“Spinal Cap” Caper in California

When Michael Drobot, Sr. owned and operated the Pacific Hospital in Long Beach, California, the hospital billed out more than half a billion dollars for spine surgeries over a six year period, primarily to the California Workers’ compensation system.

Business was good at the 147-bed hospital. A 2012 Wall Street Journal investigation found that Pacific Hospital led all California hospitals in conducting spinal fusions between 2001 and 2010. According to local press reports, Drobot lived in a two-story, three-car garage residence nestled amongst multi-million dollar homes about a minute away from the posh Bahia Corinthian Yacht Club.

Maybe business was too good. The FBI and the State Compensation Insurance Fund, which oversees workers’ comp claims for the state, took notice and started an undercover investigation called “Spinal Cap.”

According to a secret 125-page affidavit leaked by the Al JazeeraAmerica news service, the agency launched the investigation in part because of a 2007 tip from the California Fair Political Practices Commission about a $1 million payment from a company affiliated with Drobot to the Calderon Group, a firm owned by Tom Calderon, the brother of State Senator, Ron Calderon.

History Making Fraud

Before it was over, the investigators discovered one of the largest workers’ comp fraud cases in California’s history involving more than 150 insurance companies, replete with tens of millions in illegal payoffs to docs for referrals, double and overbilling for devices and alleged bribes to a powerful state senator.

The State Compensation Insurance Fund wanted to recoup some of the $160 million it paid over the past dozen years under civil statutes used to prosecute organized crime syndicates.

On February 21, 2014, Drobot pled guilty to the criminal fraud charges and offered to testify against Senator Calderon, whom Drobot claims he bribed to keep his enterprise going. Calderon surrendered to authorities, but maintains his innocence. Drobot’s sentencing, which could result in 10 years in prison, will be delayed until the conclusion of the Calderon case.

Kick-Backs and Bogus Contracts

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. Some of the patients lived as far as hundreds of miles away from Pacific Hospital and closer to other qualified medical facilities. The patients were not informed that the medical professionals had been offered kickbacks to induce them to refer the surgeries to Pacific Hospital.

There are no allegations that any of the surgeries were unnecessary or resulted in harm to the patients.

Drobot and his co-conspirators, according to the FBI, concealed the kickback payments by entering into bogus contracts with the doctors, chiropractors, and others who received kickbacks. In reality, the contracts merely provided a cover story for the kickback payments.

More Prosecutions to Come

All told, the government says the kickbacks amounted to $20 to $50 million. No charges have been filed yet against any healthcare providers who accepted the kick-backs, but Eric Weirich, deputy commissioner of the enforcement branch of the California Department of Insurance, said in a joint press conference with the U.S. Attorney’s Office, “I assure you, this is the first in many cases to come.”

In a separate civil whistleblower lawsuit, doctors were referred to by initial in documents released by a local NBC affiliate.

Spinal “Pass-Through” Legislation

The kickbacks were financed largely by money generated from inflated prices for medical devices implanted into state workers’ comp patients during spinal surgeries. Drobot exploited a now-repealed California law known as the spinal “pass-through” legislation, which permitted hospitals to pass on to workers’ comp insurers the full cost of medical devices implanted in spinal surgery patients.

Drobot set up shell companies to inflate the costs of those devices and then billed the insurers at the inflated rates. According to the FBI affidavit, Drobot and others inflated the prices by up to 10 times the actual cost.

Beginning in 2001, California workers’ comp law allowed hospitals to collect a second time for spinal devices implanted in the backs of injured workers. That’s in addition to a lump sum payment that included the cost of the device. The law permitted hospitals to pass on spinal medical device costs, plus up to an additional $250, to workers’ comp insurers.

If the surgeon did not use the devices specified by Drobot, the kickbacks were smaller, the documents said. Drobot’s hospital bought the medical supplies for the surgeries from International Implants LLC, a company he controlled.

California Insurance Commissioner Dave Jones said, “The co-conspirators lined their pockets by ripping off insurance companies to the tune of hundreds of millions of dollars. This is one of the largest workers’ compensation fraud cases in the history of the Department of Insurance—our successful investigation of this complex criminal scheme underscores our commitment to bring law breakers to justice regardless of who they are.”

Bribery

To keep the “pass-through” loophole open, Drobot needed help from lawmakers in Sacramento. State Senator Calderon, a Democrat from Montebello, California, was a powerful committee chair. According to the secret affidavit, Drobot allegedly paid Calderon $28, 000 in bribes to meet with other lawmakers and stop legislation to close the loophole.

The government specifically alleges that Drobot bribed Calderon by hiring Calderon’s college-age son to work as a file clerk at his company and paying him approximately $30, 000 over the course of three summers. Calderon’s son showed up for only about 15 days of work each summer, according to the indictment, which also accused Calderon of accepting plane trips, golf outings, and expensive dinners from Drobot.

Drobot reportedly contributed $167, 000 in campaign contributions to Ron and Tom Calderon. Drobot also reportedly contributed more than $1.3 million in total campaign contributions since 2000, nearly all to Democrats.

Calderon took an indefinite leave of absence from the Senate due to the federal investigation.

The repercussions of the investigation, guilty plea and Calderon’s indictment shook the leadership of the California Assembly and caused the Speaker to require all members to attend a one day ethics training seminar this spring.

Drobot Enemies

Drobot made enemies.

An article in the Press Telegram, a local paper quoted a neighbor calling Drobot a “real jerk” who “thought he was above it all, ” and was always showing off his cars.

After the story appeared some readers offered comments to the story. One reader wrote:

“I worked at Pacific Hospital when Drobot took over. It was pretty obvious, from the get-go, that this guy was a scammer. The authorities and overseers of the workmen’s compensation fund looked the other way. Who would foolishly pay out 500 million dollars with[out] asking a single question or realizing what was going on. My guess, other people were being supplied kickbacks at the workmen’s compensation authority. What a thief Drobot was. Everyone who worked at the hospital knew what was going on. Even the orderlies.”

Whistleblowers Go Public

In February 2014, two whistleblowers went public on the local NBC television affiliate, NBC4, talking about what they said was insurance fraud involving counterfeit medical hardware.

“The red flags started immediately, ” said Mark Sersansie of Orange County, who was hired as a sales representative for a man he said worked for Drobot. According to Sersansie, Drobot and his co-conspirators bullied their employees to keep quiet about their scheme.

“These guys are absolute thugs, ” Sersansie told NBC4. “They tried different ways to intimidate me and my family. We had instances where they actually came to my home, three of them and threatened me.”

Justin Berger, Sersansie’s attorney, showed NBC4 an invoice—an exhibit in the suit—which totals $24, 000. “These are bribes to get these surgeons to do surgeries at this hospital with this particular hardware, ” said Berger. “Much of this hardware, if not all of it, we believe is counterfeit.”

Bill Reynolds, an insurance fraud investigator and the other whistleblower, said this scheme bilked the state’s workers’ compensation system out of millions and put thousands at risk. “Initially, we were looking at 500 to a thousand (surgeries), ” said Reynolds. “But we have obtained records now that could (show) 10[000]-15, 000 surgeries nationally.”

“We thought Drobot would be the last person to plead guilty, ” Sersansie told NBC4. “We thought he would go down with a fight because he had the financing and resources to do it, because he was the big bully. When we found out he pled guilty for reasons that he pled guilty. It was a bit of vindication.”

Drobot Sings

Drobot’s attorneys, Janet I. Levine and Jeffrey Rutherford, said he accepts responsibility for his actions and “is providing information to assist the government in its expanding investigations.”

The FBI said the investigation is continuing. Drobot is talking and there are records. We have likely not heard the last of “Spinal Cap.”

Pacific Hospital was sold to Santa Fe Springs-based College Health Enterprises in early October. The facility is now named College Medical Center Long Beach and is operated by a Molina Healthcare affiliate.