The Taxman Cometh for Spinal Cap Crooks

The long simmering $950 million California Spinal Cap fraud prosecutions may be coming to a whimpering end courtesy of the IRS.

The taxman has come for the Spinal Cap crooks.

On May 3, 2018, George Hammer, the former chief financial officer of the physician management arm of Pacific Hospital in Long Beach, pled guilty to one count of aiding and assisting in the preparation of a false tax return. Hammer admitted that he disguised bribes to healthcare professional in their books and records. The IRS said the company took $7 million in unentitled deductions between 2011 to 2013.

Now the taxman wants around $2.1 million in past-due taxes because the “deductions” were thinly disguised kickbacks to physicians who referred their patients to Pacific Hospital.

The overall tax bill is negligible in the overall fraud that cost taxpayers hundreds of millions of dollars. But as is often the case—think Al Capone—failing to pay taxes can be the surest path to jail.

Hammer Sings

In Hammer’s guilty plea he names names and describes exactly how the enterprise worked. Hammer agreed to forfeit $500,000 to the U.S. Attorney’s Office before his sentencing and to cooperate with agencies as the investigation proceeds.

While he faces a maximum sentence of three years in prison, prosecutors plan to recommend a reduced sentence in exchange for Hammer’s information.

Spinal Cap

A quick Spinal Cap recap.

Spinal Cap is the name of the Justice Department investigation of a 15-year worker’s comp fraud scheme perpetrated by Michael Drobot at his Long Beach Pacific Hospital. This investigation ultimately reached beyond that single hospital and went all the way to the California Statehouse, ensnaring kickback paid physicians and exposing the $950 million false billing scheme.

Before getting busted, Drobot paid more than $40 million in kickbacks over those 15 years. Drobot’s hospital was a major provider of spinal surgeries that were often paid by workers’ compensation programs.

Drobot and a crooked former State Senator are now doing time and numerous healthcare professionals, including spine surgeons, are paying hefty fines and awaiting further sentencing.

Altogether, nine people have been convicted.

A California law known as the “spinal pass-through” legislation, allowed Drobot to pass on to insurance companies the full cost his hospital had paid for medical hardware used during spinal surgeries. As Drobot admitted in court, his hospital exploited this law, typically by using hardware he himself had made. The devices were not cleared by the FDA and purchased at highly-inflated prices from companies that Drobot controlled and passing the cost along to insurance providers.

Illegal Kickbacks

From 1997 to 2013, according to the FBI, Drobot billed workers’ compensation insurers hundreds of millions of dollars for spinal surgeries performed on patients who had been referred by dozens of doctors, chiropractors, and others who were paid illegal kickbacks.

For referrals for spinal surgeries, Drobot typically paid a kickback of $15,000 per lumbar fusion surgery and $10,000 per cervical fusion surgery. Patients came hundreds of miles to Pacific Hospital and were not informed that their medical professionals had been offered kickbacks to induce them to refer the surgeries to the hospital.

Pacific Specialty Physician Management

The conspirators, according to the government and described in Hammer’s plea agreement, concealed the kickback payments by entering into bogus contracts to provide a “cover story” for the surgeons, chiropractors and others who received illegal payments.

For example, the government says several doctors entered into agreements with Pacific Specialty Physician Management (PSPM), a company owned by Drobot and run by Hammer, under which the doctors received as much as $100,000 per month in return for the right to purchase their medical practices—an option that was never exercised. PSPM paid some doctors inflated prices for the right to operate their practices and collect on their insurance claims.

In other cases, according to the government, Pacific Hospital entered into contracts with doctors under which the doctors were to help the hospital collect surgery bills from insurance companies, but the hospital’s own collection staff, rather than the doctors, actually performed the collections work.

Several doctors entered into lease agreements under which Drobot’s management company or his 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. Still others, including marketers who introduced doctors to Pacific Hospital, had additional agreements with Drobot’s companies.

Drobot and the shell companies entered into agreements with physicians through PSPM that were used to pay the kickbacks in exchange for the referrals.

In his plea agreement, Hammer stated the agreements obviously did not specify the inducement for kickbacks, and some agreements specifically stated the referrals were not contemplated.

The contracts would allow for remunerations to the kickback recipients “far in excess” of any reasonable fair market value, according to court documents.

For example, PSPM facilitated the payments to an orthopedic surgeon named Daniel Capen, M.D., by subsidizing medical practice costs that would have reduced the profits of Capen and his practice, Downey Ortho.

Their agreement stated that PSPM’s fee projected to be sufficient to recover operating expenses and a reasonable return on their investment…”without taking into account…the volume or value of referrals.” Furthermore, no amount paid was “intended to be…an inducement…for referral.”

But PSPM’s fee was understood to be “upside down.” The monthly collections paid by the orthopedic surgeons would cover only a fraction of the expenses.

Hammer also admitted to using sham option contracts as a vehicle to pay “Kickback Induced Surgeons (KIS).” Monthly payments to KIS for the ultimate purchase of their practices. Defendants had no intention to sell their practices.

Payments would vary month-to-month and were made to “reward” or induce referments to Pacific Hospital.

Drobot instructed KIS to use specific vendors. Starting in mid-2008, KIS were instructed to use specific hardware in surgeries at Pacific Hospital. The profits financed the kickbacks and PSPM’s losses.

Surgeons Indicted

In conjunction with Hammer’s plea, the feds announced the additional indictments of physicians and others involved in the scheme.

The U.S. Attorney’s Office named Daniel Capen, M.D., Timothy Hunt, M.D., Lauren Papa, D.C., Tiffany Rogers, M.D., William Parker, Brian Carrico, D.C., and two companies Carrico partially owns—Performance Medical & Rehab Center and One Accord Management, Inc. as other defendants accused of playing a part in the scheme.

Capen, Hunt, and Papa have already agreed to plead guilty.

According to prosecutors, Capen, an orthopedic surgeon of Manhattan Beach accounted for about $142 million of Pacific Hospital’s claims to insurers, of which he was paid about $56 million.

Palos Verdes Estates resident Hunt, also an orthopedic surgeon, referred spinal surgery patients to Capen and other doctors.

Papa of Tarzana agreed to plead guilty to a conspiracy charge involving her receipt of illegal kickbacks to refer patients to a neurosurgeon with knowledge that the neurosurgeon would perform the surgeries at Pacific Hospital.

Rogers, an orthopedic surgeon living in Palos Verdes Estates, had not pleaded guilty as of this writing.

Carrico, the chiropractor of Redondo Beach and the two companies he partially owns, were charged in connection with the receipt of illegal kickbacks to influence the referral of patients to Pacific Hospital. Prosecutors allege he and the companies, as well as other co-conspirators, were responsible for $80 million in claims submitted to the federal workers’ compensation program and were paid about $56 million in connection with patients that were referred to Pacific Hospital by Performance Medical.

In a related indictment, three other orthopedic surgeons were charged earlier in June.

David Hobart Payne, M.D., of Irvine, was accused in a grand jury indictment of taking about a $450,000 bribe to direct around $10 million in surgeries to Pacific Hospital.

Lokesh Tantuwaya, M.D., of Rancho Santa Fe and Rock Springs, Wyoming, was accused in an indictment of receiving $3.2 million in kickbacks for directing or performing $38 million in surgeries to the hospital.

Jeffrey David Gross, M.D., of Dana Point, was accused in an indictment of receiving $622,000 for performing or referring $19 million in surgeries to the hospital.

The Last Word – From the IRS

The investigation into the kickback scheme was conducted by the Federal Bureau of Investigation; IRS Criminal Investigation; the California Department of Insurance; and the United States Postal Service, Office of Inspector General.

R. Damon Rowe, Special Agent in Charge of IRS Criminal Investigation’s Los Angeles Field Office, said, “Public health insurance programs—whether a workers’ compensation program or Medicare—are not a personal pocketbook for criminals seeking to exploit government programs designed to help those who need these plans the most.”

“Taxpayers rightly expect individuals working in the healthcare industry that receive payments from taxpayer-funded programs to scrupulously follow the rules. IRS Criminal Investigation will continue to protect the integrity of public health insurance programs and ensure that doctors, pharmacists and medical service providers who profit from these illicit schemes are held accountable.”