WC Provider Fraud

State Sting Uncovers Half Billion in Fraud

Payers lost millions in high-level workers' comp fraud and money laundering scheme.
By: | March 21, 2014

It’s called Operation Spinal Cap. It involved a former hospital owner allegedly paying tens of millions of dollars in kickbacks to a state senator and others for referrals for spinal surgeries billed to the workers’ comp system.

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A statement from the U.S. Attorney’s Office in Los Angeles said Michael D. Drobot paid kickbacks financed largely by money from inflated prices for medical devices implanted into workers’ comp patients during spinal surgeries between 1997 and 2013. His scheme allegedly exploited a former California law that had allowed hospitals to pass on to workers’ comp insurers the full cost of the medical devices. Drobot, according to the government, used shell companies to inflate the costs of the devices and billed the insurers at the inflated rates.

“The spinal pass-through, the provision of California law that allowed Pacific Hospital to fraudulently inflate the cost of the medical hardware used during spinal surgeries, was a vital component of defendant Drobot’s ability to pay kickbacks to the doctors, chiropractors, marketers, and others who had referred patients to Pacific Hospital for surgeries and other medical services,” according to the charging document. Drobot owned the hospital until last year.

“The referrals to the hospital led to more than $500 million in bills being fraudulently submitted during the last five years of the scheme, much of which was paid by the California workers’ compensation system,” the statement said. “For referrals for spinal surgeries, Drobot typically paid a kickback of $15,000 per lumbar fusion surgery and $10,000 per cervical fusion surgery.”

Drobot says he paid bribes to Democratic California state Sen. Ronald Calderon in exchange for Calderon performing official acts to keep the spinal pass-through law alive. Calderon has pleaded not guilty to federal charges of accepting money, plane trips, golf outings, and jobs for his children in exchange for influencing legislation. He is also accused of taking money from undercover FBI agents acting as movie executives in exchange for supporting an expansion of film tax credits in California.

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Authorities say Calderon, along with his brother Tom, laundered the bribe money through the brother’s consulting firm, Californians for Diversity. Tom Calderon, a former member of the California State Assembly, was charged with conspiracy and money laundering.

A trial has been scheduled for April. Ronald Calderon faces up to nearly 400 years in prison if convicted.

Drobot has accepted a plea agreement and is due back in court at the end of March. He could be sentenced to prison for up to 10 years.

“This is one of the largest workers’ compensation fraud cases in the history of the Department of Insurance,” said Dave Jones, California’s insurance commissioner. “Our successful investigation of this complex criminal scheme underscores our commitment to bring law breakers to justice regardless of who they are.”

Along with the department, the investigation is being conducted by the FBI, IRS-Criminal Investigation, and the U.S. Postal Service, Office of Inspector General.

Nancy Grover is the president of NMG Consulting and the Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]