Four Indicted in Southern California Pain Clinic Scam; ILWU Plan Loses $3M

The ingenuity underlying health care fraud in America is almost boundless. A recent bust of a scam in Southern California is a prime example. In the first week of February, federal agents arrested four persons for fleecing two benefit plans out of a combined $22 million of which $3 million came from one jointly sponsored by the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association. The defendants – James Nate Bell, Regina Piehl, Michael Edwards and Sara Samhat – had been indicted on January 29 by a Santa Ana federal grand jury for collecting insurance reimbursements based on unnecessary compound cream prescriptions. The actions follow an ongoing probe by the FBI, the IRS, the Defense Department, and the Labor Department’s Office of Inspector General and Employee Benefits Security Administration.

The last decade has been rife with health plan fraud. In the Chicago area, for example, Dr. Richard Kolbusz received $2.6 million in phony claims from Medicare and private insurers for skin care treatments. In New Jersey, United Auto Workers local official Sergio Acosta and insurance broker Lawrence Ackerman teamed up to market health plans nationwide to persons they knew were ineligible for coverage, in the process costing a Blue Cross/Blue Shield affiliate and a union benefit plan a combined $6.6 million. And apropos of the current Southern California case, David Gomez, a member of an ILWU local in Los Angeles, along with another defendant, billed a union-sponsored health care fund for nonexistent or questionable chiropractic services totaling at least $3 million. Each of these schemes resulted in criminal convictions. And the list is far from comprehensive.

The Justice Department’s new 48-count indictment focuses on a sophisticated health care network with an apparent legacy of fraud, kickbacks and money laundering. The maypole of this scam was an Orange County marketing firm, Professional Compounding Pharmacy (PCP). The company allegedly hired a marketing team to convince health care providers and patients associated with two plans, TRICARE, which serves military personnel, and the International Longshore and Warehouse Union-Pacific Maritime Association Welfare Plan, to aggressively inflate the number and the price of prescriptions for compound cream medication. PCP operated clinics in the Orange County communities of Brea and La Habra.

To make the scheme work, PCP created a pair of “pain clinics,” one in Lawndale (Los Angeles County) and the other in National City (San Diego County) to conduct studies on the effectiveness of pain relief creams as a substitute for opioids. Michael Edwards, a physician set these clinics up. PCP recruited current enrollees in TRICARE and ILWU health plans to participate, offering a $200 cash bonus as an inducement. Unfortunately, say prosecutors, these studies were shams. All the “patients” had to do to collect their money was show up.

Having derived favorable “results” from these fake studies, Professional Compounding Pharmacy was positioned to persuade area doctors and nurse practitioners to boost their prescriptions (including refills) for painkiller relief creams. Whether or not the prescriptions actually were needed was immaterial. As an incentive to generate billings to TRICARE and ILWU plans, PCP paid exorbitant kickbacks, generally around 50 percent, to its marketers who located doctors willing to write these prescriptions and patients willing to request them. As health care service providers received a share of revenues, the price was right. And there were plenty of patients. Since “somebody else” (i.e., health plans) would be paying the bills, health care providers, pharmacies and patients had no stake in controlling prices. This condition of moral hazard led to a gross inflation of the number of prescriptions and the prices paid for them. A single tube of cream could cost as much as $15,000.

The scam eventually collapsed under its own weight. Around 2016, TRICARE and ILWU health plan administrators, alarmed over the pileup of excessive billings, contacted federal authorities. That led to a multi-agency investigation and grand jury indictments. The defendants are: 1) James Nate Bell, 38, a resident of Anaheim Hills and owner of PCP and two related medical marketing companies that were kickback conduits; 2) Regina Piehl, 66, a resident of Pacific Palisades and a client of several companies that received and paid for kickbacks; 3) Dr. Michael Edwards, 52, a resident of Huntington Beach and a partner with Piehl in setting up the phony clinics and prescription mills; and 4) Sara Samhat, 45, a resident of Huntington Beach and a co-conspirator with Dr. Edwards in routing prescriptions to PCP and affiliated companies in exchange for kickbacks. Estimated insurance losses were $22 million, of which $19 million and $3 million, respectively, were borne by the TRICARE and ILWU plans. No further developments have occurred since.

We are likely to see a lot more scams of this nature. A 2018 report issued by the Office of Inspector General for the Department of Health and Human Services revealed that fully 547 pharmacies – nearly a fourth of the pharmacies accounting for the largest Medicare bills for topical pain creams – met at least one of five “red flag” markers, including exorbitant prices and explosive growth in the number of billings. In one case, a New York pharmacy submitted more than 5,300 prescriptions ordered by one podiatrist. In another, a Florida pharmacy generated an increase in Medicare billings for such treatments from $7,468 in 2015 to $1.8 million in 2016. Such cases may seem out of the ordinary, but taken as a whole, they go a long way in explaining why total Medicare spending for topical pain relievers rose from $13.2 million in 2010 to $323.5 million in 2016, a nearly 25-fold increase.

In light of the ongoing opioid drug crisis, it’s understandable why many doctors are prescribing cream compounds. But how much of an alternative is the latter? According to a congressionally-mandated study released in February 2019, the use of topical creams on patients at Walter Reed National Military Medical Center produced no significant improvement in pain scores relative to a control group given a placebo. The PCP scam is further evidence that prescriptions for creams, like those for opioids, are highly subject to benefit fraud. Insofar as union health plans are involved, covered workers pay the cost in the form of higher premiums.