United States ex rel. McCullough v. Anthem Insurance Companies, Inc., No. 1:21-cv-00325-TWP-TAB, 2026 WL 2448954 (S.D. Ind. Aug. 20, 2026)

Healthcare / False Claims Act · Medicaid Managed Care · Materiality · Government Knowledge

Introduction

In Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176, 194 (2016), the Supreme Court held that the materiality requirement of the False Claims Act (FCA) is “demanding,” and that the government’s own response to known violations is strong evidence of whether they matter. If the government “pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” Id. at 195. The same is true if the government “regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position.” Id. Escobar did not define the government’s “actual knowledge,” and lower courts are still working out whether an agency knows of a violation when the information is in its files or in its own contractor’s reports, but the officials who decide whether to pay or recover never reviewed or understood it.

In United States ex rel. McCullough v. Anthem Insurance Companies, Inc., the U.S. District Court for the Southern District of Indiana recently faced this issue at the pleading stage. There, two former Indiana state officials alleged that four Medicaid managed care entities and six hospital systems were paid on improper claims that IBM’s algorithms had identified, even though the state had not tried to recover the overpayments. On August 20, 2026, the court denied both defense groups’ motions to dismiss the relators’ third amended complaint, after it had dismissed the second amended complaint for failure to plead materiality. On materiality, the court held that, “though it is a close call, materiality is satisfied.” The court also made two other rulings. It adhered to its earlier rulings on falsity, scienter, and causation, again held the Indiana FCA’s public disclosure bar inapplicable, and rejected the constitutional challenge to the qui tam provisions of the FCA.

Executive Summary

From 2011 to 2021, IBM Watson and its corporate predecessors served as the fraud and abuse detection contractor for Indiana’s Medicaid program. In 2016, after a Centers for Medicare & Medicaid Services (CMS) audit, Indiana Medicaid’s Program Integrity team directed IBM to expand its algorithms beyond fee-for-service claims to claims providers submitted to managed care entities (MCEs). The MCEs receive capitated payments from the state, set in part on the basis of the encounter data the MCEs report on the claims they paid. From 2017 to 2021, IBM’s analyses identified claims that, according to the relators, the MCEs paid and the hospitals submitted in violation of billing rules and Medicaid requirements. According to the relators, Indiana Medicaid then paused its efforts to recover the overpayments IBM had identified. 2026 WL 2448954, at *2–3.

John D. McCullough, a former Director of Program Integrity for Indiana Medicaid, and James R. Holden, a former Chief Deputy and General Counsel in the Office of the Indiana State Treasurer, brought a qui tam action under the federal and Indiana FCAs. Id. at *1. The defendants include both MCEs and hospital systems: the “MCE Defendants” (Anthem Insurance Companies, Inc., MDwise, Inc., CareSource Indiana, Inc., and Coordinated Care Corporation) and the “Hospital Defendants” (Indiana University Health, Inc., Health and Hospital Corporation of Marion County, Community Health Network, Inc., Ascension Health, Inc., Lutheran Health Network, Inc., and Parkview Health System, Inc.). Id.

The court had dismissed the second amended complaint for failure to plead materiality, reasoning that the relators’ own allegations showed that Indiana Medicaid knew of the violations and chose not to act; that complaint attributed the decision not to recoup to “improper political pressure.” Id. at *5. In the third amended complaint, the relators dropped that allegation and alleged instead that an understaffed Program Integrity team and a new director never fully reviewed or understood IBM’s reports. The court accepted those allegations as true, held that they removed the “very strong evidence” against materiality that actual knowledge would supply, and denied both motions. Id. at *8–10. The ruling is an unpublished district court order at the pleading stage. It does not decide whether any claim was false or what Indiana Medicaid actually knew. But it is illustrative of the way lower courts are applying Escobar to determine whether relators are adequately pleading materiality.

Background

The IBM reports and the Program Integrity team

According to the complaint, IBM’s algorithms helped Indiana Medicaid recover millions of dollars a year in fee-for-service overpayments between 2011 and 2016, including more than $8.9 million in 2016. The relators allege that IBM’s ongoing refinement of its algorithms ensured their accuracy, and that fewer than one percent of IBM-based recoupment demands were overturned on appeal from 2011 to 2020. Id. at *2. Adding MCE claims was expected to multiply the number of improper claims IBM found and the amount recovered. Id.

The relators allege the Program Integrity team could not handle that volume. It had four staff members when McCullough became director in 2014. McCullough was told it needed at least a dozen more to pursue recoveries on the MCE findings, and he hired one before he was terminated in early 2017. Program Integrity staff repeatedly told IBM they could not fully review earlier reports, let alone new ones, and McCullough’s replacement had gaps in her understanding of IBM’s analysis. Id. As a result, the team curtailed its plans to recoup based on IBM’s findings. The relators allege that the state stopped because it lacked the staff to pursue the recoveries, not because it doubted that IBM’s findings were accurate. They also allege that the pause was not a change in the law or a formal policy decision, so the defendants could not have believed they had been released from their obligations to avoid, detect, or repay overpayments. Id. Those allegations are aimed at Escobar, under which the government’s continued payment of claims counts strongly against materiality when it pays with actual knowledge that the claims violate applicable rules. The relators’ account is that the state never made an informed decision that the violations did not matter. Medicaid fraud recoveries fell from $12.84 million in 2016 to $7.24 million in 2019. Indiana Medicaid has since reintroduced algorithms targeting the same type of billing violations and obtained recoveries comparable to those in 2016, an allegation that bears on whether the state treats these violations as material. Id.

The alleged violations

Under Indiana’s managed care model, the hospitals submit claims to the MCEs, whose provider agreements require compliance with Medicaid rules, and Indiana Medicaid providers certify compliance as a condition of payment. Id. at *3. IBM’s analyses allegedly found that the MCEs paid tens to hundreds of millions of dollars in claims that broke basic hospital billing rules (such as the rule against billing two separate inpatient stays when a patient is readmitted right away for the same condition), were plainly not payable (services after a patient’s death, duplicates), or violated Medicaid requirements for chiropractic, dental, and opioid treatment. Id. The relators allege the MCEs paid those claims rather than catching them “because they knew reporting higher expenditures in the encounter data they submitted to Indiana Medicaid would allow them to obtain higher capitated payments in subsequent years.” Id. (Encounter data are the records MCEs submit to the state of the claims they paid; the state uses these data in setting future capitation rates.) IBM’s analyses also allegedly found that the Hospital Defendants obtained millions of dollars in Medicaid funds by submitting claims that broke basic hospital billing rules, were plainly not payable, or violated Medicaid requirements for injections. Id.

The relators alleged that the defendants presented false claims and made false statements under 31 U.S.C. § 3729(a)(1)(A) and (B), and under the Indiana analogs, Ind. Code § 5-11-5.7-2(b)(1) and (2). Id. at *1. The relators did not plead a reverse false claims count under § 3729(a)(1)(G), which would have targeted the defendants’ failure to repay identified overpayments. The state’s failure to recoup therefore matters here only as evidence on materiality, not as a claim in its own right.

The prior dismissal

In the second amended complaint, the relators alleged that Indiana Medicaid curtailed recoupments because of “improper political pressure.” The court read that as a conscious choice to deemphasize correct payment and, under Escobar, as strong evidence that the violations were not material. It gave the relators a “final attempt” to plead materiality. Id. at *5.

Legal Analysis

The court first disposed of the arguments it had previously decided with regard to the second amended complaint, then took up the parties’ competing accounts of what Indiana Medicaid knew, and then decided materiality.

1. The elements the court had already decided

• The court adhered to its earlier rulings on the other elements. The Hospital Defendants argued that the complaint failed to plead falsity, scienter, materiality, and causation, and failed to satisfy Rule 9(b). The MCE Defendants made the same arguments and added the public disclosure bar and the constitutionality of qui tam. Id. at *4.
  • Other elements. Because the third amended complaint largely repeated the earlier allegations, the court did not disturb its prior rulings on falsity, scienter, and causation, noting that the defendants had preserved their objections. Id.
  • Public disclosure. The court again held the Indiana FCA’s public disclosure bar inapplicable, notwithstanding Seventh Circuit precedent that “the Government’s possession of the information exposing a fraud is alone sufficient to trigger the public-disclosure bar,” Cause of Action v. Chicago Transit Authority, 815 F.3d 267, 275 (7th Cir. 2016), because it remained persuaded that the Indiana Supreme Court would follow the majority of federal circuits. 2026 WL 2448954, at *5.
  • Constitutionality. Absent binding authority, the court agreed with the district courts in the Seventh Circuit and with the other circuits that have upheld the constitutionality of qui tam actions. Id.

2. The materiality issue

• Inconsistent pleading. The defendants argued that the new allegations do not align with the prior ones. They said the relators were backtracking on their earlier actual-knowledge allegations, and that the third amended complaint undermined the argument that the excessive claims were accepted unknowingly. The defendants noted that the third amended complaint alleges that Program Integrity staff typically reviewed IBM’s findings, that IBM sent more than 1,000 audit letters a year, and that millions were recouped annually. Id. at *6. The Hospital Defendants pointed to the relators’ own July 2020 report showing that IBM’s recoupments were among their highest in 2017, 2018, and 2019, and that Indiana Medicaid chose not to pursue 22 IBM findings, which they argued shows the state reviewed the reports and made choices not to pursue overpayments. Id. at *7. The MCE Defendants argued that the complaint alleges the state always found the violations material, changed its policy, and was too worried about the expense of administrative recoupment, which cannot all be true. Id. at *8.
• The relators responded that possessing a report is not knowing what is in it. Relying on United States ex rel. Streck v. Eli Lilly & Co., 152 F.4th 816 (7th Cir. 2025), and United States v. Rogan, 517 F.3d 449, 452 (7th Cir. 2008), they argued that actual knowledge cannot be imputed to an agency whose officials fail to appreciate the significance of what they are given. 2026 WL 2448954, at *6. The MCE Defendants answered that Streck involved an undisclosed $600 million effect on pricing, while IBM’s reports identified the claims, why they were flagged, and their financial impact. Id. at *7.
• Each side read the state’s recoupment email as support. The relators relied on an email from the General Counsel of the Indiana Family and Social Services Administration (FSSA) stating that Indiana Medicaid would seek recoupment “if the claims identified in [this] qui tam action are confirmed to be claims that are not legally entitled to payment.” As noted above, Escobar treats repeated payment with actual knowledge as strong evidence against materiality only where the government “has signaled no change in position.” The relators argued that the email was such a signal: whatever the state knew before, it had now said it would recover payments on claims found to be improper. Id. at *7. The defendants read it the other way: the state would act only if a court told it to. Id. at *6. The MCE Defendants added that the statement was not news, because “presumably” Indiana Medicaid has always cared about recoupment. Id. at *8.
• The State of Indiana weighed in. In a Second Statement of Interest, the state urged a holistic approach to materiality under the Indiana FCA, arguing that “Medicaid is not an ordinary commercial arrangement” and that focusing exclusively on enforcement decisions made “with imperfect information and limited resources” undervalues the harm of false claims. Id. at *8.

3. The court’s materiality analysis

• An amended pleading supersedes the earlier admissions. The court held that, under Scott v. Chuhak & Tecson, P.C., 725 F.3d 772, 782–83 (7th Cir. 2013), “facts or admissions from an earlier complaint that are not included in a later complaint cannot be considered on a motion to dismiss.” The political-pressure allegation was gone, so the court’s earlier finding of “very strong evidence” against materiality no longer applied. 2026 WL 2448954, at *8.
• Without actual knowledge, the holistic factors favored materiality. The court held that “[a]bsent actual knowledge by Indiana Medicaid, the holistic view the Court is required to take leads to the conclusion that the alleged false claims were material.” Id. at *9. It relied on Seventh Circuit authority that noncompliance “resulting in large price differentials in how much the government owes” strongly supports materiality, on the requirement that the defendants certify their claims, and on the parallel to United States ex rel. Heath v. Wisconsin Bell, Inc., 92 F.4th 654 (7th Cir. 2024), where a misrepresentation going to a cost-control program’s purpose was material. Because the purpose of Medicaid managed care is to reduce costs, the court found it “reasonable for the Court to infer that if Indiana Medicaid had known of the actual violations, it would have sought recoupment.” 2026 WL 2448954, at *9. That inference is not a presumption in the relators’ favor. Relators must plead and prove materiality, but they do not have to prove that the government lacked actual knowledge; the government’s knowledge is evidence the defendants offer to show that the violations did not matter. Materiality asks whether a misrepresentation has “a natural tendency to influence, or be capable of influencing,” payment, 31 U.S.C. § 3729(b)(4), and looks to “the likely or actual behavior” of the government, Escobar, 579 U.S. at 193 (internal quotation marks omitted). Where, as alleged here, the government did not know of the violations, there is no actual behavior to examine, so the court asked what the government likely would have done had it known. The court also noted that a statement can be material “even if those who make the decision are negligent and fail to appreciate the statement’s significance.” 2026 WL 2448954, at *10 (quoting Streck, 152 F.4th at 848 (quoting Rogan, 517 F.3d at 452)).
• The state’s inaction counts, but it is not dispositive. The court agreed with the defendants that “Indiana Medicaid’s inaction is evidence of immateriality, but that fact alone is not dispositive,” and held that “the mere fact that Indiana Medicaid had the reports does not automatically indicate that they knew or appreciated the reports’ significance such that it defeats materiality.” Id. at *10.
• The question is whether the claims were material, not whether the reports were. The defendants pointed to the state’s assertions that the IBM reports may be doubtful or speculative. The court responded that “the issue is not whether the IBM reports themselves were material to the government’s payment decision but rather whether the allegedly false claims to the government were material to its payment decision.” Id.

Holding

Both motions to dismiss the third amended complaint were denied. The court adhered to its prior rulings on falsity, scienter, causation, public disclosure, and the constitutionality of qui tam. On materiality, it held that the third amended complaint’s allegations that Indiana Medicaid lacked actual knowledge, which it accepted as true at the pleading stage, together with the amounts alleged, the certification requirement, and the cost-control purpose of Medicaid managed care, sufficiently plead materiality under Escobar. 2026 WL 2448954, at *4–10.

What to Watch

• Discovery into what Indiana Medicaid knew. The materiality ruling rests on allegations that the Program Integrity team lacked actual knowledge of the falsity of the claims because it did not review or understand IBM’s reports. The defendants have already pointed to evidence that cuts the other way. The relators’ own July 2020 report shows that IBM-based recoupments in 2017, 2018, and 2019 were among the highest of the decade, the same period in which the relators say the state stopped reviewing IBM’s findings, and that Indiana Medicaid chose not to pursue 22 IBM findings during that period. The defendants argue that both facts show the state read the reports and decided which findings to act on. Discovery will test whose account holds.
• The FSSA’s position on recoupment. The FSSA General Counsel’s email ties recoupment to confirmation that the claims were not payable. If the state begins recouping while the case is pending, that would support the relators’ argument that it has “signaled [a] change in position” under Escobar. If it does not, the defendants will say its inaction speaks for itself.
• The defendants’ preserved arguments. The defendants preserved their objections on falsity, scienter, and causation for later stages, and the court has now twice rejected their public disclosure and qui tam challenges. The public disclosure question is whether the bar applies when the information behind a relator’s claims was in the government’s hands but was never disclosed to the public. Under Seventh Circuit precedent, the government’s possession of the information is enough to trigger the bar, Cause of Action, 815 F.3d at 275, but the Seventh Circuit has itself indicated that it needs to reconsider that rule, id. at 277. Because the bar at issue here is the Indiana FCA’s, the court predicted that the Indiana Supreme Court would follow the majority of federal circuits, which do not treat the government’s possession alone as a public disclosure. Whether the Seventh Circuit will revisit its rule remains open.

What This Means for Resolving FCA and Payor-Provider Disputes

In most FCA cases, evidence of government knowledge helps the defense. Here, a state contractor’s list of flagged claims became the relators’ evidence of falsity and the defendants’ evidence of immateriality at the same time. The court held that possession of that list is not enough at the pleading stage to establish that the government knew. That keeps the case open, but it also keeps the central fact question, what the state knew and why it did not recoup, unresolved until discovery. Parties tend to wait on a question like that, and the court’s description of materiality as “a close call” gives both sides a reason to.

The case also puts plans and hospitals on the same side of the caption with interests that do not fully line up. The relators’ theory against the MCEs depends on their paying claims that, under the same theory, the hospitals should not have submitted. The MCEs’ provider agreements require compliance with Medicaid rules, so a plan facing exposure for paying a claim may look to the provider that submitted it. The court did not address that allocation, but any global resolution will have to.

Finally, the FSSA has said Indiana Medicaid will seek recoupment if the claims are confirmed not to be payable. That gives the defendants a separate recoupment exposure, limited to the overpayments themselves, while the FCA case adds treble damages and per-claim penalties on top of that amount. An identified-overpayment list gives every party a shared starting figure, which tends to make these cases resolvable. Until the government-knowledge question is answered, though, the parties will value the gap between recoupment and treble damages very differently.

John Libby is an arbitrator, mediator, and settlement counsel with LibbyADR LLC. This post contains his own summaries of the decisions discussed, prepared for general informational purposes only. The summaries are not intended to be a complete statement of any court’s reasoning, nor should they be taken to indicate how he would rule as an arbitrator in any particular case. In addition, the summaries are not legal advice, nor should they be construed as legal advice. Readers should not act on these posts, but should review the decisions themselves and consult with legal counsel.