Lessons of Medi-Cal’s Diaper Debacle
Fraud drains billions of dollars from California’s $29-billion health program for the poor, experts say, but few of the thousands of products provided by Medi-Cal have been abused as much or for as long as adult diapers.
In the late 1980s, Medi-Cal suffered a $200-million scandal known as Diapergate.
In response, the Legislature ordered state health officials to adopt strict monthly limits on the amount Medi-Cal would pay retailers to supply diapers and other products to elderly and disabled beneficiaries with incontinence.
But records show that Medi-Cal took more than nine years to fully put those controls in place and to close a widely known loophole in its computerized billing system that invited fraud.
The state’s spending on diapers for adults spiked again in the late 1990s as dishonest providers called “diaper bandits” stole tens of millions of dollars more from the program. In some cases, Medi-Cal was billed as much as $2,000 a month for a single patient.
The 1990s episode, state auditors found in December, amounted to a clear failure by Medi-Cal officials to promptly correct a costly and well-known fraud problem.
And as the state grapples with a multibillion-dollar budget deficit, the recurring saga of out-of-control spending for an item as simple as diapers for adults helps to illustrate why controlling spending for healthcare remains such a challenge.
State health officials say they have worked long and hard over the years to stamp out the fraud without unduly restricting access to incontinence products that give patients comfort, security and skin protection -- or unduly hurting honest providers.
Medi-Cal tightened the screening of providers, imposed its first usage limits and negotiated wholesale price levels with manufacturers.
Officials say they are steadily bringing down spending on incontinence products.
But they still can’t be certain, after two major outbreaks, that they have stemmed the thievery.
Stan Rosenstein, who oversees Medi-Cal as the state health department’s deputy director for medical care services, said the trouble with fraud is that dishonest providers “are always testing us.”
“They use their computers to test our computer system,” he said.
Growing Demand
The demand for incontinence supplies has grown as the number of aged and disabled beneficiaries has increased. Medi-Cal has paid more than $1.4 billion for such products since mid-1986.
Even so, officials saw two dramatic rises in spending for incontinence supplies that they attributed largely to fraud and misuse, not to caseload growth.
Figures compiled for The Times by Medi-Cal show that reimbursements were $13 million in 1987 and roughly tripled in each of the next two years, exceeding $130 million in 1989.
During a crackdown on providers, spending plunged to $58 million by 1991, but then began a steady climb that accelerated to more than $107 million in 1997 and peaked at $143 million in 1999. The Medi-Cal system relies, to a large degree, on the honesty of healthcare providers who submit bills for products prescribed by doctors and supplied to patients.
To file a claim, a retailer must first obtain a billing number from Medi-Cal. And in the late 1980s, that was easy to get. People with no experience in the healthcare industry, and no special license, set up shop. There was no limit on how many diapers they could bill to Medi-Cal, as long as they appeared to have doctors’ prescriptions. And many took advantage.
As pharmacy investigations chief for Medi-Cal, Carlo Michelotti was one of the first to begin chasing the “diaper bandits.”
“We identified $200 million in questionable payments,” said Michelotti, now chief executive officer of the California Pharmacists Assn. “So I put a band of merry men together.”
From San Diego to the San Francisco Bay Area, Michelotti’s staff helped track down unscrupulous diaper purveyors operating out of mail drops, a liquor store, even a used tire shop with a junkyard dog out front.
The first Diapergate investigations by federal and state authorities yielded dozens of criminal convictions.
Spurred by lawmakers and the scandal, Medi-Cal in the early 1990s established a $165 monthly limit on the cost of incontinence products for each Medi-Cal patient, which industry sources say covers several diapers a day plus pads or liners.
However, it was an open secret among providers that the Medi-Cal computer system had a gaping flaw.
The computer would stop a retailer from billing over the limit, but it would not prevent other retailers from collecting similar amounts for the same patient.
“We complained to Medi-Cal for years about it,” said Bob Achermann, executive director of the California Assn. of Medical Product Suppliers. “The response was that it was a systems issue.”
Medi-Cal had identified a fix, but officials say they decided it would put honest retailers at too much financial risk. Store operators would have no way of knowing whether another supplier had already used up a Medi-Cal patient’s monthly allotment and could get stuck for the price of the diapers.
Medi-Cal did nothing to close the loophole. And by the mid-1990s, the word was out in Los Angeles County, where experts say fraud is most prevalent and where a disproportionate number of diapers has been dispensed.
In 1997-98, there were more medical supply dealers “than 7-Elevens and gas stations put together,” recalled Roubik Assatourian, president of a medical products wholesaler, who agreed to cooperate with the government and who has testified in numerous federal prosecutions and before Congress. “It was one dealer opening and telling his sister and cousin....
“The economy was good,” Assatourian said in an interview, “and there was a surplus in the state budget, and the state was not really paying attention.”
Some retailers plied beneficiaries with free groceries or gifts to get their business. Some were swapping patient identification information so they could bill Medi-Cal. Some had so many surplus diapers, purchased at taxpayers’ expense, that they were unloading them at swap meets.
The smartest operators realized that Medi-Cal had begun to inspect invoices to see whether stores had purchased enough stock to support their Medi-Cal billings. And that’s where Assatourian came in.
As president of Apical Corp., he provided bogus invoices to dozens of retailers, making it appear that they had received the diapers that they claimed to have provided to patients.
One of his customers was Khahik Simonyan, owner of Eagle Pharmacy and a well-known member of the local Armenian community who helped sponsor youth programs and shipped containers of diapers to aid earthquake victims in Armenia.
Medi-Cal had paid Eagle about $1.45 million in 1997 through mid-1998, most of it for incontinence supplies supposedly provided to about 700 patients.
Assatourian conceded that some of his invoices had inflated the number of diapers delivered to Eagle. Other invoices falsely stated that Eagle had received adult diapers when they instead had gotten baby diapers, which are much in demand but are ineligible for Medi-Cal repayment.
“Baby diapers were delivered, but adult diapers were billed,” Assatourian testified after Simonyan was indicted in 2000 on federal charges of stealing $627,000 from Medi-Cal.
Assatourian said he had supplied falsified invoices so he could survive in a corrupt marketplace. “People ... were opening up medical supply stores with the full intent of committing fraud,” he said. “These people were putting legitimate medical supply businesses out of business.”
Simonyan was convicted, but authorities say he fled the country before his sentencing in August 2002.
Within the ranks of Medi-Cal, internal reviews in 1999 and 2000 found that spending on incontinence supplies was spiking by $5 million a month, and that sometimes more than 10 different stores were billing for diapers for the same beneficiary. Medi-Cal had a $60-million-a-year problem on its hands.
“After I picked myself off the floor, we got together a group the next day and started a multifaceted attack,” Rosenstein said. “It was all bad news, and we took it on aggressively.”
Providers Eliminated
Hundreds of providers were eliminated or dropped when Medi-Cal ordered them to reapply for eligibility. There was a moratorium on new medical equipment providers, which continues today. Dozens of bogus providers were prosecuted by federal and state authorities. And Medi-Cal billings receded.
The solution to the computer loophole was described in a 2000 staff analysis as a “simple change” costing $10,000. It essentially allowed Medi-Cal to track the dollar amount of incontinence supplies that all beneficiaries received, no matter how many stores they had used.
But before it was put in place, Medi-Cal officials spent three years debating whether to try more complicated and costly options, such as a “reservation system,” which would have allowed providers to find out whether a beneficiary was entitled to more diapers or not.
The computer change was not completed until February 2003, a few months after a Bureau of State Audits examination highlighted the problem.
However, that computer change created the very difficulty that state officials had tried to avoid.
“If I am a good provider and come in after someone over-billed, then I would be excluded” from collecting, said Achermann, of the medical suppliers association.
Rosenstein acknowledged the problem. “We do put providers at risk now ... to prevent fraud,” he said. “We decided that honest providers could come back and get it approved after a denial.”
Medi-Cal officials contend that their adult diaper cost-cutting has been highly effective. But people in the industry say businesses still are circumventing the limits by billing the program for other items when they reach the maximum for incontinence supplies.
They also say that some manufacturers and wholesalers are taking shortcuts with diapers -- using less of the substances that absorb moisture -- because Medi-Cal’s reimbursement rates have not changed for years.
“The problem is that they made so many cuts that the person in business has to look for the loopholes,” said Susan Patillo, owner of We Care Corp. in Carpinteria, which makes skin care products and sells diapers. “If they keep closing the loopholes, providers will not be able to supply Medi-Cal patients.”
Medi-Cal officials say they have not received complaints from beneficiaries about the availability of products, but that they sometimes have encountered quality problems.
Sue Hodges, an Oakland activist who uses a wheelchair, said many disabled people fear that providers would stop participating in the program because they are not being paid enough.
“Take my example,” she said, “I have partial incontinence, and I use disposable panty liners -- big things ... and I have a disposable pad on my wheelchair.” Without them, she said, “I can’t leave home.”
