DAVID VOREACOS and LINDY WASHBURN, Staff Writers
March 25, 1999

Federal prosecutors have begun a criminal investigation of the collapse of HIP Health Plan of New Jersey, whose failure has forced 194,000 people to seek new insurance coverage, to determine whether any fraud occurred, sources close to the probe said Wednesday.

As part of that investigation, federal grand jurors in January subpoenaed a number of documents from HIP New Jersey's insolvent partner, PHP Healthcare Corp., of Reston, Va., said PHP's special counsel Robert Luskin. "They subpoenaed a variety of documents regarding PHP's relationship with HIP of New Jersey," said Luskin, a Washington attorney. Another source said grand jurors also have subpoenaed an array of records from HIP of New Jersey. "They're looking to see what happened to cause HIP to go under and to see if there was any fraud by anybody," this source said. "The investigation appears to be in its early stages."

The non-profit HMO, to be shut down on March 31 under a judge's order of liquidation, was taken over by state insurance regulators last November, just a year after its partnership with PHP Healthcare began. HIP entered a contract with PHP in 1997 to manage the health care of its members, in exchange for a percentage of the premiums HIP received. The deal was approved by the state attorney general and the departments of Banking and Insurance and Health and Senior Services.

The federal probe apparently will look into how the deal was approved as well as its implementation.

Luskin said PHP has cooperated with the U.S. Attorney's Office in Newark by making current and former employees available to investigators. He said he has spoken several times with prosecutors, and met recently with Assistant U.S. Attorney Scott S. Christie of the frauds section. "I have no reason to believe that PHP or any of its officers are targets of the investigation," Luskin said. "We've got nothing to hide from a full exploration of the facts."

Luskin, former chief counsel for the U.S. Justice Department's organized-crime section, said prosecutors are collecting documents from "a variety of sources," but have reached no conclusions about whether crimes occurred. "I don't think anybody has reached a conclusion as to whether it's a criminal case," Luskin said. "They're looking at the whole transaction to see whether or not there is reason to take this to the next level."

A spokesman for the U.S. Attorney's Office, Michael Drewniak, said he could not confirm or deny whether an investigation exists, or whether subpoenas have been issued. Christie also would not confirm an investigation.

Luskin said he is conducting an internal investigation of PHP's actions, but he has not finished his work.

HIP officials have contended that PHP received $300 million in premiums, but didn't use the money to pay the expenses its members incurred with hospitals, doctors, and others. At the time of its insolvency, PHP owed these health care providers an estimated $120 million.

PHP Healthcare filed for bankruptcy protection in Delaware, and its president and chief executive officer, Jack Mazur, was terminated with cause in January. Documents in the bankruptcy case show that even as claims were going unpaid to doctors and hospitals, PHP was paying for expensive country club memberships and luxury cars for its executives.

In a separate matter, Judge Jack L. Lintner of Middlesex County Superior Court called a hearing for Tuesday to determine whether he should extend the deadline from April 1 to April 15 for HIP members to enroll in other health plans. The judge expressed concern that 50,000 people still remain on HIP's rolls as the deadline for changing to other plans nears.

In addition, Insurance Commissioner Jaynee LaVecchia ordered the state's other HMOs to expedite their handling of applications from HIP members. Under her order, coverage will be provided as of April 1 as long as an HIP member has completed his application and paid the necessary premium by March 31. LaVecchia's order was prompted by reports that some HMOs were behind in sending out insurance cards and enrollment packages, and that members feared their coverage would be delayed until May 1, said Bill Heine, a spokesman for LaVecchia.

The New Jersey attorney general's office would not comment on whether state departments had been subpoenaed in the investigation. And a spokeswoman for HIP Health Plan of New York, the affiliate of HIP Health Plan of New Jersey, said "we are not making any observations on any legal activity."

Copyright (c) 1999 Bergen Record Corp.