Charles M. Klasky, CR6484 (2024)

DECISION

The Inspector General (IG) of the United States Department of Health and Human Services excluded Petitioner, Charles M. Klasky, from participation in Medicare, Medicaid, and all other federal health care programs based on his conviction of a felony criminal offense relating to health care fraud that it determined was in connection with the delivery of a health care item or service.  For the reasons discussed below, I conclude that the IG has a basis for excluding Petitioner because he has a felony conviction for conspiracy to commit health care fraud that was in connection with the delivery of a health care item or service.  The IG has proven two aggravating factors, to include an adjudicated loss of more than $17 million, and there is one mitigating factor present.  A 20-year exclusion is reasonable, effective January 18, 2024.

I.  Background

In a letter dated December 29, 2023, the IG excluded Petitioner from participation in Medicare, Medicaid, and all federal health care programs as defined in section 1128B(f) of the Social Security Act (Act) (42 U.S.C. § 1320a-7b(f)) for a minimum period of

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20 years, effective 20 days from the date of the letter.  IG Ex. 1 at 1.  The IG explained the following bases for excluding Petitioner:

The [IG] is imposing this exclusion under section 1128(a)(3) of the Act, due to your felony conviction (as defined in section 1128(i) of the Act) in the United States District Court, Central District of California, of a criminal offense related to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct, in connection with the delivery of a health care item or service, or with respect to any act or omission in a health care program (other than Medicare and a State health care program) operated by, or financed, in whole or in part, by any Federal, State[,] or local government agency.

IG Ex. 1 at 1.  The IG informed Petitioner that the exclusion was for “a minimum period of 20 years.”  IG Ex. 1 at 1; see 42 U.S.C. § 1320a-7(c)(3)(B).  The IG extended the exclusion period from the statutory minimum of five years to 20 years based on the presence of two aggravating factors.  IG Ex. 1 at 1.  As for the aggravating factors, the IG found the following:  1) The acts resulting in the conviction, or similar acts, caused, or were intended to cause, a financial loss to a government program or one or more entities of $50,000 or more; 2) The acts that resulted in the conviction, or similar acts, were committed over a period of one year or more from about May 2010 to about December 2015.  IG Ex. 1 at 1; 42 C.F.R. § 1001.102(b).  The IG took one mitigating factor into consideration (cooperation with federal officials resulting in others’ criminal convictions).  IG Ex. 1 at 2; see 42 C.F.R. § 1001.102(c).

Petitioner filed a timely request for an administrative law judge (ALJ) hearing on January 16, 2024.  On February 6, 2024, pursuant to 42 C.F.R. § 1005.6, I presided over a telephonic pre-hearing conference, and that same day I issued an order summarizing my discussion with the parties.

The IG, through counsel, filed a brief (IG Br.) and a reply brief (IG Reply), along with seven exhibits (IG Exs. 1-7).  Petitioner, who is represented by counsel, filed a brief (P. Br.) and five exhibits (P. Exs. 1-5).  In the absence of any objections, I admit all submitted exhibits.

Neither party has submitted the written testimony of any witnesses, nor has either party provided notice that it is unable to provide the written direct testimony of an essential witness.  See Pre-Hearing Order § 14.  An in-person hearing for the purpose of cross‑examination of witnesses is therefore unnecessary.  See Pre-Hearing Order §§ 15, 16.  This matter is ready for a decision on the merits of the written record.

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II.  Issues

Whether there is a basis for exclusion, and if so, whether the length of the exclusion that the IG has imposed is unreasonable.  42 C.F.R. § 1001.2007(a)(1).

III.  Jurisdiction

I have jurisdiction to adjudicate this case.  42 U.S.C. § 1320a-7(f)(1); 42 C.F.R. § 1005.2.

IV.  Findings of Fact, Conclusions of Law, and Analysis¹

1. Petitioner was convicted of a felony offense related to health care fraud, in that he engaged in a conspiracy to commit health care fraud that was in connection with the delivery of a health care item or service, and he is subject to a mandatory exclusion from all federal health care programs for a minimum of five years.  

Subsection 1128(a)(3) of the Act requires a mandatory exclusion from all federal health care programs under certain conditions.²  Section 1128(a)(3) states:

(a) Mandatory Exclusion.—The Secretary shall exclude the following individuals and entities from participation in any Federal health care program (as defined in section 1128B(f)):

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(3) Felony conviction relating to health care fraud.—Any individual or entity that has been convicted for an offense which occurred after August 21, 1996, under Federal or State law, in connection with the delivery of a health care item or service or with respect to any act or omission in a health care program (other than those specifically described in paragraph (1)) operated by or financed in whole or in part by any Federal, State, or

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local government agency, of a criminal offense consisting of a felony relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct.

42 U.S.C. § 1320a-7(a)(3).

As explained below, I find that Petitioner was convicted of a felony criminal offense for purposes of the Act that mandates exclusion from all federal health care programs.

On July 5, 2017, the United States filed a one-count information charging that Petitioner violated 18 U.S.C. § 371 (conspiracy) and that the object of the conspiracy was to commit health care fraud in violation 18 U.S.C. § 1347.   IG Ex. 2 at 1, 5.  Specifically, the United States charged that “[b]etween in or around May 2010 and in or around December 2015 . . . [Petitioner], and others known and unknown to the Acting United States Attorney, knowingly combined, conspired, and agreed to commit health care fraud, in violation of Title 18, United States Code, Section 1347.”  IG Ex. 2 at 5.  

The United States summarized Petitioner’s criminal conduct as follows:

[Petitioner] participated in a scheme to defraud insurers through fabricated sleep study results and other falsified information that was submitted with sleep study claims and used in pursuit of approval for lucrative Lap-Band surgeries and in the provision of CPAP devices and accessories to patients.  His conduct was not limited or brief, but instead spanned years in which he fabricated reports and other medical information himself and directed others in doing so.  The parties agreed that his conduct led to billings of more than $159,000,000 for Lap-Band surgeries for patients for whom a sleep study report had been falsified and led to more than $17,000,000 in payments from victim insurers and health benefit programs like Tricare. . . . [Petitioner] also destroyed evidence and attempted to conceal the fraud through other means, including through internal memoranda designed to cover up the falsification of sleep study results.

IG Ex. 6 at 14-15 (Motion for Section 5K1.1 Departure).

Petitioner entered a guilty plea on October 19, 2022.  IG Ex. 5 at 1.  On January 19, 2023, a United States District Judge issued an amended judgment and probation/commitment order.  IG Ex. 5.  Petitioner’s sentence included eight months of home confinement, three

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years of probation, 400 hours of community service, and the payment of restitution totaling $17,895,974.  IG Ex. 5 at 1-2.

In advance of Petitioner’s sentencing hearing, the United States filed a letter requesting a 13-level downward departure under the Sentencing Guidelines based on Petitioner’s substantial cooperation.  IG Ex. 6.  The United States explained that “[i]n March 2016, agents executed a search warrant at [Petitioner’s] residence, at which point [he] admitted to falsifying sleep studies and agreed to cooperate . . . .”  IG Ex. 6 at 8.  The United States further explained that “[b]etween March 2016 and June 2017, when [Petitioner] entered into a plea agreement, [he] proffered with the government three times and, at the direction of law enforcement, conducted 14 undercover recordings of OMIDI over the course of three months.”  IG Ex. 6 at 8.  The United States explained that “[i]n consideration of this assistance, [Petitioner] was offered a plea to a conspiracy charge with a five-year statutory maximum.”  IG Ex. 6 at 8.  Addressing Petitioner’s continued cooperation following his guilty plea, the United States reported that Petitioner “continued to proffer on various aspects of the expansive scheme, testified in pre-indictment proceedings, prepared for trial in numerous sessions, and testified at trial for approximately 11 days.  Co-conspirators OMIDI and SCM were convicted following a three-month trial in December 2021 and are scheduled to be sentenced on November 8, 2022.”  IG Ex. 6 at 8-9.  The United States added:

In particular, [Petitioner] participated in four proffer sessions between August 2017 and May 2018, testified in pre-indictment proceedings for more than six hours in August 2017, participated in approximately 19 trial preparation sessions comprising many hours between March and October 2021, and testified for approximately 11 days at trial, the majority of which was spent on vigorous cross-examination. The number of meetings and hours of testimony here were both extraordinary and a function of the breadth of the scheme, which continued for nearly six years in various permutations, involved multiple co-schemers who often held in shadowy roles not always consistent with their job descriptions, and operated within a secretive and byzantine web of corporations and nominees.

IG Ex. 6 at 11.  The United States further explained that Petitioner’s assistance exposed him “for over six years” to threats, “extensive efforts to manipulate him and separate him from multiple attorneys engaged on his behalf,” “intrusive and expensive litigation in other venues,” and “approximately six days of extensive and aggressive cross-examination.”  IG Ex. 6 at 12.   The United States reported that Petitioner’s “age and health challenges made these issues even more difficult to deal with and thus make his continued commitment to cooperation all the more noteworthy.”  IG Ex. 6 at 12.

Petitioner concedes he “was convicted of a healthcare fraud felony.”  P. Br. at 1.  Pursuant to section 1128(i)(3) of the Act, an individual is considered to have been

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convicted of a criminal offense “when a plea of guilty or nolo contendere by the individual or entity has been accepted by a Federal, State, or local court.”  42 U.S.C. § 1320a-7(i)(3).  Petitioner has a felony conviction for the purposes of exclusion, as a United States District Judge accepted Petitioner’s guilty plea and imposed judgment based on his guilty plea to the offense of conspiracy to commit health care fraud.  IG Ex. 5.  Congress, through enactment of the Act, determined that an individual who has been convicted of a criminal offense related to either the delivery of an item or service under Medicare or a state health care program or felony health care fraud must be excluded from federal health care programs for no less than five years, and it afforded neither the IG nor an administrative law judge the discretion to impose an exclusion of a shorter duration.  42 U.S.C. § 1320a-7(c)(3)(B).  I cannot shorten the length of the exclusion to a period of less than five years because I do not have authority to “[f]ind invalid or refuse to follow Federal statutes or regulations[.]”  42 C.F.R. § 1005.4(c)(1).  Petitioner was convicted of felony health care fraud, and his criminal offense was in connection with the delivery of a health care item or service (e.g., Lap-Band surgery).  Petitioner’s exclusion is mandated for a minimum period of five years based on subsection 1128(a)(3).

2. A 20-year minimum exclusion is not unreasonable based on the presence of two aggravating factors and one mitigating factor. 

The Act requires a minimum exclusion period of five years when the exclusion is mandated under section 1320a-7(a).  42 U.S.C. § 1320a-7(c)(3)(B).  In this case, exclusion is required under section 1320a-7(a)(3), and therefore Petitioner must be excluded for a minimum of five years.  

The IG has the discretion to impose an exclusion longer than the minimum period when aggravating factors are present.  See 42 C.F.R. § 1001.102.  The IG increased the minimum exclusion period from five years to 20 years based on the presence of two aggravating factors.  IG Ex. 1 at 1-2.  As I explain below, a 20-year exclusion is not unreasonable based on the two aggravating, and one mitigating, factors that are present.

The IG asserts that the first aggravating factor is that the loss to a government program or other entities as a result of Petitioner’s criminal conduct was greater than $50,000, as demonstrated by the order that he pay $17,895,974 in restitution to the insurers and health benefits programs that were the victims of his crime.  IG Br. at 6-7; IG Reply at 2; see IG Exs. 1 at 1; 5 at 1; 42 C.F.R. § 1001.102(b)(1).  The IG also argues that the acts that resulted in the conviction, or similar acts, were committed over a period of one year or more, in that “the scheme lasted from May 2010 to December 2015.”  IG Br. at 7, citing IG Ex. 2 at 5; see IG Ex. 1 at 1; 42 C.F.R. § 1001.102(b)(2).  

The IG bears the burden of persuasion with respect to aggravating factors, and Petitioner bears the burden of persuasion with respect to mitigating factors.  42 C.F.R. § 1005.15(c); see Standing Pre-Hearing Order § 7.  Petitioner does not argue that the IG lacked a

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legitimate basis to consider the aforementioned aggravating factors.  Rather, Petitioner limits his arguments to the extent mitigation is warranted based on his cooperation with law enforcement officials, arguing that “[i]t appears that this is the same type of exclusion that would have been imposed had [Petitioner] not cooperated at all.”  P. Br. at 14.

The first aggravating factor is that the loss to a government program or other entities as a result of Petitioner’s criminal conduct was greater than $50,000, as evidenced by the sentencing order that Petitioner pay $17,895,974 in restitution.  IG Exs. 1 at 1; 5 at 1; see IG Ex. 2 at 1, 7 (information charging that Petitioner engaged in a conspiracy to commit health care fraud, and that insurance companies and health care benefit programs were billed “at least approximately $159,637,716 for Lap-Band surgeries” and “[i]nsurance companies and health care benefit programs paid at least approximately $17,895,974 on those claims”); 42 C.F.R. § 1001.102(b)(1).  The $17,895,974 loss was more than 350 times the $50,000 threshold for application of this aggravating factor, and the IG had a reasonable basis to significantly lengthen the exclusion based on this factor.  42 C.F.R. § 1001.102(b)(1); see Edwin L. Fuentes, DAB No. 2988 at 13 (2020) (“We find it deserves some significant weight in extending the mandatory exclusion period given that the regulations reflect that financial losses of even one dollar over $50,000 would justify at least some extension.”).  The IG contends the instant loss amounts to an “exceptional aggravating factor.”  IG Br. at 7; see Jeremy Robinson, DAB No. 1905 at 11 (2004) (“We have previously determined that restitution in an amount that is very substantially greater than the statutory standard is entitled to ‘significantly more weight,’ characterizing it as an ‘exceptional aggravating factor.’”).   I afford very significant weight to this aggravating factor that accounts for a loss amount of more than 350 times the threshold amount.  
 
Petitioner does not dispute the length of the acts that resulted in his felony conviction, and he pleaded guilty to an indictment charging that the approximate date range of his criminal conduct was from May 2010 through December 2015.  IG Exs. 2 at 4; 5 at 1.  The IG properly considered the length of acts that resulted in Petitioner’s felony conviction to be an aggravating factor in this case.  See IG Br. at 7 (“The purpose of the aggravating factor found at 42 C.F.R. § 1001.102(b)(2) ‘is to distinguish . . . petitioners whose lapse in integrity is short-lived from those who evidence a lack of such integrity over a longer period of time.’”), citing Donald A. Burstein, PhD, DAB No. 1865 at 8 (2003).

Evidence of aggravation may be offset by evidence of mitigation if it relates to one of the factors set forth at 42 C.F.R. § 1001.102(c).  I cannot consider evidence of mitigation

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unless one or more of the enumerated aggravating factors listed in 42 C.F.R. § 1001.102(b) justifies an exclusion of longer than five years.  42 C.F.R. § 1001.102(c).  

Pursuant to 42 C.F.R. § 1001.102(c)(3), Petitioner may demonstrate mitigation if his cooperation resulted in others being convicted or excluded from Medicare, Medicaid and all other federal health care programs; resulted in additional cases being investigated or reports being issued by the appropriate law enforcement agency identifying program vulnerabilities or weaknesses; or resulted in a civil monetary penalty or assessment pursuant to 42 C.F.R. part 1003.  The IG determined that Petitioner’s cooperation satisfied a mitigating factor pursuant to 42 C.F.R. § 1001.102(c)(3).  The evidence confirms that Petitioner provided an “extraordinary” amount of cooperation, and his cooperation “contributed to the conviction of others.”  IG Ex. 6 at 11, 16

Owing to the staggering loss of more than $17 million, a review of cases decided by the Departmental Appeals Board (DAB) lacks cases involving comparable losses, inasmuch as nearly every exclusion upheld by the DAB involves a far less significant financial loss.  The case of Salman Ali, DPT and Roohi Aliis one of few cases that may be instructive, with the DAB affirming an ALJ decision that upheld a 20-year exclusion of Salman Ali based on the application of three aggravating factors and one mitigating factor.  Notably, the loss involved in that case was substantially less, totaling approximately $12 million.  The other aggravating factors included a multi-year period of criminal conduct and a sentence of incarceration, with a mitigating factor being “significant” and “‘substantial and profound’ cooperation” for nearly eight years.  Salman Ali, DPT and Roohi Ali, DPT, DAB No. 3048 at 9-10 (2021).  The DAB explained that “[p]etitioners’ cooperation, although significant, does not outweigh the gravity and magnitude of the aggravating factors, which together reflect Petitioners’ lack of trustworthiness.”  Ali, DAB No. 3048 at 12; see also Juan de Leon, Jr., DAB No. 2533 at 5-6 (2013) (20-year exclusion imposed for loss of $750,000 (150 times the then-threshold of $5,000), a similar length of criminal conduct, and a more significant term of incarceration, but with a 20 percent reduction based on the application of a mitigating factor); Craig Richard Wilder, DAB No. 2416 at 9 (2011) (establishing an 18-year exclusion based on three aggravating factors including financial loss of over $4 million, criminal conduct over two years, and other convictions, as well as one mitigating factor of government cooperation); but see Eugene Goldman, M.D., a/k/a Yevgeniy Goldman, M.D., DAB No. 2635 at 8 (2015) (stating that determining the period of exclusion is case-specific and based on an evaluation of the aggravating and mitigating factors in the case); Paul D. Goldenheim, M.D., et al., DAB No. 2268 at 29 (2009) (stating that comparisons with other cases are not controlling and are of “limited utility”).

The question before me is not whether I, in the first instance, would impose a 20-year exclusion.  Rather, the question is whether the IG imposed an exclusion within a reasonable range, or stated otherwise, whether a 20-year exclusion is unreasonable.  The DAB has repeatedly upheld lengthy exclusions involving losses that pale in comparison

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to the more than $17 million loss in the instant case.  As explained by the United States in its request for a 13-level downward departure under the Sentencing Guidelines, Petitioner “participated in a scheme to defraud insurers,” and “[h]is conduct was not limited or brief, but instead spanned years,” during which time he “fabricated reports and other medical information himself and directed others in doing so” and “also destroyed evidence and attempted to conceal the fraud through other means, including through internal memoranda designed to cover up the falsification of sleep study results.”  IG Ex. 6 at 14-15.  While the IG correctly took Petitioner’s extensive cooperation into account when it mitigated the length of the exclusion, such cooperation, which undoubtedly served Petitioner’s interests in significantly reducing his exposure to incarceration, “does not outweigh the gravity and magnitude of the aggravating factors, which together reflect [Petitioner’s] lack of trustworthiness.”  Ali, DAB No. 3048 at 12.  The fact that Petitioner prudently decided, while a search warrant was being executed at his residence, to cooperate, and then continued to provide significant cooperation, despite considerable effort and difficulty, does not, in and of itself, render him trustworthy.  Petitioner’s lengthy and costly criminal activity cannot simply be erased because he cooperated with law enforcement.  See IG Br. at 11 (“Petitioner’s cooperation does not negate the seriousness of his crime.”).  The imposition of a minimum period of exclusion of 20 years, with Petitioner’s extraordinary cooperation taken into account as a mitigating factor, is not unreasonable in such an instance involving an extraordinary financial loss that resulted from a multi-year health care fraud scheme.  42 C.F.R. § 1001.2007(a).

3. The effective date of Petitioner’s exclusion is January 18, 2024.

The effective date of the exclusion, January 18, 2024, is 20 days after the date of the IG’s December 29, 2023 letter and is established by regulation (42 C.F.R. § 1001.2002(b)); I am bound by that regulation.  42 C.F.R. § 1005.4(c)(1).

V.  Conclusion

For the foregoing reasons, a 20-year exclusion from participation in Medicare, Medicaid, and all other federal health care programs, effective January 18, 2024, is reasonable.

Endnotes

¹  My findings of fact and conclusions of law are set forth in italics and bold font.

²  While there are slight differences in the wording of Section 1128 of the Act and its codification at 42 U.S.C. § 1320a-7, the two authorities are substantively identical and I refer to them interchangeably.  I further note that the Secretary of the Department of Health and Human Services has delegated to the IG the authority “to suspend or exclude certain health care practitioners and providers of health care services from participation in these programs.”  48 Fed. Reg. 21,662 (May 13, 1983); see also 42 C.F.R. § 1005.1.

³  Inasmuch as Petitioner’s offense was punishable by up to five years of imprisonment, it is a felony offense.  18 U.S.C. § 3559(a)(4); see 18 U.S.C. § 371; IG Exs. 3 at 21; 5 at 6 (addressing statutory maximum of 60 months of imprisonment).

⁴  Inasmuch as the $205,000 loss in Robinson was 41 times the then-threshold amount, the “exceptional aggravating factor” was far less significant than it is in the instant case.