Investigators say within the scheme, homeless people were recruited to defraud Medicare and Medi-Cal into paying for bogus treatments.
The investigation was sparked in October 2006 when the Los Angeles Police Department first noticed incidents of what they call "homeless patient dumping" on Skid Row.
Rudra Sabaratnam, CEO of City of Angels hospital, and Estill Mitts, operator of the 7th Street Assessment Center, were arraigned in federal court Wednesday. According to the indictment, both men allegedly conspired to recruit homeless people as patients, and then illegally charged government programs.
"The thrust of the investigation is the fact that these individuals that we are alleging, working with people out of Skid Row, basically defrauded the taxpayers out of millions of dollars," said U.S. Attorney Thomas O'Brien.
Sabaratnam has also been charged with kickbacks, while Mitts is charged with money laundering and tax evasion.
The FBI says this is just the tip of the iceberg. The agency raided three medical centers on Wednesday, including The City of Angels Medical Center, The Los Angeles Metropolitan Medical Center and Tustin Hospital and Medical Center.
"We believe this scheme happened over a period of years. Thousands of individuals were victimized by these efforts. And we hope, today, that we have put a stop to those activities," said Los Angeles City Attorney Rocky Delgadillo.
In addition, a lawsuit filed by the City Attorney's office claims the hospitals admitted homeless people as human pawns to pose as patients.
In one case, the suit says a mentally ill woman on Skid Row was diagnosed at the Assessment Center, with shortness of breath or chest pains, which she never had. She was then allegedly admitted to all three hospitals in question, over the last four years.
The suit alleges the woman received little and unnecessary treatment. Following treatment, the woman was returned to Skid Row, where she would use the $20 received for participating in the scheme to buy crack cocaine.
"And in many cases, putting these individual's lives in peril because they were getting services that they didn't need, and may have put their lives in a worse condition," said Delgadillo.
Pacific Health Corporation, the umbrella group for L.A. Metropolitan Medical Center and Tustin Hospital, says that they are cooperating with authorities.
Sabaratnam faces 50 years in federal prison if convicted. Mitts faces 140 years.