"Endgame? Subpeonas are flying as a grand jury probes PolyMedica
By Cheryl Strauss Einhorn
Federal investigators are closing in on PolyMedica, the country's largest
provider of diabetes home-testing kits. A federal Grand Jury is looking into
possible Medicare and investor fraud at the Woburn, Massachusetts-based
firm, and there is a possibility that criminal indictments will be handed out
against the company and at least some of its senior officials. Indeed, the
Federal Bureau of Investigation delivered grand jury subpoenas in late July to
several people close to the company.
Nonetheless, PolyMedica founder and chief executive Steven Lee insists, "No
one has contacted us. No one has accused us of any wrongdoing."
PolyMedica, through its Liberty Medical division, sells diabetes testing
equipment and other medical supplies, mainly by direct mail and mainly to
Medicare patients. The company's commercial spokesman, actor Wilfred
Brimley, can be heard hawking its glucose testing strips on television and
radio hundreds of times daily, noting that Medicare or your insurance carrier
will be billed directly.
People close to the matter say the FBI has contacted 20 to 30 current and
former PolyMedica employees in the past few months. Some of the people
contacted by the FBI have accepted immunity from prosecution in return for
their testimony. The agency confirms it is making inquiries.
The Securities and Exchange Commission has also been asking questions
about PolyMedica and is gathering documents. People knowledgeable about
the company say the U.S. Postal Service is involved as well, regarding
possible mail fraud.
News of investigations into PolyMedica shouldn't surprise Barron's readers.
Last fall, we broke the story about the FBI probe into alleged Medicare fraud
("Diagnosis Pending," November 20). Since then, the company's shares have
slipped to 30.59 from 52 -- a 41% decline -- though they're up 80% from
their low of 17 in March.
Interviews with people close to the inquiry say that the
FBI has told them the potential charges against
PolyMedica could be criminal and that they center
around the company's billing and general business
practices. Eighty percent of PolyMedica's revenues
come from Medicare, the balance from big insurers
like Aetna.
Warren K. Trowbridge, who runs Liberty Medical,
the company's largest division, and is one of
PolyMedica's most senior officers, has had brushes
with Medicare fraud before. Between December
1997 and February 1999, right before he joined Liberty, Trowbridge was
president of U.S. operations for Transworld Healthcare, a company with
$300 million in revenues that has a large diabetic unit, MK Diabetes Support
Services. Trowbridge ran MK between November 1994 and December
1997.
In August 2000, Transworld agreed to pay $10 million to the federal
government to settle a lawsuit that had been filed by a whistleblower under the
False Claims Act in 1997 alleging Medicare fraud. The case alleged that
"Transworld engaged in the systemic defrauding of Medicare and other
government-funded health insurance programs by claiming and causing
excessive reimbursements as part of a nationwide marketing scheme."
One person questioned by the FBI recalls that the agency asked specifically,
"Did you know Trowbridge had been involved with Medicare fraud in the
past?"
Contacted by Barron's, Trowbridge said he had "nothing to do with the
suit" and that he "never had conversations with regulators." In
fact, he says he changed Transworld's sales commission system to bring it in
line with Medicare's requirements.
PolyMedica's problems are broader in scope than those at Transworld.
Customers are often shipped products they didn't order, say people close the
probe. Indeed, several people told Barron's that orders have even been
shipped to people who are known to be deceased. "I know they ship to dead
people," says one.
And though these products are often returned, another person says, "Over
90% of returns are not refunded to Medicare."
By way of explanation, Lee says, "If you ship 120,000 units a month, you will
ship to someone who is deceased, because no one is going to call you and
say, 'I'm going to die Tuesday.' " Lee adds that PolyMedica did have some
problems getting refunds to Medicare, but only because its computer systems
were more advanced than the ones used to process refunds for Medicare:
"We were always ready, willing and able to refund the money. We were
waiting for them to accept it."
Employees have tried again and again to inform Lee, Trowbridge and others
of improper activities at the company. These reports and criticisms, some of
which were reviewed by Barron's, were sometimes met with silence or
reprimand.
One reason that billing and return problems are so rampant, say insiders, is
that PolyMedica's computer systems can easily be manipulated to generate
phony orders. "Usually the last 10% or so, give or take" of each month's sales
were to people that never ordered the goods, one person alleges and others
close to the matter corroborate. "Let me put it to you this way," the one
person explains. "Their goal in the last month was like 100,000 orders. On
Friday, they were 10,000 orders short. But magically, and curiously by the
close of the day on Saturday, they had those 10,000 orders."
Asked if it's likely that 10,000
orders could be booked in a single
day, the person responded, "It is
almost physically impossible."
Typically, the company books 3,500
orders a day, that person says.
Additionally, several witnesses say
that the company sometimes loads
up trucks with products from its
warehouses, only to have the trucks
sit in the warehouse parking lot.
These moves, they say, allow the
company to meet certain sales and
shipping goals.
"They book the sales in the prior month," says an insider. "They do it all the
time."
Lee and Trowbridge both deny that PolyMedica books sales incorrectly.
Several current and former PolyMedica employees estimate that as much as
15% of the company's business is fraudulent. The problems, they say, are
perpetuated in part because the sales force doesn't have to give back
commissions on returned sales.
While sales people were once allowed to keep a portion of their commissions
on returned sales, Lee says, that practice has stopped. "This company is
highly ethical," he adds. "You don't spend hundreds of millions of dollars to
develop a scam." |
