Blue Cross and Blue Shield Plans File $30 Million Lawsuit
Alleging "Rent a Patient" Fraud in Southern California

Summary by Blue Cross Blue Shield Association

On March 10, 2005, 12 Blue Plans (representing 15 Blue Cross and Blue Shield companies) filed a major civil fraud lawsuit against nine Southern California surgery clinics, the owners of those clinics, surgeons and others, alleging their involvement in what the California Insurance Commissioner has described as "one of the most egregious, outrageous insurance frauds" in history. The fraud targeted in the lawsuit, which is also the subject of State and Federal criminal prosecutions, has caused tens of millions of dollars of losses to insurance companies and employee benefit plans since 1999.

The Plaintiffs in the lawsuit (the "Blue Cross Plaintiffs") are: Blue Cross and Blue Shield of Alabama; Blue Cross and Blue Shield of Massachusetts; Blue Cross and Blue Shield of Michigan; Blue Cross and Blue Shield of Nebraska; Blue Cross and Blue Shield of North Carolina; Blue Cross and Blue Shield of Tennessee; CareFirst Blue Cross and Blue Shield; Empire Healthchoice Assurance, Inc. d/b/a Empire Blue Cross Blue Shield; Excellus Health Plan, Inc. d/b/a Excellus Blue Cross Blue Shield; R.M.S.C.O., Inc. (an Excellus subsidiary); Highmark Inc. d/b/a Highmark Blue Cross Blue Shield and d/b/a Highmark Blue Shield; Premera Blue Cross; Regence Blue Shield; Regence BlueCross BlueShield of Utah; Regence BlueCross BlueShield of Oregon; and Regence BlueShield of Idaho.

The Blue Cross Complaint, filed in Federal District Court in Los Angeles, alleges that the clinics paid recruiters to bring in patients for unnecessary surgery and other medical procedures. The clinics and the surgeons are then alleged to have performed those unnecessary procedures in order to generate fraudulent insurance claims.

To persuade prospective patients to undergo the procedures, the Complaint asserts, the clinics and their recruiters offered patients either cash for each procedure, or credits toward free or discounted cosmetic surgery. According to the Complaint, the clinics and surgeons fabricated phony symptoms and diagnoses for the patients, and incorporated them in fictitious claim forms and medical records. The clinics and surgeons allegedly cashed in by submitting the claims to insurers, using the bogus medical records as back-up.

Recruitment of patients and falsification of medical records have been parts of prior fraud schemes. The Blue Cross Complaint, however, also alleges that the Defendant clinics and surgeons actually performed invasive and sometimes risky procedures on patients as part of the fraud. Indeed, the Complaint alleges that one of the procedures performed on patients in the scheme—so-called "sweaty palms surgery"—involves collapsing the patient's lung and deactivating a nerve near the spine and entails significant risks to the patient.

As the Orange County District Attorney stated in announcing the criminal indictment of some of the alleged participants in the fraud: "It is hard to imagine anything more reprehensible than deliberately operating on healthy people for illegal profit."

Illegal Patient Recruiting

The Complaint alleges that the patient recruiters, sometimes referred to as "marketers" or "cappers," received a per-patient bounty that is illegal under California statutes, and that the most active recruiters received hundreds of thousands of dollars in such illegal payoffs.

In addition to persuading people to have unnecessary procedures, the Complaint asserts that the cappers helped verify that the patients had the requisite insurance coverage, provided transportation to and from the Defendant clinics, and coached the patients to lie if they were ever questioned by insurers. Using their recruiter network, Defendants are claimed to have transformed their Southern California clinics into powerful fraud magnets, attracting patients fiom every region of the country as well as large numbers of local patients. The Complaint alleges that Defendants took full advantage of this human trafficking to generate countless fraudulent bills and rake in millions of dollars.

Fraudulent Billing, Diagnoses, and Medical Records

According to the Complaint, the unnecessary procedures performed most often in the alleged scheme were procedures that are used in legitimate settings to diagnose upper and lower gastrointestinal problems. In those procedures, a flexible tube with an attached minicamera is inserted down the patient's throat (upper GI endoscopy) or into the patient's rectum (lower GI colonoscopy).

The Complaint alleges that the Defendant surgeons attempted to justify the upper GI procedures by falsely stating in medical records that the patients had severe upper GI symptoms, such as chronic heartburn or chest or stomach pain, and by assigning the patients fictitious upper GI diagnoses such as gastritis, ulcers or acid reflux disease. To justify performing the lower GI colonoscopies, the surgeons allegedly falsified severe lower GI symptoms, such as rectal hemorrhaging or severe abdominal pain, and assigned patients fictitious lower GI diagnoses such as polyps, internal hemorrhoids and colitis.

According to the Complaint, those supposed symptoms and diagnoses were fabricated for purposes of the fraud. While the ostensible purpose of the endoscopies and colonoscopies was to diagnose a medical problem so that the proper course of treatment could be determined, the Complaint alleges that patients generally received no relevant follow-up treatment after Defendants supposedly diagnosed them.

Besides endoscopies and colonoscopies, the next most frequently abused procedure alleged in the Complaint was a surgery to treat a rare disorder called palmar hyperhidrosis, or "sweaty palms," in which hands sweat profusely and uncontrollably. The so-called "sweaty palms surgery" (in medical parlance, a thoracoscopy with sympathectomy) is a complex procedure in which a surgeon makes an incision under the patient's armpit, inserts a surgical probe through the incision, collapses the patient's lung to gain access to the spinal area, and then severs or clamps a nerve near the spine that controls perspiration of the hands. According to the Complaint, this surgery can produce serious complications, including bleeding in the chest cavity, pneumothorax (a condition that impedes breathing), infection, significant pain, and increased compensatory sweating in other parts of the body.

To justify this surgery, the Complaint alleges, Defendants falsely stated in medical records that the patients experienced chronic and profuse sweating of the hands—so severe that it interfered with the patients' ability to work, to drive a car, and to engage in other essential life activities. The Complaint alleges that, though true hyperhidrosis is rare, the surgery was a favorite of Defendants and patient recruiters because Defendants could bill insurers more money, and thus would pay more to patients and their recruiters, for sweaty palms surgery than for other procedures.

Other unnecessary surgeries allegedly performed as part of the fraud included nasal surgeries and gynecological procedures.

Patterns and Indicia of the Fraud

The Complaint alleges that Defendants imported large numbers of patients to their Southern California clinics from out of State, including such faraway States as Florida, Minnesota and Texas. Under normal circumstances, the Complaint asserts, patients would not consider flying thousands of miles to have a routine procedure such as an endoscopy or a colonoscopy that could easily be performed close to home. The only explanation for the influx of out-of-State patients to Defendant clinics, according to the Complaint, is that they were promised something that no legitimate facility would provide—a cash payment for submitting to an unnecessary procedure, or a payoff in free or low-cost cosmetic surgery.

The Complaint also claims that most of the patients were subjected to more than one unnecessary procedure. In many cases, according to the Complaint, Defendants claimed to have performed both an endoscopy and a colonoscopy on the same patient, often within a day or two, many of the same patients were then paid to undergo sweaty palms surgeries, and some were paid to undergo still more unnecessary procedures. As a result, according to the Complaint, Defendants sometimes billed for performing as many as eight endoscopies, colonoscopies, sweaty palms surgeries and other procedures on the same person in the course of just a few months.

Often, the Complaint alleges, more than one member of the same family, and sometimes entire families including children, underwent unnecessary procedures at the Defendant clinics. The Complaint cites numerous examples of husbands and wives who were billed as having had parallel arrays of diagnostic and surgical procedures, often on the same days. In some of the examples described in the Complaint, Defendants not only billed for performing a series of procedures on a husband and wife, they also billed for performing endoscopies, colonoscopies and other procedures on one or more of the couple's children—children as young as 12—all in essentially the same sequence.

The Complaint further alleges that groups of patients were sometimes recruited from the same workplace. The employees in these workplace "clusters," many from out of State, were allegedly subjected to multiple procedures over weekends or other short time periods to maximize the financial return on each trip.

Criminal Charges in Connection with the Fraud

State and Federal criminal authorities have recently begun prosecuting the fraud alleged in the Complaint. In July 2004, State criminal authorities arrested three of the individual clinic owner Defendants, along with several patient recruiters, and charged them with conspiracy "to commit . . . insurance fraud and grand theft" and other crimes. (People of the State of California v. Tam Vu Pham et al., Superior Court of the State of California, Orange County, Case No. 04CF2197—Felony Complaint at 5.) The State Felony Complaint includes a long list of "materially false and fraudulent" health insurance claims that those criminal defendants are alleged to have submitted on patients treated at one of the Defendant clinics—Unity Outpatient Surgery Center in Buena Park, California.

In announcing those arrests, State prosecutors described the fraud as unprecedented in its magnitude. The prosecutors stated that, during an 8-month period from August 2002 to April 2003, the arrested Defendants recruited more than 5,000 patients nationwide to undergo unnecessary procedures at the Unity clinic, and billed almost $97 million to insurers.

In October 2004, Federal criminal authorities charged Defendant Millennium Outpatient Surgery Center in Santa Ana, California, along with its principal and three patient recruiters, with mail fraud for bilking health insurers out of $34 million by "fraudulently bill[ing] private health insurers . . . for medical procedures performed on recruited patients that defendants . . . knew to be unnecessary, corruptly induced, and falsely justified. . . .77 (United States v. Millennium Outpatient Surgery Center et al., United States District Court for the Central District of California, Case No. SA CR 04-281—Indictment at 4-5.)

Objectives of the Suit

The suit by the Blue Cross Plaintiffs targets a broad spectrum of alleged participants in the fraud. In addition to the clinics and owners charged in the State and Federal criminal prosecutions, the lawsuit targets additional clinics that are alleged to have joined in the fraud, as well as additional individuals who allegedly participated in and/or profited from the fraud, including numerous doctors who performed the procedures that Plaintiffs allege were fraudulently billed.

The suit seeks to recover monies that the Blue Cross Plaintiffs were defrauded into paying. The Complaint asserts claims under the federal racketeering statute (RICO), which increases the financial exposure of each Defendant by mandating an award of treble damages, as well as the plaintiffs attorneys' fees, for violations of the statute. RICO also provides for "joint and several" liability of defendants within a RICO "enterprise."

The Blue Cross Plaintiffs also believe that the civil suit, together with the State and Federal criminal prosecutions, will help deter others from devising and participating in insurance fraud schemes. Insurance fraud is a national epidemic that inflates the cost of health care, damages businesses and harms patients. The Blue Cross Plaintiffs are proud to join with law enforcement in combating this scourge.

Address inquiries to:

Jackie Fishman
Media Relations Manager
Blue Cross Blue Shield Association
(202) 626-8644

Additional Information

This page was posted on March 12, 2005.

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