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On June 24 the State Fund filed a RICO action in the United States District Court against California Pharmacy Management LLC, Coastal Express Pharmacy Inc, Michael R Drobot Jr, Michael D Drobot Sr, HealthSmart Pacific Inc. (a California corporation), Industrial Pharmacy Management LLC, Long Beach Pain Center Medical Clinic Inc, Long Beach Prescription Pharmacy and Meds Management Group LLC. The case has been assigned to Judge Andrew J. Guilford for all further proceedings.

The complaint alleges “Defendants in this case conspired and participated in a scheme to defraud State Fund in connection with the submission and collection of fraudulent insurance bills for medical services, spinal implant hardware, medications, and other services…” The complaint goes on to specifically allege “Defendants: (a) formed and operated shell corporations and represented that these corporations were manufacturers of spinal hardware and billed as if these corporations did manufacture the spinal hardware, when they did not; (b) billed for services at substantially higher rates than are allowed under the Official Medical Fee Schedule (“OMFS”), which governs rates that may be charged for certain services rendered in workers’ compensation cases by, among other things, “upcoding’; and “unbundling” items in their billings; (c) billed at rates up to ten times the average rate for over-the-counter medication; (d) represented and billed nurses as assisting surgeons; ( e) double-billed State Fund for radiology services; and (f) engaged in further conduct to conceal their various schemes, which were designed to, and did, induce State Fund to pay the fraudulent bills.” SCIF claims that these acts constitute a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. (“RICO”).

State Fund alleges it has paid Pacific Hospital at least $141 million for services purportedly rendered by Pacific Hospital pursuant to its workers’ compensation policies. This includes at least 16,490 bills for services, including spinal surgery and implants. State Fund has also paid over $20 million to the Pharmacy Defendants. State Fund claims to be “one of the largest victims of Defendants’ unlawful behavior.”

In the sixth cause of action, the Fund seeks to rescind settlement agreements to resolve liens filed with the WCAB with the Defendants that resolved lien claims as far back as 2004. The Fund alleges that State Fund’s consent to enter into these settlement agreements was obtained by fraud” and that “At the time State Fund entered into the settlement agreements, it was unaware of the true facts and would have acted differently if it had known the true facts.

The U.S. attorney for the Central District of California has been investigating allegations that the Pacific Hospital of Long Beach executive paid kickbacks to physicians so they would refer their patients for spine surgery at his facility. Over the past 15 years, Michael D. Drobot built a Southern California business empire centered on treating people with back problems, many of them workers’ compensation patients. At the heart of the operation is Pacific Hospital of Long Beach, a 184-bed facility that Mr. Drobot bought in 1997 and turned into a spine-surgery center.

Last April, Federal Bureau of Investigation agents raided the hospital and another company owned by Mr. Drobot as part of what the agency termed a fraud investigation. Representatives for the FBI and the U.S. attorney’s office declined to give specifics about the probe. According to the article in the Wall Street Journal, people familiar with it say it is focused on allegations that Mr. Drobot operated a kickback scheme, under which he allegedly paid doctors thousands of dollars for each spine surgery they referred to Pacific Hospital. Under California’s anti-kickback statute, it is illegal to pay money to induce patient referrals. The practice is also illegal under federal law if the patients referred are insured by government health programs such as Medicare or Medicaid.