Director apologizes after lapses lead to Medi-Cal fraud at rehab clinics

Karen Johnson, chief deputy director of the Department of Health Care Services, and Director Toby Douglas testify at a state Assembly oversight hearing about fraud at rehab clinics.Will Evans/The Center for Investigative Reporting

UPDATE, Sept. 26, 2013: This story updates to include new details from the hearing and the extent of suspected Medi-Cal fraud.

The director of the state’s Medi-Cal agency offered a full apology during a legislative hearing today for what he called “unacceptable” and “systematic” failures in state oversight of taxpayer-funded drug rehabilitation services.

The mea culpa came even as Department of Health Care Services Director Toby Douglas and others revealed further details of the extent of suspected fraud and the depth of oversight failures. New evidence also indicates that the department knew about the fraud as far back as 2007.

Since reporters began pressing for answers about the fraud, Douglas’ agency has temporarily suspended 73 clinics, along with 101 additional counseling sites – including all of the clinics highlighted in Rehab Racket, an investigation by The Center for Investigative Reporting and CNN.

More than $36 million in public funds went to the suspended clinics in the past fiscal year, according to a department spokesman.

The agency also has enlisted the help of the Department of Justice, which has opened 64 fraud investigations into rehabilitation clinics.

“We fully appreciate the gravity of this situation,” Douglas said. “And I am here to tell you that we are sorry that we did not take action sooner. … We’re going to make sure that this never happens again.”

Assemblyman Dr. Richard Pan, a Sacramento Democrat, called the hearing in response to the CIR and CNN report, which revealed endemic fraud in California’s network of taxpayer–funded drug rehabilitation centers.

During the hearing, Pan said he hoped the hearing would lead to long-term improvements in alcohol and drug treatment services for the poor.

“There are so many people dependent on the Drug Medi-Cal program,” he said. “We need it to work, we need it to be successful. We need to be sure all the resources are used appropriately.”

The CIR/CNN investigation found widespread sham billing and failures of government in the state’s Drug Medi-Cal program. Rogue clinics cheated the system by diagnosing people with addictions they didn’t have, forging signatures on attendance sheets for therapy sessions that never happened and recruiting new patients with cash or cigarettes.

The Department of Health Care Services, the state’s chief Medi-Cal watchdog, has been on notice about the fraud for at least five years, the investigation found. Further details about how much state overseers knew, and when they knew it, emerged during the hearing.

A Los Angeles County official testified that staff members who monitor the rehab clinics filed reports to the state about 50 clinics suspected of questionable activity going back to 2008.

Douglas conceded that his department’s fraud investigators did not review some complaints because they did not realize that the clinics were part of the Medi-Cal program.

After the hearing, CIR showed Douglas an email from a former audit chief in the department who raised concerns about the fraud in 2007. The email written by David Botelho, then head of audits and investigations, implored other department lawyers and managers: “… millions are going out the door – how do we stop the bleeding?”

Douglas said the email is further evidence of fragmentation of responsibility for the program. Douglas became director of the agency in January 2011, and has held leadership positions there since 2005.

“There were many times there were concerns raised around Drug Medi-Cal fraud,” Douglas told lawmakers at the hearing. “At times it was acted on. But not consistently … and this was unacceptable.”

Now, however, Douglas said major changes are underway.

Already, he said, officials have transferred a staff member believed to be obstructing clinic investigations. The department also is overhauling the way it reviews rehab clinic billing, which currently involves cursory checks of paperwork and no client or staff interviews.

“That doesn’t give us a full picture,” he said. “What we’ve learned is that we have to … (look) at who’s being served, are the patients truly there.”

The role of medical directors also is under scrutiny, Douglas said. On the eve of the hearing, CIR and CNN reported on physicians who regularly sign off on care that turns out to be bogus, yet face few consequences.

Such “unethical medical directors,” Douglas said, are part of the broader problem that he hopes to address with the physician licensing boards and through new powers provided to his department through health care reform.

“It is not right that we are seeing these medical directors prescribing unnecessary treatment to people that don’t exist,” he said.

Douglas said to expect further changes in policies and perhaps legislation to strengthen oversight. “This is not a quick fix,” he said. “We are taking action and will continue to put boots on the ground. … This is a long-term change.”

The prosecutions chief of the Department of Justice’s Bureau of Medi-Cal Fraud and Elder Abuse testified that the 64 clinic cases under his watch will be “one of my highest priorities.” Joe Chavez said that by opening investigations, the state was able to rapidly cut funding to the suspect centers.

“This first step has stemmed the tide of fiscal bleeding,” he said. “But much works remains.”

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Director apologizes after lapses lead to Medi-Cal fraud at rehab clinics

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