Rehab audit - Zev Yaroslavsky photo

The Los Angeles County Board of Supervisors commissioned the report looking into taxpayer-funded drug rehab clinics. Supervisor Zev Yaroslavsky offered the resolution calling for the audit.Alex J. Berliner/ABImages via AP

Los Angeles County authorities have let problem drug rehabilitation providers run away with millions of dollars in public money and failed to follow through on threats to stop funding errant clinics, according to a new report by the county auditor-controller.

County and state officials should communicate better, crack down on deadbeat clinics, set higher standards for approving new ones and conduct criminal background checks of clinic operators, the report stated.

The report, released late Friday, was commissioned by the county Board of Supervisors after The Center for Investigative Reporting and CNN revealed pervasive and unchecked fraud in the Drug Medi-Cal system, which provides addiction counseling for the poor. A state audit ordered in response to the investigation is due next year.

Supervisor Zev Yaroslavsky, who called for the Los Angeles review, said in an interview that he’d like to see the county get clear and strong authority to cut off fraudulent providers.

“Some of these contractors who are fly-by-night operations are certified by the state originally, got funding and then weren’t held accountable by the state or county,” he said. “That’s a troubling situation. It needs to be corrected.”

The county report confirmed many of the findings from the Rehab Racket investigation. It noted, for example, that L.A. County has failed to follow its own policy calling for immediate termination of clinics caught falsifying paperwork. The agency responsible for clinic oversight, L.A. County Substance Abuse Prevention and Control, told the auditor that the lapse happened with “only a small number of poorly performing contractors.”

The report also found that communication gaps between the county and state continued after the fraud was uncovered. It noted that state officials temporarily shut down 53 Los Angeles rehab centers without explaining specific reasons for the suspensions to county leaders.

The county Department of Public Health, which includes the substance abuse agency, already has made improvements and will use the audit “to identify additional opportunities to enhance oversight,” David Sommers, a spokesman for the county’s chief executive office, wrote in an email.

The state Department of Health Care Services is working closely with counties “to enhance communication and to improve the effectiveness of provider background checks,” said spokesman Norman Williams.

Officials must become more aggressive in collecting money that rehab centers owe the county, the report found. Rehab clinics are paid upfront for the services they claim to provide, and only afterward do state and county audits find inappropriate billings and request a refund.

County reviews questioned nearly $452,000 in clinic claims from the last fiscal year, but the audit found the substance abuse agency has collected about $48,000, or 11 percent of that money. The agency has collected 61 percent of the roughly $204,000 in refunds demanded the previous year.

Rehab audit - Ferdman/Ilouno photo

Alexander Ferdman (top) was convicted in 2000 of engaging in organized crime in Texas. George Ilouno was banned from billing Medicaid. Both were cleared to run Medi-Cal clinics in California.CNN (top); Courtesy of the Los Angeles County Sheriff’s Department

The county also racks up debt after it cuts off clinics for serious violations. Terminated clinics currently owe $6.4 million, the audit says, but the substance abuse agency has referred $1.7 million of that to the county treasurer for collection.

Such collections are difficult, agency Finance Director Leo Busa told CIR in June.

“Some of it is almost impossible to recover,” he said. “They’ve gone out of business, and they scatter in the wind.”

At the state level, the Department of Health Care Services has not required criminal background checks for clinic leaders, despite a state law barring felons from running Medi-Cal clinics. The CIR and CNN investigation found felons like Alexander Ferdman, convicted of organized crime for an insurance scam, running taxpayer-funded clinics.

The auditor’s report called for state regulators to check clinic management against the U.S. Department of Justice’s criminal database and to set up a system that would alert them to new convictions. If the state doesn’t conduct background checks, the report said, then the county should.

State regulators already check clinic leaders against a list of people who are excluded from billing government health programs, but CIR and CNN found that some banned operators go undetected. Despite his longtime exclusion for student loan fraud, George Ilouno, for example, ran a Long Beach clinic for several years before he was charged with Medi-Cal fraud this year. After initially pleading not guilty, Ilouno changed his plea to guilty in September and had to pay the state $90,000.  

In a previous interview, John Viernes Jr., the county’s Substance Abuse Prevention and Control director, expressed concerns about weeding out rehab providers based on past crimes.

“That’s a real tough question for a substance abuse field where 70 percent of the (counselors) in the business have criminal records,” he said.

This story was edited by Amy Pyle and copy edited by Nikki Frick and Christine Lee. 

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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.