President Trump’s slew of last-minute pardons and commutations included several men whom federal courts found guilty of defrauding Medicare or Medicaid:

President Trump granted full pardons to Todd Farha, Thaddeus Bereday, William Kale, Paul Behrens, and Peter Clay, former executives of a healthcare maintenance organization….In 2008, Messrs. Farha, Bereday, Kale, Behrens, and Clay were criminally prosecuted for a state regulatory matter involving the reporting of expenditures to a state health agency. The expenditures reported were based on actual monies spent, and the reporting methodology was reviewed and endorsed by those with expertise in the state regulatory scheme. Notably, there was no evidence that any of the individuals were motivated by greed…

President Trump commuted the sentence of Salomon Melgen. This commutation is supported by Senator Bob Menendez, Representative Mario Diaz-Balart, numerous members of Brigade 2506, Col. Mark D. Holten, as well as his friends, family, and former employees. Dr. Melgen was convicted of healthcare fraud and false statements.

The amount of fraud in these programs is staggering. Improper payments in Medicaid, for example, exceed one quarter of its $684 billion “budget.” The fraud persists year after year because nobody spends other people’s money as carefully as they spend their own, and sometimes the people who benefit from these frauds lobby to preserve them.

In their 2018 book Overcharged: Why Americans Pay Too Much for Health Care, Cato adjunct scholars Charles Silver and David Hyman provide background information on the allegations against Farha, Clay, and Melgen.

Their summary of the activities of Farha and Clay is a lengthy but fascinating look into the mechanics and sophistication of Medicaid fraud.

A Future Governor of Florida?

As we explained in excruciating detail in Part 1, fraud occurs at every conceivable point in the health care supply chain. Drug companies, pharmacies, doctors, nursing homes, hospitals, home health care services, durable medical equipment suppliers, ambulance companies, and patients have all committed health care fraud, as have criminals whose only connection to the system is that they prey upon it. Most of these fraudsters target govern­ment-run payment systems, which are easier to rip off than private ones, but private payers must also be on guard. Medicare, Medicaid, and private insurers must all play a never-ending game of Whac-a-Mole. The question, which this chapter addresses, is how payers can minimize their losses.

One obvious approach is to identify strategies that work and build on them. The case of Todd S. Farha provides a promising example. Farha, the former CEO of WellCare, defrauded Florida’s Medicaid program out of millions of dollars by inflating the amount WellCare spent on mental health services. In 2014, he was sentenced to three years in federal prison. For a Florida fraudster, the punishment was unusually harsh. Compare Farha’s fate to that of Rick Scott, who was CEO of Columbia/HCA when it committed one of the largest Medicare frauds in history. While Farha went to prison, Scott went on to become governor of the Sunshine State. Federal prosecutors had asked that Farha be imprisoned for 20 years. Maybe they feared Florida voters might elect him governor too.

WellCare’s scheme worked like this. Under Florida law, companies that provide mental health services to Medicaid patients must spend at least 80 percent of the dollars they receive actually delivering care. They can spend the remaining 20 percent on administrative expenses and other things. If they spend less than 80 percent treating patients, they are legally required to rebate the difference to the state. The object is to discourage providers from shortchanging patients and pocketing the money they save.

WellCare used a simple strategy to circumvent this regulation. It billed for mental health services through its Staywell and HealthEase insurance plans, but it used a subsidiary named Harmony to handle the treatments. To make the books look right, WellCare paid Harmony 85 percent of the billing receipts, thereby seeming to spend more than 80 percent on patient care. In fact, Harmony spent only 60 percent of the dollars it received on treating patients. In other words, WellCare spent only 51 percent (60 percent of 85 percent) of the money it received on patient care and pocketed much of the rest. For example, WellCare documents showed that Florida paid $30 million for mental health services provided in 2005, of which the company spent only half providing care to patients. From 2003 to 2007, WellCare supposedly kept $40 million that it should have refunded.

WellCare’s scheme came to light when Sean Hellein, who worked for WellCare as a financial analyst, decided to become a whistleblower. Working with the FBI, he wore a wire and secretly recorded 650 hours of conversations. Some of the statements he recorded were damning. According to a Bloomberg News report, Peter Clay, then WellCare’s vice president of medical economics, said that providing actual data on pay­ments would “show a 50 percent loss ratio” in all years, the same ratio reported for 2005. A few months after this comment was made, Well­Care refunded $1.1 million to the state. It should have repaid at least $11 million more.

All the while, WellCare’s profits grew, its stock price surged, and corporate insiders made millions by selling their shares. The company’s spectacular success attracted the attention of Carl McDonald, a Wall Street analyst who knew it was too good to be true. In March of 2007, he advised investors that, for WellCare’s profit margins to be as large as they were, Florida’s Medicaid program had to be overpaying. “It would seem to be only a matter of time before the state figures this out,” McDonald wrote. The state never did. Had Sean Hellein not ratted on his employer and donned a wire, WellCare would still be taking Florida for millions.

WellCare’s scheme is typical of one classic form of health care fraud. A mainstream provider run by talented people takes a government payer for millions. WellCare wasn’t some fly-by-night entity. It was “the largest insurer in Florida’s Medicaid program.” “The head of Florida Medicaid briefly served on its board and left with $1 million in stock.” And Todd Farha wasn’t some run-of-the-mill con artist, either. After graduating from the Harvard Business School, he acquired WellCare with the help of George Soros, the billionaire investor, who operated a fund that provided $70 million in seed money.

Sean Hellein held an interesting position. He wrote computer code that identified the most expensive patients on WellCare’s Medicare and Medicaid plans. Ideally, insurers use this information to appoint nurses to work with high-cost patients in hope of managing their care more effi­ciently. Instead, Farha and other WellCare managers tried to force these patients off WellCare’s rolls. For example, in 2004, WellCare convinced the parents of 425 premature babies to take their business elsewhere.

Hellein refrained from rocking the boat until 2005, when he learned that WellCare was stealing money from the state. That’s when he lawyered up, contacted the FBI, and started wearing a wire in 2006. Despite being understandably nervous, he did his work so well that WellCare’s managers rewarded him with $300,000 worth of stock.

The big break came in 2007, when Hellein videotaped a meeting of WellCare’s top executives. At the time, Florida’s Medicaid officials had demanded an accounting of WellCare’s spending on behavioral health services. The managers knew that the company had spent only half the amount reported to the state. So they devised a simple solution: double every charge. “Hellein sat in [a] swivel chair videotaping every speaker. ‘You had about 20 people talking about how to defraud the state.’” Afterward, Peter Clay, Hellein’s direct report, was upset that the meeting was so large. “You have to be careful,” Clay said. “This is fraud.”

After the FBI raided WellCare and the company’s stock tumbled, Hellein feared that he and his family would be attacked. “A guy who refused to identify himself spent three days sitting in a truck at the end of Hellein’s driveway.” Others made threatening phone calls or pounded on his front door. So he moved his family to Atlanta and started afresh.

For his troubles, Hellein eventually became wealthy. Under the False Claims Act (FCA), whistleblowers can share up to 30 percent of any mon­etary settlement that the government negotiates with the wrongdoer. In 2012, WellCare agreed to pay $137.5 million to resolve the civil case, plus $40 million in fines and another $40 million in forfeited fees. Hellein’s share was nearly $21 million, which he split with his lawyer. On top of that, WellCare paid another $200 million to settle a shareholder suit. Three WellCare executives (Farha, the chief financial officer, and the former vice president for government affairs) went to jail. Peter “This Is Fraud” Clay, was fined $10,000 and ordered to perform 200 hours of community service.

Overcharged also takes a look at Melgen. This also-lengthy excerpt provides an excellent window into how perpetrators of fraud can lobby to preserve it.

Consider the case of Dr. Salomon Melgen. Our story begins in the mid-1970s, when the Carter administration released the names of physicians and group practices that received more than $100,000 in Medicare payments. Providers didn’t want anyone to know how much money they were making, so the AMA and the Florida Medical Association persuaded a federal district court judge that disclosing this information invaded physicians’ privacy interests. Their argument should have been laughed out of court. Information about government payments to public contractors and employees is disclosed as a matter of course. Only top-secret programs are exempt from the public’s right to know.

For some strange reason, the court issued the injunction that orga­nized medicine wanted. Then something even more surprising hap­pened. Instead of appealing, seeking corrective legislation, or otherwise attempting to limit the impact of the injunction, the U.S. Department of Health and Human Services (HHS) did a complete reversal. It aban­doned all efforts to make Medicare’s payment information public and spent the next 30-plus years relying on the injunction as a basis for treat­ing all provider-level payment information as top secret. Stated differ­ently, for more than three decades the federal government and health care providers worked together to conceal an ocean of waste, fraud, and abuse from the taxpayers who were footing the bill.

The injunction was finally lifted in 2011 thanks to a lawsuit filed by The Wall Street Journal (WSJ). The WSJ had obtained limited data from Medicare and used it to produce a series of reports on fraud, waste, and abuse. However, the injunction prevented the WSJ from revealing the names of the involved physicians and from calling attention to HHS’s persistent failure to adequately address these problems. So the WSJ sued to have the injunction set aside—the exact thing that HHS had refused to do. The WSJ won, and after a two-year delay, HHS released informa­tion on all Medicare payments to physicians in 2012.

The impact was immediate. In 2014, the WSJ identified a raft of physicians with suspicious billing patterns. One who stuck out was Dr. Salomon E. Melgen, an ophthalmologist who practiced in North Palm Beach, Florida. Dr. Melgen was Medicare’s heaviest hitter, with $21 million in payments in 2012 alone. Most of Dr. Melgen’s billing was for Lucentis, a drug used to treat macular degeneration in the elderly. (We explained the financial incentive he had to use expensive Lucentis instead of much cheaper Avastin in Chapter 3.) But Dr. Melgen’s charges for Lucentis were way out of line with that of his peers. What happened next offers a case study of the politics of fraud control.

The Politics of Fraud Control

How on earth did Melgen make so much money from Medicare? In fairness, he didn’t pocket the full $21 million. For physician-dispensed pharmaceuticals, Medicare pays the physician the acquisition cost of the drug plus a 6 percent administration fee. A sizable chunk of the $21 mil­lion represented the acquisition cost of the Lucentis Melgen dispensed. But Melgen allegedly charged Medicare four times for each vial of Lucentis he used. The vials contained enough medicine to treat four patients, but standard medical policy was to use a fresh vial for each patient and discard the excess. Melgen had a different idea. He used the same vial to treat multiple patients and then billed Medicare as if he had purchased a new vial for each person. As a result, he was “reimbursed $6,000 to $8,000 for a vial that cost him $2,000,” plus the 6 percent fee he was also entitled to. Could the use of the word “reimburse” be less apt?

Melgen’s $21 million one-year haul was not his first brush with over­billing. Years before, HHS had pegged him as an outlier and concluded that he had overbilled Medicare by $9 million during 2007–2008. Melgen had actually billed $13.5 million for Lucentis during that period, but HHS sought to recoup only two-thirds of that amount. HHS did not try to throw Melgen out of the Medicare program for ripping it off to the tune of $9 million, or even scrutinize his subsequent billings before paying them. It says something about the government’s inter­est in punishing bad actors and its interest in protecting taxpayers that HHS kept paying Melgen’s Medicare claims for new patients at a feverish pace while his 2007–2008 case went through multiple levels of appeal.

As was his right, Melgen put on a full defense. He hired the former head of the Department of Justice’s Medicare fraud task force as his attorney. He called on his political protectors, enlisting the aid of Sen. Robert Menendez (D-NJ) and Sen. Harry Reid (D-NV), who was then the Senate majority leader. In 2009, Menendez “called Jonathan Blum, the Medicare director at CMS [U.S. Centers for Medicare and Medicaid Services], to express concern… . Menendez brought up Melgen’s case … in the context of broader concerns about [Medicare’s billing] guidelines.” A Menendez staffer also contacted a CMS official and allegedly pressured him to back off, stating, “bad medicine is not illegal. Medicare should pay these claims.” The point is worth repeating. One federal employee told another that the taxpayers should pay for what both of them understood to be “bad medicine.”

In 2012, Menendez “raised Melgen’s case again at a meeting with CMS Acting Administrator Marilyn Tavenner.” Frustrated that he was getting nowhere, Menendez asked Reid to arrange a meeting with HHS Secretary Kathleen Sebelius. That meeting was held on August 2, 2012, in Reid’s office. Secretary Sebelius brought along Jonathan Blum. At that meeting, Menendez again pushed for Medicare to drop the overbill­ing charges, allowing Melgen to keep the disputed $9 million.

Menendez claims not to have known that Melgen was under ongo­ing investigation and insists he did not request any specific action. But why on earth did a senator from New Jersey feel the need to intervene on behalf of a Florida doctor? And why did the Senate majority leader, who was from Nevada, feel the need to help? Perhaps it had some­thing to do with the fact that Melgen donated more than $700,000 to Reid’s political action committee, a fair chunk of which was reportedly spent on Menendez’s reelection campaign. Melgen donated additional money to Menendez directly. Plus, Melgen threw in several flights to the Dominican Republic on his private jet, where Menendez had stayed at Melgen’s seaside mansion.

In 2015, a federal grand jury indicted Menendez, charging that he “accept[ed] gifts from” Melgen “in exchange for using the power of his Senate office to benefit Melgen’s financial and personal interests.” According to the U.S. Department of Justice, Menendez “accepted up to $1 million worth of lavish gifts and campaign contributions from Melgen” and sought to influence “the outcome of Medicare billing dis­putes worth tens of millions of dollars.” Bribery charges were also filed against Melgen, who was subsequently indicted on additional grounds by a second grand jury.

Both Melgen and Menendez asserted their innocence. At a press conference, Menendez complained that federal prosecutors “don’t know the difference between friendship and corruption.” That remark led the famously cynical novelist Carl Hiaasen to pen a column entitled, “It Wasn’t Corruption—It Was a Bro-Mance.”

At Melgen’s criminal trial, federal prosecutors contended that he’d stolen up to $105 million from Medicare. About $41 million was attrib­utable to his practice of billing for the same drug vials repeatedly. The rest was connected to a different type of fraud. Melgen, they contended, intentionally misdiagnosed patients’ medical conditions so he could bill Medicare for treating them. According to Dr. Adam Berger, who testified as an expert witness for the prosecution, Melgen reported “almost every patient he saw” as having wet age-related macular degeneration (“wet AMD”). “But in the courtroom, experts called by federal prosecutors saw no signs in the scans to confirm Melgen’s diagnoses of wet AMD, and even the defense’s own witnesses who looked at the same images strug­gled to find evidence of the disease.” The diagnosis of wet AMD is also easily and cheaply made by means of an optical coherence tomography machine—a machine that Melgen “did not even own … despite the fact that virtually every retina specialist in the country uses this technology to diagnose their patients and make sure they are responding to treatment.” Melgen also used “a highly controversial and unapproved laser proce­dure” to treat patients for wet AMD, then disguised what he was doing by billing Medicare under a code for a different procedure—15,000 times. As Berger wryly remarked, “That explains the private jet.”

The jury found Melgen guilty on all counts and the trial judge sentenced him to 17 years. Menendez fared better at his bribery trial. After hearing evidence for 11 weeks, the jury deadlocked and the judge declared a mistrial. After some post-trial maneuvering, federal prose­cutors decided to drop the case. The line between bromance and bribery may always be blurry. The larger problem is that political control over health care spending increases both the incentives and the opportunities for bribery.

Institutionalized Corruption

Perhaps Melgen’s example is just an isolated case about a single bad phy­sician. Maybe Menendez was overzealous in aggressively advocating for Melgen. Maybe Reid shouldn’t have facilitated the meeting at which Menendez pressured HHS employees to drop the case. Surely most pol­iticians know better and will do everything in their power to ensure that the government buys the highest quality health care at the lowest possible price. Right?

Not even close. Both the political corruption of medicine and the medical corruption of politics are pervasive, long standing, and biparti­san. Providers ceaselessly lobby Congress and state legislatures to ensure that the flow of taxpayer money continues undiminished, and that no one holds them accountable for what they do with it. No matter how egregious the fraud, waste, or abuse, or the exploitation of consumers, providers and their lobbyists have a stock set of plausible-sounding justi­fications for leaving the payment and regulatory systems exactly as they are. They then plow much of that money into political contributions at both the federal and state levels. Melgen’s sizable contributions to Reid and Menendez are chump change compared to the aggregate amount that health care providers spend on politics. These outlays help to ensure public officials will tinker with the payment and regulatory systems as little as possible. As the Melgen-Menendez bromance shows, they also buy protection in the rare event that bureaucrats try to clamp down on the worst excesses.

Silver and Hyman return to Melgen later in the book:

Dr. Salomon Melgen, whose story is dis­cussed in Chapter 7, falsely diagnosed patients as suffering from wet age-related macular degeneration, then charged Medicare for treating them.

Of course, whether these individuals committed fraud is a different question from whether their convictions were valid. When Farha and Clay appealed their convictions, the Cato Institute filed amicus briefs on their behalf, arguing that the courts had dangerously and improperly lowered the threshold the prosecution must meet to show the defendants had knowingly violated federal criminal law. Those appeals ultimately failed.

I take no position on whether these pardons served justice.

I do take the position that Congress commits an injustice when it forces taxpayers to keep supporting federal health care programs that are so careless with our hard-earned money. For ideas on how to correct that injustice, read Overcharged.