CenCal Health, Other Healthcare Providers Agree to Pay $95.5 Million for Alleged Scheme to Defraud Medi-Cal, Medicaid

San Francisco, August 30, 2023—Under seven separate settlement agreements, CenCal Health, a California county organized health system (COHS), along with seven hospitals and clinics doing business with CenCal Health, have agreed to pay a total of $95.5 million to the federal government and the state of California to settle a whistleblower lawsuit filed by Phillips & Cohen LLP and made public today. The United States intervened in the litigation in December 2022.

Allegations of Medicaid Fund Misappropriation

The lawsuit alleges that CenCal and the healthcare providers misappropriated tens of millions of dollars from California’s Medicaid program, Medi-Cal.  CenCal Health receives funds from Medicaid to provide health care services in two California counties: Santa Barbara County and San Luis Obispo County.  The lawsuit contends that CenCal Health inflated the Medical-Loss Ratio (MLR) it reported to California’s Department of Health Care Services (DHCS) to avoid refunding tens of millions of dollars in surplus funding.  As alleged in the whistleblower’s complaint, CenCal did this by paying millions to hospitals and clinics as a “surplus distribution” disguised as compensation for health care services.  A senior CenCal Health executive allegedly described the hospital and clinic payments as “a means to incur additional cost” so that CenCal would not have to “send the dollars back to . . . Sacramento.”

“Medical Loss Ratio (MLR) inflation takes scarce healthcare dollars away from patients who need it and harms taxpayers,” said Edward Arens, a whistleblower attorney and partner at Phillips & Cohen LLP.  “These settlements show the government’s commitment to enforcing MLR requirements and the importance of whistleblowers in bringing allegations of MLR fraud to the government’s attention.”

Settlement Details and Payments

Six of the seven settlements were announced by the Department of Justice in December 2022 and June 2023, while the whistleblower’s lawsuit remained under seal.  The seventh settlement, with Lompoc Valley Medical Center, was announced today.

Under the settlement agreements:

  • CenCal Health will pay $49.5 million to the federal government;
  • Dignity Health, a not-for-profit health system that owns and operates three hospitals and one clinic in Santa Barbara County and San Luis Obispo County, has paid $13.5 million to the United States and $1.5 million to the state of California;
  • Cottage Health System, a not-for-profit system of healthcare providers that operates five hospitals, will pay $9 million to the federal government and $1 million to the state of California;
  • Twin Cities Community Hospital and Sierra Vista Regional Medical Center, subsidiaries of Tenet Healthcare Corporation, operating in San Luis Obispo County, California, have paid $6.75 million to the federal government and $750,000 to the state of California;
  • Sansum Clinic, a non-profit outpatient clinic operating in Santa Barbara County, will pay $4.5 million to the federal government and $500,000 to the state of California; and
  • Community Health Centers of the Central Coast, a community health center operating in Santa Barbara and San Luis Obispo Counties, California, will pay $3.15 million to the federal government and $350,000 to the state of California.
  • Lompoc Valley Medical Center, a California local health care district, will pay $5 million to the federal government.

Medicaid Expansion and MLR Requirements

In 2010, the Patient Protection and Affordable Care Act expanded Medicaid eligibility to a large group of low-income individuals who were previously uninsured.  California accepted this expansion and beginning in 2014, more than 1.4 million California residents became newly eligible for Medi-Cal, California’s Medicaid program.  Beginning in 2014, CenCal received supplemental funds from California’s Department of Health Care Services (DHCS) to provide healthcare services to newly eligible Medi-Cal beneficiaries.

To ensure it did not overpay for newly eligible patients, DHCS required COHS’s such as CenCal to spend at least 85 percent of their capitation payments on healthcare services.  This percentage is known as the MLR.  If the COHS spent less than 85 percent of its payments on healthcare services, DHCS required it to return the surplus to DHCS and, by extension, the federal government.

The lawsuit alleged that in the summer of 2014, CenCal allegedly determined that its payments from DHCS significantly exceeded the amount it was spending on healthcare services for the Medi-Cal expansion members, and it would fall short of spending 85 percent of its capitation payments.  To avoid returning the excess funds, CenCal allegedly developed a scheme to misrepresent to DHCS the amount spent on healthcare services for the expansion members.

As alleged in the lawsuit, beginning in March 2015, CenCal distributed tens of millions of dollars of Medi-Cal funds to hospitals and outpatient clinics in its provider network, telling the providers the payments were a “surplus distribution,” rather than compensation for services provided to expansion members.   The lawsuit alleges that over $33 million was distributed to providers retroactively.

By incurring unallowable costs and reporting these costs to DHCS as allowed medical expenses, the lawsuit alleges that the defendants presented false claims for payment, made or used false records or statements material to DHCS’s payments to CenCal, and knowingly and improperly avoided an obligation to return overpayments to DHCS.

Whistleblower’s Role and the False Claims Act

“I believed the payments to the hospitals and clinics were wrong and felt I needed to speak up,” said Julio Bordas, M.D, the whistleblower in the false claims lawsuit.  “I am grateful that the government joined my case and that funds are returning to Medicaid.”  Dr. Bordas is CenCal Health’s former Medical Director.  Phillips & Cohen filed the whistleblower lawsuit on his behalf in 2015.

The False Claims Act empowers whistleblowers to sue individuals and entities that they allege are defrauding the federal government and to recover funds on the government’s behalf. The law offers whistleblowers protection against job retaliation and whistleblower rewards ranging from 15% to 25% of the amount recovered when the government joins the qui tam case. Learn more about qui tam cases.

Dr. Bordas and his attorneys expressed appreciation to Trial Attorneys Alison Rousseau, Mary Beth Hickcox-Howard, and Tiffany Ho from the U.S. Department of Justice’s Commercial Litigation Branch, Fraud Section; Assistant United States Attorney Jack Ross for the Central District of California; and Senior Assistant Attorney General Nicholas Paul from the California Department of Justice.

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