SANTA ANA, Calif.
REAL doctors performed real procedures on real patients. The insurance claims
were real; so were the surgery centers that filed them. And the money that
insurers paid - a total of about $500 million, federal investigators estimate -
was most assuredly real.
Hundreds of people, many of them recent immigrants unfamiliar with America's
health care system, volunteered to undergo the medical tests and operations.
They traveled to surgery centers in Southern California for what would be, in
another context, routine procedures like endoscopies, colonoscopies and pap
smears. Some traveled, on the clinics' dime, from as far away as Tennessee. Some
of them, investigators say, received free or discounted plastic surgery, and
others got cash.
Any such payment was and is illegal.
Insurers, meanwhile, were billed tens of thousands of dollars for each
procedure, far more than they would have paid if the patients had gone to
Over the past two years, federal, state and insurance industry investigators
have unraveled what they say is one of the most egregious cases of doctors
manipulating the trust placed in them. But this type of fraud - which draws on a
web of doctors, surgery center owners and staff, and patient recruiters known as
"cappers" - is hard to spot and stop. The California case may be just a start.
Last summer, federal and state prosecutors charged a number of surgery center
owners with fraud. This spring, several Blue Cross and Blue Shield companies
filed civil suits against several centers, their owners and more than a dozen
Health insurance fraud is big business. The National Health Care Anti-Fraud
Association has estimated that of the $1.7 trillion spent on health care in the
United States in 2003, from 3 to 5 percent was lost to fraud, hurting insurers
that pay claims, companies that pay premiums and patients who are asked to pay
assume ever more of the burden.
Taking just the lower figure, "you get $51 billion," said Michael J. Costello,
the association's director of investigation support. That works out to more than
$100 million a day, he said, and "if that doesn't get your attention, nothing
Uncovering a well-constructed fraud can be very difficult, because nobody has an
incentive to blow the whistle - not the doctors, not the clinic owners, not the
patients receiving kickbacks and, some critics say, not even insurers, who can
simply raise premiums to cover their costs.
If investigators' view of the California case is true, "it's not just the
doctors doing the wrong thing here," said Dr. Susan Dorr Goold, director of the
bioethics program at University of Michigan. "There're lots of people doing the
A broad effort to identify surgery centers involved in fraudulent billing
probably had its genesis at a routine meeting of health insurers in January 2003
in Tampa, Fla. The executives met three times a year to compare notes on
suspicious activity, but this session was a little unusual because insurer after
insurer had observed the same thing: patients were driving and flying hundreds,
even thousands of miles to undergo suspiciously routine procedures.
"We all kind of looked at each other and said, 'What's going on here?' "
recalled Byron Hollis, national anti-fraud director of the Blue Cross Blue
Shield Association. "It just became apparent that we had a nationwide problem."
AT most big insurers, sophisticated software screens claims for unusual
patterns, and then investigators step in, Mr. Costello said. His anti-fraud
group has nearly 100 insurers and about 20 government agencies as members.
No one is sure why the suspicious activity was centered in Southern California.
But several people involved in the investigation said one reason might have been
that California, like other states, has a "speedy payment" law, which requires
insurers to pay claims in as few as 30 days. Surgery centers could thus collect
before insurers could thoroughly review a claim's accuracy.
A few months after the Tampa meeting, insurance executives met with law
enforcement agencies in Los Angeles. Soon after, the F.B.I. began its
investigation. In an unusual move, insurers began to share information on more
than a million claims - though not patient identities - with the F.B.I.
Gathering evidence took about a year, said Mr. Costello, who was at both
In March 2004, the F.B.I. executed search warrants at several surgery centers in
Los Angeles, said Daniel Martino, an F.B.I. supervisory special agent. (Agents
executed a warrant at another center, which Mr. Martino would not identify,
about two months ago outside Los Angeles.) The investigators found the same
disturbing pattern: Claims had been submitted for lucrative procedures performed
at clinics in Southern California on patients from all over the country.
F.B.I. investigators reviewed claims valued at a total of more than $1 billion,
Mr. Martino said. "We believe that the attempted fraud was about $700 million
and the actual losses were about $500 million," he added.
So far, federal prosecutors have brought charges against just one clinic, the
Millennium Outpatient Surgery Center in Santa Ana, along with its owner and
three recruiters. Prosecutors asserted that they committed fraud for up to four
years. The case is set for trial in June 2006.
The district attorney's office in Orange County last summer brought insurance
fraud, theft and conspiracy charges against eight people tied to the Unity
Outpatient Surgery Center. The preliminary hearing in that case is scheduled for
David Swanson, a lawyer for one defendant in the state case involving Unity, Tam
Vu Pham, said his client had no role in any fraud. Mr. Pham was an investor in
at least one of the other surgery centers.
"Our position is that any surgeries that were done were necessary and that he
had no knowledge of any improprieties," Mr. Swanson said.
Efforts to reach other owners of the surgery centers were unsuccessful.
Some insurers have filed civil lawsuits to try to recover money they paid on
what they now consider fraudulent claims. Last year, Aetna Life Insurance sued
nine surgery centers, including Unity; the lawsuit asserted that all were
effectively controlled by the same people.
Aetna's complaint stated that Unity submitted claims for more than $9 million;
it is not clear how much the insurer paid.
Earlier this year, with considerable fanfare, Blue Cross and Blue Shield
companies from several states filed a civil complaint against nearly a dozen
clinics - including Unity - along with their owners, recruiters and about 20
doctors. The Unity clinic alone billed almost $97 million to insurers in less
than a year, the complaint said.
The Blues' complaint asserts that the centers recruited patients "from across
the country to come to the clinics and undergo completely unnecessary diagnostic
and surgical procedures, so that the clinics and the surgeons could submit phony
insurance claims." Some procedures were highly risky: so-called "sweaty palms"
surgery, for instance, requires collapsing a patient's lung to sever or clamp a
nerve near the spine.
Calls to the doctors named in the Blues' complaint were not returned.
The centers named in court documents appear to have closed. In mid-May, a sign
on the door at Millennium's offices referred mail to the next suite down, home
to a surgical center called Park Center. A woman who answered the door there
said that it had no connection to Millennium but had bought all its equipment.
ALTHOUGH it is difficult to know what happens inside clinics, some former
patients have spoken publicly. Julio Hernandez and his wife, Sandra Padilla, of
Phoenix have talked to reporters about their experience at Unity.
When Mr. Hernandez, who worked for a waste management company, heard that he and
his wife could get a few hundred dollars and a free medical checkup, the
opportunity sounded like a good deal. All they had to do, Ms. Padilla recalled,
was visit the Unity outpatient surgery center in Anaheim, Calif., and they would
get an endoscopy and a colonoscopy and receive $400 or more per procedure.
"I could get money I needed," said Ms. Padilla, who makes $7 an hour as a
textile worker. Ms. Padilla said she traveled to the center in Anaheim on two
weekends in the summer of 2002; Mr. Hernandez said he went five times. They said
they realized that something was wrong when they received checks from insurers
for tens of thousands of dollars, much more than they were told the procedures
would cost. A lawyer for the surgery center called to demand the money,
threatening them with civil litigation, jail time and even deportation, they
said. Ms. Padilla and Mr. Hernandez said they are legal residents of the United
States. They found Holly Gieszl, a lawyer at Kimerer & Derrick of Phoenix, who
alerted the insurers and prosecutors.
The problem of identifying fraud in medical procedures is more difficult than it
is in, say, tax collection, said Henry J. Aaron, a senior fellow at the
Brookings Institute. With tax evaders, regulators can identify the types of
transactions that might be used to hide income. But in medical matters, the
situation is different.
"It's not that you say, 'Oh, tonsillectomies are a problem, but appendectomies
are not,' " Mr. Aaron said. "The problem in this case is you've got some real
companies that are real bad apples, and you have to audit everything they do.
But how do you identify them?"
It is not easy to figure out how many of the accused centers are set up or who
owns them. Court documents from a three-year-old dispute among surgery center
owners offer the best picture.
A company in Orange County called Lincoln Management filed suit against Anaheim
West Surgery Center in 2002, saying it had violated terms of a 15-year
management agreement. Under that agreement, Lincoln provided facilities, support
personnel and medical equipment and paid rent for the center. In return, Lincoln
received the fees paid by patients and insurers.
According to an amended complaint filed by Lincoln, Anaheim West's owner, Dr.
Hamilton Sah, threw Lincoln's 60 employees off the premises without warning on
June 7, 2002. As a result, Lincoln said, it lost $46 million in insurance fees
and access to medical equipment.
According to documents filed in the case, Mr. Pham - the same man charged by
state prosecutors in the case involving Unity - was the office manager at
Anaheim West and had invested $300,000 in the venture. Mr. Pham and his wife,
Huong Thien Ngo, own 40 percent of Lincoln through another company nominally
based in Nevada, court records show; many clinics seem to have these complex
layers of ownership.
In a statement filed with the court, Mr. Pham said that Lincoln set up the
outpatient center in 2001 and hired Dr. Sah as medical director. But Dr. Sah
"was on the premises only twice in the last year," Mr. Pham stated.
Business was good. At the time of the lawsuit, Anaheim West had fee income of
nearly $2 million a month, while operating costs were just $400,000, according
to court documents. The new clinic, St. Francis Outpatient Medical Center, was
just beginning to generate fee income, according to Mr. Pham's statement.
While Lincoln's court filings offer no possible explanation for its employees'
eviction, filings by lawyers for Dr. Sah and Anaheim West tell an intriguing
story. According to Mitchell Rubin, co-manager of Anaheim West with Mr. Pham and
president of a company that also owns 40 percent of Lincoln, Mr. Pham had
allowed illicit procedures to be performed.
"Against Dr. Sah's express policy, Tom Vu had permitted physicians to routinely
perform cosmetic surgeries," Mr. Rubin said in a court filing, apparently
referring to Mr. Pham by one of the names he also used. "Upon further inquiry, I
learned that these procedures, and others scheduled through Tom Vu's efforts
were paid in cash, and that records of such cash payments were not maintained."
The outcome of the lawsuit is unclear. Lawyers representing the two sides did
not return calls seeking comment. But the court documents show how easily center
owners can open new clinics. In 2002, Lincoln formed Inland Orange Medical
Management Inc., which in turn set up the St. Francis Outpatient Medical Center.
Another doctor, Daniel M. Rose, was recruited to serve as the medical director.
When a reporter called, telephone service had been disconnected at both St.
Francis and Anaheim West. At St. Francis, in a medical office park in Buena
Park, Calif., the office appears to be closed.
That may be telling. Peter J. Diedrich, a lawyer at Beck, De Corso, Daly,
Kreindler & Harris in Los Angeles who filed the lawsuit on behalf of Aetna, said
that when insurers stop paying certain clinics because investigators have
concluded that claims are suspect, often the clinics simply change their names
"These guys run a scheme as long as they can get away with it, then they shut it
down" and reopen, he said.
IN general, health care fraud is constantly evolving, said Bruce R. Chambers,
director of Cigna's special investigations unit. In the mid-1990's, he said,
Cigna investigators noticed suspicious claims from Southern California surgery
"What they were doing back then was cosmetic surgery, and they were billing it
to insurers as other necessary medical procedures," Mr. Chambers said. "They'd
go in for a tummy tuck, and we would get a bill for a hernia operation."
Then as now, one giveaway may be the distance traveled by patients. Cigna
stopped paying such claims, Mr. Chambers said, but also tracked the information
on everyone involved - doctors, surgery centers, anesthesiologists and patients.
When some of the same names started appearing on claims a few years ago, for
patients going cross-country for relatively minor procedures, Cigna again did
"It involved a lot of review of claims, a lot of research, a lot of interviewing
people," Mr. Chambers said, but it saved millions of dollars.
Some procedures have had lasting side effects. Mr. Hernandez, who made the
six-hour trip from Phoenix to Anaheim nearly three years ago in a hot van packed
with other patients, underwent surgery for sweaty palms. He says he now has dry
palms, but sweats more in other places. He says he never wants to see a doctor
Mr. Hernandez and his wife say they were not asked much about their medical
histories when they made the trip for a weekend of surgeries. On a Saturday
morning, they said, they stood in the parking lot before their surgery with
other patients, comparing how much cash they would receive.
For their surgeries, they said, they were put under total anesthesia. When Ms.
Padilla awoke, she said, she had unexplained scars from a procedure she was
never told of. A van ferried them back to a motel. They returned on Sunday for
more procedures, they said, then they received their cash and were driven home.
One group of women from Texas has filed a civil lawsuit against the Valley
Multi-Specialty Surgical Center in Reseda area of Los Angeles, where they said
they underwent plastic surgery. They are the rare patients who, once they
concluded that they had been part of a scheme, took two smart steps. They hired
a lawyer, and they deposited the money they received from insurers into a court
The women are not alone in suing Valley Multi-Specialty. In its lawsuit last
year, Aetna also accused the center of performing unnecessary procedures. Aetna
contended that Valley Multi-Specialty was "in whole or in part, a sham entity
established to bill for services rendered by Unity."
A lawyer for the owner of Valley Multi-Specialty, Brian F. Buchanan of Haney,
Buchanan & Patterson, declined to comment on the Texas lawsuit or the Aetna
lawsuit. But Wendy Schneider, the center's finance director, said that no
plastic surgery procedures were performed there. "You need different equipment,"
she said. "We don't have that stuff."
Some surgery centers where questionable procedures were performed may well have
also performed legitimate services, Mr. Chambers of Cigna said. That helped make
detecting the problem so difficult, he said.
The criminal cases in Southern California may have helped reduce the number of
fraudulent claims there, he added. "We are experiencing continual fraud issues
because we'll always have fraud to some extent," he said, "but nothing like what
we had with them."
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