risk adjustment data reported to CMS areaccurate, complete and truthful," Fisher wrote.

The unanimous Ninth Circuit opinion reversed a lower courtdecision to dismiss the suit. Fisher wrote that the lower court hadabused its discretion by denying Swoben's attorney leave to amendon the grounds that doing so would be futile and result in an unduedelay.

The decision, which vacated a 2013 judgment by U.S. DistrictJudge John Walter of the Central District of California andremanded the case for further proceedings, was joined by NinthCircuit Judges Stephen Reinhardt and Jacqueline Nguyen.

Swoben's lawyer, Los Angeles solo practitioner William Hanagami,in an interview said he estimates the insurers collectively havedefrauded CMS by more than $1 billion since the alleged conductbegan in 2005.

He also expressed confidence that the suit would not faceanother motion-to-dismiss attempt by the defendants. "Given whatthe Ninth Circuit has said, they'd be ill-advised to do that,"Hanagami said.

Michael Theis, a partner at Hogan Lovells who is counsel forHealthCare Partners, said his clients "respectfully disagree" withthe decision and characterized the case as stale and baseless.

"The conduct alleged in the complaint is more than 10 years old,the complaint itself was filed under seal prior to DaVita's mergerwith HealthCare Partners in 2012, and the complaint was dismissedmore than three years ago," Theis said in an email. "The governmentpreviously declined to intervene in the case, and we believe theallegations have no merit."

So far, the insurers have not denied that they conduct the kindof "one-sided" reviews Swoben describes. Instead, they argue Swobenhas failed to point to any specific instance of risk data beingfraudulently reported. Attorneys for UnitedHealthcare, Aetna andWellPoint did not respond to request for comment.

Although it did not intervene in the qui tam action, theDepartment of Justice argued in an amicus brief to the NinthCircuit that the alleged conduct does run afoul of the False ClaimsAct. Noting that nearly a third of all Medicare beneficiaries areenrolled in Medicare Advantage, the government emphasized it has a"strong interest" in ensuring that the data submitted arecorrect.

In order to ensure the accuracy of data, CMS requires healthplan providers to exercise due diligence, the DOJ wrote. "If a planhas not exercised such diligence—especially where it hasimplemented record-review procedures specifically designed not toreveal unsupported diagnosis codes—the plan's certification … is'false or fraudulent,' under [the False Claims Act]."