The New Face of Medicare
Drug dealers and organized-crime groups have invaded the Medicare system and are taking the government and citizens for a billion-dollar ride
Gabriel Hernandez is not your typical medical practitioner. He couldn't tell an X-ray from an EKG. His sole preparation for a career in the field was 10 lucrative years as a "logistics coordinator" for the Medellin, Colombia, cocaine cartel, a job that gave him plenty of cash, sleek powerboats--and five years in federal prison. But shortly after his release in 1993, a crooked accountant tipped Hernandez to the largess of the federal Medicare program, and his new career was born.
Hernandez set up more than two dozen phony medical clinics in the names of friends and relatives and applied for a "provider number," the code that doctors and companies use when they submit bills to Medicare's computers. Florida's Medicaid office--more than half funded by federal Medicare--gave him his provider number within two weeks. No one bothered to check his clinics, his background, or his list of patients. A few days later an assistant began billing the state, via computer, for mythical checkups and procedures, and Medicaid payment checks began to flow in. Each Sunday night, Hernandez would call the state's 24-hour provider hot line to find out the exact amount of the checks coming to his companies on Wednesday--a real convenience for a guy who had to worry about laundering ill-gotten cash.
In the course of two easy years, Hernandez received checks totaling $1.7 million. After payments to his associates and money launderers, he netted $500,000. Not bad, he says, considering that this was part-time work. Hernandez's downfall came when a friend snitched on him. Now in prison, he says he is remorseful--but also amazed at how simple, and safe, it all was. "The drug business was very dangerous," he says with a charming smile. But not health care fraud. "It was easy money, and there was no risk."
Federal investigators recently have zeroed in on allegations of Medicare bill padding by large hospitals. But a new, more pernicious side of the scandal has been left relatively unexplored. Hernandez, authorities say, is only one of a horde of hardened criminals who saw Medicare for what it really was--an unguarded, $250 billion-a-year pile of cash just waiting to be had. Over the past decade, many of the criminally inclined have moved out of the drug trade to start careers in Medicare fraud, a crime where penalties are low and rewards stratospheric. To realize this windfall, they have set up thousands of phony clinics, medical-equipment outlets, and laboratories--a vast underworld of health care that investigators find particularly difficult to understand, let alone penetrate. Owners are shielded by layers of "cut-out" companies. Lowly runners and mules are employed, and sometimes blackmailed, to move the money. Profits flow through a maze of bank accounts and to offshore places like Liechtenstein, the Turks and Caicos Islands, and Cyprus--and often back into the drug business. One Russian informant, in an interview, says Russian groups cleverly serve up defunct medical companies to investigators, diverting them from ongoing fraud. "We're always chasing something that isn't there anymore," says Bruno Varano, who heads the New York section of the Department of Health and Human Services' Office of Inspector General.
Win valuable prizes. The scams span the nation but are most often found in states where there are large Medicare and Medicaid populations. In New York, Florida, and California, federal agents say, Russian organized-crime figures run hundreds of clinics, testing centers, laboratories, and medical-equipment companies that siphon millions of Medicare and Medicaid dollars each year. A pair of Russian emigres in New York's Brighton Beach, according to an indictment, gave patients microwave ovens and air conditioners in exchange for their Medicare numbers and then used those numbers to bill Medicare for $12 million. In New Jersey, authorities believe members of the Genovese organized-crime family used a health-insurance brokerage to skim money from health care groups. One clinic owner suspected of Medicare fraud and drug dealing was shot down in 1996 outside his Miami clinic. Reputed narcotrafficker Frank Morfa swindled Medicare out of $7.5 million by billing for nutritional supplements, most of which were undelivered. Another scam artist, Akiyoshi Yamada, set up clinics in Miami after pleading guilty to investment fraud. Agents say that he may have stolen $200 million.
Bilking Medicare is so lucrative in Florida that some crooks have taken to kidnappings, burglaries, and home invasions to loot the profiteers. The fraud has even spawned a whole subculture of supporting illegality--recruiters to find willing elderly patients, accountants who expertly fill out bogus Medicare claims, shady physicians who sign off on procedures never performed--that is now hard to separate from legitimate health care. This week, the Senate Permanent Subcommittee on Investigations is set to hold hearings on the criminal invasion of Medicare. One key witness and informant, scheduled to testify behind a screen, is a big drug trafficker turned Medicare fraud practitioner. "There is so much money in the Medicare program, and it's so vulnerable to abuse, that it's relatively easy picking for criminals," says Sen. Susan Collins, subcommittee chairwoman. "It's similar to the old expression--when Willie Sutton was asked why he robbed banks: 'Because that's where the money is.' "
Avoiding hassles. When President Lyndon B. Johnson scratched his name on the parchment that made Medicare the law of the land 33 years ago, he could never have imagined the likes of Gabriel Hernandez. No one could: Back then, Johnson and his advisers were afraid that doctors or hospitals would refuse to take part in the unprecedented government program. Medicare guarantees comprehensive health care to people ages 65 and older or disabled. Medicaid, funded by both federal and state governments, provides health care for low-income people. Both had been branded by critics as one step away from socialized medicine. So everything about the system was designed to make it hassle free for doctors to accept Medicare patients. Paperwork was kept to a minimum, and a premium was placed on getting checks out the door so doctors, clinics, laboratories, and other medical service providers wouldn't have to wait for reimbursement.
Medicare officials today are racing to catch up with the explosion of fraud by screening health care providers more closely and by increasing criminal investigations. Despite that, the system still tilts heavily in favor of paying claims quickly over applying the necessary scrutiny. "You have to go back to 1965, when controls were not put in the system," says Richard Kusserow, who from 1982 to 1991 was the inspector general overseeing Medicare. "We've been jury-rigging it ever since, and 30 years later, we're struggling with the front end, where controls weren't put in." Yet some of the scams are so brazen that even the most cursory checks upfront would have exposed them. In Florida, for instance, officials found clinics using the provider numbers of doctors who had retired or died years earlier. No one had bothered to erase those old numbers from the billing computers. In other places, the addresses of many clinics and medical companies have proved to be post office boxes. One phony magnetic resonance imaging (MRI) clinic in New York had its post box in a mailbox-rental store--emblazoned with a huge "Mail Drop" sign. A medical-equipment company's address turned out to be the back of a laundromat. Near Miami, the listed mailing address of an MRI center is a metal door leading to an empty room. A Miami map showed that the company's stated "corporate address" would put its offices on the center line of Runway 9 Right at Miami International Airport. The owners, suspected narcotraffickers, have fled with $4 million in Medicare funds.
The sheer size of the Medicare system is a huge impediment to fighting fraud. Each year, 800 million claims are filed. Payments are processed and checks issued by electronic systems managed by about 70 different contractors, many of them statewide Blue Cross/Blue Shield plans. The government then reimburses the contractors. Humans see only a fraction of the claims in the highly automated process.
Malcolm Sparrow of Harvard's Kennedy School of Government, author of License to Steal, a book on health care fraud, says he posed a not unlikely scenario to the executives of Medicare contractors: A fraudulent operator submits one claim for a medical procedure that requires a $1,500 Medicare payment. His bill is correctly coded, and the claim is paid. So the same operator submits 10,000 claims for the same procedure on 10,000 other patients--a total of $15 million in bills on one day. "In every field site I went to, bar one, a $15 million check would have been issued without a hiccup," Sparrow says. Since it's only a one-time payment, Sparrow says, the contractors' computers might not even flag the payment as unusual, since a billing pattern hasn't developed. Or as one executive told him: "We would probably never notice. It's not our money."
The Health Care Financing Administration, the 4,000-person federal agency that runs Medicare, does require contractors to check for fraud. But its financial incentives send the opposite message. HCFA regularly evaluates contractors on how efficient they are in getting payments out the door, and it penalizes contractors if they don't process claims within 30 days.
Deactivating controls. Not surprisingly, in this climate Medicare contractors have tended to view spending a lot of time on fraud detection as bad for business. While Medicare claims have nearly doubled in the past eight years, the number of those reviewed for irregularities has dropped from 17 percent to 9 percent. Often, employees say, all that a contractor does when it detects a fraudulent billing is to not pay the claim--and let the matter quietly drop. Some contractors don't stop with benign neglect, however: Blue Shield of California pleaded guilty and paid a $1.5 million fine in 1996 to three felony counts that it altered mistake-prone claims and destroyed others to improve its "performance" rating with HCFA. Michigan Blue Cross/Blue Shield paid the government $27 million and lost its Medicare contract altogether after admitting to falsifying data that HCFA uses to rate performance. In fact, there are 215 active cases filed by whistle-blowers against Medicare contractors. A case involving Florida Blue Cross & Blue Shield is a good example. Theresa Burr, a former claims supervisor, says she was fired after objecting to the company's decision to turn off its "audit and edit" software--the controls that catch billing duplication and anomalies--when claims backed up on a new computer system. If the delays had been reported, the company would have faced costly penalties. But turning off the software meant that thousands of duplicate and possibly fraudulent claims were paid. The Justice Department took over Burr's suit and settled with the company for $10 million--while allowing it to retain its Medicare contract. "This group of people didn't pay attention to fraud at all," says an angry Burr. "They were just processing claims and worrying about their jobs." In a statement, Florida Blue Cross & Blue Shield noted that the government "specifically provided that the settlement was not an admission of wrongdoing" by the company and that the maker of the new computer system, GTE, in turn reimbursed Blue Cross & Blue Shield for the $10 million.
Linda Ruiz, who heads HCFA's program integrity unit, strongly disputes any notion that HCFA is oblivious to fraud. "In the time I've been with HCFA, not only my efforts but the efforts of the entire agency have been to continuously improve our ability to detect and combat fraud," she says. But even Ruiz agrees that for years HCFA's main priority was servicing claims: "We tended to remove the hassle factor, so to speak. We wanted to unburden the providers, make it easy to process claims."
One thing that greatly complicates the war on fraud is the lack of any central Medicare computer linking the entire system. Contractors use more than 30 different computer systems to process claims, so a contractor in Florida can't see if someone is submitting claims for the same patient in California. HCFA's ability to scrutinize such duplicate claims is limited, and the bad guys know this. In New York, a company called R. M. Lipsap Medical Supplies Inc. was found fabricating addresses for Medicare patients and then submitting $1.5 million in claims using their Medicare numbers in a variety of states. To plug that loophole, HCFA hired GTE in 1994 to develop a systemwide computer network. But last summer it canceled the plan after spending $60 million, complaining that the cost and pace of the project were not acceptable. GTE said that HCFA kept changing its requirements. A federal audit noted that the contract's cost had ballooned from $151 million to $1 billion in just five years.
Bruce Vladeck, who ran HCFA until last summer, says that efforts to get tough have encountered other bureaucratic and political barriers. "In the 1980s and early 1990s, attention to these issues was reduced to a very low level," Vladeck says: When budgets were tight, the first thing to get cut was funding for fraud detection. Lobbies for the large insurance companies meanwhile bristled every time someone suggested a reform that would change their contracts.
Federal and state investigators insist they are now determined to go after Medicare scam artists with unprecedented vigor. In 1996, Congress passed the Kennedy-Kassebaum bill, which contained tough antifraud measures, including $104 million to pay for 370 new agents, lawyers, and other personnel to prosecute fraud. Prosecutors have started using federal civil statutes to freeze claims and payments until they can build criminal cases. In Miami, federal agents have formed a special Medicare fraud task force, and the FBI recently used a home health care company as a front to ensnare a group now indicted on charges of laundering drug profits. In New York, agents nabbed a doctor who was prescribing unnecessary medical equipment and then planted a camera in her office. Equipment-company representatives kept calling on her, giving her money in exchange for her signature on their orders. Eight people pleaded guilty.
But officials also say they are simply overwhelmed by the sheer numbers, and ingenuity, that they come up against each day in the various parts of the fraud puzzle. "This program is such a massive cash cow. The more you clear, the more businesses you open up," says HHS's Varano. So broad and prosperous is the Medicare fraud business that, in some locales, it has become hopelessly intertwined with legitimate trade, even part of the local culture. Gabriel Hernandez says that when he was running fraudulent businesses, he knew of many legitimate clinics that had set up phony spinoffs. They collected names and Medicare numbers of patients in the real clinics and billed them again in the phony clinics.
Finder fees. What Hernandez describes is nothing less than the booming health care fraud "support industry," teams of accountants, computer billers, and check cashers whose "no questions asked" work ethic greases the fraud skids in places like Miami. Finders seek elderly people as "patients" for crooked clinics; they are paid $300 for a patient with both a Medicare and a Medicaid number, $150 for just one number. The finders, in turn, pay the patients between $75 and $150 for their help. The practice has become so popular that many elderly people depend on the cash, says Hernandez. "I've seen some old people go to four different clinics in one week." Medicare fraud is also heavily intertwined with the narcotics trade, says Anthony Vitale, a Miami lawyer who specializes in Medicare issues. Cash from drug sales is used to start up bogus clinics; cash from drug sales is laundered with the clinics' Medicare checks; profits from Medicare reimbursements are plowed back into the drug trade.
Gang attacks. Not surprisingly, as in the drug trade, the huge amounts of cash generated can also spawn violence. Sergio Echevarria, Eladio Munoz, and their friends, a federal indictment alleges, made up a band of thugs who staged a series of home invasions against people they believed were profiting from fraudulent Medicare clinics. One night in January 1996, the gang stopped Idania Arias, the wife of one Miami clinic owner, outside her home. They jumped into her white Jaguar and, with her two young boys in the back, poked a .38 revolver into her face and ordered her to drive to a truck stop. There, Arias and the boys were put into a cargo container. The mother was allowed to leave to go get cash. Their kidnappers believed that she could turn over $500,000, but they released all three when that didn't happen. But then Arias did something her kidnappers hadn't expected: She called the police. The alleged kidnappers were arrested a short while later, driving around.
Juan Cortina wasn't so lucky. He was shot in September 1996 outside his Executive Health and Therapy Center on Miami's Flagler Street. Shortly afterward, someone tried to dig up clinic records that Cortina had buried in a lot he once owned. Police haven't found Cortina's killer, but they say Cortina was suspected of Medicare fraud; he had already done time for smuggling 20,000 pounds of marijuana.
HCFA officials have begun to admit the agency's past failings and the role that its policies have played in encouraging fraud. "I'm outraged by some of the things people will do to rip off the Medicare program," says Nancy-Ann Min DeParle, HCFA's new administrator. "We are making some big changes." These include visiting new home health care providers and medical-equipment companies before they get Medicare provider numbers. Min DeParle says that of 2,000 home health care agencies checked so far, 650 have been denied approval. HCFA this year has allocated $150 million for contractors to use in fraud detection. And with Kennedy-Kassebaum money, HCFA may now hire outside companies to watch over its contractors. Previously, the law pointedly did not allow HCFA to do this. But more than a year after the law's adoption, HCFA has yet to award any such contracts. And though HCFA now requires more information from providers, such as Social Security numbers, Senator Collins and others claim that it does little if anything with those data. "I don't think they've very effectively used the new resources, new agents, the task forces that have been set up," she says. "It just doesn't seem to be a priority."
The agency has launched a host of other initiatives, including a national database that agents can tap into to see who is being investigated; a system that will require more information from those seeking health care provider licenses; and a $50,000 bond for those who want to sell medical equipment under Medicare's aegis. New laws also prohibit felons, like Gabriel Hernandez, from getting licenses. Most notably, HCFA has continued its Operation Restore Trust, a pilot program begun in eight states in 1995 that targets areas of intense fraud. But with a 30-year head start, the bad guys remain far out front. "We in the federal government and officials from the state of Florida have pooled our resources to combat this vexing problem," says one frustrated HCFA official working fraud cases in Florida. "And together, we have been remarkably ineffective."
Medicare by the numbers
Annual claims $250 bil.
Number of claims $800 mil.
Patients participating $38 mil.
Estimated annual loss to waste, fraud, and abuse $27 bil.
Total recovered through prosecutions in 1997 $1.2 bil.
Total claims audited by Medicare contractors $74 mil.
Sources: HCFA, HHS Office of Inspector General
Macarena day care June Schuman's retarded son was supposed to be going on field trips with other residents of his group home. But David, 31, told his mother that, on the trips, "We just go to another counseling place and sit." When Schuman went to David's "counseling place" in Orlando, Fla., she says, "I was absolutely appalled. I saw about 20, 25 patients, just sitting outside smoking." Inside the building, formerly a dairy plant, she found dingy, unpainted walls, some spartan furniture, and more patients like David doing nothing. Then she got David's Medicare statement. It showed that Orlando doctor Jerome Feldman was charging Medicare $200 a day for David's visits. Medicare even paid Feldman's operating costs.
Federal officials say Feldman was billing for dozens of patients. They stopped his Medicare payments last summer, and he is now under investigation. (He could not be reached for comment.) But his was just one of 250 Medicare-funded Community Mental Health Centers in Florida--and one of more than 1,000 across the country--that sprang up after Congress relaxed a rule requiring them to operate only on hospital grounds. In Florida, authorities have suspended payments to nine centers.
The law requires such centers to offer counseling on aging and the loss of partners and intensive therapy. Many, though, are simply expensive adult day care, offering nothing more than fast-food and television. In one, the "therapy" offered the elderly was dancing the macarena.
Moscow on the Hudson He funneled money through eight different New York City banks. He borrowed the names of legal Russian residents in the United States: Mikhail Goldenberg, Yakov Dubinski, Leonid Simonovski. The only thing Yury Bizaykl--his real name--couldn't conceal was his looks. That's how he got caught.
Bizaykl, who pleaded guilty last year, was the middleman in an organization that operated a multimillion-dollar Medicare scam, which agents say they haven't fully cracked. According to an affidavit, it ran at least 13 companies that billed Medicare $10 million for MRIs, equipment, and other services never rendered. The companies, which agents believe are controlled by a Russian crime group in New York, billed Medicare for "patients" in six other states.
New York's Empire Blue Cross/Blue Shield and C&S Administrative Services, which serviced the claims, paid out at least $2 million of the $10 million billed. Dozens of patients, however, complained that their Medicare statements showed services that they never received, including $2,400 MRIs, from clinics they never heard of. Empire and C&S notified authorities. Susan Frisco, an agent with the Department of Health and Human Services' Office of Inspector General, tracked down the phony companies and found that Bizaykl's banks had photocopies of his passports. She circulated his picture. He was picked up withdrawing $40,000 and pleaded guilty to fraud charges. Still, much of the stolen $2 million is missing.
The mambo king In Miami, Frank Morfa was known as the proprietor of Little Havana's Mambo Club. In Cuba, he was allegedly "the Accountant," who helped military officials launder cocaine profits.
But lucrative as his nightclub and drug smuggling were, nothing beat the profits provided by U.S. taxpayers, courtesy of the nation's Medicare system. Morfa, investigators say, got into the health care business in 1989 to launder drug money. He settled on a plan selling nutritional milk supplements to Medicare patients whose systems could no longer tolerate milk. Morfa sent recruiters to seek out retirees in homes, apartments, and senior centers, "offering them the opportunity to receive free milk [supplements] from the government," according to a Justice Department statement. Morfa paid his recruiters $50 to $70 for each retiree's Medicare number. The recruiters also took Medicare patients to cooperative doctors, who signed Medicare forms certifying the need for supplements. Morfa paid the recruiters $100 for each form.
Morfa's companies--Morfa Healthcare Inc., Courie Medical Center Corp., and six others--then proceeded to bill the government $400 a month for up to 19 cases of milk supplements per patient, mostly undelivered. Morfa used his many companies to avoid detection and bilked Medicare for $7.5 million. When federal auditors got wise, Morfa fled to Venezuela, but he was arrested and expelled. He pleaded guilty in 1994 and is serving 10 years for Medicare fraud.
Medicare laundry Jose Luis Zayas said he was a drug dealer with a lot of cash that needed to look legitimate. Zayas also was the owner of Perfect Nursing, a home health care agency. But he had a secret job as well: running an FBI sting. From March 1996 to June 1997, according to a federal affidavit, Zayas supplied other home health care agencies with $1.2 million in drug profits that he wanted to cleanse.
Caught in the FBI trap were Ramon Dominguez and Eusebio Huerta, operators of Amitan Health Services and X-Tended Care, a home health care agency. On a dozen occasions beginning in November 1996, Huerta met Zayas at Perfect Nursing's storefront office in Miami's Little Havana. Each time, Zayas handed over $100,000 in cash. Huerta put it in a brown bag or box, the affidavit says. Then, for each $100,000 payment, he would provide Zayas with "between 20 or 25 checks" from a corporate medical account. The checks were for small amounts, "consistent with the fees payable to a subcontractor for home health services." A note on the memo line of each check claimed that it was for "health care visits," the affidavit states.
Huerta and Dominguez allegedly kept about $200,000 of the $1.2 million as a laundering fee. That's a tidy sum, but nothing close to the $8 million that prosecutors allege Dominguez's company, Amitan, also obtained through more than 8,000 Medicare billings. Both men have pleaded innocent and face trial this spring.
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This story appears in the February 2, 1998 print edition of U.S. News & World Report.