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The facts discussed in this article are based on the information provided in the indictment. All persons and entities are innocent until proven guilty. — ed.

In October 2016, a federal grand jury returned a 32-count indictment against four men alleging a massive fraud and kickback scheme with illegal profits that exceeded $16 million. The indictment listed two executives at American Senior Communities (ASC), a senior care and nursing home management company, who allegedly perpetuated the fraud from early 2009 through 2015. Their alleged crimes included a series of billings and agreements that involved inflated costs and invoices claiming markups from 25 percent to 200 percent and kickbacks that allowed the accused conspirators to buy vacation property, Rolex watches, gold bars and diamond jewelry. They also allegedly funneled money through 20 shell companies to pay for gambling junkets, the use of a private plane and unspecified political contributions. Some of the victims of the fraud include the federal Medicare system and Indiana Medicaid. (See U.S. attorney: $16 million fraud scheme was product of ‘unbridled greed’ by Russ McQuaid and Kendall Downing, CBS4, Oct. 12, 2016.)

According to the article, a member of the public stepped forward after being approached about some of the arrangements and said, “You know, this doesn’t sound right.” According to the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse, tips remain the most common method of detection. So, I wondered: Did anyone else have the same opportunity to come forward to say, “This doesn’t seem right” earlier on? If so, the potential impact for taxpayers could’ve been lessened. I used the criminal indictment to analyze the fraud scheme with this question in mind. Let’s set the stage.

The environment

A regulation loophole within Medicaid financing on intergovernmental transfers periodically attracts attention from Congress. A 2004 Government Accountability Office publication outlines a scheme that the loophole makes possible: 1) A nursing home entity contracts with a local governmental hospital to obtain a higher federal share of reimbursement than if the nursing home had directly billed the government. 2) The reimbursement dollars, greater than provider costs, are paid back to the state. 3) The state isn’t legally required to use these funds on Medicaid patients.

To do this legally, the state must have an approved state plan amendment on file with the Center for Medicare and Medicaid Services (CMS), and there must be legal agreements between the nursing home entity and the local government hospital that cover intangible property licenses, physical property leases and management services.

The main parties

In this case, the local government hospital corporation, Health and Hospital Corporation of Marion County (HHC), provides health care to residents of Indiana. It opened its first skilled nursing facility in 1995. On its website, HHC describes its current partnership with a private entity, ASC, to manage more than 60 health care communities of varying levels within Indiana, although many are centered around Indianapolis.

The partnership covers skilled nursing facilities and assisted living facilities. The relationship between these two parties allows for participation in the intergovernmental transfers discussed above involving Medicaid patients, so the state of Indiana, HHC and ASC all benefit.

The fraud scheme

The indictment describes aspects of the agreement between HHC and ASC. ASC had direct access to select HHC bank accounts to pay vendors and others for the facility operations. HHC authorized former ASC CEO James Burkhart and COO Daniel Benson to write checks and make payments from the HHC bank account (management has since changed). To put this in perspective, the ASC portfolio of nursing homes extends beyond those covered under contract with HHC. Therefore, other nursing home activity was being processed through ASC bank accounts for which Burkhart and Benson also had signatory authority.

From 2009 to 2015, Burkhart and Benson pressured vendors to mark up invoices, redirected rebates owed to HHC and ASC to personal accounts, and received kickbacks from vendors. Steven Ganote, an associate of James Burkhart, and Joshua Burkhart, James’ brother, were also involved. The accounting firm that prepared ASC’s and HHC’s cost reports — information that ASC submitted to the federal government, which impacts the reimbursements received for patients with Medicare/Medicaid — employed Joshua. However, there’s no public record that Joshua worked directly on the engagement preparing the cost reports.

Invoice and rebate schemes

HHC paid more for services and goods than it should’ve for its senior care operations, which resulted in inflated invoices and rebates. The alleged ASC perpetrators directed vendors to submit marked up invoices for payment to ASC (for example, payment for a invoice at $110 instead of $100). ASC would use the HHC bank account to pay the invoices (for example, HHC would pay the $110). The vendors would subsequently remit the overpayments to shell companies that ASC had created (for example, the vendor would pay ASC $10). Sometimes, the overpayment was split between a shell company maintained by one of the four indicted individuals and a vendor company or vendor shell company. (For example, sometimes $5 went to a shell company of an indicted individual and $5 to the vendor company or a related shell company.) Variations of this type of activity occurred often during the time frame of the alleged wrongdoings.

The accused also submitted false invoices for “consulting services” to ASC, which ASC subsequently paid with HHC funds. These consulting services were really reimbursements to the accused for personal use for vendor companies’ planes, vendor-paid golf trips or vendor-paid political donations made at Burkhart’s direction. In other cases, these “consulting services” never existed and were a method to funnel money to the shell companies.

In one case, Joshua purchased flags from a local company and distributed them to ASC facilities. He submitted invoices to ASC from a shell company called Heartland Flag LLC. ASC’s CEO approved these invoices for payment. When communicating with ASC employees concerning the flags, Joshua used a different name (Justin Barnes) with an associated email address (Justin.barnes@heartlandflag.com). He did this several times a year.

The inflated invoices ranged from 5 percent to 200 percent over the original, actual invoice amount and resulted in $195,000 to $3.7 million in payments to individual vendors. Benson also directed rebates on purchases (2 percent to 3 percent of the total volume) to be paid directly to the Dan Benson Family Charitable Trust, Benson’s personal trust, instead of the original purchaser of the items (ASC).

Kickback schemes

A combination of named conspirators perpetuated the kickback schemes. They conspired to steer ASC patients to preferred providers and/or allowed the vendors to be involved in ASC managed facilities as “preferred providers” in these areas:

• Pharmacy: $5.5 million kickback as “marketing fees.”
• Food: $825,000 kickback as “group purchasing organization.”
• Home health: $325,000 kickback as “consulting.”

After patients or facilities used the services, each vendor directly paid a shell company controlled by the named individuals.

Analysis of external parties

Who might’ve known that fraud was occurring and reported it? The indictment specifically indicates two incidents in which outside vendors declined to mark up the invoices and participate in the fraudulent schemes (November 2013 and June 2015). These two vendors could’ve contacted a third party with their concerns. If they’d realized that Medicaid was probably going to pay for items provided to nursing homes, they could’ve contacted the attorney general’s office. If an individual is aware of any fraud to Medicare or Medicaid, there are methods for reporting. These vendors who refused to do what ASC requested might have had knowledge of potential fraud within the system.

Vendor interactions weren’t necessarily with purchasing individuals. The vendors interacted with Ganote — who wasn’t an employee but an associate — when they negotiated the purchases for ASC. This is a key red flag for vendors that a company might not be ethical.

Accounts payable personnel at these vendors made payments to shell companies with names like MMAJ LLC, Driver Sandwedge LLC and Bright HVAC LLC. Any robust vendor approval process should’ve highlighted the non-business nature of these entities.

Vendor interactions weren’t consistent with the customer who purchased their services. For example, employees at one of the vendors prepared invoices on a shell company’s letterhead and submitted the invoices to ASC. Although their company split the overcharge with the alleged perpetrators, these vendor employees might have been aware that something wasn’t right with the situation. And as discussed earlier, Benson instructed individuals at vendor companies to make rebate payments payable to the Dan Benson Family Charitable Trust instead of the company that purchased their services. These payable situations should’ve raised red flags.

Other departments within the vendor companies might have noticed improprieties. Ganote also directed a vendor to send full-priced invoices to ASC but would receive the payments from “Med-Healthline Supply LLC” — not ASC. This could be a red flag for accounts receivable personnel as they might have been suspicious of the different name.

Because outside parties were authorizing transactions, the HHC bank account activity needed to be examined. Other than a bank account reconciliation, examination of the detailed flows should’ve raised some questions. For example, account activity differed from previous periods or other vendors for similar services. It’s critical to properly analyze outsourced activities to vendors to ensure the company receives the services it believes is appropriate.

Also, since HHC received Medicaid and Medicare dollars for patient care, the cost reports submitted to the government for the ASC-managed facilities would’ve significantly varied from previous periods. This could’ve been a red flag for HHC personnel (or an accounting firm if HHC had outsourced its reports).

See something, say something

The scheme probably needed the involvement of vendors, employees with access to the HHC bank account and key outside assistance (Ganote, in particular) to be as successful as it was.

Organizations must fully examine internal control functions when they detect deviations from expectations based on past experiences. They must examine the web of controls in the entire supply chain — from vendors to customers — to detect or investigate abnormalities.

All those involved in this case had opportunities to know that things weren’t right within these business interactions. If someone had spoken up sooner, the taxpayers of Indiana might not be paying so much for care that wasn’t provided to patients.

Renee Flasher, Ph.D., CFE, CPA, is an assistant professor in the Department of Accounting in the Miller College of Business at Ball State University. Her email address is: rflasher@bsu.edu.