Medicolegal Sidebar: Healthcare Fraud and Abuse Laws—Illustrative Case of an Indicted Surgeon

Violation of healthcare fraud and abuse laws can have very serious repercussions. One orthopaedic surgeon who found himself in the crosshairs of federal criminal prosecution agreed to share his experience in this interview. Daniel Capen MD, who specialized in spine surgery at Pacific Hospital in Long Beach, CA, USA, was sentenced to 30 months in a federal prison as part of a plea bargain in an alleged healthcare fraud scheme.

Although the allegations against Dr. Capen were never tested in a court of law before a jury, press coverage of the case alleged that Dr. Capen received at least USD 5 million in kickbacks to perform spine operations at Pacific Hospital [1]. In a document posted online, the Department of Justice (DOJ) said that Dr. Capen had received kickbacks in a “massive healthcare fraud” that entailed payments for medical services primarily through the California workers compensation system [2]. The DOJ report described a quid pro quo arrangement wherein several doctors, chiropractors, and marketers received kickback payments in return for referrals to Pacific Hospital in Long Beach. That same DOJ document stated that Dr. Capen also received benefits for using hardware from a hospital-related entity, and for referring diagnostic services to a Pacific Hospital–affiliated entity [2].

The alleged misconduct was investigated by several government authorities, including the FBI, the IRS Criminal Investigation Division, the California Department of Insurance, and the US Postal Service, Office of Inspector General. Of the 17 individuals charged in the fraud scheme, 10 were eventually convicted. Hospital owner Michael D. Drobot MD received a 5-year prison sentence for leading what amounted to nearly a billion-dollar healthcare scam over several years; Drobot went as far as paying bribes to California State Senator Ronald Calderon in exchange for Calderon performing official acts to keep the spinal pass-through law on the books. Calderon served a 3½-year sentence in federal prison after admitting that he took bribes from Drobot and undercover FBI agents [5].

Separately, Dr. Capen was also charged with unnecessary prescriptions of a compounding cream formulation, targeted mostly at workers compensation cases [3]. Creams with a wholesale cost of about USD 70 were marked up to the USD 1500 to 3000 range for insurance companies; in the 3 months spanning July through September 2012, Dr. Capen was reportedly the largest prescriber in LA County, with compound creams accounting for two-thirds of his prescriptions, and nearly 98% of the total amount of his billings [4].

I had the opportunity to interview him for the “Medicolegal Sidebar” column in Clinical Orthopaedics and Related Research®. In the interview, Dr. Capen presented his view of what transpired, described his experience with the criminal justice system, and shared some explanations for his conduct.

Interview With Daniel A. Capen MD

(This interview has been edited for brevity and clarity).

B. Sonny Bal MD, JD, MBA, PhD: Dr. Capen, could you please summarize your path through the judicial system?

Daniel A. Capen MD: Dr. Bal, the timeline that I recall went something like this: My orthopaedic group would routinely bring patients to the local Pacific Hospital in Long Beach, CA, USA. In 1998, my practice was offered a practice management contract; this was duly reviewed by Pacific Hospital’s and our lawyers, and ultimately accepted by my group. No red flags were identified during the legal review, and the contract was clearly advantageous for my group since we offloaded practice management headaches.

Things went well until 2005, when a retired anesthesiologist-turned-entrepreneur, Dr. Faustino Bernadett, bought Pacific Hospital under Abrazos Health Care. Attorneys for that entity reviewed the management contract again, and they found no concerns. Our group’s counsel had experience in healthcare litigation, and that person also identified no concerns with the contract, now tied to the new hospital owners.

From 2005 to 2013, the contract remained in place, adding about 15% to 18% to our group income. Dr. Bernadett owned Pacific Hospital from 2005 to 2010. In January 2020, he was sentenced to federal prison in connection with a scheme that paid USD 30 million in kickbacks to doctors and others who referred spinal fusion surgeries to Pacific Hospital. He never served time; Dr. Bernadett was pardoned by President Trump, just before he left office.

The first hint of trouble for me personally came in 2013, when the US Attorney’s Office (USAO) raided Pacific Hospital and the corporate office of the practice management company, hauling off all the computers at those locations. What prompted the raid is unknown; I suppose that an undercover operation had been underway for some time. Sometime after the raid, the hospital administrator, who owned the management company running my practice, pleaded guilty and agreed to cooperate with the USAO investigation. The business relationships were complex in that the practice management company also had an implant company on the side that provided implants at a marked-up price, with handling fees tacked on, to Pacific Hospital.

Since the management contract was signed in 1998, several adjustments to it had been made in later years, to shift costs around in order to remain compliant with the law. For example, at some point, it become necessary for individual doctors to pay for their own physician assistants, family health insurance policies, and medical malpractice premiums, all of which had been covered previously by the management company. The management contract never paid for the maintenance of our CME credits, which included the costs of travel to meetings. With the periodic tweaks to the contract, I believed that we were in compliance with the law all along.

Dr. Bal: Knowing that you were part of a federal investigation, what did you do next?

Dr. Capen: Frankly, after 2014, I was interacting with lawyers so often that it was a major distraction from my practice. After the initial retainer of USD 100,000, lawyer bills varied from USD 25,000 to 50,000 per month, as lawyers conferred with each other to come up with a joint defense for all the defendants. My fear and anxiety grew as Pacific Hospital came under a cloud, and as some of the codefendants entered guilty pleas to lesser charges and agreed to cooperate with the federal investigation. By 2015, my patient referrals had dropped off sharply; I maintained my practice as best as possible, in part to keep my sanity. My active interactions with the USAO did not really begin until 2017, at which time the lawyer increased the retainer to USD 250,000. My formal indictment did not materialize until 2018, with years of attendant fear, shame, anxiety, and a further drop in referrals.

Dr. Bal: What transpired after the indictment?

Dr Capen: In 2018, I pleaded guilty, and agreed to 30 months in prison, with a total loss of patient referrals, surrender of medical license, and expulsion from insurance networks. The alternative was to try my luck at trial. My lawyer, who had experience in such matters, advised that the federal government had an overwhelmingly high success rate at prosecuting cases such as mine, and that email messages shown at trial would help the government establish its case, resulting in a very lengthy prison sentence. Painted in a corner, I had no choice. My actual time in prison was just over 13 months for good behavior, and an agreement to enter a drug and alcohol rehabilitation program that my lawyer advised would further mitigate the sentence. The latter issue arose from a significant escalation in my alcohol consumption. I could not go to sleep with all the stress related to my legal troubles, even though I never got into any kind of trouble because of the alcohol habit.

My sentencing was in 2019, in addition to loss of my medical license, most insurance carriers cited clauses to justify withholding payments for existing bills for medical care that I had already rendered. In 2020, I was incarcerated at the medium-security federal correctional institution in Florence, CO, USA, and in 2021, I was released on probation.

Dr. Bal: What were the financial costs?

Dr. Capen: My financial costs were about USD 800,000 in lawyer fees, USD 5,500,000 in restitution and fines, USD 800,000 in lost receivables, and costs attendant to a complete loss of practice for 3 years. All these funds came out of my pocket; none of this is covered under medical malpractice policies. During my ordeal, the State of California had passed legislation allowing insurance companies to deny payment if the underlying medical service involved the possibility of a crime. To this day, although I still collect some fees for reviewed personal injury cases, I lost the accounts receivable from my work in workers compensation and the private insurance carriers that expelled me from their network; this loss was probably at least USD 800,000.

Dr. Bal: What rehabilitative measures, if any, are available for someone in a comparable situation, who wants to return to an orthopaedic practice?

Dr. Capen: In terms of my future, the State of California requires 3 years to pass after the indictment before one can apply for reinstatement of a medical license, which is not guaranteed in any case. The licensing authorities view the indicted physician as being at high risk of future misconduct. It may well be that the medical license of a convicted felon is never reinstated, depending on the state rules. In other words, a federal criminal conviction can be a career-ending event, even if one never goes to trial.

Dr. Bal: What was the experience at the correctional institution like? Are there any particular moments that you remember?

Dr. Capen: Well, there is no sugar-coating the fact that prison sucks. Still, I met people who had similarly found themselves entangled in white-collar crimes. As examples, I met a superintendent of public schools, an insurance person, an investment advisor, and others who seemed to be normal, nice people; the kind who are your neighbors. Of course, there were others who were not, mainly people involved in lower levels of the drug trade or people who were convicted of financial fraud. It was quite a heterogenous mix of characters.

Prison security was mostly a joke at my level of incarceration; the guards knew that inmates could run down to the road next to the correctional facility and pick up bags full of booze, drugs, cigarettes, cell phones, and other supplies that were supposedly prohibited in prison. In the sleep barracks, there were drunken parties and fist fights, almost as a routine on Friday and Saturday nights, and on holidays. While there were no tennis courts or swimming pools, the environment was one of being supervised, when in fact we were mostly unsupervised. A recent news item about a similar Virginia prison incident will illustrate the point; four inmates simply walked out, and it was hours before their absence was even noticed; all four eventually returned to the prison, or surrendered to authorities, after spending some time outside. I kept myself busy enough, working on a regular basis at the adjacent maximum-security prison kitchen, preparing halal and kosher meals because I was the one person trusted with that task. In any event, here I was, never having imagined that I would be scrambling breakfast eggs for famous drug lord El Chapo Guzman, who was in the maximum-security section of the same facility as myself.

Dr. Bal: Looking back, what was the key error that led to this series of events? What would you tell young orthopaedic surgeons just starting practice?

Dr. Capen: Looking back, I believe that the key error on my part was in not keeping up with the law. Ignorance of the law was clearly not a defense in my situation. Neither my group, nor the attorneys kept up with changes in the legal landscape concerning tightened regulations of medical equipment companies, physician-owned distributorships, the Sunshine Act, and other changes to Medicare laws. This was a big mistake.

My advice to young orthopaedic surgeons is that short of getting your law degree, establish some kind of regular maintenance of knowledge and awareness effort targeted at not just medical education and practice guidelines, but also the legal environment in which you will practice. With that said, the majority of orthopaedic surgeons coming out of residency go into employment situations with large employers. With tightly controlled practice environments, the risk of becoming ensnared in legal trouble may be less so that for someone entering private practice, where all the responsibility for compliance rests squarely upon the provider. With that said, I believe that no one is completely immune; even with all the conflict-of-interest disclaimers that the highly-revered university professors flash for a nanosecond on their opening slide presentations at meetings, even they could get into legal trouble from illicit industry business agreements. Somewhere along the line, the paradigm shifted, I think, such that it became an obligation of a doctor to understand all the ramifications of the legal system or risk getting caught up in it.

Update:

Dr. Capen’s indictment was part of a major criminal investigation that involved a number of providers, with ongoing indictments. On September 1, 2022, for example, the US Attorney’s Office for the Central District of California announced another guilty plea related to spinal surgeries at the now-defunct Long Beach Hospital; a neurosurgeon admitted to having accepted USD 3.3 million in bribes from hospital owner Michael Drobot in exchange for performing spinal surgeries at Drobot’s hospital [6].