California Schemin'

Earlier this month, the Blue Cross and Blue Shield Association commandeered the National Press Club for a "media briefing." Reporters from publications like the New York Times and Wall Street Journal showed up en masse.

The news of the day on March 11 was the filing of a mammoth lawsuit by the association and 12 of its plans against nine southern California surgery clinics, 21 doctors and 13 other people involved in what has been called one of the most costly insurance frauds in the nation's history -- the "rent-a-patient" scam.

The suit asks for $30 million in damages.

First revealed to the public by Phoenix New Times ("Rent a Patient," April 24, 2003), the now-infamous scheme included thousands of patients from 47 states who traveled to outpatient surgery clinics in the Los Angeles area to undergo medically unnecessary and grossly overpriced procedures.

In turn, those patients were paid about $800 per procedure or, in some instances, underwent cosmetic surgery procedures as partial payment.

Most common among the surgical procedures were colonoscopy, endoscopy and sweat-gland surgery, the last of which is supposed to curb excessive perspiration. At least one patient told New Times that he'd undergone both a circumcision and a sweat-gland operation over a period of a few months -- and showed the scars to prove it.

The initial New Times story focused on what attorneys for the Blue Cross plaintiffs have dubbed the "Onyx Employee Cluster from Phoenix, Arizona," in the federal lawsuit, which was filed in the U.S. District of California. It told how a group of employees at Onyx Environmental Services -- a hazardous-waste firm with a plant in west Phoenix -- had taken advantage of a health-insurance plan that allows for easy "out of network" access to medical care.

The Phoenix employees -- about 40, according to the lawsuit -- traveled from Phoenix to California after work on Fridays, underwent their unnecessary surgeries, then returned to work on Mondays. Things got sticky after some of the Onyx workers and others cashed more than $400,000 in insurance checks originally earmarked for Unity Outpatient Surgery Center, one of the more active clinics involved in the scam.

They were able to do so because Onyx's Blue Cross policies allow reimbursement checks to be issued directly to patients who undergo out-of-state medical treatment.

Attorneys for Unity then sued the Phoenix rent-a-patients in Orange County, which unintentionally opened a revealing window into what was happening at the busy surgery center, about 20 miles southeast of Los Angeles. That civil case is still pending.

Unity, which later changed its name to St. Paul Outpatient Surgery Center, long has been a focus of the Orange County district attorney's office. Last July, an investigation by that office's Bruce Rogers led to the arrests of clinic owners Tom Vu and his wife Hoang, and others. The others included four "cappers" who had recruited patients for their own piece of the lucrative action. That case, too, is pending.

The doctors who performed the surgeries have yet to face criminal charges.

Almost 200 pages in length, the Blue Cross lawsuit goes into great detail about a scheme the company's New York City-based attorneys describe as "simple, but diabolical."

"The unnecessary procedures that [the defendants] induced patients to undergo posed direct risks to the patients' health. Indeed, one of the procedures favored by defendants because they charged so much for it -- so-called 'sweaty palms surgery' -- involves collapsing the patient's lung and deactivating a nerve near the spine. It is no wonder, then, that the California Insurance Commissioner called this 'one of the most egregious, outrageous insurance fraud cases.'"

In another part of the suit, the lawyers describe how the clinic operators and doctors "took full advantage of . . . human trafficking, generating fraudulent bills for countless unnecessary diagnostic and surgical procedures and raking in millions of dollars in ill-gotten insurance benefits."

Though the lawsuit is exhaustive in its detail, it does omit an important detail: Employees and administrators at the insurance companies (Blue Cross plans and others) at first rarely questioned the medical necessity or excessive costs of the thousands of surgical procedures completed on the rent-a-patients.

In fact, insurance investigators told New Times that ineffective billing practices at many insurance companies may have "saved" those companies millions of dollars. Even then, according to Los Angeles-area FBI special agent Dan Martino, insurance companies paid out more than $350 million of the $1.3 billion billed by the surgery centers.

Roy Dickson, a Yorba Linda, California, attorney who has represented some of the defendants (and has threatened more than once to sue New Times) did not return a call for comment.

But insurance company investigators and claims representatives inundated the paper with e-mails after the rent-a-patient press conference landed on the evening news and in such august publications as the New York Times and the Wall Street Journal.

For example, a claims consultant from Greensboro, North Carolina, (whose company is not a party to the recently filed litigation) recently thanked New Times for providing "the information that we needed to be assured that we were dealing with crooks, especially when we were threatened by collection and lawsuits . . . and when we couldn't get the locals to take an interest in the case."

But North Carolina wasn't the only jurisdiction that apparently was lax in attacking the rent-a-patient menace. The 2003 New Times stories identified about 125 Arizonans who had gone to southern California for the unnecessary surgical procedures, including a now-fired Onyx supervisor named Qui Pham -- who was both a capper and a patient.

Also in 2003, an Arizona Department of Insurance (DOI) spokesperson confirmed that the agency was doing its own investigation into the rent-a-patient scams. That December, DOI public information officer Erin Klug reiterated DOI's "deep commitment to fighting fraud."

But California investigators have told New Times that white-collar prosecutors with the Arizona attorney general's office kept the DOI investigators from pursuing grand-jury indictments and arrests of the alleged wrongdoers. In fact, the California investigators claim that the AG's office declined to allow a DOI investigator to even seek a search warrant for confirmed capper Qui Pham's west Phoenix home.

The state of Arizona's investigation into the rent-a-patient fraud seems have slipped away into oblivion.

"The reality is that the decision to prosecute cases is up to the [AG] prosecutor's office, not us," says DOI deputy director Gerrie Marks. "We have continued to stay in touch with our counterparts and others in California on this matter, but beyond that I really can't say much."

Nationally, at least, the forces seem to be well-aligned against many of the scamsters who perpetrated the rent-a-patient scheme for at least two years and probably longer.

Tom Brennan Jr., director of special investigations for Highmark Blue Cross Blue Shield (which serves Onyx Environmental, among other clients), sees the litigation as an important step toward reform.

"This [lawsuit] is a significant milestone in the fight against health-care fraud," he says.

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Paul Rubin
Contact: Paul Rubin