Phony drug rehab facilities addicted to fraud

On July 14, 2020, in a Los Angeles courthouse, Christopher Bathum, the enigmatic founder of a well-known drug and alcohol treatment center, was sentenced to 20 years in prison for running a $175 million health care-billing fraud scheme. The self-styled “Rehab Mogul” was also sentenced to 52 years for sexually assaulting seven female patients. The convictions and sentencings for Bathum and his codefendant Kirsten Wallace, chief financial officer of the treatment center, were the culmination of a lengthy investigation by Los Angeles County authorities and the California Department of Insurance. (See “Former Rehab Center Owner Sentenced in Sex Assault, Healthcare Fraud Cases,” Los Angeles County District Attorney’s Office, July 14, 2020.)

Growth of the ‘Rehab Riviera’

In the early 2000s, Bathum was dabbling as a hypnotherapist in Los Angeles. His first serious foray into addiction treatment was opening a sober-living home in 2006. Seeing the potential for growth, he co-founded an upscale drug rehab called Seasons Malibu in 2008. It was while leading therapy sessions at Seasons that Bathum allegedly created a fake persona as a licensed psychotherapist specializing in drug addiction, although he’d never finished college and had no legitimate health care credentials. He also had several felony fraud convictions on his record from an eBay scheme he’d perpetrated, which barred him from becoming a licensed therapist. Regardless, Bathum cemented his reputation as an addiction expert in 2010 when he co-authored a book on the subject called “Walking Miracles.” (See “A Drug Rehab Mogul Built an Empire That’s Now Being Probed by the FBI, DA and State of California,” by Hillel Aron, LA Weekly, Dec. 17, 2015.)

When the U.S. Affordable Care Act (ACA) took effect in 2010, the drug rehab industry experienced a massive increase in activity. For the first time, insurance companies were required to pay for drug and alcohol treatment at the same rates as any major illness. Prior to the ACA, the for-profit rehab clinics tended to focus on high-net-worth clients, but the sudden influx of insurance money made any addict, even homeless addicts, incredibly valuable. (See “The Predatory Malibu Rehab Guru Who Ripped Off Obamacare,” by Evan Wright, The Daily Beast, May 30, 2019.)

A single patient could bring in as much as $100,000 for 30 days of treatment. It was in this environment that Bathum founded a new rehab clinic, Community Recovery of Los Angeles (CRLA), in 2012, according to The Daily Beast article. Within four years, CRLA grew to include two dozen facilities in Colorado and California. Many of CRLA’s facilities were typical of the luxury rehab mansions located throughout Orange County and Malibu, an area that had come to be known as the “Rehab Riviera.”

According to The Daily Beast article, treatment at CRLA seemed to be top-notch. Bathum hired renowned doctors and a staff that included more than a few former-addict celebrities. In addition to conventional treatment programs, such as 12-step, detox and therapy, there were fun activities like surfing, go-karts and zip lines. And the most surprising part was that CRLA told most patients that it would all be free. While some did pay, most patients had scholarships and never paid a dime, according to The Daily Beast article.

Of course, the promises of free housing and drug treatment in a resort-like atmosphere were attractive to patients, and CRLA grew by leaps and bounds. Bathum, still posing as a psychotherapist, was right in the middle of it all, leading therapy sessions. Staff and patients treated him like a guru, according to The Daily Beast article.

It all comes crashing down

By the end of 2015, Bathum’s fame and success as an addiction expert began to catch up to him. The Dec. 17, 2015, LA Weekly exposé, “A Drug Rehab Mogul Built an Empire …” claimed that Bathum was a drug addict and “nearly every large insurance company in California, as well as the FBI, Los Angeles Police Department, L.A. County District Attorney’s Office and California Department of Health Care Services …” were investigating him for fraud. The article included former patients’ allegations of sexual assault against Bathum, going back at least seven years to his time at Seasons Malibu.

In the months following the exposé, Bathum fought back against his accusers and even countersued several of the women for libel who sued him for fraud and sexual battery. In June of 2016, he was featured in an episode of ABC’s 20/20, which detailed the fraud and sexual assault allegations, as well as allegations that he’d suffered a drug overdose in a Malibu motel while partying with CRLA patients. Bathum even agreed to be interviewed for the episode by ABC’s Matt Gutman and continued to deny the allegations, stating that he was the victim of “identity theft.” (See “ABC News Interviews Rehab Owner Christopher Bathum and Women Who Filed Suit Against Him for Alleged Sexual Battery,” by Van Scott, ABC News, June 15, 2016.)

Several weeks after the 20/20 episode aired, Bathum was arrested on a minor drug charge. He publicly resigned as chairman of the board for CRLA, although he still retained his majority ownership stake. Several former employees, however, claimed Bathum simply changed offices and didn’t actually step down.

The negative publicity from the exposé, the 20/20 episode and his arrest took their toll. By this point, both Bathum and CRLA appeared to be on life support, fielding numerous cease-and-desist letters from the California Department of Health and a lawsuit filed by numerous former clients. CRLA attempted a reorganization, announced Bathum’s departure and changed its name to Commonwealth Global. (See “Rehab Mogul Scrambles to Reorganize his Sober Living Chain,” by Hillel Aron, LA Weekly, Sept. 2, 2016.)

Arrested and exposed

On Nov. 10, 2016, the hammer finally dropped. In an early-morning raid on 15 CRLA locations throughout Los Angeles, detectives arrested Bathum and his CFO Kirsten Wallace. Both were charged with multiple felony counts of fraud, while Bathum also faced several counts of sexual assault on the suspicion he’d assaulted more than a dozen female patients. (See “‘Rehab mogul’ accused of sexually assaulting patients and ‘elaborate’ fraud,” by Veronica Rocha, LA Times, Nov. 11, 2016.)

Details on the true extent of the fraud itself finally began to emerge. The criminal complaints showed how Bathum and Wallace used aggressive marketing to lure vulnerable addicts into treatment at CRLA. They conspired to steal patients’ identities to purchase health insurance plans on the ACA marketplace without patients’ knowledge. Once the plans were in place, they billed the insurance companies more than $176 million in fraudulent claims. Many of these claims were for services that CRLA had never rendered, some even including periods after the patients completed treatment and left CRLA. The five insurance companies involved paid out approximately $44 million before discovering the suspected fraud and stopping payments.

In addition to the billing scheme charges, Bathum and Wallace were charged with five counts of grand theft by false representation for representing CRLA as a licensed residential treatment facility, which it wasn’t. California’s Insurance Commissioner Dave Jones said, “Bathum and Wallace’s alleged conspiracy victimized hundreds of people addicted to drugs and alcohol by keeping them in a never-ending cycle of treatment, addiction, and fraud — all the while lining their pockets with millions of dollars from allegedly fraudulent insurance claims.” (See “Rehab Facility Owners Arrested in $176 Million Fraud Scheme,” California Statewide Law Enforcement Association, Nov. 14, 2016.)

Bathum eventually pleaded no contest to seven counts of grand theft, five counts of insurance fraud and one count each of identity theft and money laundering, but he continued to deny the sexual-assault allegations. That portion of the case went to trial, and in February of 2018, jurors found him guilty of 31 counts. For the sexual-assault charges, he was sentenced to 52 years in prison, to run concurrent with the 20 years he received for the fraud convictions. Wallace was sentenced to 11 years in prison after she pleaded no contest to her part in the health care billing scheme. (See “Former Rehab Center Owner Sentenced in Sex Assault, Healthcare Fraud Cases,” Los Angeles County District Attorney’s Office, July 14, 2020.)

Fighting drug rehab fraud

One of the biggest barriers to fighting fraud in the drug treatment industry is the regulatory environment itself, says Jessica Gay, CFE. Gay is the co-founder and vice president of Integrity Advantage, an organization that provides support and consulting in the detection, investigation and prevention of health care fraud, waste and abuse.

“The industry is generally underregulated, and the rules that do exist can vary widely from state to state,” says Gay. “One big example is the loopholes in licensure for clinics and their employees.”

According to Gay, when a facility files an insurance claim for inpatient drug treatment, the treatment generally needs to have occurred in a licensed residential facility that uses licensed professionals. The most common facilities in the industry are residential treatment centers and sober homes, she says. Residential treatment centers are typically licensed to provide services such as therapy and medical detox, using licensed doctors and therapists, Gay says. However, many sober homes are unlicensed. They’re supposed to be transitional places for people who’ve already gone through licensed drug treatment programs to return to normal life, but many aren’t authorized to provide the treatment itself, she says.

“And the problem,” Gay says, “is that it’s often very difficult to determine what type of facility you’re dealing with and if it was actually licensed to provide the services on the claim. Is it a drug testing lab? Is it residential treatment? Is it a sober home?” she asks. “The industry can be incestuous, often with the same owners running all three types of facilities. If there are allegations of fraud involving one facility, it can be easy to reorganize the company or change the name, or for the owners to switch from a residential center to a sober home, which may be regulated completely differently.”

This is one trend occurring in the industry right now, according to ACFE Associate Member Patty Hoofnagle. Hoofnagle is vice president with the special investigations unit for Magellan Health. Hoofnagle says that as insurance companies get smarter at identifying those clinics suspected of fraudulent billing, some owners are switching over their billing scheme to drug-testing labs. Drug treatment programs require periodic drug testing for the patients. Some labs, especially those owned by, or contracted with, companies that own or previously owned sober homes, excessively bill insurance for daily qualitative and quantitative drug testing, which would normally be required less frequently. This lack of checks and balances, and the ease with which owners can change operations if they’re accused of fraud, make it much more difficult to investigate when there are allegations of fraud, waste and abuse, Gay says. “And it’s hard to put those regulatory guardrails up ahead of time, because states want patients to get good care and have easy access to drug treatment when they need it,” she says.

Many of the fraudulent billing schemes occur at unlicensed sober homes as they did with Bathum and CRLA. As is apparent in Bathum’s case, the requirements for who can own and operate a sober home are lax, according to Hoofnagle. With Bathum’s prior felony convictions, he was unable to own or provide treatment at a licensed residential drug treatment facility. However, that didn’t stop him from masquerading as a licensed therapist, and many of his patients assumed they were staying at licensed facilities even though CRLA’s facilities were mostly unlicensed sober homes. “Sober homes also tend to employ untrained and unqualified staff” says Hoofnagle.

Another side of the problem is the ACA. According to Hoofnagle, many fraudsters in the for-profit drug treatment industry were already learning to work the system even before the ACA was created. They knew which health plans were easier to target for filing fraudulent claims, they employed aggressive recruiting tactics to lure people into rehab (a process dubbed “body brokering”) and, most of all, they knew the importance of keeping their patients in the dark by often taking away their IDs and credit cards when they checked in. When the ACA kicked in with legally guaranteed insurance money, an already growing fraud problem exploded.

According to Hoofnagle, one facet of the ACA makes it especially vulnerable to this type of fraud: Anyone can legally purchase an insurance plan for someone else on the ACA marketplace. This means owners of sober homes can purchase insurance plans on behalf of their patients (although in Bathum’s case, he stole patients’ identities and bought the plans without their consent, which is illegal).

This ACA loophole is the primary reason many fraud-minded owners of sober homes can lure vulnerable addicts into unlicensed treatment with the promise of free care in a luxury setting. The owner of the sober home can make tens of thousands of dollars or more by illegally billing unlicensed treatment to the patients’ insurance plans, often without the patients’ knowledge. According to Hoofnagle, some lawmakers have attempted to close this loophole by not allowing providers to buy insurance for their patients, but to date, it remains legal.

Preventing the fraud

While closing this loophole likely wouldn’t be a fix-all for fraud in the industry, it may help prevent the initial marketing aggressive clinics use to lure patients with promises of free treatment, Hoofnagle says.

Insurance companies also need to do more to monitor out-of-network benefits on the platinum ACA plans that fraudsters most target, Hoofnagle says. Insurance companies need to ensure that providers are licensed and credentialed, and they need to set up preauthorization controls to ensure that treatments are necessary, she says. Many clinics bill for therapeutic treatments that don’t meet the criteria for necessity. For example, Hoofnagle says that in one claim she dealt with, a clinic tried to bill insurance for a drug treatment patient hanging hurricane shutters on the clinic, which was listed as life skills-related therapeutic treatment.

On the billing side, Hoofnagle says one of the most effective things an insurance company can do to prevent fraud is a full prepayment review on any suspect claims. An insurance company, before it pays a claim, conducts a prepayment review of “unclean claims” by requesting all available records from the provider. The insurance company can request medical records for the patient and prove the treatment was performed and qualified persons conducted it. “If the provider doesn’t turn over these documents, you don’t pay the claim,” says Hoofnagle. “And chances are, if it’s a fraudulent claim, the provider won’t give them over, and they’ll drop the claim."

According to Gay, these issues have been on insurance companies’ financial intelligence units’ radars for a long time, and they’re getting more proficient at spotting the fraudulent drug treatment billing that providers commit.

“If insurance companies and regulators can better work together to cut down on the waste and abuse that already exists in the industry, it will help insurance companies to focus more on the fraud,” Gay says. “At the end of the day, though, the biggest problem is that the bad guys are always evolving and staying one step ahead. As insurance cracks down on sober homes, they move to labs. They’ll always find ways around the regulations and controls.”

Jason Zirkle, CFE, is the ACFE training director. Contact him at jzirkle@ACFE.com.