Rehab Riviera: Insurer wins big racketeering, fraud verdict against defunct Sovereign Health

It was a vicious back-and-forth over who was truly evil — the big bad insurance company, refusing to pay for desperately needed addiction treatment for vulnerable patients? Or the greedy, manipulative treatment provider, milking those vulnerable patients for every last cent it could wring out of their insurers, then kicking them to the curb when benefits ran out?

In the battle between now-defunct Sovereign Health/Dual Diagnosis of San Clemente and insurance giant Health Net, the insurer won. Big.

After a trial that lasted some seven weeks, the jury took about a day to decide that Sovereign/DD and its erstwhile CEO Tonmoy Sharma acted with “malice, oppression or fraud,” and that Health Net proved Sharma violated the Racketeering Influence and Corrupt Organization Act.

Sovereign and Sharma must pay Health Net just shy of $45 million in damages and interest, said the jury in Los Angeles Superior Court, where the case was tried.

Health Net, apparently not eager to gloat, said it wasn’t going to comment on the verdict.

One of Sovereign’s attorneys, Lisa S. Kantor, said this: “We believe that there were multiple reversible errors and that the most significant evidence was kept from the jury. We look forward to obtaining a reversal on appeal.”

That $45 million hit to Sovereign and Sharma breaks down like this: Health Net’s damages for fraud and/or intentional interference amounted to $15.82 million, with a $13.31 million cherry on top awarded for interest. Health Net is due another $15.82 million for the RICO violations, the jury said.

It happens that $15.82 million is how much Sovereign billed for urine and other lab tests that weren’t necessary or even ordered by doctors, according to testimony at trial.

Sovereign, which filed the initial lawsuit against Health Net, got zip.

“Sovereign is not an innocent little lamb,” Health Net attorney Kenneth Julian said during closing arguments. “Sovereign is a ravenous wolf, and it took advantage.”

The fight

Sovereign, once a prominent addiction treatment and behavioral health provider in Southern California and several other states, sued Health Net in 2016 after the insurer refused to pay for treatment already provided to Health Net customers.

Sovereign alleged the insurer “engaged in a disgraceful scheme to enrich themselves by backtracking on their insurance promises to recovering addicts and the mentally ill,” and that its “misconduct is part of a sad pattern of prioritizing dollars over decency.”

Health Net owed Sovereign $55 million for services rendered back then — and, with statutory interest, that ballooned to $80 million and beyond, according to Sovereign’s court filings.

Health Net, of course, has a vastly different perspective.

In a counter-suit, it argued that Sharma and his companies engaged in massive fraud that harmed all consumers. In 2013 — before coverage for addiction treatment was mandated under Obamacare — Health Net paid $251,000 to out-of-network providers like Sovereign. In 2015, it paid them more than $190 million, “an almost 1,000-fold increase in just two years,” it said.

Monthly billings from Sovereign’s companies to Health Net climbed from less than $50,000 to more than $13 million within the span of a single year, Health Net said.

Treatment providers gamed and abused the Affordable Care Act, Health Net said. Sovereign and other clinics “engaged in a sophisticated fraud involving paying kickbacks to ‘buy’ hundreds of patients from teams of brokers, or ‘cappers,’ who find the patients in 12-step programs, AA meetings, homeless shelters and jails, often from outside California, and then ‘sell’ them for cash to the highest-bidding clinic,” its suit said.

“Because the prospective patients typically would not be able to afford private health insurance or the cost-sharing obligations associated with receiving services from an out-of-network provider — and who should therefore be enrolled in state-funded or subsidized health care programs such as Medicaid — the providers, including (Sovereign), offer the patients financial kickbacks and inducements.”

The primary inducement is the offer of free care, Health Net said. Sovereign, and providers like it, signed people up for top-tier insurance policies. Those providers — not the clients — paid the insurance premiums. Then the providers either waived — or paid — the patients’ out-of-pocket deductibles and co-pays, which Health Net said violated the policy terms.

Sovereign and the others recouped their cash outlays by billing massive amounts — often for services that were never rendered, were not medically necessary or were not covered, the counter-suit said.

“This scheme, which involves fraudulently obtaining insurance policies and the submission of thousands of false and fraudulent claims, also raises the costs of healthcare coverage to consumers, who ultimately will have to pay higher insurance premiums.” the insurer argued.

‘Patients as pawns’

Sovereign’s lawyers argued that Health Net was ill-prepared for the mass of claims it would get for addiction treatment and simply decided not to pay them.

The legal process dragged on for years and the insurer had years to investigate, gained access to hundreds of pages of documents, “but at the end, their accusations are based on hearsay, innuendo, gossip,” Sander Dawson said. “They call any obvious mistake part of a fraudulent scheme.”

In the end, Sovereign sought reimbursement for just $10 million of unpaid claims and interest on those claims; it couldn’t collect on the rest because it paid for patients, which is illegal, Health Net told jurors.

Health Net was apparently more convincing to the jury.

“Insurance doesn’t work if a person buys insurance when the fire is coming down the hill, puts in a massive claim for their house that has burned down and then cancels it afterwards,” Health Net attorney Gregory Pimstone said during closing arguments.

“It doesn’t work. The system would collapse … and here we have something even worse than that. It’s not just that they bought the insurance as the fire was coming down the hill and then terminated the insurance after the claim had been put in. But here it’s like the contractor is buying insurance for all the homeowners and saying….’Free insurance for you if you let me rebuild your house so I can submit claims to your insurer for rebuilding your house.’

“Sovereign (gamed) the system. It  defrauded Health Net, and it used its patients as pawns.”

We’ll tell you more about the eye-popping evidence in coming days — which includes a “mop-up” team in India padding medical histories, but sometimes forgetting to change patient names — but the legal proceedings aren’t quite over. There will be a short second phase of the trial in September to consider punitive damages.

Sharma was hoping to use the proceeds from this trial to pay hundreds of Sovereign workers who never got paid as the company was imploding in 2018. Those wage claims are still outstanding.

Sharma, however, has been working with a company, Invictus Health LLC. He has said he advises Invictus and other providers about what they need to do and how they need to do it, but said he had no financial stake in the businesses and they cannot be sued in lieu of Sovereign.

Update 8/2/22 to attribute “ravenous wolf” quote to Kenneth Julian

Read trial transcripts:

2022-07-21 Trial Transcript_Redacted

2022-07-19 Trial Transcript (Closing Arguments)