Southland reportedly spawns health care fraud wave.

Authorities liken crisis to savings and loan industry fiasco

Health care fraud is shaping up to be the 1990s' equivalent of the savings and loan debacle of the 1980s, according to industry observers and law enforcement officials. And just as with the savings and loan crisis, the current health care fraud epidemic appears to be centered in Southern California.

Other similarities with the 1980s' crisis are that taxpayers are once again picking up the tab because much of the fraud involves Medicare and other government-funded programs, and federal prosecutors are making the epidemic one of their top priorities.

The epidemic started in 1992 with a groundbreaking case of Medicare fraud in which a practice once deemed standard among health care providers was deemed fraudulent.

The U.S. Attorney's Office charged that La Jolla-based National Health Laboratories, one of the nation's largest medical laboratory chains, conducted unneeded medical tests on patients to inflate lab charges.

The chain's CEO was sentenced to jail, and the company paid more than $115 million in criminal and civil penalties.

Then, in June of this year, Santa Monica-based National Medical Enterprises Inc., one of the nation's largest psychiatric hospital chains, pleaded guilty to paying kickbacks and bribes for referrals of Medicare patients. NME agreed to pay the government more than $362 million, and a former company executive faces up to 10 years in prison and a $500,000 fine.

Industry observers agreed that these Southern California prosecutions and others throughout the country, coupled with the Clinton administration's beefed-up efforts to police Medicare fraud, is resulting in an unprecedented number of health care fraud cases.

According to the 1992 U.S. Industrial Outlook published by the U.S. Department of Commerce, health care spending in 1994 will reach $1 trillion. And prosecutors estimate that up to 10 percent of those expenditures involve fraud or abuse.

In addition, with health care reform and the skyrocketing costs of health care on the national agenda, fraud elimination and prevention plays right into the current political climate.

"It's politically popular to point to fraud as a source of rising costs. That way, one can promise to deliver better health care services without the requirement of taxes," said William Braniff, of counsel at the San Diego office of Latham & Walkins.

Braniff, who served as a federal prosecutor on the National Health Laboratories case, added, "I'm not trying to say that fraud is not a problem, but fraud has become the bugaboo of the people. Those ripping off the system become the evil people and, if you can eliminate them, then there's a feeling we can have everything that's been promised, a more efficient system without the consequences of higher taxes."

Health care fraud continues to be the No. 1 priority for Janet Reno's Department of Justice. And with help from the Inspector General's Office of the Department of Health and Human Services, the U.S. Attorney's Office, the FBI, and state regulatory agencies, investigations are looking into frauds such as billing for unnecessary services, kick-backs for provider referrals, coding insurance company forms for more expensive procedures, and charging for several tests when only one was performed.

"Our case load has increased dramatically," said John M. Morris, an assistant special FBI agent in charge of white-collar crime. "When health care fraud was identified as a priority in 1992, we (the FBI) had brought 365 cases under investigation (nationwide). And now, in 1994, we have 1,150 pending cases (nationwide). We've grown in manpower in that time frame as well, starting out with less than 70 agents (nationwide) in 1992; and today, nationwide, we're using about 187 agents." Morris refused to disclose how many of the 1,150 pending cases involve L.A.-area companies. He also refused to disclose how many of the 187 agents fighting health care fraud nationwide are stationed in the L.A. area.

Not only has the FBI increased its manpower, it is also applying aggressive, proactive investigative tactics, such as electronic surveillance and undercover operations.

"Basically, we're applying the techniques that we use to investigate organized crime and white-collar crime to health care fraud," Morris said.

The use of such covert operational tactics - and the largely publicized and costly prosecutions that follow - have created what some health care attorneys call a "dragnet" climate.

And that climate is resulting in a burgeoning health care business for criminal attorneys in Southern California.

"Our firm until a couple of years ago limited its criminal practice to the defense industry," said David Vena, chairman of Latham & Watkins' health care practice. "But in the last several years, we've made a concerted effort to expand our white-collar criminal practice, particularly in response to the government's emphasis on health care fraud. In order to be competitive, we had to get into this field."

Health care providers are feeling the pressures resulting from the fraud crackdown. David Langness, spokesman for the Hospital Council of Southern California, said, "We're seeing a great deal of legal activity in the health care system. There's an enormous shake-up on how the system works, and that involves a great deal of merger and acquisition activity. The lines that used to keep doctors, hospitals and insurance companies apart have been blurred, and that's created a great amount of legal questioning of what can and can't occur."

But because regulatory laws are often murky, technical and detailed, health care providers may commit inadvertent mistakes that could result in costly Medicare fraud lawsuits and negative publicity.

"There are lots of cases where kickbacks and stuff like that (are) happening. But in some instances, the regulations are very technical and include a lot of gray area," explained a Washington D.C.-based defense attorney who sits on the American Bar Association's subcommittee on health care fraud and abuse.

"When you talk about health care fraud, you're talking about criminal intent," the attorney continued. "And in a lot of cases, that's simply not there."

With that in mind, health care legal practices are taking preventative measures to protect their clients, should those clients find themselves under investigation.

"With integrated delivery systems in an industry that's consolidating all the time, it's important to set up the models and the nature of the relationship between the parties," explained Paul DeMuro, a partner in Latham & Watkins' Los Angeles office, "The government scrutinizes these relationships. So we need to make sure our clients' actions comply. We're becoming the architects of the transactions so providers don't find themselves in a position that what they're doing is illegal."