Former hospital CFO, two surgeons, charged in $600 million healthcare billing fraud

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The former CFO of a Long Beach hospital in California, two orthopedic surgeons and two others have been charged in relation to a $600 million fraudulent billings scheme involving illegal referrals of thousands of patients for spinal surgeries, the U.S. Department of Justice, Central District of California announced.

James L. Canedo, 63, of San Pedro, the CFO of Pacific Hospital of Long Beach from 1999 to 2013, was responsible for tracking payments made directly to doctors by the hospital, as well as the number of patients each doctor referred and the amounts the hospital collected for those patients' procedures, according to authorities.

Canedo communicated directly with a number of the doctors regarding the payments and surgeries, and sometimes mediated disputes between different doctors who claimed credit for the same referral, the Justice Department said.

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Canedo pleaded guilty on September 4 to numerous criminal charges, in a case unsealed Monday by the United States District Court. Canedo is scheduled to be sentenced on June 17, 2016. He faces up to five years in prison and is expected to pay restitution of at least $20 million.

All five defendants, including orthopedic surgeons, have agreed to cooperate with the government's ongoing investigation called "Operation Spinal Cap."

In a second, similar scheme also involving spinal surgeries, the former CEO and owner of Pacific Hospital pleaded guilty in April 2014 to illegally billing workers' compensation for claims filed by  doctors who received kickbacks for referrals, according to the Justice Department.

Michael D. Drobot, the CEO and owner of Pacific Hospital until late 2013, ran a 15-year scheme which resulted in the billing of hundreds of millions of dollars for spinal surgeries, according to authorities. Many of the fraudulent claims were paid by the California worker's compensation system and the federal government, they said.

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California Insurance Commissioner Dave Jones called it one of the largest workers compensation insurance fraud cases his department has ever seen.

"Injured workers were treated like livestock by doctors and hospitals who paid or accepted kickbacks and bribes in exchange for referrals," Jones said.

The conspirators typically paid a kickback of $15,000 for each lumbar fusion surgery and $10,000 for each cervical fusion surgery, authorities said. Some of the patients lived hundreds of miles away from Pacific Hospital and closer to other qualified medical facilities.

The kickback payments were concealed through bogus contracts, authorities said. For example, a number of doctors entered into agreements with a Drobot-owned company, Pacific Specialty Physician Management, under which the doctors received as much as $100,000 per month from the company in return for the right to purchase their medical practices – an option that was never exercised.

Several doctors entered into lease agreements under which Pacific Specialty Physician Management or Pacific Hospital paid rent for the use of office space, but rarely used the space. And other doctors had agreements to provide consulting services to Drobot's companies, but did not actually provide the services.

Two other Drobot companies, California Pharmacy Management and its successor, Industrial Pharmacy Management, set up and managed what were essentially mini-pharmacies within doctors' offices, the Justice Department said. The pharmacies bought and dispensed medication that the doctors prescribed to their patients, and these businesses received a portion of the money reimbursed by insurance companies, according to authorities.

Others charged or named in the case involving Canedo include: Philip Sobol, 61,  an orthopedic surgeon; Alan Ivar, 55, of Las Vegas, a chiropractor; and Mitchell Cohen, 55, an orthopedic surgeon.

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Sobol, Ivar and Cohen each received, respectively, $5.2 million, $1.24 million, and $1.64 million in kickbacks from the referral of more than 200 patients, according to the Justice Department. Paul Richard Randall, 56, a healthcare marketer previously affiliated with Pacific Hospital and Tri-City Regional Medical Center in Hawaiian Gardens, California, also admitted having a role in the scheme, authorities said.

Through his company Summit Medical Group, Randall distributed spinal surgery hardware to Tri-City at inflated prices and then used the proceeds to pay a 5 percent kickback to Tri-City and up to $20,000 per surgery to the doctors and chiropractors who referred the patients, the Justice Department said.

In addition, though a separate company, Platinum Medical, Randall paid kickbacks to doctors in return for referrals of patients for toxicology tests, resulting in several million dollars in losses to insurers, authorities said.

The ongoing investigation is being conducted by the Federal Bureau of Investigation; the United States Postal Service, Office of Inspector General; IRS Criminal Investigation; and the California Department of Insurance.

Twitter: @SusanJMorse