One of the most brazen — and costliest — hospital kickback schemes involving the region’s largest hospital group took place inside a nondescript, palm tree-lined medical plaza in north Fresno.

That’s where a healthcare technology company founded with money from Community Regional Medical Center built an exclusive wine and cigar lounge, complete with private humidor lockers for cigar storage, a state-of-the-art smoke ventilation system, and luxury wines and liquors valued about $1 million.

Only a select few executives and physicians had access to the office-turned-lounge near First Street and Alluvial Avenue, known as “HQ2.” It was a place where doctors, healthcare executives and physician group leaders were generously rewarded for using the company’s electronic health record system and fraudulently referring patients in violation of several federal laws, according to a 2019 unsealed federal whistleblower lawsuit.

The alleged conspirators planned to build a grander “ranch” luxury retreat using funds generated from the kickback scheme, according to the complaint, which was unsealed Wednesday.

The scheme came to light only after a 2017 building fire at the medical plaza revealed a cache of a thousand bottles of wine, arousing suspicions from the whistleblower, an accountant, of improper spending.

The U.S. The Attorney’s Office announced Wednesday that Community Health System and healthcare technology affiliate Physician Network Advantage Inc. (PNA) have agreed to pay $31 million to the federal government to settle allegations that it violated the False Claim Act.

Community Health System (CHS), Fresno’s largest healthcare group, owns downtown Fresno’s Community Regional Medical Center and the Clovis Community Medical Center, as well as a health plan and physician network. Community Medical Centers (CMC) is the name of the group that includes the hospitals and clinics under the CHS umbrella.

PNA is a health care technology business founded and funded by CMC to support Fresno-area physicians’ adoption of the electronic health records platform used by Community, according to federal prosecutors. PNA’s CEO Chris Roggenstein is a “longtime friend” of former CHS CEO Craig Castro, according to the lawsuit.

At the heart of the complaint is a scheme that PNA provided lavish benefits to doctors and physician group executives in exchange for enrolling in CMC’s electronic health record technology known as “Epic EHR.”

The lawsuit also alleges physicians and medical groups who joined the network made fraudulent referrals to CMC facilities in violation of the Anti-Kickback Statute.

The kickback scheme involves several major players in Fresno’s medical system, from hospital executives to medical records companies to some of the largest physician groups in the Central Valley.

Some of the 17 luxury gifts, trips and donations listed in the lawsuit included:

A trip to Paris, France, for Castro and his family totaling approximately $63,000.

A private plane for Timothy Joslin, former CEO of CRMC, to go to Las Vegas.

Strip clubs and meals for CMC executives and physicians during a Las Vegas medical conference in January 2016.

A $9,400 trip to Spain for Scott Wells, president of Santé Health and Santé Foundation, as well as Joyce Fields-Keene CEO of Central California Faculty Medical Group, or CCFMG (now known as Inspire Health Medical Group).

“The whistleblower lawsuit makes claims regarding personal choices that don’t reflect our high standards as a nonprofit health system, or the values of our current leadership team and board. And a number of elements in the 2019 lawsuit reflect either inaccurate or incomplete information,” said Michelle Von Tersch, senior vice president and chief of staff for CHS.

In a statement, PNA said it cooperated with the Civil Division of the U.S. Attorney’s Office in Sacramento in its review of Community Health System’s electronic medical records program that began nearly 15 years ago. “The settlement brings this matter to a conclusion without any determination or admission of legal liability for PNA,” the statement said.

Thirty-five doctors were known to have received payment from CHS, according to the settlement agreement.

How it worked

According to the complaint, CMC embarked on the seven-year, $75 million quality improvement initiative in or around 2010 to replace their business and clinical data system with new technology — the Epic EHR system.

CHS Board Chair Roger Sturdevant said that, in 2009, the federal government directed the healthcare industry to transition to electronic health records, which CHS did to provide patients with a “robust, consistent, and secure electronic health records system.”

“However, it is clear we needed stronger oversight measures to assure that both Community and our vendor partner maintained appropriate compliance at all times.” Sturdevant told The Bee in a statement. “While we are confident that physician referrals were driven by Community Health System’s position as a leading provider of hospital-based and specialty services, we recognize that even the appearance of inappropriate incentives must be addressed.”

In 2010, Physician Network Alliance, Inc. was formed with the sole purpose and business function of expanding defendant CMC’s Epic EHR network of Fresno area medical practices — and to shelter the illegal kickback payments and elaborate gifts, the lawsuit says.

According to the complaint, as early as 2011 CMC and PNA started giving kickbacks to Fresno-area physicians in the form of cash, expensive wine, strip-clubs, trips with private planes and free or heavily discounted access to the Epic EHR software.

PNA would bring in physicians and doctors groups into the network, all of which were subject to approval by CMC. In or around 2014 and 2015, CMC and PNA changed their building model so that PNA could retain some of the money received from the physician group, licensing fees and other monthly fees for maintenance and support of the Epic EHR system.

Defendant PNA was able to retain a cash surplus from the Epic EHR client fees, so PNA began to use the excess cash for extra gifts and travel for CMC executives and CMC network physicians, such as the European and Vegas trips.

PNA allegedly provided jobs to family members of CMC executives at the request of CMC.

The HQ2 cigar lounge was constructed sometime after 2014 with an estimated $1.1 million of CMC funds, the complaint said.

Michael Terpening, the former controller for PNA, discovered the “illegal activity” after a fire at PNA’s headquarters in 2017, in which 40 to 50 boxes of wine — totaling 1,000 bottles — were found in a storage room.

When Terpening approached his boss Roggenstein about the wine, he was told it was “leftover from the holiday party.”

Terpening and his attorney could not be reached for comment.

Discovery of the wine surplus led Terpening to become suspicious of other large expenditures submitted as deductible “business expenses” for PNA, the complaint said.

But, according to the complaint, Roggenstein ignored Terpening’s advice to cease the illegal activity, and instead “redoubled his criminal efforts.”