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Lessons of Medi-Cal's Diaper Debacle

Slow-moving agency took years to close a loophole to fraud. And still problems persisted.

March 23, 2004|Tim Reiterman | Times Staff Writer

SACRAMENTO — Fraud drains billions of dollars from California's $29-billion health program for the poor, experts say, but few of the thousands of products provided by Medi-Cal have been abused as much or for as long as adult diapers.

In the late 1980s, Medi-Cal suffered a $200-million scandal known as Diapergate.

In response, the Legislature ordered state health officials to adopt strict monthly limits on the amount Medi-Cal would pay retailers to supply diapers and other products to elderly and disabled beneficiaries with incontinence.

But records show that Medi-Cal took more than nine years to fully put those controls in place and to close a widely known loophole in its computerized billing system that invited fraud.

The state's spending on diapers for adults spiked again in the late 1990s as dishonest providers called "diaper bandits" stole tens of millions of dollars more from the program. In some cases, Medi-Cal was billed as much as $2,000 a month for a single patient.

The 1990s episode, state auditors found in December, amounted to a clear failure by Medi-Cal officials to promptly correct a costly and well-known fraud problem.

And as the state grapples with a multibillion-dollar budget deficit, the recurring saga of out-of-control spending for an item as simple as diapers for adults helps to illustrate why controlling spending for healthcare remains such a challenge.

State health officials say they have worked long and hard over the years to stamp out the fraud without unduly restricting access to incontinence products that give patients comfort, security and skin protection -- or unduly hurting honest providers.

Medi-Cal tightened the screening of providers, imposed its first usage limits and negotiated wholesale price levels with manufacturers.

Officials say they are steadily bringing down spending on incontinence products.

But they still can't be certain, after two major outbreaks, that they have stemmed the thievery.

Stan Rosenstein, who oversees Medi-Cal as the state health department's deputy director for medical care services, said the trouble with fraud is that dishonest providers "are always testing us."

"They use their computers to test our computer system," he said.

Growing Demand

The demand for incontinence supplies has grown as the number of aged and disabled beneficiaries has increased. Medi-Cal has paid more than $1.4 billion for such products since mid-1986.

Even so, officials saw two dramatic rises in spending for incontinence supplies that they attributed largely to fraud and misuse, not to caseload growth.

Figures compiled for The Times by Medi-Cal show that reimbursements were $13 million in 1987 and roughly tripled in each of the next two years, exceeding $130 million in 1989.

During a crackdown on providers, spending plunged to $58 million by 1991, but then began a steady climb that accelerated to more than $107 million in 1997 and peaked at $143 million in 1999. The Medi-Cal system relies, to a large degree, on the honesty of healthcare providers who submit bills for products prescribed by doctors and supplied to patients.

To file a claim, a retailer must first obtain a billing number from Medi-Cal. And in the late 1980s, that was easy to get. People with no experience in the healthcare industry, and no special license, set up shop. There was no limit on how many diapers they could bill to Medi-Cal, as long as they appeared to have doctors' prescriptions. And many took advantage.

As pharmacy investigations chief for Medi-Cal, Carlo Michelotti was one of the first to begin chasing the "diaper bandits."

"We identified $200 million in questionable payments," said Michelotti, now chief executive officer of the California Pharmacists Assn. "So I put a band of merry men together."

From San Diego to the San Francisco Bay Area, Michelotti's staff helped track down unscrupulous diaper purveyors operating out of mail drops, a liquor store, even a used tire shop with a junkyard dog out front.

The first Diapergate investigations by federal and state authorities yielded dozens of criminal convictions.

Spurred by lawmakers and the scandal, Medi-Cal in the early 1990s established a $165 monthly limit on the cost of incontinence products for each Medi-Cal patient, which industry sources say covers several diapers a day plus pads or liners.

However, it was an open secret among providers that the Medi-Cal computer system had a gaping flaw.

The computer would stop a retailer from billing over the limit, but it would not prevent other retailers from collecting similar amounts for the same patient.

"We complained to Medi-Cal for years about it," said Bob Achermann, executive director of the California Assn. of Medical Product Suppliers. "The response was that it was a systems issue."

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