Lawsuit Alleges Fraud by FHP

FOUNTAIN VALLEY —  An investor lawsuit alleges that FHP International Corp. padded its membership numbers by signing up homeless and mentally incompetent people, defrauding the federal government out of an average $400 a month per patient.

FHP, which operates the nation’s second-largest Medicare-substitution plan through its health maintenance organization, denied that the suit has any merit and said the company would defend against it vigorously.

The suit, which is a consolidation of three lawsuits filed last fall, seeks class-action status on behalf of investors. It was filed in federal court in Santa Ana on Wednesday and claims that top management was aware that a government investigation of FHP’s sales practices would reveal the alleged membership fraud and that several managers sold shares in the company shortly after government investigators contacted them for questioning.

Jack Massimino, FHP’s executive vice president and chief operating officer, pointed out that the Health Care Finance Administration had completed its investigation in December and had found the Fountain Valley-based company in compliance with regulations.

“We have some 225,000 seniors enrolled in the program and over the course of a year we save them more than $100 million in medical costs,” Massimino said.

The complaint consolidates three investor lawsuits that were filed separately in October, shortly after FHP released earnings for its first quarter that were 30% lower than the year before. The company said earnings fell because of the economy and changes that had recently been made to the Senior Plan sales program.

“Such ‘recent changes,’ ” according to the lawsuit, “amounted to the cessation of the use of a myriad of fraudulent sales tactics, including forgery, enrolling homeless people, (and) enrolling nursing home-bound incompetents.”

The suit does not estimate the number of people signed up for the program under these circumstances. However, it states that many of these people never used FHP health care services, and so any payment for them from the federal government was pure profit.

The government pays FHP and other HMO operators a flat monthly fee to take care of Medicare patients, which theoretically amounts to a savings to the government of 5%.

Moreover, the suit claims, FHP was able to project a more efficient image to investors by adding members who do not use the services. The efficiency of an HMO is often measured in per-patient costs, so FHP’s costs seemed smaller when its number of members appeared higher.

Following the Oct. 17 report of lower earnings, FHP’s stock fell $5.50 per share to $12.25 in a single day. The plaintiffs bought their shares earlier when prices were higher. For example, one man paid $23.25 a share for 500 shares in May, according to the suit.

Membership in the Senior Plan made up 32% of FHP’s total membership but 62% of the company’s revenue for the six months ending Dec. 31, 1990, according to the suit.

Plaintiffs’ attorneys said that to prepare the consolidated complaint, they interviewed former Senior Plan sales people for FHP.

Nearly half of the company’s Senior Plan sales force is no longer selling the plan in the wake of a federal government investigation of FHP that began in July, according to the suit. Of that number, a third have been placed on disability leave, citing “stress” as the cause of their injury. At its height, the Senior Plan had a staff of 300 sales people.

The suit also claims that four top FHP officials sold shares in the company between Feb. 6 and Sept. 25, 1991.

According to the lawsuit, Robert Gumbiner, chairman of the board, sold 1.1 million of his 2.7 million shares for a profit of $17.3 million during that period.

In an earlier interview with the Los Angeles Times, a spokesman for the federal Health Care Financing Administration, which conducted the investigation of FHP, said the agency had contacted FHP officials about problems with its Senior Plan sales as early as January, 1991.