Health Insurance Fraud Schemes Thrive, Mutate in Southland


Editor’s note: Because of a production error, a portion of the following story did not appear in Sunday’s edition in Orange County. We are reproducing the story in its entirety. Since 1988, a computer at Blue Shield of California has been spitting out suspicious health-insurance claims for referral to its special investigations department.

Interestingly, many of the claims--more than $2.6 million worth so far this year--are simply repackaged versions of bills that the company had already rejected months or years earlier on suspicion of fraud.

Unwilling to overlook a dime of potential profit, some entrepreneurs have been bundling up their contested claims and selling them as “investments.” When the investors pass the claims on to Blue Shield for payment, the computer kicks them out and adds them to the special investigations department’s growing workload.

The rebillings allegedly are a new manifestation of a complicated kind of health-insurance fraud that took hold in Southern California in the mid-1980s. Despite some federal criminal convictions and a successful civil racketeering suit filed by a group of insurance companies, the scheme refuses to die.


Indeed, it evolves: While insurance investigators cope with the rebillings, they say another group--working primarily in Los Angeles and Orange counties--has copied the original scheme and is busy trying to milk the system in its own way.

Health-insurance fraud is a $60-billion-a-year problem for insurance companies, by the estimate of Aetna Life Insurance Co. But, as a major force driving insurance premiums and general health costs skyward, it is also a menace to consumers. Harry S. Miller, Blue Shield’s vice president for consumer affairs, said fraud may account for as much as 5 cents of every health care dollar.

Such fraud takes many forms, as clever criminals strive to stay a step ahead of the science of fraud detection. This story concerns just one type of scheme, but insurance officials say it is responsible for millions of dollars of losses and provides a glimpse of the state of the art of fraud in Southern California.

This recent contribution to the annals of health-insurance fraud is something that insurance companies have dubbed the “rolling labs” scheme. It is so called because it involves creating scores--even hundreds--of medical clinics that never seem to stay in the same place more than a week or two.

Telemarketing techniques are often used to recruit patients, particularly the elderly, with offers of “free” medical tests. Only those with health insurance are targeted, because seeking reimbursement from the insurers is at the heart of the scheme. The clinics generally perform only routine, non-invasive procedures such as heartbeat and blood-pressure measurement.

Sometimes a token cash payment is extracted from the patient, but the real payoff is in filing claims to the patient’s insurance company. A creative biller can generate as much as $10,000 in claims from a single patient. Many insurance policies reimburse only a portion of a bill--typically 80%--leaving the patient to pay the rest. But operators of the “rolling labs” reassure patients that they will “waive” this co-payment and not send them a bill.

Because insurance companies cover only medically necessary procedures and not general health screening tests, the scheme depends on doctors who are willing to invent an ailment that the tests are supposed to help diagnose.

In a path-breaking 1986 civil suit that three insurance companies brought under the Racketeer Influenced and Corrupt Organizations Act, two Soviet immigrants were identified as masterminds of the rolling labs scheme.

According to the lawsuit, brothers David and Michael Smushkevich, formerly of Los Angeles, set up clinics that filed more than $100 million in claims for unnecessary diagnostic tests.

During their investigation, insurance companies contacted some of the clinics’ patients to confirm their suspicions about the claims. Aetna, for example, questioned a 37-year-old man who said he was in good health before and after he plunked down $5 to take a series of tests. But on paper, he was almost blind and about to keel over from heart disease--at least according to the false diagnoses on 10 different claims totaling thousands of dollars that flooded Aetna from 10 different providers.

The Smushkeviches initially contested the lawsuit. But after the brothers and their lawyers failed to show up for several hearings, the judge last February awarded an $18-million default judgment to the insurance companies, who are still trying to collect.

David Smushkevich was jailed in 1987 after he and several others were convicted of soliciting and receiving kickbacks for referring Medicare work to medical labs. His brother was never charged.

David Smushkevich disappeared after serving his criminal sentence, insurance investigators say. They have had reports of Michael moving to the Midwest or returning to the Soviet Union. They are also pursuing tips that one of the Smushkeviches has been operating a medical clinic across the border in Tijuana.

In what authorities say is another mutation of the rolling labs scheme, six people are scheduled to stand trial in U.S. District Court in San Diego next month on criminal charges that they attempted to bilk the civilian health program administered by the Department of Defense.

The six were indicted last fall in San Diego for mail fraud, making false statements and conspiring to defraud the U. S. government. They allegedly submitted “false and fraudulent claims” totaling more than $3 million to health-insurance companies, including Blue Cross/Blue Shield of South Carolina, which at the time processed claims for the Defense Department program.

The defendants--all of whom pleaded not guilty to the charges--are: Max Sperling of Palos Verdes, his sons, Craig Allen Sperling of La Habra and Howard Aaron Sperling of Palos Verdes, and Donald and Minnie Bader and Marie Manuela Souza, all of San Diego.

Documents filed along with the indictment link the defendants to Michael Smushkevich.

The indictment accuses the six of submitting claims with false employer-identification numbers, which insurance companies require to identify providers of medical services. (Employer-identification numbers, issued by the U.S. Treasury Department, are assigned to all corporations for tax purposes.)

According to the court filings, the scheme worked this way: The Sperlings would bring bills generated by two San Diego medical-testing clinics to the Baders’ office, also in San Diego, at a company called Center City Funding. There, the bills would be processed and mailed out as claims to Blue Cross and other insurance companies.

Although all bills were generated by the same two clinics, the claims would carry the employer-identification numbers of several companies created by the Baders, according to the indictment. The companies, including Center City Funding, Bader Financial Services, Mindon Investment Services and DaVisa Investments Inc., were falsely identified on insurance claims as providers of medical services, the indictment states.

The clinics where the bills originated and where the testing was performed were the “K” and “W” medical clinics, operated in San Diego by Dr. William O. Kupferschmidt, according to the indictment.

“The majority of the tests administered by the K and W Medical Groups were administered without any showing of medical necessity,” the indictment says.

Dr. Kupferschmidt, who currently operates the San Jose Medical Clinic in Hawthorne, was not indicted in the case. A graduate of the University of Guadalajara, he has been licensed to practice in California since 1979.

He would not respond to numerous telephone messages and a written request for an interview.

Despite similar requests, written and oral, none of the six defendants agreed to be interviewed either.

An attorney for Craig Sperling said only that his client “is not guilty of the charges.” Max Sperling declined to be interviewed. Howard Sperling did not respond to interview requests, and his lawyer said he would not allow his client to comment.

Marie Souza’s lawyer said she is innocent and merely did her job as office manager of Center City Funding. Although she did not respond to interview requests, a transcript of her testimony to the grand jury is on file with the indictment.

Souza told the grand jury that Craig and Max Sperling and Michael Smushkevich, who represented another clinic that Center City handled billing for, told her staff not to use the identification numbers for either Kupferschmidt’s medical clinics or a clinic that Smushkevich represented.

Asked if they told her why she should use other identification numbers, Souza said: “Because they did billings themselves from their ID numbers and the volume would be very . . . would raise suspicion from the insurance companies.”

Donald and Minnie Bader, the couple that the government says controlled Center City Funding, dispute the charges in the indictment, according to Donald Bader’s lawyer.

Attorney Craig E. Weinerman of San Diego, who represents Donald Bader, said the Baders were in the business of factoring medical bills.

Factoring is better known in the wholesale and retail garment industry. Factors are agents who finance a company’s operations, often by purchasing its accounts receivable at a discount.

Although the company receives less than the full face value of its bills, the advantages are that it gets its cash immediately and it doesn’t have to operate a collection department. Experts say the practice is unusual in the medical industry because collecting from insurance companies can be complex and time-consuming.

Weinerman contends that the Baders themselves were cheated because the bills they bought had already been rejected by insurance companies when submitted earlier.

“The Baders were pawns of the people who set up the clinics, the people who brought in all of those patients,” Weinerman said.

Donald Bader is the subject of a thick dossier of lawsuits on file in San Diego County Superior Court, dating back to 1984. One of the pending suits accuses him of defrauding people who invested with them in accounts receivable. He is contesting the charges.

The Baders also face trial in Iowa in July on charges of criminal securities fraud in connection with the sale of investments in accounts receivable. Iowa investors lost thousands of dollars, according to the state’s complaint. Donald and Minnie Bader have pleaded not guilty. Also pending in Iowa is a civil suit that the state brought against the Baders, alleging securities fraud.

The practice of packaging medical bills and selling them as investments first came to the attention of Blue Shield, Aetna and other insurers in 1988, when they started seeing old, previously rejected claims coming back to them like bad pennies.

Blue Shield’s computer cracked the codes that the rebillers were using and proved that the claims had been submitted before. Blue Shield trained its mail-room staff to send envelopes with certain markings to company investigators. The company identified 77 company names--most with addresses in Southern California--under which the bills were being resubmitted, said Louis L. Lovato, Blue Shield’s manager of special investigations.

Late last year, Blue Shield also began to get complaints from some of its subscribers that credit-collection agencies were hounding them to pay bills that Blue Shield had refused to pay a couple years earlier. Blue Shield’s lawyers got the collection agencies to back off after explaining the history of the claims.

The agencies had been hired by investors who had bought bundles of claims, many of which the insurance companies say are fraudulent. When insurance investigators questioned investors, they said they had no idea that the validity of the bills was in dispute.

One such investor is Les Thompson, who operates a medical equipment supply business in Burbank.

Thompson said he had never invested in medical bills until he met the Sperlings. Over time, Thompson said he invested $350,000 with Max Sperling to purchase medical bills that were said to be worth $1 million.

Today, piled alongside the medical equipment at Thompson’s company are tall stacks of files on bills that he has been unable to collect a dime on. The deal has turned into a catastrophe for him, Thompson said, because not all of the money invested was his. He said he has gone broke trying to repay the partners he recruited.

“I lost everything. I lost my house. It’s going to take me several years to pay these people off,” he said.

Thompson said he did get $25,000 back, but he later learned that that money had come from new investors recruited into the Ponzi-style scheme.

“All hell broke loose” when Thompson tried to collect on his investment, he said. For one thing, he discovered that Center City Funding was trying to collect on the same bills.

Business associates introduced him to the Sperlings, he said. “I heard they were the good guys,” Thompson said.

Max Sperling said he was a lawyer and an accountant, Thompson said. “They were driving Mercedes. They had this real facade of being businessmen,” he said.

Thompson said he made three short-term loans to the Sperlings. They paid the debts promptly each time, he said. Then, in the summer of 1988, Thompson said Max Sperling asked him to invest in accounts receivable from a medical clinic. “They said they had an opportunity and would let me in,” he said.

To persuade Thompson that the bills were from a legitimate clinic, Max Sperling showed him a signed contract between himself and Kupferschmidt in which the physician agreed to pay Sperling’s company a service fee of 10% of the gross billings sent out for collection.

Thompson said he does not know precisely what Kupferschmidt’s role was in the affair. Regardless of his role, he said, Kupferschmidt should admit responsibility to people who got hurt, Thompson said. “I brought (partners) in. The money I collected from those people, I am responsible for. I have to pay those people back,” he said. “That hurts . . . losing my money and having to pay those people back besides.”