SACRAMENTO — Ignoring clear warnings that California's Medi-Cal system was rife with fraud, state officials allowed the situation to go unchecked for years until the FBI swept in with massive arrests.
The state's failure to act in the face of alarming audits came less than a decade after an almost identical scam--the $100-million "Diapergate" scandal in 1988-92--rocked the medical program for the poor.
Records and interviews show that the agencies responsible for combating Medi-Cal fraud took little action to stop the criminal activity or to punish the operators who were stealing hundreds of millions of dollars. Not until the FBI launched an investigation in 1998 was the fraud attacked. FBI agents estimate that the total fraud, which is concentrated in the Los Angeles area, may reach $1 billion.
"Was someone asleep at the wheel or what?" said current state Senate Health Services Committee Chairwoman Martha Escutia (D-Whittier).
The "Diapergate" scandal, in which dozens of businesses submitted millions of dollars in false claims for incontinence supplies, prompted a series of reforms that were supposed to be stopgaps for such Medi-Cal abuses. But it turned out the new requirements were rife with unchecked loopholes.
The recent fraud mushroomed at a time when the attention of then-Gov. Pete Wilson and then-state Atty. Gen. Dan Lungren was locked on the hot-button issues of the day: violent crime and welfare cheaters. State resources were poured into programs to combat crime and investigate welfare recipients, but no effort was made to beef up the forces fighting Medi-Cal fraud.
"The department [of health services] under the previous administration was not focused on provider fraud," Gov. Gray Davis said in an interview. "They were focused on individual fraud. The money is in provider fraud and that's where we're going."
A spokesman for Wilson said no evidence of widespread fraud by businesses serving Medi-Cal ever reached the former governor's office.
"The governor finds fraud in any form to be unconscionable," said former press secretary Sean Walsh. "Any time fraud was brought to his attention, Gov. Wilson would make it a priority to end that shameful practice. He thinks it's inexcusable."
Kimberly Belshe, director of the Department of Health Services when the recent fraud took place, declined to be interviewed.
From 1996 until the end of 1998, Controller Kathleen Connell's office submitted more than 100 audit reports to the state attorney general's office suggesting that pharmacies, medical equipment suppliers and laboratories in the Los Angeles area were fraudulently billing Medi-Cal for millions of dollars and should be prosecuted.
Connell said in an interview last week that only three of the audits between 1996 and 1998 ever resulted in criminal charges.
In June 1996, she announced that auditors had examined 11 pharmacies within two miles of each other in Long Beach. The shops had caught her office's attention because they had billed Medi-Cal for $6.3 million in a five-month period. She said most of the billings were found to be fraudulent. "I am concerned that the situation in Long Beach may be widespread," she wrote Belshe, then director of health services.
The case was referred to the state attorney general's office, but the first action taken was by the FBI against one of the pharmacy owners in 1998.
In the summer of that year, the Los Angeles County district attorney's office alerted state officials that it had discovered a $1-million Medi-Cal fraud mill while investigating Dr. Yenok Ordoyan and his wife, Armenui, for false welfare claims. Steve Cooley, director of the district attorney's welfare fraud division, said a raid on the couple's bank accounts produced hundreds of thousands of dollars--allegedly the proceeds of false billings to Medi-Cal and welfare.
'Hard to Imagine How It Went Unnoticed'
The Ordoyans were convicted of welfare fraud, but a Medi-Cal case against them has never been filed.
"It's very frustrating," said Cooley, who is now a candidate for district attorney. "We seized all that money, did all that work, and we sit here waiting for them to do something and it's just not happening." A spokesman for the attorney general's office said the Ordoyans are under investigation.
While searching out welfare fraud, Cooley said, his office often finds evidence of Medi-Cal fraud. "It's a huge problem," he said.
Health and Welfare Secretary Grantland Johnson said he spotted dramatic spikes in orders for medical equipment--mainly for elderly and disabled patients--as soon as he took over last January.
"It is hard to imagine how it went unnoticed," Johnson said. "And I'm a layman. So if I noticed it, everyone else must have too."
In March 1996 a controller's evaluation of the Department of Health Services warned of "significant Medi-Cal accounting and payment control deficiencies which allow for financial abuse, waste and fraud."