Billing fraud crackdown is dealt setback

California's powerful insurance lobby has quietly scuttled an effort to combat fraudulent medical billing that drains hundreds of millions of dollars from the state's workers' compensation insurance system.

At issue was a proposal aimed at preventing billing scams backed by a task force of public and private employers, including Los Angeles County and Walt Disney Co. It would have required insurers to send notices to injured workers to check whether they actually received all medical services billed.

But insurers balked, complaining about the high cost of increased paperwork. They persuaded state Sen. Roderick Wright (D-Inglewood) to strip the plan from a bill he introduced in February, Wright's office confirmed.

The proposal's setback frustrated employers seeking new tools to battle illegal traffic in medical records.

"It's a massive problem. Hundreds of millions of dollars go down the tube," said David O'Brien, a workers' compensation attorney active in the employers' task force. "It's mind-boggling that the insurance industry says this is just another unnecessary form."

But insurers said they saw no reason to change current practices.

Sending out notices is "prohibitively expensive" and would confuse injured workers, said Steven Suchil, an attorney with the American Insurance Assn. The association said it did not have a detailed analysis of how much the mailings might cost.

There are better and more effective ways to fight fraud, such as providing extra money for law enforcement investigators, said Nicole Mahrt, an association spokeswoman. Companies don't need a government mandate to send notices if that's what they want to do, she said.

In the meantime, Disney said it was not waiting for action from the Legislature. The Disneyland Resort unit plans to start mailing notices early next year to 20,000 employees when workers' compensation bills are paid.

"Once the provider realizes that someone else is looking at what's being billed, there's a built-in incentive for them to go somewhere else" to commit fraud, said John Riggs, the workers' compensation manager for the resort unit.

In many workers' compensation fraud cases, experts say, criminals typically obtain names and data about injured workers and then set up "phantom" medical laboratories. The labs then bill insurers for services that did not occur.

"You feel violated," said John O'Brien, a retired captain in the Los Angeles County Sheriff's Department who is not related to David O'Brien. The retired officer's medical records were stolen and used to bill the county for phony medical tests.

"I was never aware of this, and that's why the crooks were so successful," he said.

In February, task force members concluded that much of the fraud could be eliminated with a simple fix: sending out notices. Injured workers could then blow the whistle if they spotted any bogus billings. Such notices, though standard practice in health insurance, aren't used in workers' compensation insurance.

Faced with opposition from the insurance industry, Wright removed the notice requirement from the bill in April before the measure had its first committee hearing, said the senator's legislative director, Stan DiOrio. The bill, SB156, was left as a noncontroversial effort to encourage insurers to meet with prosecutors to talk about fraud.

According to state campaign finance reports, Wright received $45,000 in campaign contributions from the insurance industry between January 2007 and June 2009. A prodigious fundraiser, Wright collected $765,000 in total contributions in that period.

"You can't run a bill on insurance fraud when some of the insurance folk say they do not think it works," DiOrio said. "That's not effective because we were faced with them opposing the bill."

DiOrio said Wright would consider introducing a new bill next year if the insurance companies and task force members could reach an agreement.

It's "an absurd situation," said Albert MacKenzie, a Los Angeles prosecutor who came out of retirement to lead a special district attorney's unit to combat fraud. "If I know you're an injured worker and you don't get a copy of the bill, then I basically have a license to steal."

Loopholes can be exploited with "a very simple scam" by a rogue hospital billing clerk or a sophisticated ring that gets hold of a computer hard drive with thousands of individuals' names and insurance identification records, MacKenzie said.

District attorneys in Southern California in recent years have successfully prosecuted some brazen medical billing fraud cases. More prosecutions are expected, targeting gangs, doctors, owners of pharmacies and medical supply companies, insurance claims adjusters and billing clerks at clinics and hospitals.

Cracking down on fraud in the $7-billion California workers' compensation program could create substantial savings that could be turned into rate cuts for employers and free up capital to expand businesses, create jobs and boost California's economy, experts say.

A 2008 study by the California Department of Insurance indicated that claims overpayments, some fraud related, account for more than 20% of all workers' compensation claims.

Insurance companies should realize that "you have to spend money to control fraud," said Malcolm Sparrow, a Harvard University corruption-control expert and a former police detective chief inspector in Britain. The problem, he said, is that "in the current climate no one wants to spend it even though they'd get back $10, $20 or $30 for every dollar spent."

In the meantime, Sparrow said, insurers have no systematic way to ferret out medical billing fraud. "It's potluck," he said.

The insurance industry "already spends money to fight fraud in a variety of ways," countered Mahrt, the association spokeswoman.

In August 2006, a company handling workers' comp claims for the Los Angeles Unified School District got a lab bill for a school principal. The bill purported to be part of a workers' compensation claim the principal filed after being hurt in a fall the previous May.

But an insurance adjuster became suspicious when he discovered that the educator had died before the suspected lab test was done. An investigation found a dozen similar phony bills for LAUSD employees from the same lab.

The man behind the scheme was James Allen Wilson, who worked as a financial representative at Cedars-Sinai Medical Center in Los Angeles and had access to patient records, prosecutors said. In June, Wilson was convicted in Los Angeles County Superior Court on five felony counts and was sentenced to more than four years in state prison.

In another case, a complaint from a doctor led to the conviction in May 2008 on fraud and grand theft charges of one member of a gang that investigators said stole hundreds of names of workers' compensation claimants from a medical billing service. According to court documents, the gang billed L.A. County for 220 false workers' compensation claims involving sheriff's deputies.

Another suspect fled the country, and the case remains active and may represent a larger medical billing fraud network, said Sgt. Steve Opferman, an L.A. County Sheriff's Department detective. He described the network as a "United Nations of white-collar crooks."

Employers need to prevent fraud before sophisticated gangs strike, said Riggs, the Disneyland workers' compensation manager.

"Criminal activities will follow the path of least resistance," he said. "If you don't do anything about it, you're just letting yourself be the victim. If you think you don't have fraud, you've just got your head stuck in the sand."

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marc.lifsher@latimes.com

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