$40 Million in Medi-Cal Fraud Alleged

A state and federal crackdown on Medi-Cal laboratories, pharmacies and equipment suppliers has resulted in dozens of federal prosecutions for alleged fraud involving more than $40 million.

The contractors are accused of submitting false billings for medical devices such as shoe inserts and back supports, for phony lab tests and for prescriptions that were never delivered to patients, state officials disclosed Tuesday.

Since July, 38 businesses--all in the Los Angeles area--have been charged with defrauding the government program that provides medical care for the poor. So far 23 of those have been convicted as a result of plea bargains.

The owners of the businesses have been sentenced to at least a year in federal prison and ordered to pay restitution. An additional 150 businesses are still under investigation.

At the same time, audits conducted by state Controller Kathleen Connell’s office have pinpointed $17 million more in suspected fraud. Those findings will be forwarded to prosecutors for further investigation.

Alan Cates, chief of the state’s Medi-Cal Fraud Prevention Bureau, said nearly all of the fraud is occurring in the Los Angeles area, where 40% of the state’s 5 million recipients reside and where most of the independent contractors that provide medical supplies and services are located.

“We rarely find a case that is outside of the L.A. area, and recently most of our cases have come out of the San Fernando Valley,” he said.

The rash of prosecutions and convictions is the work of a joint FBI-state task force that was created by Gov. Gray Davis in July to crack down on Medi-Cal fraud, a problem that his staff said first attracted his interest decades ago when he was California’s controller.

“We all had the impression coming into this that Medi-Cal fraud was a big problem,” said Susan Kennedy, the governor’s Cabinet secretary. “The governor wanted an operation that would scare . . . these guys.”

Dramatic Shift of Investigative Focus

The inquiry represents a dramatic shift of emphasis in such investigations. Instead of targeting recipients, as past administrations have, the new task force is focusing on providers--companies that supply prescription medicines, laboratory tests, nonemergency transportation and medical devices to needy patients.

State officials said provider fraud drains hundreds of millions of dollars more from the system than does patient fraud. Provider fraud has emerged as a multimillion-dollar business only in recent years as sophisticated criminal organizations have infiltrated the Medi-Cal system, officials said.

“The majority of our providers are excellent and do a good job,” said Diana Bonta, director of the state Department of Health Services. “Unfortunately there is a criminal element that’s gotten into the business of misusing the medical money.”

Medi-Cal is a $20-billion-a-year operation, the bulk of it involving payments to well-established hospitals, nursing homes and managed care providers. The focus of the fraud crackdown is not these operations but a part of the Medi-Cal program that accounts for slightly less than $1 billion of its annual expenditures. This portion of the program uses small independent companies and non-chain pharmacies to provide supplies and services to needy recipients who are not part of a managed care system.

The recent audits and investigations have uncovered a variety of scams. Controller Connell said the latest trend among the scam artists is to set up a straw company that has no inventory or assets but bills the state for Medi-Cal supplies.

“I call them the vanishing providers,” she said. “. . . They come into existence and stay just long enough to invoice the state, and then they disappear. It’s really a high-stakes game of hit and run.”

She said that when her accountants set up interviews with some of the storefront operations, they find days later that the scam artists have fled, leaving no forwarding address.

Patient Numbers Sold to Black Marketeers

Cates said most of the fraudulent operators bought patient Medi-Cal numbers from black marketeers. He said the numbers are obtained from Medi-Cal recipients who agree to give them to a marketeer in return for a gift such as a pair of shoes or a toaster. Once the number is in the hands of scam artists it can be used to bill the state for hundreds of thousands of dollars in phony supplies.

But Bonta said more serious than the dollar loss to the state is the impact of the scams on Medi-Cal recipients. She said her particular concern involves laboratories that pay teenagers $10 to $30 to supply blood specimens so the labs can bill the state for phony tests.

She said the specimens are never tested, but when state inspectors ask for verification, the laboratories show them vials of blood. The blood is often drawn by nonprofessionals with contaminated needles.

“Some of these scams really hurt people, that’s the hard part,” she said. “And any time you have fraud, it takes money away from clients who need it.”

As part of the task force’s crackdown, she said, her department has also taken steps to discourage fraud, including establishing a hotline--(800) 822-6222--that patients can call to report suspicious activities.

The agency has also temporarily stopped admitting new suppliers to Medi-Cal and has notified the 4,500 companies that provide supplies, laboratory services, nonemergency transportation and prescriptions that they will have to re-enroll in the program.

The new agreement they will have to sign with the state requires greater disclosure of their other business activities and relationships.

Of the companies required to re-enroll, state officials said, 67 immediately notified the state that they were no longer interested in participating in Medi-Cal. The applications of 260 more were returned with a notification from the post office that no such entity existed at that address.

Stan Rosenstein, the health department’s assistant deputy director for medical care services, said that by identifying billing patterns that lead to fraud, the agency is also attempting to uncover the fraud before--rather than after--the state pays the invoices.

“Our approach has very definitely changed,” he said. “It is much more aggressive.”

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Medi-Cal Fraud

These medical supply companies were convicted of Medi-Cal fraud between July 1 and Oct. 5.

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Business Location AAA Medical Supply Los Angeles Acme Medical Supply Northridge Adana Marketing Management North Hollywood Angel Medical Supply Montebello Classic Comfort Reseda Delta Medical Wholesale Sherman Oaks Edgemont Pharmacy Hollywood Family Medical Supply Glendale Hollywood GMG Van Nuys Kisco Medical Supply Whittier La Vista/Montrose Montrose Magnolia Medical Burbank Mid-Valley Medical North Hollywood Montrose Home Health Care Montrose New Century Medical Supply Paramount Palmer Medical Supply Glendale S&M; Medical Supply Van Nuys Sinai Pharmacy Reseda Skin Care Medical Glendale US Distributor Glendale Westwood Orthopedic Los Angeles Worldwide/Q&M;/Group Montrose Zorri Medical Supply Altadena

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Source: Department of Health Services