Knox Ricksen LLP Moves Its Northern California Office to Walnut Creek

Knox Ricksen LLP Moves Its Northern California Office to Walnut Creek

Knox Ricksen LLP has moved its Northern California office to Walnut Creek, California. After decades of being known as an Oakland-based law firm, Knox Ricksen joins a growing number of law firms moving their practices to Walnut Creek, an East Bay hub just fifteen minutes east of Oakland.  Walnut Creek features an active downtown area with “hundred-year-old buildings, extensive high-end retail establishments, restaurants and entertainment venues.”  “Even though we have a tremendous amount of litigation in Southern California, we are a Northern California based firm and it made sense to find a location where we can centralize the handling of our health care fraud and mass tort operations, yet maintain our traditional local practice in Northern California,” says Managing Partner Thomas E. Fraysse.  “With Walnut Creek as our base of operations and with our Southern California office conveniently located in downtown Los Angeles, we are able to handle litigation throughout the State of California.” 

Knox Ricksen LLP provides consulting and litigation services to entities and individuals who have been victimized by fraudulent activities specializing in Insurance Code section 1871.7 qui tam and federal False Claims Act (31 U.S.C. sections 3729-3733), imposing liability on persons who defraud governmental programs; maintains an active Mass Tort practice representing injured persons in consumer product and pharmaceutical claims; and a Personal Injury and Wrongful Death practice, representing individuals in claims and litigation whose lives have been changed forever by tragic deaths or severe injuries caused by negligence or the intentional acts of others.     

CALIFORNIA ENACTS NEW LEGISLATION FOR THE SUSPENSION OF MEDICAL-LEGAL SERVICE PROVIDERS IN THE WORKERS’ COMPENSATION SYSTEM

CALIFORNIA ENACTS NEW LEGISLATION FOR THE SUSPENSION OF MEDICAL-LEGAL SERVICE PROVIDERS IN THE WORKERS’ COMPENSATION SYSTEM

 

Continuing the legislative endeavor to excise fraudulent medical and medical-legal services from the Workers’ Compensation System, Governor Jerry Brown signed Senate Bill 1160 and Assembly Bill 1244 on September 30, 2016, to take effect January 1, 2017.  The most notable changes introduced by these bills are the procedures for suspension of medical and medical-legal service providers from the Workers’ Compensation System, and for the stay and potential dismissal of all liens owned by such providers. Providers, including individual doctors, or associations such as agencies, clinics, or corporations, may now be subjected to automatic suspension from participation in the Workers’ Compensation System upon being charged or indicted with criminal or fraudulent conduct related to their services.

 

The state legislature determined that employers and insurers are routinely pressured to settle liens with medical and medical-legal service providers, even after the provider is charged with fraud. This is partially attributable to a failure to document the system’s databases with information regarding the criminal charges and suspensions. As a consequence, lien claims continue to be processed during the pendency of criminal proceedings against the providers whom own those liens, and can result in additional funding to these providers for services that were connected to fraudulent activity. To bring an end to these monetary rewards for fraudulent providers, AB 1244 and SB 1160 intend to guarantee the automatic suspension of providers from the Workers’ Compensation System upon the provider being charged with any felony or misdemeanor involving abuse of a patient, or medical fraud, including fraud on the federal Medi-Cal, Medi-Care, or state Workers’ Compensation Systems. The bills additionally increase the level of scrutiny applied during processing and adjudication of all liens owned by a provider who has been charged with criminal fraud, or otherwise suspended from the Workers’ Compensation System.

 

AUTOMATIC SUSPENSION FROM THE WORKERS’ COMPENSATION SYSTEM FOR CRIMINAL

AND FRAUDULENT CONDUCT

 

Existing law requires that the Secretary of the United States Department of Health and Human Services notify the California Director of Health Care Services when a medical provider is suspended from the federal Medicare or Medicaid programs, and also requires that the Director of Health Care Services must suspend that provider from the state Medi-Cal program. AB 1244 extends this notification process to the Workers’ Compensation System by requiring that the Director of Health Care Services notify the Workers’ Compensation Administrative Director of the suspensions, and also requiring the Administrative Director to thereafter suspend the providers from the Workers’ Compensation System as well.

 

Beginning January 1, 2017, the Workers’ Compensation Administrative Director is required to suspend any medical or medical-legal service provider from the Workers’ Compensation System if they’ve either (1) been suspended from the Medi-Cal or Medicare programs due to fraud or abuse; (2) surrendered their license, certificate, or approval to provide healthcare, or had them revoked; of (3) been convicted of a felony or misdemeanor which:

 

  1. Involves fraud or abuse of the Medi-Cal program;
  2. Involves fraud or abuse of the Medicare program;
  3. Involves fraud or abuse of the Workers’ Compensation System;
  4. Involves fraud or abuse of a patient;
  5. Relates to the conduct of the individual’s medical practice as it pertains to patient care;
  6. Is a financial crime that relates to the Medi-Cal program, Medicare program, or Workers’ Compensation System;
  7. Is otherwise substantially related to the qualifications, functions, or duties of a provider of services.[1]

 

The Administrative Director will be responsible for updating the Division website regarding the names of suspended providers.[2]

 

A PROVIDER’S RIGHT TO NOTICE AND HEARING PRIOR TO SUSPENSION FROM THE WORKERS’ COMPENSATION SYSTEM

 

The newly added language of AB 1244 requires the Administrative Director to notify the provider of the pending suspension and allow the provider 10 days to request a hearing, prior to issuing the suspension. If a hearing is not requested then the Administrative Director will suspend the provider thirty days after the notice was given.  If a hearing is requested by the provider, the suspension is stayed and the Administrative Director must set a hearing and come to a final determination within 30 days of the provider’s request for hearing.[3]

 

Following a suspension, the Administrative Director is responsible for updating the Workers’ Compensation qualified medical examiner and medical provider network databases by removing the suspended provider’s name. The Administrative Director will also provide notice of the suspension to the public at large via the Department’s website, as well as written notice to the Workers’ Compensation Chief Judge, and to the provider’s relevant state licensing, certifying, or registering authority.[4]

 

THE FINAL DISPOSITION OF LIENS FOLLOWING SUSPENSION FOR CRIMINAL CHARGES OF FRAUD

 

A provider who is charged with criminal fraudulent conduct automatically has all medical or medical-legal service liens stayed, and they remain stayed until the final disposition of the criminal case is issued.[5]  The final disposition may order the dismissal of the provider’s liens with prejudice.[6]  If there is no final disposition directing dismissal, then all liens filed by the provider throughout the State will be consolidated and adjudicated by the special lien process as discussed below. The special lien process is subject to the same laws and procedures as all other matters before the Workers’ Compensation Appeals Board.[7]

 

THE SPECIAL LIEN PROCESS FOLLOWING SUSPENSION OF A LIEN CLAIMANT WITHOUT A FINAL DISPOSITION FROM A CRIMINAL CASE

 

There are two circumstances in which the liens of a suspended provider are handled by the special lien process: (1) the suspension was for a reason other than criminal charges, or (2) the final determination of a criminal case did not direct the Appeals Board to dismiss the provider’s liens. For both, the Chief Judge for the Workers’ Compensation System must appoint an attorney to identify all outstanding liens owned by the provider and appoint them to an appropriate district to be handled by the special lien process.[8] Under the special liens process, the burden of proof shifts to the suspended provider-lien-claimant to overcome a rebuttable presumption by a preponderance of the evidence. The provider must prove that each of the liens, and underlying bills, are not connected to any criminal, fraudulent, or abusive conduct by the provider.[9] If the provider-lien-claimant fails to overcome the presumption, they will not have a right to payment.[10] However, if the provider-lien-claimant is successful in rebutting the presumption, then the liens will be adjudicated by the special lien proceedings, or will be transferred back to the originating venue for adjudication, as determined by the presiding Workers’ Compensation Judge.[11]

 

DECLARATIONS UNDER PENALTY OF PERJURY FOR THE FILING OF LIEN CLAIMS

 

The Workers’ Compensation System functions under existing law, which requires all lien claimants to file their lien with the Appeals Board for adjudication. In light of SB 1160, the legislature has expanded liability for perjury in order to avoid payments for fraudulent services. Now, all lien claimants who file a lien after January 1, 2017, must also file a declaration under penalty of perjury that the lien is not subject to independent medical review or independent bill review, and that the lien claimant:

  1. Is the employee’s treating physician providing care through a medical provider network;
  2. Is the agreed medical evaluator or qualified medical evaluator;
  3. Has provided treatment authorized by the employer or claims administrator under Section 4610;
  4. Has made a diligent search and determined that the employer does not have a medical provider network in place;
  5. Has documentation that medical treatment has been neglected or unreasonably refused to the employee as provided by Section 4600;
  6. Can show that the expense was incurred for an emergency medical condition, as defined by subdivision (b) of Section 1317.1 of the Health and Safety Code; or
  7. Is a certified interpreter rendering services during a medical-legal examination, a copy service providing medical-legal services, or has an expense allowed as a lien under rules adopted by the administrative director.[12]

 

Any lien filed after January 1, 2017, without this declaration may be dismissed with prejudice.[13] Furthermore, liens filed prior to January 1, 2017, are retroactively required to have this declaration on file no later than July 1, 2017, or they too will be subject to dismissal with prejudice.[14]

 

INCREASED REGULATION ON THE ABILITY TO ASSIGN LIENS

 

Language of Section 4903.8 of the Labor Code has been amended to declare that only a lien owner will be entitled to any payment for lien services identified by subdivision (b) of Section 4903. This includes liens for medical-legal expenses except for those subject to independent medical review or independent bill review. New language adds that payment for the liens defined by subdivision (b) of Section 4903 will only be made to the lien claimant who provides evidence that they are the owner of the lien.[15]

 

Furthermore, the new language provides that any lien filed after January 1, 2017, may not be assigned for any reason aside from the one exception: where the person who performed the lien services no longer performs such services and has assigned all right, title, and interest in the remaining accounts to another.  In this very limited circumstance the assignee may recover the lien payments. Otherwise, any assignment after January 1, 2017, will be invalid.[16]

 

CONCLUSION

 

The increased cooperation between state and federal agencies is expected to efficiently end funding of fraudulent medical and medical-legal services in the Workers’ Compensation System. By automatically suspending providers who have engaged in fraud or abuse, and subjecting lien payments to the special lien process the Workers’ Compensation System endeavors to eliminate any reward of fraudulent conduct, and deter future fraud in the system by this lack of reward. Finally, to avoid future circumvention of this new legislation through assignment of liens, increased regulation of the ability to assign has been included.  Beginning January 1, 2017, the legislature has added additional defenses to fortify the Workers’ Compensation System from fraud.

 

[1] Labor Code §§ 139.21(a)(1)(A), (C); 4615(a).

[2] Labor Code §4615(b).

[3] Labor Code 139.21(b)(2).

[4] Labor Code § 139.21(c)-(d).

[5] Labor Code §4615(a).

[6] Labor Code §139.21(e)(1).

[7] Labor Code  §139.21(e)(2), (h).

[8] Labor Code §139.21(f).

[9] Labor Code §139.21(g).

[10] Labor Code §139.21(g).

[11] Labor Code §139.21(i).

[12] Labor Code § 4903.05(c)(1)-(2).

[13] Labor Code § 4903.05(d).

[14] Labor Code § 4903.05(c)(1)-(2).

[15] Labor Code § 4309(a)(2).

[16] Labor Code § 4309(a)(4).

KNOX RICKSEN LLP SECURES $11.5 MILLION JUDGMENT FOR ALLSTATE INSURANCE COMPANY IN “SHAM” LAW OFFICE QUI TAM ACTION

By Angelica A. Zabanal, Knox Ricksen LLP

Allstate Insurance Company and the People of the State of California were awarded $11.5 million and permanent injunctive relief after prevailing in a qui tam lawsuit filed in Los Angeles County Superior Court against defendants involved in a scheme to defraud insurance companies through phony or “sham” law offices. The Final Judgment and Permanent Injunction in the matter of People of the State of California ex rel., Allstate Insurance Company, et al. v. Wonguen Chang et al. (Los Angeles County Superior Court Case No. BC541476), ordered by Superior Court Judge Michael L. Stern on November 22, 2016, follows Allstate’s favorable jury verdict against defendants Christina Chang (“Chang”) and Christine Suh (“Suh”) in the matter on July 13, 2016.

The matter was handled by Knox Ricksen LLP’s qui tam practice group, including Thomas E. Fraysse, Richard A. DiCorrado, Angelica A. Zabanal and Ryan G. Jacobson.

Allstate alleged that Chang and Suh knowingly engaged in a fraud scheme in which they used the identity of practicing lawyers to create eight “sham” law offices to make false, fraudulent or misleading claims against insurance companies, so that settlement payments could be converted to their own use. Evidence presented at trial showed that several California lawyers were paid $3,000 per month for the use of their names and law licenses, which resulted in the creation of at least eight “sham” law offices in the Los Angeles area, over which the lawyers exercised no significant direction, management or control over the operation of the law office or the making and processing of claims. Chang and Suh rented office space, named the firms using the lawyers’ names, hired staff, opened firm bank accounts, obtained clients, presented demands to insurance companies for settlement and negotiated settlements, all in the name of licensed California attorneys, falsely making it appear as if a lawyer represented the client and claimant. Settlement payments from Allstate and other insurance companies were deposited in the “sham” law firm client-trust accounts (IOLTA accounts) opened by Chang and Suh, who then used remote check-cashing facilities, including a check-cashing facility owned by Suh, to convert the settlement proceeds to untraceable cash. Four lawyers whose names were used testified that they did not procure any clients for the law offices that they purportedly owned, did not create the law firms, did not authorize demand letters that were sent to insurance companies under their signature, were unware that settlements had been negotiated and paid by insurance companies, and had no access to client files, firm records and firm bank accounts. One lawyer testified that when he first appeared to work at a law office bearing his name, he was told to go home and was not allowed to review client files.

 

Allstate contended that Chang and Suh knowingly misrepresented that the law offices were lawful enterprises and that they concealed the fact that they were “sham” law offices, owned, operated, managed and controlled by unlicensed persons, all in violation of California law, including California’s Insurance Frauds Prevention Act. Allstate also contended that the settlements were procured so that Chang and Suh could convert the settlement proceeds for their own use by “structuring” checks out of the firms’ client trust accounts which were cashed in bulk at remote check cashing facilities, including liquor stores and small local markets.

 

At trial, Chang testified in her own defense, but her daughter, Suh, invoked her Fifth Amendment Privilege Against Self-Incrimination.

 

On July 13, 2016, after a two-week trial, a Los Angeles jury agreed with Allstate, finding that Chang and Suh knowingly made false claims against Allstate in 241 and 313 claims, respectively, and imposed civil penalties and assessments totaling $6,407,859.39. In post-trial motions, Judge Stern imposed further civil penalties and assessments against defendants Charles Rhyu, Robynnie Byon, Eunjin Chang and Wonguen “Steve” Chang in the amount of $1,734,948.26, and ordered the defendants to pay $3,401,229.38 in attorney’s fees, expenses and costs. The total monetary judgment is $11,544,037.03.

 

Judge Stern also issued a permanent injunction, prohibiting Chang and Suh from owning, operating or controlling a law firm; from hiring lawyers to work in a law firm; from practicing law without a license; from representing persons making claims against insurance companies; from advertising legal services; from issuing checks from law firm operating and client-trust accounts; from splitting fees with lawyers; from handling or processing insurance settlement checks; and from opening or using any bank account for a business engaged in the practice of law.

 

“This trial was notable as it represents one of the highest jury verdicts in a qui tam action brought on behalf of the State of California,” says Thomas E. Fraysse.  “We are very pleased with the outcome of the matter, especially with respect to jury verdict and the injunctive relief ordered by the Court.”

 

Chang and Suh have filed an appeal.

A copy of Allstate’s Complaint and the Final Judgment and Permanent Injunction is attached and can be accessed by clicking the following links: Allstate’s Complaint is posted here and the Final Judgement and Permanent Injunction is posted here.

Calif. Attys’ Press Statements Protected By Anti-SLAPP

By Andrew Strickler

Law360, New York (December 20, 2016, 6:45 PM EST) — A California appeals court Monday agreed that a trio of law firms targeted in a $60 million defamation suit did not defame a former hospital executive in media interviews when they raised allegations of counterfeit medical devices and a kickback scheme involving prostitution.

A three-judge panel affirmed a lower court ruling for defendants Kabateck Brown Kellner LLP, Cotchett Pitre & McCarthy LLP and Knox Ricksen LLP, saying lawyers’ statements to reporters about Michael Drobot and Healthsmart Pacific Inc.

For the full article, click here.

Five People, including Two Doctors, Charged in Kickback Schemes Involving nearly $600 Million in Fraudulent Claims by SoCal Hospitals

Doctors, a former Hospital Exec and Two Others Admit Roles, Agree to Cooperate

Santa Ana, California – In a series of related cases announced today, the former CFO of a Long Beach hospital, two orthopedic surgeons and two others have been charged in long-running health care fraud schemes that illegally referred thousands of patients for spinal surgeries and generated nearly $600 million in fraudulent billings over an eight-year period.

Two of the defendants have previously pleaded guilty, and three others have agreed to plead guilty in the coming weeks. All five have agreed to cooperate in the government’s ongoing investigation into kickbacks for patient referrals and fraudulent bills for spinal surgeries.

The schemes involved tens of millions of dollars in illegal kickbacks to dozens of doctors, chiropractors and others. As a result of the illegal payments, thousands of patients were referred to Pacific Hospital in Long Beach, where they underwent spinal surgeries that led to more than $580 million in bills being fraudulently submitted during the last eight years of the scheme alone. Many of the fraudulent claims were paid by the California worker’s compensation system and the federal government.

In a second, similar scheme -also involving spinal surgeries -doctors received illegal kickbacks for referrals to a Hawaiian Gardens hospital.

Today, federal prosecutors today filed two cases related to the scheme, and yesterday three other cases were unsealed by a federal judge. Those named in the cases are:

  • James L. Canedo, 63, of San Pedro, the former chief financial officer of Pacific Hospital of Long Beach, who pleaded guilty on September 4 to a criminal information charging him with participating in a conspiracy that engaged in mail fraud, honest services fraud, money laundering, paying or receiving kickbacks in connection with a federal health care program, and violating the Travel Act (specifically, interstate travel in aid of a racketeering enterprise). The case against Canedo was unsealed yesterday by United States District Judge Josephine L. Staton, who is scheduled to sentence the defendant on June 17, 2016.
  • Philip Sobol, 61, of Studio City, an orthopedic surgeon, who has agreed to plead guilty to conspiracy (to commit mail fraud, honest services fraud, and violations of the Travel Act) as well as a separate, substantive Travel Act violation. The information against Sobol and a related plea agreement were filed today in United States District Court, where the defendant is expected to be arraigned next month.
  • Alan Ivar, 55, of Las Vegas, a chiropractor who formerly resided in San Juan Capistrano and owned several businesses based in Costa Mesa, was charged today in a criminal information that alleges one count of conspiracy (to commit mail fraud, honest services fraud, money laundering, and violations of the Travel Act). In a plea agreement also filed today, Ivar admitted that for well over a decade, he had an agreement with the owner of Pacific Hospital to refer patients in exchange for a monthly retainer. Ivar, who also has agreed to plead guilty, is expected to be arraigned next month.
  • Paul Richard Randall, 56, of Orange, a health care marketer previously affiliated with Pacific Hospital and Tri-City Regional Medical Center in Hawaiian Gardens, who pleaded guilty on April 16, 2012 before Judge Staton to conspiracy to commit mail fraud. Randall, who admitted recruiting chiropractors and doctors to refer patients to Tri-City in exchange for kickbacks, is scheduled to be sentenced on April 8, 2016.
  • Mitchell Cohen, 55, of Irvine, an orthopedic surgeon, was charged last week with filing a false tax return. Cohen, who in a plea agreement also filed on November 16 admits the he failed to report income received from kickback payments, is expected to be arraigned next month.

All five defendants have agreed to cooperate with the government’s ongoing investigation -dubbed “Operation Spinal Cap” – into the kickback schemes, which involved dozens of surgeons, orthopedic specialists, chiropractors, marketers and other medical professionals.

Under the terms of their plea agreements, Sobol faces a federal prison term of up to 10 years;Canedo, Ivar and Randall could be sentenced to as much as five years;and Cohen faces up to three years in prison on the tax charge. All defendants will be required to pay restitution to the victims of the scheme, which in Canedo’s case will be at least $20 million.

The former CEO and owner of Pacific Hospital of Long Beach, Michael D. Drobot, pleaded guilty in April 2014 to participating in the scheme (see: http://go.usa.gov/cjqtF). Drobot is also cooperating with the investigation.

As described in court documents, Drobot, who was the owner and/or CEO of Pacific Hospital of Long Beach until late 2013, ran a 15-year-long scheme in which he and others billed workers’ compensation insurers and the U.S. Department of Labor hundreds of millions of dollars for spinal surgeries and other procedures performed on patients who had been referred by dozens of doctors, chiropractors and others who were paid illegal kickbacks.

As part of the scheme, the conspirators typically paid a kickback of $15,000 for each lumbar fusion surgery and $10,000 for each cervical fusion surgery. Some of the patients lived hundreds of miles away from Pacific Hospital, and closer to other qualified medical facilities. The patients were not informed that medical professionals had been offered kickbacks to induce them to refer the surgeries to Pacific Hospital. From 2005 through 2013 (which is only part of the overall scheme), Pacific Hospital billed insurers more than $580 million for spinal surgeries on over 4,400 patients. Insurers paid the hospital more than $226 million for the surgeries performed as a result of illegal kickbacks.

“Health care fraud and kickback schemes burden our healthcare system, drive up insurance costs for everyone, and corrupt both the doctor-patient relationship and the medical profession itself,” said United States Attorney Eileen M. Decker. “The members of this scheme treated injured workers and their spines as commodities, to be traded away to the highest bidder. This investigation should send a message to the entire industry: patients are not for sale.”

The conspirators in the Pacific Hospital scheme concealed the kickback payments by entering into bogus contracts to provide a “cover story” for the doctors, chiropractors and others who received illegal payments. For example, a number of doctors entered into agreements with a Drobot-owned company, Pacific Specialty Physician Management (PSPM), under which the doctors received as much as $100,000 per month from PSPM in return for the right to purchase their medical practices -an option that was never exercised. PSPM paid some doctors inflated prices for the right to operate their practices and collect on their insurance claims. In still other cases, Pacific Hospital entered into contracts with doctors under which the doctors were to help the hospital collect on its surgery bills to insurance companies, but the hospital’s own collection staff, rather than the doctors, actually performed the collections work. Several doctors entered into lease agreements under which PSPM or Pacific Hospital paid rent for the use of office space, but rarely used the space. And other doctors had agreements to provide consulting services to Drobot’s companies, but did not actually provide the services. Still others, including marketers who introduced doctors to Pacific Hospital, had additional agreements with Drobot’s companies.

Canedo, as Pacific Hospital’s CFO from 1999 through October 2013, was responsible for tracking payments made directly to doctors by the hospital, as well as the number of patients each doctor referred to the hospital and the amounts the hospital collected for those patients’ procedures. Canedo also communicated directly with a number of the doctors regarding the payments and surgeries, and sometimes mediated disputes between different doctors who claimed credit for the same referrals.

Sobol, Ivar and Cohen each received, respectively, $5.2 million, $1.24 million, and $1.64 million in kickbacks. Together they referred more than 200 patients to Pacific Hospital.

“The defendants carried out this elaborate scheme by callously gathering patients, remaining indifferent to patient needs, and greedily lining their pockets with a cut of the cash from taxpayer-funded health care systems,” said David Bowdich, the Assistant Director in Charge of the FBI’s Los Angeles Field Office. “The effort by investigators and prosecutors in this case cannot be overstated and, as it continues, will play a part in restoring confidence in the medical marketplace.”

Two other Drobot companies, California Pharmacy Management (CPM) and its successor, Industrial Pharmacy Management (IPM), were also important players in the scheme. Both companies set up and managed what were essentially mini-pharmacies within doctors’ offices. CPM and IPM bought and dispensed medication that the doctors prescribed to their patients, and these businesses received a portion of the money reimbursed by insurance companies for the medications. Drobot, along with others at CPM and IPM, often agreed to increase the doctors’ shares of the insurance claims in return for those doctors’ referral of patients to Pacific Hospital. In many cases, for doctors who made such referrals, the conspirators “advanced” payments from CPM and IPM before the companies had collected any money for the medications or even prescribed them, and often simply “wrote off” payments as losses when collections fell short.

“Injured workers were treated like livestock by doctors and hospitals who paid or accepted kickbacks and bribes in exchange for referrals,” said California Insurance Commissioner Dave Jones. “Injured workers are put at risk when their medical treatment is based on kickbacks and bribes instead of their medical needs. Detectives from the Department of Insurance worked closely with federal law enforcement agencies to investigate and expose this illegal conspiracy, which is one of the largest workers compensation insurance fraud cases we have ever seen.”

Randall, who also facilitated the Pacific Hospital scheme by introducing doctors to Drobot and coordinating kickback arrangements, pleaded guilty to participating in a separate, similar scheme involving Tri-City Regional Medical Center. According to his plea agreement, Randall acted as a “marketer” for Tri-City and conspired with hospital executives to pay kickbacks to doctors and chiropractors to refer workers’ compensation patients Tri-City for spinal surgeries. As in the Pacific Hospital scheme, the surgeries at Tri-City involved use of spinal surgery hardware that Randall distributed to Tri-City at inflated prices through his company Summit Medical Group, knowing that the cost would be passed on to insurers. Using proceeds from the sale of the hardware, Randall paid a 5 percent kickback to Tri-City and kickbacks of up to $20,000 per surgery to the doctors and chiropractors who referred the patients. In addition, though a separate company, Platinum Medical, Randall paid kickbacks to doctors in return for referrals of patients for toxicology tests. The scheme resulted in several million dollars in losses to insurers.

“Medical referrals should be based on what’s best for the patient -not what’s best for the doctor’s bank account,” said IRS-Criminal Investigation Special Agent in Charge Erick Martinez. “In paying the kickbacks and submitting the resulting claims for spinal surgeries and medical services, the defendants acted with the intent to defraud workers’ compensation insurance carriers and to deprive the patients of their right to honest services.”

Tom Frost, Special Agent in Charge with the Postal Service Office of Inspector General, stated: “We are committed to preserving Postal Service resources by vigorously investigating allegations of fraud and corruption. We are grateful for the efforts of the U.S. Attorney’s Office and our State and Federal partners in this investigation.”

The ongoing investigation into abuses involving the spinal pass-through law and kickbacks paid for spinal surgery patients is being conducted by the Federal Bureau of Investigation;the United States Postal Service, Office of Inspector General;IRS Criminal Investigation;and the California Department of Insurance.

Kickbacks, Bribes, and the Horrifying Truth Behind California’s Largest Medical Fraud Scandal

The medical fraud scheme of Michael Drobot, a Long Beach hospital owner, racked up half a billion dollars and implicated two politicians

 

Ron Calderon sat alone in the New Deal-era federal courthouse at Spring and Temple streets in downtown Los Angeles. Moments before, this scion of a California political dynasty had strolled through the room’s big Wizard of Oz double doors, his suit jacket open to expose a generous girth, as though he were casually stepping onto the floor of the state senate, where he had once been a power broker. Nobody paid attention to him, and he had a whole row to himself. On this morning last April Calderon had nothing to do but fuss with his glasses and await the appearance of a judge. At the podium Mark Geragos, the theatrically affable celebrity lawyer, was playfully straightening the tie knot of an unsmiling Doug Miller, an aggressive assistant U.S. attorney who sported a shaved head.

They were all gathered for one of a string of hearings that might eventually lead to Calderon’s trial on bribery and conspiracy charges. A conviction could, if only theoretically, put the Montebello Democrat in prison for the rest of his life. If, as Calderon sat in court, he wondered how he got here, he might have begun with his first handshake with a Long Beach hospital owner named Michael Drobot.

Drobot, then 70, was not there that day. He had pleaded guilty to bribery and conspiracy charges in 2014 in exchange for his future testimony against the man he was charged with bribing: Ron Calderon. Drobot had been accused by the Justice Department of masterminding a byzantine web of kickbacks that were paid to dozens of doctors, chiropractors, and others to steer spinal fusion patients to Drobot’s Pacific Hospital. Most of the patients had back problems stemming from work-related injuries, and many were low-income Latinos who spoke and read little or no English. Their operations might have been paid for by any of several taxpayer-supported insurance systems available to Californians, including the Federal Employees’ Compensation Act, the state’s workers’ compensation system, or—for low-income residents, seniors, and the disabled—Medi-Cal. The surgeries may have also been covered by various private insurance carriers. Pacific Hospital, along with several other hospitals named in two civil suits, allegedly stuck the carriers with invoices that were stratospherically higher than the actual value of their billed services.

Calderon is not charged in connection with the medical fraud itself but with taking Drobot’s money in exchange for the senator’s help in ensuring that a highly lucrative law covering spinal surgeries remain unmolested by reform impulses in Sacramento. The broker for these bribes was Drobot’s legislative consultant and a former assemblyman, Tom Calderon—Ron’s brother.

But there is more to the story than kickbacks and creative accounting. Drobot and his associates are also being accused in a cascade of civil lawsuits of supplying surgeons with substandard, knockoff hardware that sometimes broke apart in patients’ bodies. A “whistle-blower suit” further claims that some of the thousands of patients who had entered Drobot’s hospital and others since 1998 went under the knife “for surgeries that were not medically necessary.”

L to R: Michael Drobot, Tom Calderon, and Ron Calderon
L to R: Michael Drobot, Tom Calderon, and Ron Calderon

PHOTO OF RON BY RICH PEDRONCELLI/AP PHOTO

The FBI raided Ron Calderon’s offices in June 2013; by November he was suspended from the senate until his term expired. He and Tom were indicted together on February 20, 2014. Calderon’s fall was spectacular, but then, Drobot’s scam was so vast, so brazen, and involved so much money that it would become California’s largest case of medical fraud—a category of criminal deceit that has experienced white-hot growth over the past few decades. Half a billion dollars had been paid out to Drobot’s hospital by government and private insurers between 2008 and 2013; the scheme’s kickbacks alone may have amounted to $50 million. While Calderon’s trial is scheduled for May 10, the suits against Drobot, who already faces up to ten years in federal prison, are drifting along in slow motion. Given the animosity between Drobot and his accusers, however, there’s little doubt of the courtroom acrimony that lies ahead. “This is going to be World War III,” a plaintiff’s attorney, Brian Kabateck, promised me.

Spinal fusion operations, intended to alleviate severe chronic back pain, have been around since the early 1900s. Doctors first used them to treat the spinal deformities associated with tuberculosis infections and scoliosis. The 1960s saw the development of special screws that allowed bracing plates and rods to be secured to the ridges of a patient’s spine called pedicles. Suddenly a range of stabilizing hardware could be implanted in patients’ backs, and corrective surgeries that in the past had spotty success rates became more common. With subsequent refinements in the pedicle screws, recovery times were cut dramatically—and the spinal fusion industry exploded. Operations jumped nationally by 70 percent from 2001 to 2011, when they reached 488,300 procedures; the most recent estimates say that more than 600,000 fusion operations are performed annually.

Although the procedure has evolved, the general approach has not: Often it involves a surgeon replacing a damaged disc in the lower back (the lumbar region) or neck (the cervical structure) with a sliver of bone. Sometimes it will first go into a threaded cylinder known as a cage. As it grows, the bone graft fuses with the vertebrae above and below it to stabilize that portion of the spine. For added support the surgeon will install plates or rods, which in the latter case are routed through small loops at the top of pedicle screws that have been drilled into bone. Once implanted, the instrumentation is there to stay—removal can lead to serious injury or death. That is why such parts are made from surgical steel or titanium, which is able to withstand the lifetime of stress a patient’s body will place on them.

The operation usually lasts at least three to four hours and is followed by up to a week’s hospital stay. The typical tab paid by insurers (inevitably more than what hospitals actually charge) is between $80,000 and $150,000, making spinal fusion not only a complex medical procedure, but one of the nation’s most expensive, according to the federal Healthcare Cost and Utilization Project. An elective surgery, it’s normally not the kind of operation the average wage earner can afford, but in California spinal fusions have been available for decades through workers’ compensation to people who have suffered job-related back injuries (the procedure accounts for about 40 percent of in-patient bills charged to workers’ comp in the state) and through Medi-Cal. That may be an additional reason for the proliferation of such surgeries. In fact, a considerable number of medical experts believe the procedures are no more effective than physical therapy and can result in permanent postoperative pain. There is even a term for this condition: failed back surgery syndrome.

If injured California workers wanted their backs fixed, the state did its best to guarantee their operations were paid for in full. Until January 1, 2013, Section 5318 of California’s Labor Code mandated that the state should reimburse providers for the individual devices, instrumentation, and pieces of hardware implanted in patients. Providers could bill for the cost of each item, including shipping, handling, and taxes. They could also tack on a 10 percent surcharge, as long as that little bonus didn’t exceed $250 for each item.

The provision was known as the “pass-through allowance.” Its fundamental flaw was that hospitals were already able to charge this same amount when they included costs for pedicle screws and other hardware in their invoices for the surgeries themselves. So hospitals that were willing could double-bill for their hardware costs and inflate them in the process. As it turned out, the pass-through allowance wasn’t a license to print money; it was an ATM card to Fort Knox.

Drobot had begun his hospital management career during the Vietnam War, when as a Navy officer he had run the thousand-bed Oakland Naval Hospital’s outpatient services. Spinal surgeries were not the house specialty of the 29 other hospitals Michael Drobot had managed prior to his purchase of Pacific Hospital. Nor had they been at the seven he had previously owned, including medical centers in Tustin and Rosemead. The Long Beach facility he bought for $4.1 million in 1997 was bankruptcy-bound and catered to Medi-Cal patients. Earlier that decade he left the 15,000-square-foot home he and his wife, Patricia, owned near Seattle (asking price: $17 million) and wound up in posh Corona del Mar in Southern California.

In Washington State Drobot had maintained a low profile, and in California he remained just as inconspicuous. The single published photo of him shows a bald executive in his sixties, looking for all the world like a man trying to overcome a bout of heartburn as he has his picture taken at the DMV. Drobot surfaced briefly in the news in 2008, when he built 18 luxury condominiums in Bandon, Oregon. The coastal site had belonged to the Oceanview Care Center, which was demolished at the order of the local health district. Drobot then bought and developed the property. According to the California Secretary of State’s office, Ron Calderon’s Diversity Political Action Committee spent $104,443 on fundraising events at the nearby Bandon Dunes Golf Resort between 2008 and 2013.

One place Drobot was not low-key was in the hearing rooms of the state’s workers’ compensation board, where he became an assertive—some have said arrogant—presence as he and a bodyguard of experts fought to keep the pass-through allowance. And while avoiding court appearances whenever possible, Drobot has shown an unflinching combativeness by countersuing patients and their lawyers who’ve filed legal complaints against him. He’s also sued dozens of unindicted doctors and business associates with whom he has worked. His lawsuits had a possibly desired chilling effect: For much of last year plaintiffs and their attorneys would not talk to the media.

The hospitals named in the whistle-blower and patient lawsuits are alleged to be linked to Drobot through shell companies that manufactured, distributed, and marketed counterfeit screws and rods. Many of the doctors he is accused of bribing to perform surgeries at Pacific Hospital stand accused of accepting kickbacks to the other three hospitals as well.

Drobot would not speak to me but did, via intermediaries at a crisis communications firm, respond to written queries. Since Pacific had been losing about $21 million per year through its services to charity patients, according to a statement from the firm, “Mr. Drobot had to make changes.” Those changes included pumping up the Medi-Cal trade so that it accounted for 95 percent of Pacific’s business. “He also started,” the statement continued, “a Workers Compensation service to help offset the loss. The workers’ comp business provided a stream of revenue that helped the hospital to stay open and keep its 1,000 employees working.” That is, Drobot tapped a state money hydrant intended to give medical care to injured workers and the state’s poor.

Shortly after he began performing his economic turnaround, though, Drobot was faced with a threat to his back-surgery profits: The workers’ comp rule that had allowed hospitals to charge the state for the cost of the spinal fusion hardware was set to expire at the end of 2001. Drobot started sinking big money into lobbying efforts to maintain that allowance and the loophole that went with it.

The point man for this campaign was Tom Calderon. In 2001, the Los Angeles County Democrat received $65,000 in campaign donations from Drobot and his business ventures; as Calderon’s Assembly Bill 1177, designed to renew the existing reimbursement schedule for spinal fusions, headed to Governor Gray Davis, Drobot ponied up at least $200,000 for Davis’s reelection campaign. Davis signed the bill, which allowed the old reimbursement provisions to be extended until new regulations could be formulated by the state.

Those new regulations came soon enough: That same year Tom Calderon introduced Assembly Bill 749, a massive overhaul of the state’s workers’ compensation system. Among other things, the legislation created the pass-through allowance with the loophole that legislators were slow to grasp and even slower to reform.

For Tom Calderon, the next year proved to be mixed. He had come through brilliantly for Drobot but couldn’t get voters to elect him as their insurance commissioner, despite having received an eyebrow-raising $1.5 million in campaign donations from the insurance industry. Drobot would not permit his champion in the assembly to enter political exile; instead he hired him as his Sacramento consultant. In 2004, Calderon received $1 million from Drobot for helping him browbeat $27.5 million in disputed reimbursements out of the State Compensation Insurance Fund (SCIF). Public records suggest that for the next decade Drobot and his associates worked along two tracks: to defeat any attempt in Sacramento to close California’s hardware pass-through loophole and to find new ways of making more money off the backs of patients.

 

Few people driving past Drobot’s little hospital tucked on a dowdy stretch of Long Beach’s Pacific Avenue would have imagined that behind its brick and stucco walls operated a surgical assembly line that carried out more workers’ comp spinal fusion procedures than Cedars-Sinai. Now sold and transformed into College Medical Center, Pacific Hospital was a split-level complex of one- and two-story wings built in a midcentury Legoland style, too far away to see the ocean, close enough to hear gulls wheeling overhead. The neighborhood’s cluster of rehabs, pharmacies, and medical offices marks it as a place where the old or injured go to recover or die: “Wound Management…Falls Prevention” announces the nearby Royal Care Skilled Nursing Center.

Pacific Hospital's former Long Beach campus
Pacific Hospital’s former Long Beach campus

PHOTO BY BRITTANY MURRAY/PRESS TELEGRAM

By the time Drobot had built his Oregon condos, he had turned the 184-bed medical center around, and with the help of Ron Calderon’s skill at beating back reform measures from the likes of state senators Ted Lieu and Kevin De León, he succeeded in retaining the pass-through allowance. Under Drobot, Pacific reaped industry praise for curbing hospital-generated infections.

There was even a brief moment in 2008 when Pacific seemed poised to take over Martin Luther King, Jr./Drew Medical Center, the troubled giant that served low-income neighborhoods ten miles to the north in depressed Willowbrook. With Los Angeles County supervisor Yvonne Brathwaite Burke’s blessing, Pacific Hospital was tapped as the outside agency that could restore King/Drew to a semblance of functionality. In fact, through the county’s vetting process, Drobot’s hospital was declared the only facility to completely qualify as King/Drew’s savior, partly because larger, marquee-name hospitals preferred to keep their distance from the controversy-racked medical center.

Doubters, however, questioned how such a small hospital could be chosen to provide administrative triage to King/Drew and protested the closed-door secrecy of the board’s negotiations with Pacific. Those talks fizzled, and the hospital’s candidacy was withdrawn. Then in 2012, a Wall Street Journal report on suspicious billing charges for spinal fusions at Pacific would throw an unwelcome glare on the hospital until it was sold in 2013.

 

Drobot’s 2014 plea deal closed the door on only one problem, and he entered 2016 free on $5,000 bond while facing several major civil lawsuits. One was filed in federal court under the Racketeer Influenced and Corrupt Organizations (RICO) Act, in which the SCIF claims Drobot and a list of doctors, business associates, and hospitals massively overbilled the state. A separate whistle-blower suit claims that Drobot and three other hospitals—Tri-City Regional Medical Center in Hawaiian Gardens, Riverside Community Hospital in Riverside, and St. Bernardine Medical Center in San Bernardino—fraudulently overcharged the SCIF and gave kickbacks to doctors who performed back surgeries at these facilities. The suit was filed by Mark Sersansie, who had been employed by one of Drobot’s associates, and by William Reynolds, an insurance fraud investigator who also alleges that Drobot and company illegally manufactured, marketed, and used counterfeit hardware in spinal fusion surgeries.

Until last November Drobot was the only person in the case known to have cut a deal with the federal government. (His sentencing date has continually been postponed, presumably until after he testifies against Ron Calderon.) “Right now the defendants are operating in a pack,” plaintiff’s attorney Brian Kabateck told me last summer. “Nobody’s peeling off yet, but they will.”

Sure enough, on November 24 the Justice Department announced that five key suspects had entered plea agreements with the government. The defendants were James Canedo, Pacific Hospital’s chief financial officer, who admitted his involvement with mail fraud and money laundering; Mitchell Cohen, a spine surgeon who faces a single count of filing a false income tax return; Philip Sobol, another orthopedic surgeon, who pleaded guilty to mail fraud and other charges connected to his receiving kickbacks from Drobot’s hospital; and Alan Ivar, a chiropractor, who admitted to receiving kickbacks in return for referring his patients to surgeons who would then recommend spinal fusion surgery at Pacific Hospital. A fifth defendant, Paul Randall, had been an important marketer for a couple of the implicated hospitals and was accused of paying doctors to steer patients to their operating rooms.

Derika Moses, one of Drobot's victims
Derika Moses

PHOTO BY GREGG SEGAL

In a third civil complaint, 106 former surgery patients sued Drobot, his former associates, and four hospitals on the grounds they were harmed by substandard hardware that was not approved by the Federal Drug Administration and that broke off in their bodies.

One of those patients was Derika Moses. She was working for Pepsi, delivering sodas to a Riverside County supermarket on Labor Day 2007 when her problems began. “I lifted a case of two-liter bottles when I heard pops in my back and felt it. It took a while for me to leave the store, and when I did, I was still bent over.” Despite months of steroid injections, ice packs, MRIs, and X-rays, her pain persisted. “ ‘The only way I can get you feeling 85 to 95 percent better is with spinal fusion surgery,’ ” Moses recalls her orthopedist saying. She was terrified at the thought of having her back opened up but wanted to be free of her pain. “He went through my workers’ comp insurance and got the clearance. Eight months later I was in for spinal fusion.”

Moses is telling me this in the living room of her Riverside tract home, owned by her parents, where she lives with her 16-year-old daughter, 13-year-old son, and an in-home caregiver who carries her groceries and helps her cook. She says she has remained in pain ever since her spinal fusion. Perhaps that would have been the case without the surgery. Still, in 2013, after more X-rays and MRIs, her surgeon told her a screw had come loose and was hitting a nerve, which explained the constant numbness in her toes.

“Then he said, ‘Well, we can take them out,’ ” she says. “He told me he could never take the cage out because the bone has fused through it. He couldn’t take three pins out because they were holding everything in. But he took out the screws, connectors, and rods.”

Now those 20-plus pieces of fusion hardware might become evidence in the patient suits against her orthopedist and others. Because her operation was not performed at Pacific Hospital, Drobot was severed from Moses’s case last year by a judge, who concluded the same for dozens of other complaints. After that ruling, Drobot still faces 16 patient complaints about substandard hardware.

It’s unclear why the federal government isn’t pursuing the claim that Drobot used knockoff screws. Assistant U.S. Attorney Josh Robbins declined to comment when asked, while SCIF spokeswoman Jennifer Vargen replied by e-mail to say, “As an insurance company, we wouldn’t have a direct cause of action for issues stemming from counterfeit medical hardware allegedly harming a patient.”

The counterfeit hardware charge remains an important accusation in two other complaints. The whistle-blower suit, for example, contends that “plaintiffs are in possession of the counterfeit screws and rods that Defendants have knowingly implanted in hundreds, likely thousands, of California workers.” But the screws were not confined for use in California; they were also sold to hospitals throughout the country.

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Crowder Machine and Tool Shop occupied space within an anonymous business park in the Riverside County town of Temecula. That’s where, according to lawyers, William Crowder, an octogenarian, fabricated screws and rods that were copies of those manufactured by two legitimate medical equipment suppliers: South Korea’s U&I Corporation and a South African company, Ortho Sol Development. He was working for Roger Williams, a Drobot codefendant who operated a Murrieta, California, distribution company called Spinal Solutions.

The allegedly bogus hardware removed from Moses's back
The allegedly bogus hardware removed from Moses’s back

PHOTO BY GREGG SEGAL

To an undiscerning eye, the pedicle screws allegedly used by the implicated hospitals might appear legitimate. But not only was U&I’s logo in the wrong font, the screws’ manufacturing lot numbers didn’t correspond with actual serial numbers. In addition, the patients’ suits claim, the screws came with varying thread sizes. One person familiar with Crowder’s work, speaking on condition of anonymity, told me the screws were so roughly executed that their threads bore tiny metal fragments. Citing poor health, William Crowder declined to return phone calls and e-mails requesting comment for this article.

The two whistle-blowers, Sersansie and Reynolds, claim that he billed Drobot’s associates $65 to produce a single screw for which a legitimate surgical hardware manufacturer might charge $400. To be sure, the hospitals named in the civil complaints are not the only medical centers to use “alternative” hardware. The high price of pedicle screws has motivated some to explore the possibility of manufacturing their own, according to Alan Hilibrand, the director of medical education for the Department of Orthopaedic Surgery at the Rothman Institute at Philadelphia’s Jefferson Medical College. “It’s really gaining more and more traction as a concept,” he says of house-brand spinal hardware. “People are talking about doing it because [the hardware] is so expensive and there’s less money to pay for these surgeries. Some places—not many—are trying to manufacture their own implants. Whether that’s OK or not depends on if they’ve been tested mechanically to show they can stand the stresses required to do the operation.”

Crowder’s screws, though, do not seem to have been made with lowering surgical overhead in mind. At least they didn’t save the state’s health insurance funds any money. Tri-City Regional Medical Center would bill California’s workers’ comp $12,000 or more per screw in an operation that would often require half a dozen screws. But the price wasn’t only jacked up nearly 200 times, according to complaints. The screw was also laundered through a chain of “distributors” and “marketers” that were really shell companies run by Drobot and his confederates. It might ship from Crowder’s shop to Spinal Solutions. Spinal Solutions would then “sell” the product to the Drobot-owned International Implants, which sold the hardware to Drobot’s hospital or to one of the other defendant medical centers.

An anonymous source familiar with the charges against Drobot and his associates says the alleged counterfeits began rolling out of Crowder’s shop at least by 2008 and possibly earlier. The scheme came to light in 2009, when Spinal Solutions defaulted on its payments to Ortho Sol, the South African company from which it had been purchasing pedicle screws for resale in the United States. “Spinal Solutions,” Ortho Sol’s CEO, Richard Walker, said in an e-mail to me, “not only counterfeited our products but as our distributor stole over a million dollars of our consignment stock.” Ortho Sol dispatched a company auditor to California, who recovered about 5 percent of the screws for which it was owed money. But most of those, Walker said, turned out to be counterfeit.

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Fridays may be the busiest day of the week for bank robbers, but medical insurance scams occur with metronomic regularity in California. Over the past year eight people in Los Angeles were accused of Medicare grift totaling $66 million, while three Orange County women were convicted of bilking insurance companies out of $71 million in claims for medically unnecessary procedures. Then there were the 16 Glendale residents convicted of running a $20 million bogus prescription-drug racket involving the recruitment of homeless people from Los Angeles’s skid row.

The figures involved Lotto-size jackpots, but the stories barely scratched the news cycle. They are part of an expanding phantom zone of crime seldom reported by the media. Adam Weintraub, a spokesman for California’s Department of Health Care Services, told me that while state agencies are making strides to catch and analyze more quickly the warning signals that go up almost every day from health care providers, staying ahead of scammers is an almost Sisyphean task. “It’s a little like an arms race,” he says. “Criminals are clever and innovative. We have to be the same to keep up.”

In the case of Drobot and his cohorts, what’s amazing is the large number of warning signs there seemed to be. Among them was the fact that many patients, as the Justice Department charges, were encouraged to travel hundreds of miles to Pacific Hospital for their surgeries, even though they could have had them performed closer to home. From 1998 to the end of 2013, Drobot admitted, he offered money to doctors in exchange for their referral of thousands of spinal fusion patients to Pacific Hospital—a transaction that the other three hospitals also allegedly engaged in. Surgeons were typically kicked back $15,000 for a lumbar operation and $10,000 for each cervical fusion surgery performed at Pacific Hospital. Paul Randall, one of the five who’d entered a plea agreement last November, admitted to recruiting chiropractors and doctors to refer patients to the Hawaiian Gardens hospital; the government claimed he had given one chiropractor alone $30,000 in cash.

The kickbacks didn’t exactly arrive in anything so obvious as bags of money. At least not all of them did. According to one of the civil lawsuits, “flights were provided to a large number of spinal surgeons…and transported medical devices and/or instruments, cash, and prostitutes or other ‘adult entertainers’ for the spinal surgeons’ enjoyment.” The doctors’ payments were also allegedly cloaked by invoices for sham consulting agreements, marketing deals, research and development agreements, overinflated pharmacy reimbursements, lease and rental contracts, management arrangements—even rare coins.

All three civil suits allege that the accused hospitals vastly “upcharged” their billing for surgery and prescription drugs by “unbundling” traditional surgical costs. A spinal operation involves an array of medical services (doctors, imaging systems, blood-saving processes, et cetera) that are discounted when they are bundled for an individual operation. Yet Pacific Hospital is accused of billing SCIF separately for each service and at the highest rate possible. It was the equivalent of a car dealership charging for each individual part of an automobile instead of just for the car. And for several years the state paid, but not just for unbundled services and marked-up screws. The hospital also had a habit of billing the state and other insurers for attending nurses who should have been included in the basic surgery bill but who were additionally itemized as “assistant surgeons”—an exaggerated job description that allowed the hospital to claim the nurses cost it more than they did.

What seems to have put Drobot and his schemes on the federal radar were the extraordinary consultant fees he was paying Tom Calderon (who wasn’t a registered lobbyist) and the suspicion that his brother, Ron, was running interference for Drobot in Sacramento. Drobot allegedly supplied the senator with entrée to luxury golf courses, bought him expensive dinners, and flew him around the country on private planes—all in violation of state ethics laws. Ron Calderon returned Drobot’s favors by setting up meetings between himself, Drobot, and a director of the Division of Workers’ Compensation, as well as with state senators and others whose ears Drobot was eager to bend on the subject of the pass-through allowance. The senator had been able to spike legislative attempts to close the pass-through loophole in 2011 and then again in 2012. But later that year a third bill came up in Sacramento, and this time Calderon could not stop the pressure for reform. By then, an FBI investigation of Ron Calderon was well under way.

 

The Bureau started in 2011 with an undercover investigation called Operation Spinal Cap, to dig up enough incriminating evidence to obtain a search warrant for Calderon’s office that would look for, as the document would later state, “all records relating to the spinal surgery legislation” from January 1, 2008, onward. In 2012, three undercover agents set a honeytrap for the senator, posing as people connected to an independent film company based in downtown L.A.’s Arts District. The agents told Calderon they were seeking inclusion in a newly expanded version of the state’s film tax credit program. The cover story made sense—in 2009, California, alarmed by the number of film and TV productions being shot elsewhere, launched a tax credit program aimed at keeping the movie business in state. After all, the author of the bill creating the tax credits had been Ron Calderon, who chaired the state senate’s Film and Television Industries committee.

In order to qualify for a credit, a project has to have a minimum $1 million budget. The FBI “filmmakers” told Calderon they were seeking legislation to lower that threshold to a level that seemed more reasonable to them: $500,000. The senator expressed sympathy for the indie producers before he added that lowering the cutoff to $750,000 would make it easier for him to move it out of his committee.

As part of the alleged bribe, Calderon persuaded the FBI agents to hire his daughter, Jessica, for a $3,000-a-month job that didn’t exist, for more than a year. The FBI was seeing a pattern: Between 2010 and 2012, Drobot had spent about $30,000 bribing Calderon by paying the senator’s son, Zachary, for summer jobs in which the son appears to have been a ghost employee. What had worked for the son was being proposed to the indie filmmakers as a way to grease the legislative wheels.

Sprinkled throughout the affidavit of one undercover agent are snatches of conversation with Calderon. In several instances Calderon sounds like a man trying to cover his tracks. Especially when he explains his contractual precautions while instructing the FBI agent on how to set up payments for his daughter’s ghost job: “The second problem I have…that…um…and again this is an uncomfortable thing to do, OK, but because of my position, you cannot…we cannot have a conversation we just had. We cannot have a quid pro quo conversation.”

A moment later he tries to clarify things: “What…what…what I have to say…what I have to say…is…that I cannot guarantee that I can help you. I can’t. And I cannot take payment…or…uh…negotiate payment for Jessica in any way with the…with the…with the understanding that I’m gonna do this for you, and it’s gonna be deliberate.”

The FBI had no trouble understanding what the senator was hemming and hawing about. “Ronald Calderon,” the undercover agent wrote, was telling him that “you never take money directly from people and you have to be careful about a tit-for-tat relationship.”

Calderon didn’t deliver on lowering the project budget threshold for the FBI’s movie people. He failed to keep the pass-through allowance from being terminated in 2013, too. In the year following closure of the loophole, California’s billing costs for spinal surgeries plunged 56 percent, saving the state $110 million. That figure is only a slight indicator of how much medical fraud bleeds taxpayers.

“Health care fraud and waste costs somewhere in the tens of billions of dollars, but no one knows the real figure,” says Louis Saccoccio, the CEO of the National Health Care Anti-Fraud Association, a Washington, D.C.-based watchdog group. “Many of these providers started off completely honest and went down a road they should not have.”

Lawyers aren’t complaining—Drobot’s business activities have practically created a legal employment agency in Los Angeles. During a pretrial hearing in the Superior Court Building near Lafayette Park, about half of Department 323’s seating capacity was taken up by attorneys. There were so many, it was not possible to divide the court between plaintiff and defendant lawyers. Those attorneys who could not find table space immediately before Judge Elihu Berle had to fill the jury box so that one of Drobot’s lawyers, former chief deputy city attorney Terree Bowers, sat next to lawyers who were suing his client. The last time I’d seen such an attorney cattle call was at a hearing for Bernie Madoff’s Los Angeles accomplice, Stanley Chais.

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The legal complaints against Michael Drobot and the doctors and hospitals associated with his business model stagger the imagination not only because of the money or the number of people involved or even its audacity. What may be most disturbing of all is the notion that those we entrust our health to will harm us for profit—that suspicion may surface only as we drift off on a surgery table counting backward from 100. It’s a reality, however, that Derika Moses, like other patient plaintiffs, awoke to in 2007.

The medication Moses has been prescribed since her surgery
The medication Moses has been prescribed since her surgery

PHOTO BY GREGG SEGAL

“A good day is when I’m not falling over every five seconds,” she says, her smile evaporating as she leans to one side at her dining table. Against a wall behind her stand a walker and a back brace. As a teenager at Riverside’s Arlington High School, Moses reigned as the school softball team’s Most Valuable Player for three years and held track and field records in discus, shot put, and running. Since her surgery, she has become a recluse, rarely allowing old friends or even family members to visit and see her in her handicapped state.

Moses hadn’t heard the first fleeting news reports about Ron Calderon or Michael Drobot, but in March 2014 she got a letter from one of the law firms searching for spinal fusion patients who may have received counterfeit hardware. “Normally I’d throw it away,” Moses recalls, “but it said, ‘You might be a victim of counterfeit screws.’ I never suspected this was going on—not a clue.”

She joined the dozens of other former patients in their complaints and is among those who were sued last year by Drobot. He alleged that all the patient plaintiffs and their attorneys were defaming him with their charges. Drobot’s complaint was thrown out in court, and Moses hopes the people involved in his purported enterprise of kickbacks and counterfeit hardware will be “prosecuted or held accountable for what they did. I want to see them lose their licenses.”

Drobot’s plea agreement required him to surrender his passport, but in late September the government handed it back to him so he could travel to Vietnam. The reason he gave to the federal court was his desire to participate in another business venture—specifically, to help his son Greg expand his Oregon-based cheese business. (Another son, Michael Jr., is a defendant in the RICO Act complaint.) None of the doctors accused of having knowingly used counterfeit hardware or who persuaded their patients to undergo unneeded surgery have had their licenses suspended. When I’ve spoken to people connected with this case on or off the record, each has focused on one specific corner of it—screws, prescriptions, kickbacks—leaving the impression that it is too vast to fully comprehend and might yet produce allegations of even more crimes.

Regardless of the outcome of her lawsuit or of what happens to Drobot, his business associates, the doctors, or Ron Calderon, Moses will be in pain for the rest of her life. She says she must go to three or four doctor’s appointments each week and that she has been diagnosed with major depression. Her tone remains stoic when I ask what she regrets most about her life after her accident and surgeries. “I wish I could teach my daughter softball,” she says.

Why is Workers’ Comp such an easy target?

Billion Dollar Scam

Apr 2, 2016

California’s workers’ compensation program covers 15 million workers across the state. If you get hurt on the job – fall off a ladder, for instance – it’s the system you turn to. Most employers are required to carry workers’ comp insurance, which helps cover medical bills and lost wages for injured employees.

But Reveal reporter Christina Jewett has discovered serious fraud in the system after reviewing thousands of documents. They show that in the last decade, more than 80 people have been accused of cheating California’s workers’ comp medical system out of $1 billion.

Jewett and producer Delaney Hall tell the story using an undercover law enforcement wiretap and the accounts of a worker, employer and investigator.

Host Al Letson then sits down with Jewett to really dig into what it is that makes workers’ comp such an easy target for people who want to take advantage of it.

And finally, we revisit a story about the bogus screws that ended up in spines of surgery patients. You can consider it the prequel to the main investigation …

DIG DEEPER

  • Read: Profiteering masquerades as medical care for injured California workers
  • A history of corruption: How California’s health care system for workers forgot about fraud
  • Previously on Reveal: Medical firm profited on pain with knockoff spine surgery hardware