In many ways, scamming the health system meant to heal California’s injured workers is just too easy.
Anyone can hang out a shingle and purport to be a medical vendor or caregiver by sending a letter to the state – no proof required. Unscrupulous providers can run up tens of thousands of dollars in bills for meaningless drug tests, salves and medical equipment, knowing that injured workers never will lay eyes on the bill.
The gaps in oversight are so tempting that one prosecutor says scammers test-drive ways to fleece the system, often pocketing millions before anyone in a vast market of insurers catches on.
“They study the weaknesses of the system and exploit it,” said Shaddi Kamiabipour, an Orange County deputy district attorney.
Kamiabipour is among the legion of state and federal prosecutors throughout California who maintain that more than $1 billion has been siphoned out of the system.
Yet their case documents reveal something else: gaping holes in the state’s strategy to prevent fraud. The architects of other major health programs shored up similar weaknesses long ago. Here is a comparison:
Consolidate the power
When Medicare makes rules, it has a strong incentive to encourage doctors, pharmacists and others to follow them: money.
The purse strings are not held nearly as tightly in California’s workers’ compensation system, in which a division of power creates the first major hurdle.
Lawmakers make rules. The state’s Department of Industrial Relations administers workers’ compensation. Judges issue orders in workers’ compensation courts. Medical boards and commissions oversee doctors, pharmacists and chiropractors. And a market of more than 300 insurers and self-insured employers do the day-to-day job of deciding which medical bills to pay and which claims to fight.
“When everyone is responsible, no one is,” said Kate Zimmermann, a Kern County prosecutor who has combated workers’ compensation fraud for eight years. “He who has the gold can write the rules. … If you have one checkbook, you can say, ‘If you want the check, this is how.’ ”
Leveraging the power to zip the wallet, the federal Affordable Care Act handed a particularly powerful fraud-fighting tool to state Medicaid agencies. They must stop paying a health care provider if they determine there is a “credible allegation of fraud.” Medical providers then can fight the determination in administrative courts.
No such rule exists in California’s workers’ compensation program. Yet the facts outlined in one case suggest it could have spared numerous questionable surgeries.
Dr. Douglas Mills testified in court that in 2007, he formally complained about a clinic at which he saw an improbable number of MRI reports come back supporting the case for surgery.
“In my opinion, people were getting hurt, so I wanted to stop it,” Mills said of his experience at San Fernando-based Frontline Medical Associates. Court records show that a state insurance department investigation was underway even before Mills’ report.
Further testimony confirmed Mills’ suspicions, including a clinic staff member who said she was paid a bonus to falsify MRI reports, bolstering the case for surgery. The revelations came to light last year – eight years after Mills’ initial complaint – when 15 people related to the clinic were criminally indicted. The charges in the pending case include aggravated mayhem for surgeries that prosecutors deemed inappropriate.
Root out sham facilities
Medicare officials know scammers can be brazen enough to steal patient identities, fabricate a sham medical office and bill for phantom care. As a result, the federal program has set up a system to check on medical offices.
Medicare uses its own data to determine whether classes of providers with track records of graft are medium or high risk, such as wheelchair merchants and home health agencies.
Both types of providers are visited when they initially open, three or five years later – depending on the industry – and whenever officials get a complaint. A government-contracted auditor interviews operators and takes a look behind the counter, according to Jason Weinstock, a former supervisory investigator for the U.S. Health and Human Services Department’s inspector general.
In California’s workers’ compensation system, no such data reviews or facility vetting occur on a regular basis. In fact, no central authority performs inspections to make sure medical firms are doing what they claim to do.
Insurers can steer workers to a network of hand-picked medical providers. But a shadow system operates to the side, in which workers can get medical care from thousands of unregulated providers who seek payment later in workers’ compensation courts.
In that vacuum of oversight, James Allen Wilson saw a golden opportunity.
Wilson worked in the billing department at a hospital, where he had access to the personal information of workers’ compensation patients. Using their information, he set up a fake lab, billed for bogus services and started collecting $354,000 in checks at a post office box.
He got caught, according to news reports, when a savvy claims adjuster noted that he billed to perform tests on a dead man.
Wilson pleaded guilty to identity theft, grand theft and insurance fraud in 2009. In the years since, no checks of workers’ compensation medical providers have been instituted.
Empower workers to identify bogus bills
Albert MacKenzie, a former Los Angeles County prosecutor familiar with the Wilson case, said the oversight gaps are compounded by the fact that workers don’t have a way to flag bogus care. Unlike in Medicare or employer-paid health care, injured-worker patients aren’t mailed an explanation of benefits, or a summary of the services and charges related to their health care.
“When you have a system that doesn’t even send a patient a copy of what’s being billed for, it’s just Dodge City; open season for fraud,” MacKenzie said. “It’s just a massive cesspool.”
Kim Reeder, a worker who requested her medical records and discovered bills for transportation and language-interpreting services she never used, said mailing such information to workers would be beneficial.
“I’d like to see all workers have their billing,” said Reeder, of Sherman Oaks. “If that happens, all this can go away. I just think California is made of significantly more honest people than dishonest people.”
State labor officials say they’ve tried to clamp down on the unregulated care through legislation that gives insurers the power to deny payment for unapproved health treatments. Despite the law, though, such bills for unapproved care remain commonplace in the state’s small workers’ compensation courts.
Ban providers convicted of fraud
In Medicare, medical professionals may be banned from seeking money to see patients if they’ve been convicted of defrauding a health care program or fraud-related offenses.
But those banned providers have no problem starting a second career in California’s workers’ compensation system.
Medicare banned Dr. Thomas Heric in 2006 after he pleaded guilty to charges related to writing reports based on diagnostic tests that turned out to be fraudulent. In his letter to the judge who sentenced him, Heric pledged that going forward, he would use “whatever talents I may have in service to the community.”
Heric then found a new line of work in the workers’ compensation medical system. His job was to review data on injured workers’ sleep patterns and issue reports needed to bill insurers.
Five years later, prosecutors accused Heric of fraud again. They say he was writing virtually identical reports that gave rise to sham billing. One expert testified in court that Heric’s sleep-study reports were so bad that they failed to address one worker’s serious breathing problems for months, a lapse that he said could harm “the general public.”
That case is pending in Orange County Superior Court. Heric’s attorney, Robert Moest, said Heric stands by the reports and is fighting the charges.
“There are different opinions in the scientific community,” Moest said. “It shouldn’t be the matter of a criminal charge.”
A Reveal analysis of public records found that several other chiropractors and doctors banned by Medicare moved their career to workers’ compensation.
Among them: chiropractor David C. Nguyen. Medicare banned him in 2005 over an insurance fraud conviction. Earlier this year, San Diego prosecutors indicted him for insurance fraud again, this time for passing along bribes from a chiropractor to a therapy center – both workers’ compensation medical providers.
Look at who’s running the place
Medicare doesn’t bar just doctors, pharmacists and chiropractors with histories of fraud. It also takes a look at who’s in charge.
Officials with the Department of Health and Human Services’ inspector general’s office will investigate clinic operators’ ownership and ban those with a 5 percent or greater stake who have a history of certain fraud convictions, according to Jason Weinstock. The rule covers direct and indirect ownership.
No such rule exists in workers’ comp. State labor department officials said they do not have the authority to review the practices of medical professionals.
Instead, they said in a statement, the boards that issue licenses to medical providers are the “appropriate authority for regulation and review.” Yet no board or commission checks who’s running workers’ compensation clinics.
The state’s chiropractic board stripped Fred Khalili of his license and denied his attempt to get it back in 2013. But he still signs physicians’ paychecks at two Los Angeles County workers’ compensation clinics.
Khalili’s legal problems started in 1995, when an FBI agent informed him that he was under investigation for paying $135,000 in kickbacks to auto-injury lawyers. Khalili was seeing a steady flow of patients who’d been hurt in car crashes, court records say.
Facing an indictment, he began to work undercover for the FBI. He recorded phone conversations with lawyers who demanded a cut of his medical treatment income in exchange for a parade of patients. He even went to the office of one lawyer who was believed to be a member of a Russian gang and kept a gun in his desk drawer, according to court records.
Khalili ultimately pleaded guilty to wire fraud and tax evasion and lost his chiropractic license in 2000. Twelve years later, he returned to the chiropractic board, hoping to get his license reinstated. The board refused, citing subsequent arrests for vandalism, a hit-and-run collision, driving without a license and making harassing phone calls. He appealed the decision to a higher court but lost.
Khalili remains heavily involved in workers’ compensation clinics, something that would draw scrutiny under Medicare’s rules as a fraud prevention measure. In the vacuum of such oversight in workers’ compensation, prosecutors now are pursuing charges against Khalili.
He was accused in February of insurance fraud for accepting kickbacks on behalf of First Choice Healthcare Medical Group clinics in Los Angeles and Panorama City. In exchange for the kickbacks, he directed staff at the clinics to dispense expensive pain creams to injured workers, the case alleges.
The charges against Khalili say he directed an attorney in 2009 to put the clinic ownership in the name of a physician, but Khalili controls the bank accounts. Attorney Malcolm McNeil, who advises First Choice, said Khalili does not own the clinics.
Khalili has not entered a plea in the case, and his criminal attorney did not return calls for comment.
Free the data
Last summer, Medicare released millions of records detailing the services and charges of doctors across the nation. The federal agency billed it as a move “to promote better care, smarter spending, and healthier people.”
The Medicare data identifies doctors’ billing practices down to the specific test or treatment.
A flood of news stories based on the data followed, identifying high-billing doctors who also were in the crosshairs of law enforcement.
Among them was a Florida physician accused in a Justice Department lawsuit of performing invasive procedures to clean out seniors’ arteries – even if they didn’t need it. Another top biller is accused of reaping millions for diagnosing seniors with an eye malady that leads to blindness, whether or not they had the ailment.
No such transparency effort sheds light on health care spending in California’s workers’ compensation program. Public records in workers’ comp cases are limited to the names of medical providers seeking money in contested court cases.
Barbara Wynn, a Rand Corp. expert who was commissioned by the state to study health spending in its workers’ comp program, has access to the data as a researcher. She said making it available to the public could deter questionable practices: “It could start fingering potential fraud situations.”
Yet the data she has seen is riddled with gaps, she said. She said rules that allow the state to fine insurers that fail to report data are seldom enforced.
“If you’re going to profile what’s happening, you’re only looking at half a deck,” Wynn said. She added that California labor department officials “have sanction authorities, and they need to exercise it. Texas does, Florida does; they really come down on it.”
California labor officials estimated that about 20 percent of the billing data is missing but said they are writing letters and following up with insurers to encourage them to report all required data.
Similar data is used in Medicare to identify aberrations and notify doctors when their treatment practices appear unusual. It’s the kind of notice that two California physicians who ended up testifying in a fraud proceeding could have used.
Dr. Javier Torres testified that in his 17 years of performing nerve tests on patients, he never did a “single fiber” nerve test.
That testimony came in a 2014 fraud case. Orange County prosecutors claim physician Sim Hoffman’s office billed for more than $9 million worth of “single fiber EMG” tests that it was not even equipped to perform.
During the test, a hair-thin needle is dipped into a muscle to detect the nerve jitters that are the hallmark of a disease called myasthenia gravis, which causes weakness and difficulty breathing. It’s believed to be a disease you’re born with – not something you pick up at work or from doing heavy labor.
That didn’t stop Hoffman’s office from billing for 18 such procedures in Torres’ name, for a total of more than $8,000, according to court testimony. Hoffman has pleaded not guilty to insurance fraud, and his attorney said in a court filing that the charges against him are so vague and voluminous that “he has no meaningful way to mount an adequate defense.”
Opening up billing data would be politically difficult, said Frank Neuhauser, a UC Berkeley researcher who’s studied the California workers’ compensation system for 25 years. Some doctors and attorneys for injured workers could see their income fall if excessive care is reined in.
But for workers who get questionable surgeries or treatments, and for employers who foot the bill, he said, it would be the right thing to do.