Sen. Ron Calderon and former Assemblyman Tom Calderon are accused of taking bribes to perpetuate an audacious, $500 million health care and workers’ compensation fraud, setting up high courtroom drama reminiscent of ABSCAM in the 1970s and ’80s, or ShrimpGate in the 1990s.
More importantly, the case against a state senator and his brother from Montebello shines a spotlight on the high human and financial cost of workers’ compensation fraud and reminds policymakers they must remain vigilant in thwarting these kinds of crimes.
The case could turn into the biggest insurance scam in California’s history. As has been widely reported, Pacific Hospital in Long Beach overbilled for roughly $500 million for spinal surgeries – often unnecessary or even hazardous to patients – and passed the costs on to 150 insurance providers.
Ron Calderon is charged with taking about $100,000 in bribes from Michael Drobot, the former owner of Pacific Hospital, to keep a loophole in place that allowed the fraud to continue. The indictment alleges that both Calderons, who have pleaded not guilty, engaged in conspiracy, money laundering and other crimes.
Drobot has pleaded guilty and agreed to cooperate with investigators.
Doctor, hospital or Medi-Cal provider fraud such as this is a sophisticated and calculated crime. In this case, Drobot paid millions of dollars to doctors to refer patients for expensive back treatments primarily to one hospital – Pacific Hospital of Long Beach.
A loophole in the law allowed the hospital’s owner, Drobot, to act as the manufacturer of the durable medical equipment used in the procedures. In this cozy arrangement, he was able to bill insurers $40,000 for durable medical equipment that cost him only $4,000.
By pleading guilty, Drobot admitted bribing and engaging in other forms of corruption with the Calderons to make sure the loophole remained in the law.
Unnecessary spinal fusion procedures performed on injured workers put them at risk for surgical complications and a lifetime of pain. In fact, The Wall Street Journal reported some of these patients died as a result of the procedures.
Unfortunately, this is not an isolated case. A recent Aite Group study released in 2013 reported that workers’ compensation fraud totals $8 billion nationally. Fraud in all property casualty insurance lines totals $64 billion.
In addition to harming workers, this scheme hurts consumers and insurers, who ultimately absorb the costs of these schemes in the form of higher premiums and inflated prices for consumer goods and services.
All this drags down economic growth. California’s economy, still recovering from the Great Recession and massive government debt, and hampered by drought, can ill afford this. Companies saddled with high insurance costs will have trouble creating the jobs California needs.
Detecting and stopping this kind of crime is difficult and requires adequate resources. Following the exposure in the 1990s of so-called doctor mills that coached workers on how to fake an injury to generate tests and treatment, a tough anti-fraud system became law. Under the law, the California Department of Insurance provides grants to local district attorneys to investigate and prosecute insurance fraud.
The grants for 2013-14 total $61.1 million, about 52 percent of which is for investigating and prosecuting workers’ comp cases. The California Department of Insurance’s fraud unit, the Enforcement Branch, has 300 enforcement staff, including sworn officers, investigators and administrative staff.
In addition, each insurance carrier has a fraud investigation unit responsible for analyzing claims and reporting to local district attorneys and the state Insurance Department.
In this case, the partnerships between insurers, and state and local agencies worked. When most of the state’s workers’ compensation carriers reported unusually high billing, public officials detected a pattern and isolated the source.
It might seem like an elaborate or expensive system. However, when one considers the sophistication and potentially huge costs of fraudulent schemes that continue to be hatched by Drobot and others, it is money well spent, like an insurance policy that protects all companies of all sizes and consumers.
In the months to come, we can expect a lot of political commentary on a scandal that involves a state lawmaker. But this case goes beyond politics. It demonstrates the need to stay vigilant in identifying and stopping insurance fraud, and highlights the enormous financial and human costs of failing to do so.
Mark Sektnan is president of the Association of California Insurance Companies, whose members write 40 percent of private workers’ compensation insurance policies sold in California.