rehab hearing 9/26- Karen Johnson Toby Douglas photo

Karen Johnson, chief deputy director of the Department of Health Care Services, and Director Toby Douglas testify at a state Assembly oversight hearing about fraud at rehab clinics.Will Evans/The Center for Investigative Reporting

UPDATE, Sept. 26, 2013: This story updates to include new details from the hearing and the extent of suspected Medi-Cal fraud.

The director of the state’s Medi-Cal agency offered a full apology during a legislative hearing today for what he called “unacceptable” and “systematic” failures in state oversight of taxpayer-funded drug rehabilitation services.

The mea culpa came even as Department of Health Care Services Director Toby Douglas and others revealed further details of the extent of suspected fraud and the depth of oversight failures. New evidence also indicates that the department knew about the fraud as far back as 2007.

Since reporters began pressing for answers about the fraud, Douglas’ agency has temporarily suspended 73 clinics, along with 101 additional counseling sites – including all of the clinics highlighted in Rehab Racket, an investigation by The Center for Investigative Reporting and CNN.

More than $36 million in public funds went to the suspended clinics in the past fiscal year, according to a department spokesman.

The agency also has enlisted the help of the Department of Justice, which has opened 64 fraud investigations into rehabilitation clinics.

“We fully appreciate the gravity of this situation,” Douglas said. “And I am here to tell you that we are sorry that we did not take action sooner. … We’re going to make sure that this never happens again.”

Assemblyman Dr. Richard Pan, a Sacramento Democrat, called the hearing in response to the CIR and CNN report, which revealed endemic fraud in California’s network of taxpayerfunded drug rehabilitation centers.

During the hearing, Pan said he hoped the hearing would lead to long-term improvements in alcohol and drug treatment services for the poor.

“There are so many people dependent on the Drug Medi-Cal program,” he said. “We need it to work, we need it to be successful. We need to be sure all the resources are used appropriately.”

The CIR/CNN investigation found widespread sham billing and failures of government in the state’s Drug Medi-Cal program. Rogue clinics cheated the system by diagnosing people with addictions they didn’t have, forging signatures on attendance sheets for therapy sessions that never happened and recruiting new patients with cash or cigarettes.

The Department of Health Care Services, the state’s chief Medi-Cal watchdog, has been on notice about the fraud for at least five years, the investigation found. Further details about how much state overseers knew, and when they knew it, emerged during the hearing.

A Los Angeles County official testified that staff members who monitor the rehab clinics filed reports to the state about 50 clinics suspected of questionable activity going back to 2008.

rehab hearing 9/26- Richard Pan photo

Assemblyman Dr. Richard Pan (fourth from left), a Sacramento Democrat, called the hearing.Will Evans/The Center for Investigative Reporting

Douglas conceded that his department’s fraud investigators did not review some complaints because they did not realize that the clinics were part of the Medi-Cal program.

After the hearing, CIR showed Douglas an email from a former audit chief in the department who raised concerns about the fraud in 2007. The email written by David Botelho, then head of audits and investigations, implored other department lawyers and managers: “… millions are going out the door – how do we stop the bleeding?”

Douglas said the email is further evidence of fragmentation of responsibility for the program. Douglas became director of the agency in January 2011, and has held leadership positions there since 2005.

“There were many times there were concerns raised around Drug Medi-Cal fraud,” Douglas told lawmakers at the hearing. “At times it was acted on. But not consistently … and this was unacceptable.”

Now, however, Douglas said major changes are underway.

Already, he said, officials have transferred a staff member believed to be obstructing clinic investigations. The department also is overhauling the way it reviews rehab clinic billing, which currently involves cursory checks of paperwork and no client or staff interviews.

“That doesn’t give us a full picture,” he said. “What we’ve learned is that we have to … (look) at who’s being served, are the patients truly there.”

The role of medical directors also is under scrutiny, Douglas said. On the eve of the hearing, CIR and CNN reported on physicians who regularly sign off on care that turns out to be bogus, yet face few consequences.

Such “unethical medical directors,” Douglas said, are part of the broader problem that he hopes to address with the physician licensing boards and through new powers provided to his department through health care reform.

“It is not right that we are seeing these medical directors prescribing unnecessary treatment to people that don’t exist,” he said.

Douglas said to expect further changes in policies and perhaps legislation to strengthen oversight. “This is not a quick fix,” he said. “We are taking action and will continue to put boots on the ground. … This is a long-term change.”

The prosecutions chief of the Department of Justice’s Bureau of Medi-Cal Fraud and Elder Abuse testified that the 64 clinic cases under his watch will be “one of my highest priorities.” Joe Chavez said that by opening investigations, the state was able to rapidly cut funding to the suspect centers. 

“This first step has stemmed the tide of fiscal bleeding,” he said. “But much works remains.”

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Christina Jewett is a reporter for Reveal, covering labor and workplace issues with a focus on the workers' compensation system. With reporting partner Will Evans and CNN, she exposed widespread fraud and failed government oversight of California’s network of addiction treatment centers for the poor. The stories led to the defunding of more than 200 rehab clinics and changes in state law. The Emmy-nominated series won the 2013 broadcast award from Investigative Reporters and Editors. Jewett – as part of California Watch, a project of The Center for Investigative Reporting – won the 2011 George Polk Award for medical reporting with Lance Williams and Stephen K. Doig. The series exposed outsized rates of rare but lucrative medical conditions at a rapidly growing hospital chain and spurred a federal investigation. She was also a Livingston Award finalist in 2010. Previously, Jewett worked at ProPublica and The Sacramento Bee, where a story she broke about contracting malfeasance led to arrests and convictions. She and a colleague also chronicled jail abuse and medical mistreatment, spurring countywide policy reforms. Those stories were honored with awards from the John Jay College of Criminal Justice and the National Council on Crime and Delinquency. Jewett is based in Sacramento, California.

Will Evans was a senior reporter and producer for Reveal, covering labor and tech. His reporting prompted government investigations, legislation, reforms and prosecutions. A series on working conditions at Amazon warehouses was a finalist for a Pulitzer Prize and won a Gerald Loeb Award. His work has also won multiple Investigative Reporters and Editors Awards, including for a series on safety problems at Tesla. Other investigations exposed secret spying at Uber, illegal discrimination in the temp industry and rampant fraud in California's drug rehab system for the poor. Prior to joining The Center for Investigative Reporting in 2005, Evans was a reporter at The Sacramento Bee.