Owner of Los Angeles Compounding Pharmacy Sentenced to 30 Months in Federal Health Care Fraud Case

Compounding pharmacies have been under intense scrutiny by Medicare, private third-party insurance and workers’ compensation insurance carriers for almost ten years. The criminal cases take so long to investigate and prosecute that there is a significant lag time between the time of operations and prosecution.

Compounding cases that proceed criminally usually involve aggressive and illegal marketing, medical necessity issues, and violation of pharmacy compounding laws and regulations. A recent case gives insight into a case involving compounding pharmacies where preprinted physician prescription pads, waiving of patients’ copays, and attempts to hide the waiving of copays caused criminal problems. 

According to court documents, Fusion Rx Compounding Pharmacy was a provider of compounded drugs. What are compounded drugs? They are non-FDA approved medications that are supposed to be tailored to the needs of a specific patient when FDA-approved medications do not meet the health needs of patient. The pharmacy obtains a compounding license and combines, mixes or alters two or more drugs. The physician is supposed to prescribe and order the compounded medication and indicate what drugs are to be compounded to make it for that particular patient. Fusion RX was owned by Navid Vahedi, a Los Angeles pharmacist. 

The prosecution alleged in its charging documents and there were admissions in the plea agreements that pharmacist Mr. Vahedi and Fusion Rx paid millions of dollars in kickback payments through the businesses of two marketers to send prescriptions for compounded drugs to Fusion Rx. It was also alleged that Mr. Vahedi and the of his two marketers provided physicians with preprinted prescription script pads that offered “check-the-box” options on the form to maximize the amount of insurance reimbursement for the compounded drugs. From May 2014 to at least February 2016, it was alleged that Fusion Rx received approximately $14 million in reimbursements on its claims for compounded drug prescriptions. 

Four Indicted in California for Billing Compound Cream Prescriptions to TRICARE and Labor Union Health Plans

The government has been investigating pharmacies that dispense and bill compound creams for the past 5 years as well as the marketing companies that work with them. Much of the focus has been on billings to workers' compensation carriers or billing to TRICARE, military health insurance, and billing to union health plans.

On February 4, 2020, a 48-count grand jury indictment was unsealed naming four  defendants relating to an Orange County compound pharmacy, Professional Compounding Pharmacy (PCP), that allegedly submitted fraudulent bills to the military’s TRICARE health plan and a labor union health plan for medically unnecessary compound cream prescriptions in which there was alleged illegal marketing. An indictment is not evidence and all defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt. 

The indictment – which contains charges of health care fraud, mail fraud, illegal kickbacks and money laundering – alleges that PCP, its marketers and a physician fraudulently generated prescriptions for custom-made compound cream medications. The indictment alleges that some bills charged as $15,000 per tube.

The indictment alleges that two “pain clinics” in Lawndale and National City recruited beneficiaries of TRICARE and the International Longshore and Warehouse Union’s (ILWU) Pacific Maritime Association Welfare Plan. 

Los Angeles Orthopedic Surgeon Sentenced to 30 Months in Federal Prison for Receiving Kickbacks for Referring Surgeries to Pacific Hospital and Using Medical Hardware From Hospital-Related Entity

On November 22, 2019, an orthopedic surgeon specializing in spinal surgeries, Dr. Daniel Capen, was sentenced to 30 months in federal prison after he pleaded guilty. Dr. Capen pleaded guilty in August 2018 to conspiracy to commit honest services fraud and to soliciting and receiving kickbacks for health care referrals relating to Pacific Hospital and related entities. 

In his plea agreement, he agreed that he received at least $5 million in kickbacks for performing hundreds of spinal surgeries that were mostly for workers' compensation patients. 

U.S. District Judge Josephine Staton who sentenced Dr. Capen also ordered him to forfeit $5 million to the United States and pay a $500,000 fine. 

Dr. Capen is 70 years' old and the sentence appears to have taken into account his age and his acceptance of responsibility for the plea. One reason the sentence is 30 months is due to the total loss related to the kickbacks. When there is an illegal referral fee, the entire bill is considered a false or fraudulent claim. Given the cost of hospital bills for such surgeries, the plea agreement indicated that the illegal referral fees resulted resulted in more than $580 million in fraudulent bills being submitted, mostly to California’s worker compensation system.

This kickback arrangement centered on the now-closed Pacific Hospital in Long Beach, which specialized in surgeries, especially spinal and orthopedic procedures. Pacific Hospital’s owner, Michael Drobot who is serving a 5-year sentence for conspiracy and illegal kickbacks, paid kickbacks to doctors, chiropractors and marketers in return for the referral of thousands of patients to Pacific Hospital for spinal surgeries and other medical services paid for primarily through the California workers’ compensation system.

U.S. Department of Justice Intervenes in Five Civil Qui Tam Lawuits in Los Angeles Accusing Insys Therapeutics of Paying Kickbacks in Form of Speaker Fees, Meals, Entertainment, Jobs, Etc. to Encourage Physicians Promote Sybsys, a Sublingual Spray Form of Fentanyl

On May 15, 2018, the United States intervened in five “whistleblower” lawsuits that have been consolidated in United States District Court in Los Angeles and accuse Insys Therapeutics, Inc. of paying illegal kickbacks and defrauding federal health programs in connection with the marketing of Subsys, an opioid painkiller manufactured and sold by the Arizona-based company.   The civil claims asserted against Insys are allegations only, and there has been no determination of liability.

The five cases brought pursuant to the False Claims Act were ordered unsealed late last week, as was the government’s complaint in intervention. The United States has separately pursued a number of criminal cases against Insys employees and Subsys prescribers.

The cases allege illegal marketing tactics related to Subsys, a sublingual spray form of fentanyl, an opioid painkiller. In 2012, Subsys was approved by the Food and Drug Administration for the treatment of persistent breakthrough pain in adult cancer patients who are already receiving, and tolerant to, around-the-clock opioid therapy.

The government’s complaint alleges that Insys paid kickbacks to induce physicians and nurse practitioners to prescribe Subsys for their patients. Many of these kickbacks allegedly took the form of sham speaker fees to physicians, jobs for the prescribers’ relatives and friends, and lavish meals and entertainment.

The United States also alleges that Insys improperly encouraged physicians to prescribe Subsys for patients who did not have cancer, and that Insys employees lied to insurers about patients’ diagnoses in order to obtain reimbursement for Subsys prescriptions that had been written for Medicare and TRICARE beneficiaries.

Sales Representative Who Gave Gift Cards and Personal Checks to Medical Referral Sources Sentenced for Obstructing Federal Investigation of Health Care Offenses During Meeting With Investigators

It is becoming more common to charge individuals for "obstructing" a health care fraud investigation. Recently, on February 8, 2016,Terrence Kyle Tackett, a sales representative for multiple healthcare companies was sentenced in U.S. District Court in Boston in connection with obstructing an investigation into kickbacks paid to medical professionals.

From 2012 to 2013, Mr. Tackett worked as a sales representative in Kentucky for California-based healthcare company Cardio Dx, and from August 2013 to February 2015, he worked for Aegerion Pharmaceuticals, Inc., a Cambridge-based pharmaceutical company. 

Mr. Tackett now admits that from 2012 through February 2015 he gave medical professionals gift cards and personal checks in exchange for ordering or prescribing the products he promoted and to get access to private patient information protected by HIPAA. In May 2016, Mr. Tackett pleaded guilty to one count of obstruction of a criminal investigation of health care offenses.

However, during a January 2015 meeting with investigators, Mr. Tackett falsely denied and attempted to conceal the gift cards and checks he had been paying to physicians and their staffs for years in Kentucky and southern Ohio. 

Mr. Tackett was sentenced by U.S. District Court Judge Allison D. Burroughs to three years of probation, with the first six months in community confinement and then six months on home detention, 100 hours of community service to be completed during the last two years of probation, and a fine of $15,000. 

The obvious lesson here is not to meet with any federal investigators unless you understand your rights, the scope of the investigation and AFTER you have consulted with counsel. Importantly, not being honest with the investigators is a separate criminal offense and one that may be easier to prove than a kickback count.  

Posted by Tracy Green, Esq.
Email: tgreen@greenassoc.com
Office: 213-233-2260

Florida Man Indicted for Receiving $20 Million in Marketing Fees From Compounding Pharmacy For Patients Covered by Tricare Health Insurance and Paying Telemedicine Companies to Prescribe Compounded Medication Prescriptions

Compounding pharmacies are facing investigations for marketing arrangements, drug misbranding as well as for health care fraud in billing workers' compensation insurance or Tricare health insurance. A recent case involves billings to Tricare, commission payments and the use of telemedicine in order to have providers issue the prescriptions. 

On December 13, 2016, Monty Ray Grow of Tampa, Florida was charged by Indictment which alleges that between September 2014 and June 2015, Mr. Grow received approximately $20 million in payments from a Broward County, Florida compounding pharmacy in exchange for recruiting and referring patients that were covered by the Tricare health care insurance program. The government alleges that these payments were "kickbacks." An Indictment is merely an accusation and every defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

The Indictment further alleges that Mr. Grow and others defrauded Tricare by paying telemedicine companies to provide compounded medication prescriptions to the recruited patients without conducting any physical examination of the patients as required by law. It is also alleged that these invalid prescriptions were issued without regard to the patients’ medical necessity.  The Indictment further alleges that Mr. Grow used the proeeds to buy real estate, luxury vehicles and securities.    

The time period here was key for Tricare which was to adopt new controls on compounded medication prescriptions in May 2015. The year before there was aggressive marketing of military families who were cold called about compounded medications. In 2004 Tricare paid $5 million for compounded medications but in the fist 3 months of 2015 alone, Tricare was billed at least $700 million. This is by all providers and it shows part of the reason Tricare became aggressive about compounding. The marketing of compounding medications directly to patients was aggressive across the country and this case is the first of more to come against compounding pharmacies, physicians and marketers.

Doctor Arrested For Accepting Free Meals and Speaker Fees From Pharma Company

A gynecologist Rita Luthra, M.D. in Springfield, Massachusetts, was indicted and arrested last week in connection with allegedly accepting free meals and speaker fees from a pharmaceutical company Warner Chilcott in return for prescribing its osteoporosis drugs, allowing pharmaceutical sales representatives to access patient records, and lying to federal investigators.Warner Chilcott is a unit of Allergan.

Dr. Luthrow is presumed innocent of all charges and through her attorney she denies them. She was charged with one count of violating the Anti-Kickback Statute, one count of wrongful disclosure of individually identifiable health information, and one count of obstructing a criminal health care investigation by lying to federal agents and directing an employee to do the same. The Indictment also seeks $23,500 in criminal forfeiture which is the amount of payment Dr. Luthra received from Warner Chilcott.

According to court documents, Warner Chilcott, a pharmaceutical company, allegedly paid Dr. Luthra $23,500 to prescribe its osteoporosis drugs (Actonel and Atelvia) from October 2010 through November 2011. On thirty-one occasions, a Warner Chilcott representative allegedly brought food to Dr. Luthra's medical office for her and her staff, and paid $750 to speak with Dr. Luthra for roughly thirty minutes, while she ate. Warner Chilcott also paid to cater a barbeque hosted by Dr. Luthra at her home, and paid Dr. Luthra $250 for speaker training, despite the fact that there are no records where she spoke to any other physicians.

It is alleged that Dr. Luthra's rate of prescribing Warner Chilcott's osteoporosis drugs increased during the time she was paid by the company, and abruptly declined once she stopped being paid by Warner Chilcott. Additionally, it is alleged that Dr. Luthra allowed Warner Chilcott to access protected health information in her patients' medical files without appropriate authorizations.

When Dr. Luthra was interviewed about her relationship with Warner Chilcott by federal agents, she allegedly provided false information to those federal agents and allegedly instructed at least one of her employees to also lie and provide false information to the federal agents.

In related federal cases, Warner Chilcott has agreed to plead guilty to health care fraud and pay a $23 million criminal fine and $102 million to whistleblowers in a qui tam case. In addition, the former CEO of Warner Chilcott was also charged with conspiracy to pay kickbacks to physicians and his case is pending. Three former district managers of Warner Chilcott have agreed to plead guilty to conspiracy to commit health care fraud and other violations.

Attorney Commentary

Lessons of the day. First, when federal investigators come to your office, do not speak to them, do not instruct your staff to do anything or do anything unless and until you seek advice of counsel. 

This “lying to federal investigators” portion of the case reminds me of the Martha Stewart case except it involves a physician. I see many cases that proceed criminally because prosecutors have found mistruths during interviews, telling others to not be truthful or altered or destroyed records.

Second, federal and state anti-kickback statutes can be far reaching and are now being prosecuted more aggressively. Massachusetts has state laws that require public disclosure of physician payments and gifts to be reported which allows prosecutors to then see if there are any patterns in prescribing. This probably made it easier for the federal authorities to prosecute this case.

While actual sentences for federal crimes tend to be less than the statutory maximum penalties, the charges Dr. Luthra is facing each come with heavy possible penalties. Worse are the collateral consequences to Dr. Luthra’s medical license, her ability to participate in Medicare and Medicaid programs, her insurance provider contracts, and so on. Even if Dr. Luthra wins the criminal case, the Medical Board can pursue under a lower burden of proof. Further, a qui tam civil lawsuit can be filed.

In other words, a case like this can end or hobble a medical career. For this reason, it is critical to avoid the filing of charges if ever possible. Just the filing of charges starts a chain reaction that makes practicing medicine difficult. Compliance while engaging in marketing or receiving benefits from health care providers or companies is critical. See what the "safe harbor" is when doing marketing in health care. Make sure your practice is compliant and use health care attorneys.

Advice of counsel can be a critical defense in a case. For example, if Dr. Luthra could show that she consulted with an attorney who stated that it was not a violation of law, that could show her good faith and demonstrate that she did not have “scienter” to violate the Anti-Kickback Statute. One of the reasons prosecutors charge defendants like Dr. Luthra with lying to federal investigators is to show that there was knowledge that the conduct was wrong and an attempt to cover it up. Clearly, no one would choose to ruin their medical career over $25,000 in meals and compensation but what everyone was doing in marketing years ago does not pass muster any longer and criminal prosecutions and qui tam cases are being filed with greater frequency.

Posted by Tracy Green, Esq.

Green and Associates

Medical and Physician Marketing: Los Angeles Times Article On "Scrutiny Of Lap Band Enterprise Is Overdue"

On March 4, 2010, I posted an article regarding the Los Angeles Times' articles on Top Surgeons' marketing of lap bands entitled "L.A. Times Article On Lap Band Surgery Centers: What Other Legal And Consumer Issues Are Raised Here?"

The Los Angeles Times recently wrote another article on December 19, 2010 stating that "Scrutiny of Lap Band Enterprise Is Overdue." 

According to the L.A. Times, the 1-800-GET-THIN billboards which pepper the Los Angeles and Orange County freeways have caught the attention of the Los Angeles County Department of Public Health and it has asked the U.S. Food and Drug Administration to investigate the ad campaign.  Here is a link of the letter that was sent to the FDA. 


The referral to the FDA was probably made since the Medical Board does not have jurisdiction over advertising by non-physicians and there were some issues over who has jurisdiction over the surgery centers operated by non-physicians. The success of this type of marketing to patients comes with its pitfalls and level of scrutiny. 

For health care providers, this article is a reminder that they need to ensure that their advertising and referral arrangements with surgery centers and companies that advertise (on the Internet and elsewhere) comply with California and federal laws prohibiting false advertising and the giving of any consideration (money or other things of value) for the referral of a patient.

Should you have any questions regarding your own situation or this post, you can email physician attorney Tracy Green at tgreen@greenassoc.com. Green and Associates is located in downtown Los Angeles, California and focuses their practice on the representation of licensed professionals, individuals and businesses in civil, business, administrative and criminal proceedings. They have a long-standing specialty in representing health care providers. Ms. Green is presently a member of the Board of Directors of the California Naturopathic Doctors Association. The firm website is: http://www.greenassoc.com/