Warnings of Medi-Cal Fraud Went Unheeded

SACRAMENTO —  Ignoring clear warnings that California’s Medi-Cal system was rife with fraud, state officials allowed the situation to go unchecked for years until the FBI swept in with massive arrests.

The state’s failure to act in the face of alarming audits came less than a decade after an almost identical scam--the $100-million “Diapergate” scandal in 1988-92--rocked the medical program for the poor.

Records and interviews show that the agencies responsible for combating Medi-Cal fraud took little action to stop the criminal activity or to punish the operators who were stealing hundreds of millions of dollars. Not until the FBI launched an investigation in 1998 was the fraud attacked. FBI agents estimate that the total fraud, which is concentrated in the Los Angeles area, may reach $1 billion.

“Was someone asleep at the wheel or what?” said current state Senate Health Services Committee Chairwoman Martha Escutia (D-Whittier).

The “Diapergate” scandal, in which dozens of businesses submitted millions of dollars in false claims for incontinence supplies, prompted a series of reforms that were supposed to be stopgaps for such Medi-Cal abuses. But it turned out the new requirements were rife with unchecked loopholes.

The recent fraud mushroomed at a time when the attention of then-Gov. Pete Wilson and then-state Atty. Gen. Dan Lungren was locked on the hot-button issues of the day: violent crime and welfare cheaters. State resources were poured into programs to combat crime and investigate welfare recipients, but no effort was made to beef up the forces fighting Medi-Cal fraud.

“The department [of health services] under the previous administration was not focused on provider fraud,” Gov. Gray Davis said in an interview. “They were focused on individual fraud. The money is in provider fraud and that’s where we’re going.”

A spokesman for Wilson said no evidence of widespread fraud by businesses serving Medi-Cal ever reached the former governor’s office.

“The governor finds fraud in any form to be unconscionable,” said former press secretary Sean Walsh. “Any time fraud was brought to his attention, Gov. Wilson would make it a priority to end that shameful practice. He thinks it’s inexcusable.”

Kimberly Belshe, director of the Department of Health Services when the recent fraud took place, declined to be interviewed.

From 1996 until the end of 1998, Controller Kathleen Connell’s office submitted more than 100 audit reports to the state attorney general’s office suggesting that pharmacies, medical equipment suppliers and laboratories in the Los Angeles area were fraudulently billing Medi-Cal for millions of dollars and should be prosecuted.

Connell said in an interview last week that only three of the audits between 1996 and 1998 ever resulted in criminal charges.

In June 1996, she announced that auditors had examined 11 pharmacies within two miles of each other in Long Beach. The shops had caught her office’s attention because they had billed Medi-Cal for $6.3 million in a five-month period. She said most of the billings were found to be fraudulent. “I am concerned that the situation in Long Beach may be widespread,” she wrote Belshe, then director of health services.

The case was referred to the state attorney general’s office, but the first action taken was by the FBI against one of the pharmacy owners in 1998.

In the summer of that year, the Los Angeles County district attorney’s office alerted state officials that it had discovered a $1-million Medi-Cal fraud mill while investigating Dr. Yenok Ordoyan and his wife, Armenui, for false welfare claims. Steve Cooley, director of the district attorney’s welfare fraud division, said a raid on the couple’s bank accounts produced hundreds of thousands of dollars--allegedly the proceeds of false billings to Medi-Cal and welfare.

‘Hard to Imagine How It Went Unnoticed’

The Ordoyans were convicted of welfare fraud, but a Medi-Cal case against them has never been filed.

“It’s very frustrating,” said Cooley, who is now a candidate for district attorney. “We seized all that money, did all that work, and we sit here waiting for them to do something and it’s just not happening.” A spokesman for the attorney general’s office said the Ordoyans are under investigation.

While searching out welfare fraud, Cooley said, his office often finds evidence of Medi-Cal fraud. “It’s a huge problem,” he said.

Health and Welfare Secretary Grantland Johnson said he spotted dramatic spikes in orders for medical equipment--mainly for elderly and disabled patients--as soon as he took over last January.

“It is hard to imagine how it went unnoticed,” Johnson said. “And I’m a layman. So if I noticed it, everyone else must have too.”

In March 1996 a controller’s evaluation of the Department of Health Services warned of “significant Medi-Cal accounting and payment control deficiencies which allow for financial abuse, waste and fraud.”

The report said the agency’s scrutiny of non-chain suppliers of goods and services was minimal and did not “provide an adequate deterrent against overbilling.”

It warned that medical equipment suppliers who sold crutches, wheelchairs, adult diapers, canes and other devices are historically high-risk “and, therefore, warrant . . . attention.”

A follow-up three months later criticized the department for not acting on the recommendations. A second follow-up in December 1996 reported that the controller “is concerned that [the department] has not made any significant progress in areas where abuses to the system appear to be greatest.”

“We could not understand why there was this deafening silence . . . in what we thought was a growing and significant epidemic of illegal activity in the Medi-Cal program,” Connell said in a recent interview.

In a reply to the 1996 audit, then-director Belshe indicated that while the department was concerned about fraud, its overriding worry was that legitimate providers would flee the program because of recent cuts in the amounts that Medi-Cal would pay for services. The department has to balance “the need for sensitivity to provider concerns about the . . . intrusiveness of audits, with the need to protect Medi-Cal funds,” she wrote Connell.

In 1998, the frustrated Connell turned over to the FBI many of the audits of Medi-Cal businesses, and the FBI began an exhaustive investigation. So far, the FBI has filed charges against 75 Medi-Cal providers and 36 have entered guilty pleas.

It has 300 additional cases pending, including one involving four state employees who are being investigated for allegedly selling Medi-Cal numbers.

The fraud followed the script that the controller laid out in her audits four years ago, and confirmed her warnings that the illegal activity was rampant among medical equipment suppliers. They were billing the state for thousands of dollars in equipment they claimed they had provided to Medi-Cal patients.

To support the claims, the suppliers included each patient’s Medi-Cal number. But in reality no equipment had ever been provided, and the patient numbers were phony.

What made the state so vulnerable to these fraud artists, audit reports said, was the absence of checks on the system. Any enterprise that wanted to sell services or supplies to Medi-Cal patients simply applied for a state provider number.

That was usually granted with little attempt to determine if the business was legitimate. Later, when some of them were investigated, FBI agents found that the addresses led them to empty lots or mailboxes.

The provider number was essentially a license to do business with Medi-Cal that entitled an enterprise to begin billing electronically for goods and services. Rarely were the bills even randomly audited before payment to determine if the goods or services were actually delivered.

“Technological advancements have unfortunately made this more pervasive,” said Connell. “You can instantaneously bill Medi-Cal and very quickly get a payment returned.”

The controller’s office conducts its audits after the fact, long after payments have been made. When audits were sent to an overburdened attorney general’s office, Connell said, they were seldom prosecuted.

“These operators would see this as an open field. No one is tending shop. No one is watching. No one is looking,” said Dennis Warren, a Sacramento attorney who represents a coalition of medical supply businesses. “There was a feeling that there was absolutely no risk to doing fraud.”

Collin Wong, the new head of the Bureau of Medi-Cal Fraud and Elder Abuse under state Atty. Gen. Bill Lockyer, said that for years under Lungren the office was plagued with staff shortages and a backlog of cases. In the last decade, as the Medi-Cal program was doubling in size, the staff prosecuting fraud was not increased by a single position. All additional staff went to other areas in the criminal law division.

He said the Medi-Cal branch had responsibility for prosecuting not only equipment providers, but also all other providers in the $18.5-billion system, including nursing homes, hospitals and doctors. And the Medi-Cal bureau was required to investigate complaints from the controller as well as those from the health department and citizens.

“The bureau really was the victim of benign neglect,” Wong said. “It was just overwhelmed.”

Lockyer, who took office in January, has moved to fill vacancies and beef up the staff. “My [instructions] are very clear: to improve the performance and productivity of the bureau,” Wong said.

At the Department of Health Services, Warren said, auditing of businesses providing Medi-Cal supplies and services virtually stopped in the last half of this decade, when much of the system was put under managed care. He said auditors and investigators were assigned to monitor managed care, leaving few checks on other parts of the system.

He said health officials, under orders to cut costs, felt they were safe because reforms initiated after “Diapergate” meant there was little likelihood of fraud. The “Diapergate” scandal was uncovered in the late 1980s by the controller’s office, then headed by Davis.

To stop the hemorrhaging of tax dollars, the state set new requirements for businesses to become Medi-Cal suppliers, and put a dollar cap on the amounts that could be billed to each recipient’s number.

But “the new requirements were easy to get around,” said Warren, “and the cap did not eliminate the financial incentive for fraud.”

Warren said about three years after “Diapergate,” legitimate pharmacies and medical supply firms began to suspect that fraud had again enveloped Medi-Cal.

“Our members were discovering that competitors were giving either cash or small gratuities to entice people to give them their Medi-Cal numbers,” he said. “I had members calling me and saying, ‘I reported this to everybody, I’ve given names, and nothing happens.’ ”