Red Flags

One question that nags in the Southern California rent-a-patient scam is this: Why have health-care insurance companies paid crooked clinics and doctors millions of dollars since 2001 for medically unnecessary, often dangerous procedures, when these same companies routinely shortchange honest consumers?

New Times first exposed the scheme ("Rent-A-Patient," Paul Rubin, April 24, 2003), and has published several stories describing how "recruiters" working for Orange County outpatient surgery clinics convinced (with cash) more than 2,000 mostly out-of-state patients with liberal health-insurance policies to undergo surgeries ranging from sweat-gland removal to adult circumcision.

The California medical providers dramatically overbilled insurers for services rendered, often 10 times more than what would be considered "reasonable and customary" in the area. (The most prominent of the clinics, now called St. Paul Outpatient Surgery Center, in Buena Park, billed insurers more than $60 million in a 15-month period that ended last July.)

Until publication of the story, say law enforcement and insurance-fraud investigators, most of the nation's insurers were reimbursing the Southern California clinics and doctors whatever they asked. However, that mostly seems to have changed in recent months, as insurance company fraud units nationwide and an array of law enforcement agencies have made the rent-a-patient scam a top investigative priority.

Many in the insurance industry blamed California's "prompt-pay" laws for the quick and full distribution of claims to the medical providers. Those laws, similar to those in 46 other states, including Arizona, call for insurance companies to reimburse so-called "clean" claims within 30 working days to PPO policyholders, and 45 days to those under HMOs.

The laws were designed to force insurers to pay medical providers in a more timely fashion. For example, the Texas Medical Association complained while lobbying for prompt-pay in 2001 that 60 percent of its doctors were experiencing cash-flow problems because of slow payments or claim denials.

Insurers violating prompt-pay laws can face hefty financial sanctions, though a nationwide scanning suggests enforcement by Departments of Insurance has been sketchy: California has imposed almost $1 million in fines against insurers for violating the laws since July 2000, but few recently.

But even the presence of prompt-pay couldn't justify why grossly inflated, frequent claims failed to raise red flags inside the insurance companies for so long.

"Some flags should have come up with normal edits within 48 hours," says Becky Busch, an Illinois-based insurance-industry consultant. "On colonoscopies, for example, these clinics have charged far more than the average market price. That should have rung bells with claims adjusters. But they paid up big, and that has skewed all kinds of data about what procedures should cost. That excessive cost now is trickling down to the honest consumer who may never have set foot in California."

Dr. John Short, the managing partner of Salt Lake City's Phase 2 Consulting, a health-care management firm, is blunt: "I can't believe any of these insurance companies paid these bills. It's a dereliction of their duties. How could they not see the pattern here -- someone from out of town undergoing not one, but two, three or four medical procedures on different parts of their bodies at the same clinics? And the cost? Ridiculous."

Bill Mahon, who heads the National Health Care Anti-Fraud Association -- a group of law enforcement officials and private insurers -- has a theory about how and why the rent-a-patient scam could flourish:

"The nickel-and-dime part of the system works like a Swiss watch," he says. "The system is geared toward the normal, and it keeps beautiful track of deductibles and all. It's the fraud part that's a lot trickier. This scam has been so wildly abnormal that things broke down somewhere. I don't excuse it. It has been a big heads-up for some of the [insurance] plans that something like this happened. In terms of the entire scope of the insurance industry, it's small. In terms of dollars, it's been enormous."

(An FBI agent estimates the rent-a-patient conspiracy has cost consumers and insurers about $300 million in the last two years.)

Says Thomas Brennan Jr., head of special investigations for Highmark, a Pennsylvania-based Blue Cross/Blue Shield insurance company, "We process 52 million claims a year, and there's no way to investigate them in the amount of time available. The insurance industry is built on the honor system -- that the consumer is being straight with us, as is everyone else up the line. When they're not, bad things can happen."

Barry Zalma, a Los Angeles attorney and certified fraud examiner, says it's no surprise large-scale scams such as rent-a-patient so easily thrive.

"The prosecutions of these massive crimes against insurers and Medicare are minuscule," says Zalma, who has testified as an expert in numerous insurance-fraud cases. "And the California Department of Insurance audits insurers regularly to be sure they are investigating and seek prosecution of insurance-fraud perpetrators. Simultaneously, that same department punishes insurers for not paying claims fast enough."

Zalma says few of the about 2,500 complaints that insurance companies file monthly with the state agency are investigated, much less prosecuted.

"These cases are heavy with documentary evidence and are complex," he says. "It's hard work, and what do you get when you're done? A fine and 30 days of public service in a jail for some lowlife who worked at a bad clinic or something."

Though Zalma says "insurance companies are not in the police business," he agrees that insurers could do a far better job training claims adjusters to identify fraud.

"When the companies stop spending money on training claims people, which has happened," he says, "you'll find people doing things by rote, which gives the fraudsters a better chance to succeed.

"Then there's this angle: If there's fraud in 3 to 10 percent of the claims, and you as the insurance company hire 100 experienced private investigators and they do a good job, maybe they'll stop 10 percent more of the fraud. That will save an average-sized company, say, $5 million. But make one mistake in the process and you'll get nailed in a civil suit that will cost the company more than that."

In the end, Zalma says, "You can't really deal with people who want to commit fraud, because they are going to succeed."

E-mail [email protected], or call 602-229-8433.

KEEP PHOENIX NEW TIMES FREE... Since we started Phoenix New Times, it has been defined as the free, independent voice of Phoenix, and we'd like to keep it that way. With local media under siege, it's more important than ever for us to rally support behind funding our local journalism. You can help by participating in our "I Support" program, allowing us to keep offering readers access to our incisive coverage of local news, food and culture with no paywalls.
Paul Rubin
Contact: Paul Rubin