Lessons of Medi-Cal’s Diaper Debacle

Los Angeles Times , CA
March 23 2004

Lessons of Medi-Cal’s Diaper Debacle

Slow-moving agency took years to close a loophole to fraud. And still
problems persisted.

By Tim Reiterman, Times Staff Writer

SACRAMENTO – Fraud drains billions of dollars from California’s
$29-billion health program for the poor, experts say, but few of the
thousands of products provided by Medi-Cal have been abused as much
or for as long as adult diapers.

In the late 1980s, Medi-Cal suffered a $200-million scandal known as

In response, the Legislature ordered state health officials to adopt
strict monthly limits on the amount Medi-Cal would pay retailers to
supply diapers and other products to elderly and disabled
beneficiaries with incontinence.

But records show that Medi-Cal took more than nine years to fully put
those controls in place and to close a widely known loophole in its
computerized billing system that invited fraud.

The state’s spending on diapers for adults spiked again in the late
1990s as dishonest providers called “diaper bandits” stole tens of
millions of dollars more from the program. In some cases, Medi-Cal
was billed as much as $2,000 a month for a single patient.

The 1990s episode, state auditors found in December, amounted to a
clear failure by Medi-Cal officials to promptly correct a costly and
well-known fraud problem.

And as the state grapples with a multibillion-dollar budget deficit,
the recurring saga of out-of-control spending for an item as simple
as diapers for adults helps to illustrate why controlling spending
for healthcare remains such a challenge.

State health officials say they have worked long and hard over the
years to stamp out the fraud without unduly restricting access to
incontinence products that give patients comfort, security and skin
protection – or unduly hurting honest providers.

Medi-Cal tightened the screening of providers, imposed its first
usage limits and negotiated wholesale price levels with

Officials say they are steadily bringing down spending on
incontinence products.

But they still can’t be certain, after two major outbreaks, that they
have stemmed the thievery.

Stan Rosenstein, who oversees Medi-Cal as the state health
department’s deputy director for medical care services, said the
trouble with fraud is that dishonest providers “are always testing

“They use their computers to test our computer system,” he said.

Growing Demand

The demand for incontinence supplies has grown as the number of aged
and disabled beneficiaries has increased. Medi-Cal has paid more than
$1.4 billion for such products since mid-1986.

Even so, officials saw two dramatic rises in spending for
incontinence supplies that they attributed largely to fraud and
misuse, not to caseload growth.

Figures compiled for The Times by Medi-Cal show that reimbursements
were $13 million in 1987 and roughly tripled in each of the next two
years, exceeding $130 million in 1989.

During a crackdown on providers, spending plunged to $58 million by
1991, but then began a steady climb that accelerated to more than
$107 million in 1997 and peaked at $143 million in 1999. The Medi-Cal
system relies, to a large degree, on the honesty of healthcare
providers who submit bills for products prescribed by doctors and
supplied to patients.

To file a claim, a retailer must first obtain a billing number from
Medi-Cal. And in the late 1980s, that was easy to get. People with no
experience in the healthcare industry, and no special license, set up
shop. There was no limit on how many diapers they could bill to
Medi-Cal, as long as they appeared to have doctors’ prescriptions.
And many took advantage.

As pharmacy investigations chief for Medi-Cal, Carlo Michelotti was
one of the first to begin chasing the “diaper bandits.”

“We identified $200 million in questionable payments,” said
Michelotti, now chief executive officer of the California Pharmacists
Assn. “So I put a band of merry men together.”

>From San Diego to the San Francisco Bay Area, Michelotti’s staff
helped track down unscrupulous diaper purveyors operating out of mail
drops, a liquor store, even a used tire shop with a junkyard dog out

The first Diapergate investigations by federal and state authorities
yielded dozens of criminal convictions.

Spurred by lawmakers and the scandal, Medi-Cal in the early 1990s
established a $165 monthly limit on the cost of incontinence products
for each Medi-Cal patient, which industry sources say covers several
diapers a day plus pads or liners.

However, it was an open secret among providers that the Medi-Cal
computer system had a gaping flaw.

The computer would stop a retailer from billing over the limit, but
it would not prevent other retailers from collecting similar amounts
for the same patient.

“We complained to Medi-Cal for years about it,” said Bob Achermann,
executive director of the California Assn. of Medical Product
Suppliers. “The response was that it was a systems issue.”

Medi-Cal had identified a fix, but officials say they decided it
would put honest retailers at too much financial risk. Store
operators would have no way of knowing whether another supplier had
already used up a Medi-Cal patient’s monthly allotment and could get
stuck for the price of the diapers.

Medi-Cal did nothing to close the loophole. And by the mid-1990s, the
word was out in Los Angeles County, where experts say fraud is most
prevalent and where a disproportionate number of diapers has been

In 1997-98, there were more medical supply dealers “than 7-Elevens
and gas stations put together,” recalled Roubik Assatourian,
president of a medical products wholesaler, who agreed to cooperate
with the government and who has testified in numerous federal
prosecutions and before Congress. “It was one dealer opening and
telling his sister and cousin….

“The economy was good,” Assatourian said in an interview, “and there
was a surplus in the state budget, and the state was not really
paying attention.”

Some retailers plied beneficiaries with free groceries or gifts to
get their business. Some were swapping patient identification
information so they could bill Medi-Cal. Some had so many surplus
diapers, purchased at taxpayers’ expense, that they were unloading
them at swap meets.

The smartest operators realized that Medi-Cal had begun to inspect
invoices to see whether stores had purchased enough stock to support
their Medi-Cal billings. And that’s where Assatourian came in.

As president of Apical Corp., he provided bogus invoices to dozens of
retailers, making it appear that they had received the diapers that
they claimed to have provided to patients.

One of his customers was Khahik Simonyan, owner of Eagle Pharmacy and
a well-known member of the local Armenian community who helped
sponsor youth programs and shipped containers of diapers to aid
earthquake victims in Armenia.

Medi-Cal had paid Eagle about $1.45 million in 1997 through mid-1998,
most of it for incontinence supplies supposedly provided to about 700

Assatourian conceded that some of his invoices had inflated the
number of diapers delivered to Eagle. Other invoices falsely stated
that Eagle had received adult diapers when they instead had gotten
baby diapers, which are much in demand but are ineligible for
Medi-Cal repayment.

“Baby diapers were delivered, but adult diapers were billed,”
Assatourian testified after Simonyan was indicted in 2000 on federal
charges of stealing $627,000 from Medi-Cal.

Assatourian said he had supplied falsified invoices so he could
survive in a corrupt marketplace. “People … were opening up medical
supply stores with the full intent of committing fraud,” he said.
“These people were putting legitimate medical supply businesses out
of business.”

Simonyan was convicted, but authorities say he fled the country
before his sentencing in August 2002.

Within the ranks of Medi-Cal, internal reviews in 1999 and 2000 found
that spending on incontinence supplies was spiking by $5 million a
month, and that sometimes more than 10 different stores were billing
for diapers for the same beneficiary. Medi-Cal had a
$60-million-a-year problem on its hands.

“After I picked myself off the floor, we got together a group the
next day and started a multifaceted attack,” Rosenstein said. “It was
all bad news, and we took it on aggressively.”

Providers Eliminated

Hundreds of providers were eliminated or dropped when Medi-Cal
ordered them to reapply for eligibility. There was a moratorium on
new medical equipment providers, which continues today. Dozens of
bogus providers were prosecuted by federal and state authorities. And
Medi-Cal billings receded.

The solution to the computer loophole was described in a 2000 staff
analysis as a “simple change” costing $10,000. It essentially allowed
Medi-Cal to track the dollar amount of incontinence supplies that all
beneficiaries received, no matter how many stores they had used.

But before it was put in place, Medi-Cal officials spent three years
debating whether to try more complicated and costly options, such as
a “reservation system,” which would have allowed providers to find
out whether a beneficiary was entitled to more diapers or not.

The computer change was not completed until February 2003, a few
months after a Bureau of State Audits examination highlighted the

However, that computer change created the very difficulty that state
officials had tried to avoid.

“If I am a good provider and come in after someone over-billed, then
I would be excluded” from collecting, said Achermann, of the medical
suppliers association.

Rosenstein acknowledged the problem. “We do put providers at risk now
… to prevent fraud,” he said. “We decided that honest providers could
come back and get it approved after a denial.”

Medi-Cal officials contend that their adult diaper cost-cutting has
been highly effective. But people in the industry say businesses
still are circumventing the limits by billing the program for other
items when they reach the maximum for incontinence supplies.

They also say that some manufacturers and wholesalers are taking
shortcuts with diapers – using less of the substances that absorb
moisture – because Medi-Cal’s reimbursement rates have not changed
for years.

“The problem is that they made so many cuts that the person in
business has to look for the loopholes,” said Susan Patillo, owner of
We Care Corp. in Carpinteria, which makes skin care products and
sells diapers. “If they keep closing the loopholes, providers will
not be able to supply Medi-Cal patients.”

Medi-Cal officials say they have not received complaints from
beneficiaries about the availability of products, but that they
sometimes have encountered quality problems.

Sue Hodges, an Oakland activist who uses a wheelchair, said many
disabled people fear that providers would stop participating in the
program because they are not being paid enough.

“Take my example,” she said, “I have partial incontinence, and I use
disposable panty liners – big things … and I have a disposable pad on
my wheelchair.” Without them, she said, “I can’t leave home.”