Nonprofit gone wrong

Small-town rescue squad president defrauds insurance providers of more than $900,000


By Colin May, M.S., CFE; and Mark F. Zimbelman, Ph.D., CPA

colin-may-80x80   mark-zimbelman-80x80.jpg   Starting Out: For new and budding fraud examiners

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Internal controls and proper oversight should be the bedrocks of any organization’s approach to preventing fraud. But when corrupt individuals enrich themselves and make false statements to perpetrate a fraud, it becomes the beginning of the end. One recent case highlights the problems faced in both the prevention and investigation of a corrupt manager and an organization that lacks many principles of an effective nonprofit. The lessons learned for new (and experienced) fraud examiners are invaluable.

NEIGHBORS HELPING NEIGHBORS (BUT NOT ALWAYS)

Saltville is a small town in the middle of the mountains of Southwest Virginia. Its population is just under 2,100, and the median annual income is just over $31,000. Saltville claims a rich history, but sadly the town has become better known for a series of scandals in recent years.

Two staples of living in a small town are the sense of community and the importance of “neighbors helping neighbors.” Most American towns, especially in rural areas, are proud of their volunteer fire and rescue squads. These departments respond to traffic accidents and fires. They transport patients and serve as vital lifelines (literally in some cases) for their neighbors.

However, small-town departments aren’t immune to fraudsters who take advantage of their positions of responsibility. In February 2012, the U.S. attorney for the Western District of Virginia, along with the Virginia Attorney General’s Medicare Fraud Control Unit, indicted the Saltville Rescue Squad Inc., and two of its employees, Eddie Wayne Louthian Sr. and Monica Jane Hicks, for their roles in a scheme to defraud the Medicare program of more than $900,000 in a six-year period.

As described in the indictment and court documents, Louthian was the president and business manager of the rescue squad. Hicks was the squad’s health privacy and records manager. She waived trial and later pleaded guilty to a single count of conspiracy to commit health care fraud.

THE SCHEME

Louthian’s scheme for the fraud, which he and Hicks began in 2005, was pretty simple. Among other ambulance services, the squad provided non-emergency transport to local hospitals or care facilities. Saltville routinely provided this transportation for three dialysis patients — identified as “N.H., B.M. and J.R.” in court records.

Medicare regulates the reimbursement process for non-emergency ambulance transports. Patients must be confined to their beds or otherwise be in a medical condition that necessitates ambulance transport. Louthian and Hicks knew the three patients didn’t qualify for non-emergency transport because they had no trouble walking.

To be paid for the dialysis transportation expenses, the squad submitted the call sheets and transportation records for the three patients to health insurer Anthem Blue Cross Blue Shield and Medicare. These providers relied on these records to evaluate and pay the claims.

However, Louthian knew the squad wouldn’t be reimbursed if the insurance providers knew that all three patients were ambulatory. So, he and Hicks doctored and falsified the call sheets to show that the three dialysis patients couldn’t walk unassisted. Louthian directed Hicks to forge physicians’ signatures on the insurance providers’ “certificates of medical necessity.”

THE PAYOFF  

On every fraud case, we always ask, “Why did they do this?” These were trusted managers of a community-based emergency medical service. They were friends and neighbors in a very small town. What led them to commit this fraud?

At the trial, a special agent from the Internal Revenue Service – Criminal Investigation Division testified that Louthian’s salary doubled during the six-year run of the scheme. He also purchased expensive real estate.

Louthian paid himself generously. His annual salary began at $20,000 in 2005 when he took over the position. By the time his scheme was in full force, he had given himself a substantial raise and was earning $52,000 a year.

The squad also benefited. In June 2008, the squad purchased 40.37 acres of land for $175,000 and later moved into expensive new digs. However (and possibly unbeknownst to some members of the rescue squad’s board of directors), the land purchase was part of a package deal in which Louthian also bought an adjacent five-acre tract for only $10,000 from the same seller — a classic case of insider dealing and a “less-than-arms-length” transaction.

THE INDICTMENT
 
On January 18, 2012, a federal grand jury returned an indictment that charged the Saltville Rescue Squad, Louthian and Hicks as corporate defendants.

  • The squad as a corporation was charged with one count of conspiracy to commit health care fraud, one count of health care fraud, five counts of making false statements in relation to a health care matter and two counts of money laundering.
  • Louthian was charged with one count of conspiracy to commit health care fraud, one count of health care fraud, four counts of making false statements in relation to a health care matter, two counts of money laundering and one count of making a false statement to a federal grand jury.
  • Hicks was charged with one count of conspiracy to commit health care fraud, one count of health care fraud and one count of making false statements in relation to a health care matter.
The indictment alleged that between Dec. 6, 2005 and Sept. 17, 2011, the defendants fraudulently billed Medicare approximately $1.65 million and fraudulently received approximately $750,000 in reimbursements for Medicare ambulance transports. Between Dec. 20, 2005 and Sept. 3, 2011, the defendants also fraudulently billed the insurance provider approximately $1 million and fraudulently received approximately $130,000 in reimbursements for the ambulance transports.

THE FALLOUT
 
Pandemonium ensued after the charges went public. The board of directors voted to shut down the organization, but because of a technicality in the vote (all the board members hadn’t voted, as required), the board vote was invalidated. Many board members quit. The episode became a toxic quagmire for the town.

Hicks, the former business manager, pleaded guilty and received probation. Louthian and the squad went to trial. The squad was ultimately acquitted of any involvement. Louthian was convicted in September 2012 in a jury trial on one count of conspiracy to commit health care fraud, one count of health care fraud, four counts of making false statements in relation to a health care matter and one count of making a false statement to a federal grand jury.

In March 2013, Louthian was sentenced to 48 months in federal prison and three years of supervised release. The judgment against him was $907,521, the full amount of the fraud. The court ruled that assets associated with Louthian, including bank accounts, vehicles, real estate and an ambulance service, would be forfeited in partial satisfaction of the judgment.

LESSONS LEARNED
 
The case of the Saltville Rescue Squad presents some very compelling lessons, especially for small town non-profit organizations and community-based service providers.

First, the classic “tone at the top” principle, for better or worse, reigned. Members of the squad listened to, and followed the directions of, their leadership. Sadly, no one considered that falsifying run sheets was a federal crime. This case illustrates that when the leadership of an organization doesn’t establish the proper control environment, fraud often follows.

Second, of course, internal controls matter. Two separate positions did handle the insurance provider charges. However, it appears that no other controls were in place. King assisted Louthian, who ran the squad for his personal benefit. If the organization was ever audited (and it sounds like it wasn’t), the audit must have been cursory and not meaningful.

Third, the town didn’t prepare for the community damage. In Saltville, the prospect of shutting down the rescue squad was a non-starter, but efforts to curb the squad and reorganize were disastrous. The squad board wasn’t any more transparent than the original squad. Some small communities can have a monolithic “us versus them” mindset and a “you can’t tell us what to do” attitude. Auditors and fraud examiners must be mindful of this.
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