A court dismissed an action against a health insurance company after finding that the complaint failed to properly plead falsity and scienter. The complaint alleged that an insurance exchange’s rosy predictions about its future after the implementation of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) artificially inflated its share price. The court, however, concluded that the company’s statements about key revenue metrics were not misrepresentations. The investors have thirty days to file an amended complaint or notice of submission (West v. eHealth, Inc., March 14, 2016, Donato, J.).
eHealth is the largest private insurance exchange in the country, offering online access to enrollment in plans issued by leading health insurance carriers. Commissions from insurance purchases made through eHealth’s online platform are the company’s primary source of revenue.
According to the complaint, analysts and investors felt that eHealth was well positioned to take advantage of various requirements of the ACA. This bullish outlook was the result of statements made by eHealth’s CEO at a June 2014 health care conference. In the end, however, eHealth did not benefit to the extent anticipated, and, shortly thereafter, reported disappointing results and downgraded its guidance for the rest of 2014. The investors claimed that after the ACA’s implementation, eHealth’s stock price was artificially inflated by its executives’ misrepresentations about key metrics for the company’s revenue generation.
No misrepresentations. The investors asserted that the company misrepresented three revenue generation metrics: churn, conversion, and membership and financial guidance. First, the complaint alleged that company executives made knowingly false statements that the ACA had cased minimal levels of “churn,” that is, the rate of membership attrition. The investors pointed to statements made in an early 2015 earnings call describing substantial changes in churn after the implementation of the ACA. The court, however, found that the later statements about churn did not directly contradict the earlier ones. Further undermining the allegations were cautionary statements made in earlier earnings calls warning that the ACA would likely lead to increased churn.
Next, the court found that eHealth’s statements regarding its conversion rate were not misleading. The issue here was a dispute over definitions: the investors asserted that the conversion rate referred to the percentage of applicants who become premium-paying members, while eHealth maintained that the term referred to the percentage of applications that were approved by the insurance carriers. Looking at the statements in context, the court determined that a reasonable investor would have understood the statements as argued by eHealth. Allegations concerning a set of statements made later in 2014 were also unavailing, because the statements at issue were simply statements of opinion as to the cause of the decline in conversion rate, the court said.
The court the found that eHealth’s membership estimates and revenue projections were protected by the Private Securities Litigation Reform Act (PSLRA) safe harbor. The estimates and projections were identified as forward-looking statements and were accompanied by the required cautionary language identifying important risk factors, the court said.
Scienter not pleaded. Finally, the court found that the complaint failed to adequately plead scienter under the PSLRA. According to the court, the investors failed to allege any direct evidence of scienter, such as an incriminating statement from any of the individual defendants. Nothing in the facts pled by the investors rendered the inference of knowing deception at least as compelling as the competing, innocent explanation for the same facts, the court said.
The case is No. 3:15-cv-00360.
Attorneys: Matthew Seth Melamed (Robbins Geller Rudman & Dowd LLP) for Jeffrey West. Jerome F. Birn, Jr. (Wilson Sonsini Goodrich & Rosati) for eHealth, Inc.
Companies: eHealth, Inc.
Cases: CaseDecisions InsurerNews CaliforniaNews
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