In Stockings, Cheats Are a Step Ahead of Medi-Cal

By Tim Reiterman

Dec. 22, 2003 12 AM PT

Times Staff Writer

SACRAMENTO —

For years, state health officials have known that dishonest medical providers were stealing tens of millions of dollars from California’s health-care program for the needy by overcharging for a relatively mundane item -- compression stockings.

But each time they tried to stop the fraud, records and interviews show, they failed to act quickly and decisively and were simply out-smarted by those who abuse the system.

The California Medical Assistance Program, or Medi-Cal, routinely reimbursed medical equipment stores, pharmacies and other suppliers up to $45 a pair for below-knee stockings and up to $100 a pair for full-length elasticized hosiery, even though their cost for the items often was a small fraction of that much.

Many times the program was paying for stockings prescribed for people without the leg or foot ailments that require compression therapy.

And it took years to discover that a weakness in Medi-Cal’s computer system was allowing unscrupulous operators to use the same patient’s name to bill, as one official put it, for more socks than “a normal person could use in a lifetime.”

Although compression stockings are only one of thousands of products Medi-Cal provides, the program’s struggle with this small item illustrates how inadequate controls, if allowed to persist, can generate substantial waste and blatant fraud.

“The M.O. used by lots of criminal elements is they do lots of reconnaissance or scouting,” said Collin Wong, head of the state attorney general’s bureau of Medi-Cal fraud. “They experiment to see what kind of fraud controls are there, and when they find them lax or unenforced, then it is open season.”

An internal memo obtained by The Times shows that the tab for stockings leaped from $1 million to $5 million a year in the early 1990s -- much faster than program enrollment -- and kept climbing. Figures recently provided by the health department show that annual expenditures have averaged more than $11 million since 1996.

Most billings came from Los Angeles County, considered by law enforcement investigators to be the state’s capital of health-care fraud.

“It seemed like everyone in [parts of] the L.A. area was getting them for varicose veins,” recalled Ralph Duff, a pharmacist who conducted field audits for the health department for 27 years before retiring five years ago. “We told the department ‘You are paying a great deal of money for very expensive hose.’ ”

The stockings were ripe for fraud, said Los Angeles medical wholesaler Ruben Assatourian, because retailers could acquire them for very little and make a hefty profit by billing at Medi-Cal reimbursement rates.

“If a dealer billed 1,000 pairs, they would get $70,000 to $80,000 reimbursement, and the net cost was only $10,000 to $12,500,” said Assatourian, who has testified in numerous Med-Cal fraud cases as a federal witness. “Medi-Cal was not paying any attention.”

When Medi-Cal’s patients receive prescriptions for medical products, retailers and others who provide them seek payment from the $29-billion health program that is financed by state and federal Medicaid money. Aided by a computerized billing system, program workers are supposed to monitor costs and regulate prices as well as protect the legitimate health-care needs of Medi-Cal’s 6.5 million clients.

Over the years, state and federal investigators have unearthed hundreds of millions of dollars in health-care fraud. But compression stockings stand out because the fraud is pervasive and persistent -- officials suspect that most claims are inflated or bogus.

“We have done a number of things to try to control the program,” said Stan Rosenstein, the health department’s deputy director for medical care services. “But ... they figured out ways to beat us again. Unfortunately with fraud, we take action and they take one to get around it.”

In May 1998, Medi-Cal’s billing consultant, EDS, found that the program was paying too much for stockings. The consultant said in a letter that Medi-Cal’s reimbursements appeared to be based on wholesale prices from “traditional” manufacturers, although new manufacturers had emerged with quality stockings that cost about a third as much. Reducing Medi-Cal prices on two types of stockings alone, the consultant said, would save more than $2 million a year.

But the price change never happened, and Rosenstein said through a spokesman that he did not know why.

Medi-Cal did install other cost controls several years ago after its staff and EDS warned that the program was being cheated. But the measures were ineffective, officials now say.

In 2001, they decided to implement tougher regulations to curtail the fraud, yet were stymied by their own procedures: As the program paid out millions a year, the reforms took nearly two years to put in place.

“It is inexcusable and embarrassing,” Rosenstein said.

A staff evaluation in December 2001 found that stockings went to people diagnosed as incontinent and to young women with uncomplicated pregnancies -- but Medi-Cal’s claims processing system was not set up to flag and stop payment on such questionable billings.

During the 2000-01 fiscal year, 40% of stocking recipients were age 40 or younger. And the payments for 16- to 20-year-olds rose 1,400% over five years. “Generally speaking,” the staff memo said, “individuals in these age groups do not have the medical conditions for which elastic stockings would be provided by the program.”

Finally, the Department of Health Services this fall struck compression stockings from its list of products that can be provided to beneficiaries and billed to the Medi-Cal program without authorization.

It also eliminated arch supports that had cost the program up to $84 a pair, plastic heel stabilizers that cost up to $100 a pair, and shoe inserts that cost up to $238 a pair. In all three areas, some suppliers billed Medi-Cal for custom or high quality versions, but provided inferior over-the-counter products.

The projected savings from these changes and other restrictions are $22.4 million a year.

Deputy Health Director Rosenstein said the department decided to eliminate the benefits only after finding that cost containment efforts since the mid-1990s had fallen short.

After they discovered that beneficiaries were getting an excessive number of stockings, the department limited each patient to three pairs every six months, which officials say helped trim costs by $4 million. They cut pantyhose from coverage after discovering that some providers were billing for $90 leotards but supplying $19 pantyhose. And they eliminated leotards because they cover the torso, not the legs, and were costing $2 million a year.

“In hindsight, [the previous controls] did not go far enough,” Rosenstein said. “Incremental approaches did not work .... Enough is enough.”

It took nearly two years of drafting, discussions with suppliers and legal reviews to tighten the rules. But Rosenstein said recent legislation allowed the department to avoid the cumbersome regulatory process in the future -- and to change rules within two months.

Although he is hopeful the new restrictions will work, Rosenstein said he cannot be certain that people won’t find ways to thwart the new system. “We have learned not to be confident we have stopped all fraud,” he added.

Compression stockings can be prescribed for serious swelling and varicose veins in the legs, or after surgery to avert blood clotting. Under federal Medicaid guidelines, they are considered an “optional benefit” that states such as California can choose to cover.

But some other states say they provided stockings to Medicaid patients without suffering the same level of fraud. In Texas, where proof of medical necessity is required before stockings are provided, officials said they do not have a fraud problem.

Meanwhile, the Florida Medicaid program has about a third as many beneficiaries as California and no requirement that stockings be approved in advance. Records show that the state spent $121,000 on stockings in 2003 -- only about 1% as much as California did last fiscal year.

Items such as stockings and heel cups have been a pet peeve of J. Alan Cates, who is retiring as Medi-Cal’s fraud prevention chief. When appointed by then-Gov. Gray Davis, he said he told health officials “it was virtually all fraud.” And that was four years ago.

At the urging of Cates, the department adopted a regulation this year that would limit reimbursements for such items to no more than 200% of the provider’s wholesale cost, with the additional amount covering overhead expenses and profit.

Overspending and fraud involving support stockings came to the attention of law enforcement officials years ago.

Sacramento Assistant U.S. Atty. Daniel Linhardt, who has pursued numerous Medi-Cal fraud cases, said he had successfully prosecuted one Los Angeles provider who used falsified invoices in the late 1990s to bill Medi-Cal for pricey compression stockings while giving beneficiaries ordinary dress socks.

Health officials said they have referred several cases of suspected medical supplies fraud to federal investigators since 2001. But spokesman Ken August said they had stopped in September 2002 because they intended to discontinue stockings as a benefit and were focusing on more costly fraud problems.

Legitimate orthotics and prosthetics suppliers saw an inordinate amount of Medi-Cal money going to compression stockings and heel cups, so they acquiesced to tighter controls to help reduce fraud.

But they were upset that reimbursements for other items such as artificial limbs and braces would be reduced 5% in January. Another 10% cut has been proposed in recent weeks by Gov. Arnold Schwarzenegger’s administration.

Health-care provider groups have sued, saying that reimbursement levels for many items are lower than their costs.

“The department knew about the fraud for many years, and now in an attempt to clean it up, and in the guise of forecasts of budget gloom and doom, they are hitting legitimate dealers,” said Sherry Daley, spokeswoman for the California Orthotics and Prosthetics Assn. But it’s the state health department’s fault, she said, that Medi-Cal “did not have a computer means to stop someone from billing” for numerous pairs of support hose in a week.

The program’s computer system allowed providers to bill up to $450 a day per patient for hosiery and other orthotic items. Now they require approval to exceed that amount within 90 days.

Rosenstein defended the department’s anti-fraud strategy, saying, “These items are rarely used as legitimate medical expenses .... And we’re in very difficult times and cannot allow waste to continue.”

Bob Achermann, executive director of the California Assn. of Medical Product Suppliers, said he fears that providers will stop supplying stockings and other items rather than go through Medi-Cal’s authorization process. The cutbacks already have hurt, said David Robison of Grass Valley, who is paralyzed from the waist down by a birth defect and now has severe circulation problems in his legs as the result of diabetes.

In November, after stockings were eliminated from the Medi-Cal list, Robison’s supply ran low. “When they wore out, my feet started swelling, I got sores and an infection, and went to the doctors,” he said. “They believe it is a bone infection ... I could lose my [left] foot over this.”

Robison, board chairman of Nevada County’s independent living center, said he would try to get advance approval for new stockings, which he says could take a week to several weeks, because he cannot afford to buy them himself.

But he still considers the cutback foolhardy because stockings in his case would cost the state less than antibiotics and doctor bills, let alone an amputation.

(BEGIN TEXT OF INFOBOX)

California’s stocking costs

Medi-Cal saw its bill for support stockings skyrocket between 1991 and 1996-1997. It has averaged more than $11 million yearly for the past 7 years.

*--* Fiscal year Amount (in millions) 1991 $1.0* 1994-95 $6.9 1996-97 $12.3 1998-99 $13.6 2000-01 $9.9 2002-03 $10.3

*--*

*Calendar year, number is approximate

Source: Medi-Cal

(BEGIN TEXT OF INFOBOX)

Where the money went

Los Angeles County accounted for most of the $57 million in claims paid by Medi-Cal for support stockings from fiscal year 1996-97 through 2000-01.

Counties that account for the largest percentages of payments

Los Angeles: 87.20%