Sunday, November 15, 2015

"Honest Services" Mail Fraud and Kickback Case: How The Feds Are Asserting Jurisction in Charging a Shockwave Therapy Company and its Purported Owners, a Referring Chiropractor, Unindicted Referring Doctors and Unindicted Marketers Over Workers' Compensation Patient Referrals and Alleged Kickbacks Disguised as Agreements for Billing, Rent, Receivables and/or Management Services

For the past five years, after the conviction of former Enron CEO Jeffrey Skilling was upheld at the U.S. Supreme Court, federal authorities have been getting ready to use "honest services" mail fraud in health care fraud and kickback cases involving private insurance, workers' compensation insurance as well as Medicare and Medicaid (Medi-Cal) billing. 

In Skilling, the U.S. Supreme Court found clear congressional inent to limit honest services prosecutions to "offenders who, in violation of fiduciary duty, participated in bribery or kickback schemes." In state health care, physicians and chiropractors owe a general fiduciary and statutory duty as part of their professional duties to patients to disclose financial relationships they have with referring businesses (Bus. and Prof. Code Section 654.2) and this will be the core of the conspiracy count but the prosecutors have alleged specific violations of state law which prohibit unlawful referral arrangements for workers' compensation patients as well. 

In three California cases filed this past week, the U.S. Attorney's Office for the Southern District of California (San Diego) is using honest services mail fraud (18 U.S.C. Section 1341 and 1346) and the travel act (18 U.S.C. Section 1952) to prosecute kickbacks and unlawful referral arrangements in treatment of California workers' compensation patients. 

Apart from the fiduciary duty to patients, these honest services fraud cases are also using violation of the underlying California state laws that prohibit referring patients to providers or individuals where the referring person has a financial interest or relationship with them (Labor Code Sections 139.3 and 3125), and state laws that prohibit kickbacks or any compensation or inducement for referring patients (Bus. and Prof. Code Section 650 and Insurance Code 750). 

In one of them filed in the Southern District of California on November 6, 2015, United States v. Reese, Mathis, et al., Case No. 15CR2822, charges were filed against:

(1) Chiropractor George Reese and his professional corporation, 
(2) Foremost Shockwave Solutions, a shock wave therapy services company,
(3) Lee Mathis, a purported partial owner of Foremost who is also an attorney who allegedly owned management and/or billing companies that are referenced in the Indictment, and
(4)  Fernando Valdes who is also a purported owner of Foremost.  
Anyone charged is presumed innocent, and charges in an Indictment are not evidence.

The Indictment also references a doctor, a chiropractor and marketers who are not charged. Some of the uncharged coconspirators may be cooperating with the government (and recording phone conversations and/or meetings) based on the drafting of the Indictment. Other unindicted entities are management and billing entities that are purportedly owned and/or controlled by Valdes and Mathis which are MMN, iMedical, MLCA and L and T.

It is alleged that Mathis, Valdes and Foremost generated $22 million in billing for shockwave therapy. What is not spelled out in the Indictment but is apparent between the lines is that shockwave therapy in this case is mobile, meaning that Foremost (or an intermediary company) would send a technician with the Sonocur machine to the referring physician or chiropractor. The mobile treatment with equipment owned by Foremost and technicians hired by Foremost (or its intermediary company) will also play into how the services were performed and billed by physicians, chiropractors, Foremost, or other Mathis/Valdes related entities and how the patients came to be referred for shockwave therapy. 

Indictment Seeks to Apply Honest Services Mail Fraud to Unlawful Referral Arrangements in State Workers' Compensation Claims

The "honest services" theory focuses of the fiduciary duty owed to the patient under the existing state and professional laws. This way the federal prosecutors can avoid having to focus on the specifics of each insurance claim, do not have to show a "financial loss," as long as they can show through testimony and summary expert testimony that the claims all fall within the prohibited referrals or kickback cases. In such cases, the government does not need to address whether the services were medically necessary, effective or whether the insurance company was defrauded or paid the claims.  The prosecutors have also alleged in this case that the withholding of information about the financial relationships and/or referrals to the patients, employers and insurance carriers were material. This is probably being done to address challenges that have been made to honest services mail fraud in other federal circuits.  

One of the issues that will likely be challenged in this case is whether honest services mail fraud should be applies to state workers' compensation kickback or unlawful patient referral cases. What is the federal interest here will be asked? The Skilling case involved federal securities case. The federal prosecutors are likely using honest services mail fraud theory since prior state workers's compensation cases have been unwieldy and difficult to prosecute when the state prosecutors used fraud theories which require an intent to defraud, reliance, financial loss and have other defenses.

The prosecutors in this case have a number of different theories in which it alleges that the indicted and unindicted coconspirators (Dr. B, Dr. C, Persona A, and Dr. D) violated the state referral and kickback laws which, in turn, serve as alleged grounds for the honest services mail fraud or travel act violations. The US Attorney's Office in San Diego is coordinating with the San Diego District Attorney's Office and California Department of Insurance.  

While not set forth in the Indictment, California workers' compensation has numerous disclosure laws on medical treatment reports submitted (Labor Code Section 4628) which require disclosure of all persons who performed any services and a declaration that there has not been a violation of Labor Code Section 139.3 regarding illegal referral to party with whom a physician has a financial interest. Even where no fraud is alleged, misrepresentations may be used to show other bad conduct.

While the Indictment does have some specific allegations of cash kickbacks which undoubtedly add color (dropping off $3,000 at the Jolly Roger Restaurant) and the prosecutors use to help prove that the participants knew they were violating the law and had to hide the payments. The prosecutors will undoubtedly seek to use the claim forms submitted by the medical providers that were submitted and the lack of disclosure to patients about financial arrangements between the parties. 

The prosecutors have also obtained incriminating recorded statements by the indicted parties showing the true purpose of the referrals, payments, agreements and that they were not legal. While they may not have those statements in arrangements with physicians or chiropractors, the similarity of the arrangements to the one that is recorded will be used as circumstantial evidence that they had the same unlawful referral purpose.

Types of Illegal Referral Arrangements Referenced in This Indictment

There are at three types of unlawful referral arrangements referenced in this Indictment regarding shockwave billing. 

1.  Supervision Billing Was An Alleged Kickback.  Unindicted Doctor B Billed A "Supervision" Fee For Shockwave Treatments Performed In His Office By Foremost Technician As Compensation For Referring The Case to Foremost

In the over act part of the Indictment involving an unidentified physician Dr. B, it is alleged that there was split billing and that unindicted coconspirator Doctor B referred the patients to Defendants for shockwave therapy and billed "supervising" Foremost technicians when there was no actual supervision. The alleged illegal referral fee or financial arrangement is providing the shockwave treatments at Dr. B's office and letting Dr. B bill the supervisory fee as compensation for the referral.  

The arrangement becomes more complicated since it is also alleged that the billing was performed by Valdes and Mathis' companies MMN and iMedical.  The prosecution will use this to show that Mathis and Valdes created this billing arrangement as an unlawful referral fee for the shockwave patients.

In this type of case, it is expected the prosecutors will seek to demonstrate there was no disclosure to patients of the business relationship between Dr. B and Foremost (or the other related Mathis or Valdes companies) and that there was no disclosure on the medical reports to the carriers about the services performed by the technician.

While supervision billing is typical in radiology where there is a technical and professional component, it is alleged in the Indictment that there was no real supervision in these shockwave treatments as there was no anesthesia or need for professional component. The claims of Dr. B will be reviewed in these cases to determine whether the Foremost technicians were disclosed as assisting Dr. B.

2.  Payment Per Patient - Allegedly Disguised As Rent or Lease Agreements As Referral Fees for Ordering Shockwave Treatments for Patients.

The Indictment alleges that doctors and chiropractors were paid "rent" for leases between Foremost (or other Mathis or Valdes entities) and the referring physicians. While not spelled out, where there are mobile shockwave treatments it may have been indicated that there was a lease for the equipment and location. Even if the lease was market value and necessary, the issue will be whether the business relationship was disclosed to the patient, whether it was disclosed on the medical report or claim forms, and whether the arrangement violated state anti-kickback statutes. The prosecutors may simply argue that by not disclosing to the patients that there was a financial relationship between Dr. B and the shockwave provider - that was enough to violate the fiduciary relationship and Labor Code 

In the Overt Acts of the Indictment, the agreement between Dr. Reese and the other defendants and coconspirators for referral of shockwave therapy in 2012 is set forth. This is done to show that the agreements for management, marketing or rent is a "sham."

Given the detail of telephone conversations and dates set forth in the Indictment, these appear to be recorded in some fashion. It is alleged that in July 2012, Dr. Reese told the marketer who is identified only as "Person A" that he was "open to change" when it came to shockwave therapy. It appears Person A then went to Mathis who agreed to pay $100 for each of Dr. Reese's patients where $75 would go to Dr. Reese and $25 to  Person A, and Person A would disguise the payment to Dr. Reewse as rent for office space.  Days later, Dr. Reese agrees to accept $6,000 per month for referral fees (or rent).  On that same date, Mathis agrees to pay the $100 plus an additional 10% to Person A of the amount Foremost or iMedical collects. A couple of weeks later on September 5, 2012, Dr. Reese, Valdes and Person A have a phone call confirming these arrangements so that Foremost begins treating patients at Dr. Reese's office.

The Indictment then details phone calls where Mathis allegedly states his intent in paying Dr. Reese the $6,000 per month and why it is requested that Person A front one-half of the payment, including statements that Mathis is paying an unidentified Dr. D $30,000 per month for 300 to 350 shockwaves per month.  

3.  Marketing, Receivable Agreements and Management Services Agreements Alleged to be Disguised Referral Fees

The Indictment also alleges that with some doctors and/or chiropractors, Valdes and Mathis and their companies used receivable purchase, management or marketing services which, in reality, were for referral fees.  The Indictment indicates in one conversation relating to Dr. Reese that Mathis explained he would use an intermediary company to lease Foremost to perform shockwave treatments and acquire the receivables and then require the intermediary company to contract with iMedical to collect the receivables.  

The Indictment appears to only be an outline of the various arrangements used where there are a number of physicians and chiropractors that entered into these agreements with Mathis, Valdes, Foremost or their uncharged entities.

This will be a large, complex case and will highlight a number of financial arrangements that have been used over the years in the workers compensation system. Expect numerous pretrial motions challenging jurisdiction in this case.

Related Indictments and Wave of Indictments

This Indictment with over acts from 2012 is related to two other indictments (Case No. 15CR2821 against Dr. Grusd and seven other defendants for referrals for ancillary medical services to Chiropractor A in 2014; and Case No. 15CR2820 another against a DME company owner Julian Garcia for paying $50 for each order of hot/cold packs to a chiropractor in 2014 and 2015). It is not revealed how they are related but they come from the same June 2014 grand jury. Careful reading shows that Chiropractor A with three offices is involved in both the Grusd and Garcia cases and may have cooperated after being targeted in the Foremost or other cases since Chiropractor A is not a named conspirator). 

Moreover, Dr. Grusd's companies were also involved in shockwave, EMG, nerve conduction and diagnostic imaging. In shockwave, there is often a need for diagnostic studies to justify the billing in the cases. It is also not unusual for durable medical equipment to be ordered for patients who need diagnostic studies or therapy and the referral fee arrangements between the chiropractors and DME company would also fit within the charges in these three cases.

There is expected a large number of Indictments over the next year, and the scope will cover a wide swath of services in workers' compensation. Lease, marketing, management, receivable collection and other mechanisms that exist between referring parties will be subject to great scrutiny and attack and there appear to have been a number of individuals caught up in their own cases who chose to cooperate and get other providers and individuals recorded on phone calls, text messages, emails and in person meetings.


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