Blue Shield Admits Faking Audit Reports


Blue Shield of California has agreed to plead guilty to federal criminal charges that it engaged in a years-long conspiracy to falsify government audit reports on the insurer’s processing of billions of dollars’ worth of Medicare claims, the Justice Department said Friday.

The San Francisco-based insurer agreed to pay a $1.5-million fine to settle the criminal charges and faces additional civil sanctions, federal prosecutors said.

The government took the unusual step of filing criminal charges against the insurer because the six-year scheme was “so pervasive . . . and a companywide problem,” U.S. Atty. Charles J. Stevens in Sacramento said.

The agreement comes just two weeks after Blue Shield won approval from the U.S. Health Care Financing Administration to expand its Medicare business by marketing an HMO medical plan for seniors.


An HCFA spokeswoman said federal regulators were aware of the criminal investigation and decided to approve Blue Shield’s HMO application anyway because they were satisfied with corrective actions taken by the insurer.

As a condition of approval of the HMO license, the government required Blue Shield to sign an unusual “corporate integrity agreement.”

The guilty plea--the first ever by a government contractor that processes Medicare claims--follows an 18-month probe by investigators for the Department of Health and Human Services. Blue Shield pleaded guilty to three felony counts that carry a maximum fine of $500,000 each.

Prosecutors said the wrongdoing took place from 1988 to 1994. The government did not file charges against any former or current Blue Shield employees because “we concluded it was a corporate program rather than a case of individual liability,” Stevens said.


Blue Shield supervisors and employees at the firm’s Medicare division in Chico and Marysville, Calif., altered, backdated and destroyed documents to hide processing errors from auditors, prosecutors said. About 20 employees were believed to be involved.

Blue Shield executives said one employee was fired and 11 others were disciplined after the company became aware of the investigation in late 1994.

Two senior executives of the claims-processing division voluntarily resigned at the time. Blue Shield Chairman Wayne Moon, who joined the firm in 1994, said he is convinced the executives had no knowledge of the wrongdoing.

By pleading guilty, Blue Shield avoided the much harsher sanction of a possible disbarment from federal Medicare and Medicaid programs. Such an action was considered but rejected by regulators, according to one investigator.


But some health-care advocates questioned the government’s decision to approve the insurer’s application for a Medicare HMO plan in the face of the criminal charges.

“This seems part of a pattern of large HMOs getting regulatory approvals in the face of what appear to be patterns of outrageous conduct,” said Peter Lee, a director at the Center for Health Care Rights, a Los Angeles advocacy group specializing in Medicare issues.

“If they can’t meet the standards for processing paper,” he said, “what kind of quality standards will they meet for handling the health care of individuals?”

Blue Shield has held an exclusive contract to process claims for Medicare, the federal health insurance program for the elderly and disabled, since 1966. The government paid Blue Shield about $40 million a year to handle as many as 25 million claims in Northern California and parts of Southern California.


The purpose of the scheme, prosecutors said, was to deceive federal auditors into thinking that Blue Shield was doing a better job than it actually was. The Blue Shield contract was renewable each year, and companies that scored poorly on federal audits risked losing the contract.

Prosecutor Stevens said there was “no specific evidence” that Blue Shield’s top corporate officers were directly involved in the scheme. “But we do believe that the attitudes of top-level management at the time created an environment for this type of abuse,” he said.

Blue Shield employees were given financial bonuses based in part on the company’s performance in meeting audit requirements.

The government did not allege that any false billing took place or that patient claims were improperly denied. But because so many documents were destroyed or falsified, Stevens said, investigators couldn’t tell if “mistakes were made that could have cost the Medicare trust fund a tremendous amount of money.”