Fraud costs military health program $100 million-plus

MADISON, Wis. -- The U.S. military's health insurance program has been swindled out of more than $100 million over the past decade in the Philippines, where doctors, hospitals and clinics have conspired with American veterans to submit bogus claims, according to prosecutors and court records.

Seventeen people have been convicted so far in a little-noticed investigation that has been handled by federal prosecutors out of Wisconsin because a Madison company holds the contract to process many of the claims. It has not been accused of any wrongdoing.

At the center of the case is Tricare, a Pentagon-run program that insures 9.2 million current and former service members and dependents worldwide. The United States closed its military bases in the Philippines in 1992 and withdrew its active-duty forces, but thousands of retirees remained. Some saw an opportunity to pry easy cash from Tricare.

Health-care providers in the Philippines filed claims for medical services never delivered, inflated claims by as much as 2,000 percent and shared kickbacks with retirees who played along, court records reviewed by The Associated Press show.

"There just seemed to be so many possibilities for abuse of the system, and there were so few controls in terms of monitoring," said former Federal prosecutor Peg Lautenschlager, who oversaw prosecutions in the late 1990s.

Pentagon auditors say Tricare moved slowly to uncover and stop the fraud. And a February audit warned that the program is still vulnerable to rip-offs because of lax controls and that similar fraud schemes are starting to emerge in Latin America.

News of the scope of the fraud comes as the Pentagon seeks to raise fees for Tricare's beneficiaries -- fourfold, in some cases. The proposed increases have outraged groups representing servicemen and have been blocked by Congress.

Tricare paid $210.9 million in overseas claims in 2006, the latest year for which figures were available. At the height of the fraud in 2003, Pentagon officials say, two-thirds of the $61.8 million paid to Philippine providers -- about $40 million -- was fraudulent.

The fraud in the Philippines was so extensive that the number of claims filed there skyrocketed nearly 2,000 percent between 1998 and 2003 even as beneficiaries there -- about 9,000 mostly retired military members and dependents -- remained constant.

"I know this is illegal and wrong to submit fraudulent claims to get money, but I did it for fun," U.S. Navy retiree Romulo Estoesta told investigators. He died in 2002.

Austin Camacho, a spokesman for the Pentagon's Tricare Management Activity, which runs the program, said the fraud has been hard to prove because of language barriers, a lack of cooperation from providers and limited law enforcement resources. But he said the agency added numerous controls and is making every effort to stop fraud.

In one big case, prosecutors say Health Visions Corp. -- which owns hospitals and clinics in the Philippines -- bilked the program out of nearly $100 million from 1998 to 2004.

Its former president, Thomas Lutz, has pleaded guilty to his role in a kickback scheme and could get five years in prison. He could be sentenced in Madison as early as Thursday. The company has also reached a plea agreement, but it is sealed.

Prosecutors say Health Visions executives instructed billers to inflate every claim by at least 233 percent and falsify diagnoses. Lutz refused to comment when reached by telephone in Columbia, Mo., where he is living with relatives. The company's lawyer had no comment.

Pentagon officials received fraud allegations against the company in 2000 but waited until late 2005 to move to cut off payments, according to an internal audit report. The company reaped tens of millions of dollars in payments in the meantime.

In a 2005 memo, William Winkenwerder, then assistant secretary of defense for health affairs, complained that his requests to send additional investigators to the Philippines were ignored.

The fraud went well beyond Health Visions. A Pentagon official warned in 2004 that the Philippine schemes were costing U.S. taxpayers $40 million a year.

In all, those convicted have been ordered to pay back only about $1.8 million.

Assistant Federal prosecutor Peter Jarosz said of the 37 people indicted, about 20 remain free, in part because requests to extradite suspects from the Philippines have rarely succeeded.

Claro de Castro, chief of the Philippine National Bureau of Investigation's Interpol division, insisted Philippine authorities have cooperated with the U.S.

Nevertheless, federal agents have resorted to trying to capture defendants when they step on U.S. soil.

Dr. Diogenes Dionisio, who ran a clinic near Manila, was arrested earlier this year after he arrived in Guam for a vacation. He has pleaded not guilty to submitting $2 million in fraudulent claims. His lawyer, Charles Giesen, said his client was never notified he was facing indictment.

"He was getting off the plane with his golf clubs and they put him in handcuffs," Giesen said. "It was a complete surprise and somewhat baffling."