California’s Medi-Cal agency is launching an overhaul of its drug rehabilitation program in light of a damning internal audit that spotlights ham-handed oversight and confirms many findings of a yearlong investigation by The Center for Investigative Reporting and CNN.

The Department of Health Care Services pledged a multitude of changes in a report to the Legislature last week, including tightening rules through emergency regulations and using an “elite strike team” to detect fraud by mining data. The department also will ask the federal government for permission to more radically refashion Drug Medi-Cal, part of the nation’s largest Medicaid system.

The report made public an internal audit that identified weak rules, dysfunctional bureaucracy and ineffectual monitoring that left the publicly funded rehab program for the poor open to fraud and put patients at risk.

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

“This clearly has been a tough process that we’ve gone through,” said department Director Toby Douglas. “These are all steps in the right direction, but they’re not in sum the only actions that we need to take. …

“You put the light on it,” Douglas added, referencing the CIR and CNN investigation, “and we’re working to fix it.”

State legislators praised the department’s report as a good start but said they would keep a close eye on progress.

“They could have gone the other way and said everything’s fine, but they didn’t do that,” said Sen. Ted Lieu, a Democrat from Los Angeles County, where the fraud was most pronounced.

Lieu said he’d also like to see criminal background checks for clinic leaders, a step not included in the agency’s action plan. L.A. County authorities also have pushed the state to begin regular background checks. The state says it has a plan to do so.

“Every person on an application for a Drug Medi-Cal clinic will be scrutinized and their criminal background checked,” said department spokesman Norman Williams.

State law says felons should not be Medi-Cal providers, but CIR and CNN highlighted the case of Alexander Ferdman, who set up a San Fernando Valley rehab clinic after serving time in prison for an organized crime conviction.

 “Key issues still remain to be worked out,” such as increased monitoring of individual clinics, said Assemblyman Dr. Richard Pan, a Sacramento Democrat.

Beyond the proposals on paper, it remains to be seen whether investigators will take the actions necessary to clean up the system, said Peter DeMarco, a spokesman for Senate Republicans.

“Given the absolute failure in the ability to administer these programs in recent years, they had nowhere to go but up,” he said.

The internal review, by the department’s audits and investigations unit, helps explain how the oversight system spun out of control.

A clinic tracking system launched in 2008 still can’t track basic information like compliance problems and complaints. Standards to run a clinic are too easy to meet and aren’t regularly monitored. Once approved, clinics never had to get recertified.

Some government analysts were in over their heads and didn’t have the expertise to detect fraud, according to the review. Different divisions didn’t understand each other’s roles or share information. Trained investigators closed fraud cases because they didn’t realize the clinics were part of Medi-Cal.

“Processes that are intended to serve as vital checks and balances within the program have not been effective,” the report said. “Until these internal control weaknesses are fully addressed, DHCS (the Department of Health Care Services) will continue to be exposed to … increased risks of fraud, waste and abuse.”

There were hints of possible impropriety by state workers. Clinic reviews that failed to identify any problems mostly were conducted by one or two staffers, “which raises concerns about the accuracy of those findings,” according to the department.

Douglas said new management is now “instilling the (department’s) culture of program integrity and checks and balances.”

But the health department’s audits and investigations division should not be fully trusted to follow through, said Joy Jarfors, a former manager with the state Department of Drug and Alcohol Programs, which ran Drug Medi-Cal until July 2012. She said she sent confirmed fraud cases to investigators and nothing happened.

“You can do all the recommendations, but it doesn’t speak to getting the complaints actually investigated,” she said.

The health department outlined reforms to address most of the audit’s 32 recommendations, including beefed-up training, coordination and internal checks. All clinics also must be recertified by the state every five years, less frequently than the two-year recertification urged by L.A. County.

The state aims to increase the oversight responsibilities of counties, which contract directly with the clinics. Counties have clamored for more control, but CIR and CNN also found that county administrators were vulnerable to pressure by local politicians to go easy on problem clinics.

Douglas said he’s aiming for more far-reaching changes, allowing counties to pick a few high-quality providers instead of having to contract with all certified clinics in the area. Counties also would be able to screen clients and determine their need for treatment, instead of leaving that determination to clinics – which have a financial incentive to admit as many as possible.

To make those changes, Douglas’ department will seek permission from federal officials, who provide half of the funding for Drug Medi-Cal.

Meanwhile, the state will check every month to make sure clinic operators aren’t on a national list of banned providers. That should help avoid cases like that of George Ilouno, who ran a Long Beach clinic for years despite being barred from federal health programs.

But there was no mention of a system to identify clinic leaders being investigated for fraud by law enforcement agencies. State law allows the Medi-Cal agency to suspend those under investigation, but CIR found examples like Dimitry Ashbel, who led a Van Nuys clinic even after being indicted in a prescription drug smuggling scheme.

The Medi-Cal department doesn’t always get notified of outside fraud investigations, spokesman Williams said. 

The state review reserved particularly harsh scrutiny for the role of clinic medical directors, the doctors who sign off on patient treatment. CIR and CNN showed how one doctor, Howard Oliver, approved services at 19 Los Angeles-area rehab clinics with more than 1,800 patients and never met most of them. Other medical directors had been caught approving fraudulent care or were accused of negligence by the state medical board.

The department should consider limiting a medical director’s caseload to avoid fraud “as well as patient harm due to sub-standard care,” the state review said. Clinics currently are abusing a loophole in regulations, it said, allowing doctors to routinely waive physical exams instead of meeting the rehab clients, many with serious health conditions.

There are no checks on the doctor’s decisions, the audit stated, and a “huge gap” in expertise prevents government regulators from challenging them.

“This system makes it easy for fraudulent providers and unethical physicians to bypass the medical oversight intent of the regulations and simply pre-sign blank documents or sign completed documents without any real assessment of the beneficiaries’ needs,” it said.

Douglas’ department has begun a process to change state regulations with a focus on the medical director’s role, including limits on waiving physical exams. The action plan doesn’t address whether physicians will be required to have substance abuse expertise.

The department shot down a couple of recommendations from its audits and investigations unit. It rejected, for example, the recommendation to perform more financial audits of methadone clinics. The audit said there was a “false sense of security” regarding such clinics.

And the agency didn’t agree with Drug Medi-Cal managers who want to recoup more money from clinics caught overbilling. Douglas said he would ask his staff to further explore the issue.

The audit also brought to light a record-keeping problem in L.A. County. Last year, state officials took back $3.7 million because the county didn’t have documentation to back up past payments to clinics.

A county public health department spokesman responded to the state audit in a statement, saying, “we are continuing efforts to develop and improve our internal operations.”

CIR reporter Christina Jewett contributed to this story. It was edited by Amy Pyle and copy edited by Nikki Frick and Christine Lee.

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Will Evans is a senior reporter and producer for Reveal, covering labor and tech. His reporting has 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 have 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. He is based in Reveal's Emeryville, California, office.