National Medical Shaken by Fraud Investigation
National Medical Enterprises, once the darling of Wall Street and one of the country’s most profitable health-care corporations, is facing allegations of fraud and unethical marketing in some of its hospitals, reflecting a toughening environment for the entire health-care industry as insurers and government authorities try to crack down on costs.
Reports this week that the New Jersey Insurance Department, the Texas attorney general and other state and federal agencies are investigating hospitals owned by NME’s Psychiatric Institutes of America unit sent the company’s stock plunging 20% in a single day.
PIA’s hospitals face allegations that they:
* Misdiagnosed psychiatric patients in order to keep them in the hospital for longer than therapeutically necessary in order to continue collecting insurance payments.
* Overbilled or charged for services not rendered.
* Kidnaped patients and committed them to mental institutions in order to milk their insurance.
* Paid “bounties” for patients referred to psychiatric hospitals.
NME said it is cooperating in the investigations and conducting its own internal inquiries.
The day after the stock plunge, the company replaced Norman Zober, the head of the division that includes the psychiatric hospitals, with another executive.
The $3.8-billion company says it doesn’t expect the investigations into allegations of fraud and unethical marketing in some of its hospitals to hurt its performance, which has shown an impressive 26% annual profit growth over the past five years. Earnings in the last quarter were up 14% over the previous year. “Our recent performance for shareholders is an indication we’re a well-run company. And so are thousands of satisfied patients who have benefited from our treatment,” NME spokesman David Olson says.
But the allegations of fraud reflect a rapidly changing environment in the hospital business, which can no longer rely on insurers to foot whatever bills they send out. Hospitals and doctors are at war with insurers and employers desperate to cut skyrocketing health-care costs. Insurers and HMOs try to slash payments, while hospitals try to find ways around the cut in their income, which has bankrupted many institutions.
As hospitals compete aggressively for the few “full-fare,” fully insured patients left and increase costs, those paying the bills are putting institutions under a microscope searching for abuses and questionable practices.
Psychiatric hospitals have come under special scrutiny in the past few years. The number of these institutions doubled in the 1980s, providing new substance-abuse and mental health programs often heavily advertised on television and in print and paid for by insurance companies.
But as employers saw the cost of these programs skyrocket, they began to cut back, leaving thousands of psychiatric beds empty. That hurt companies such as Laguna-hills based Community Psychiatric Centers, which recently announced a 98% drop in third-quarter earnings.
Until now, NME’s psychiatric hospitals have fared better than most, say analysts. The company says that by creating more outpatient treatment plans to match changing demands by insurers, it plans to stay profitable.
NME, which operates more than 150 hospitals across the nation, is in a strong financial position as it faces the storm of allegations. The company maintains a strong balance sheet and is widely admired by industry analysts for agile management in a tough business.
Its specialty hospitals, including psychiatric, substance-abuse and physical rehabilitation institutions, have contributed an increasingly large portion of the company’s profit. The speciality hospital group accounted for 58% of operating profit and 46% of NME revenue last year.
Analysts have only slightly downgraded earnings forecasts after the news of continuing investigations and its subsequent share price drop. Analysts say they expect profits to continue to grow. Rae Alperstein, an analyst at Kemper Securities, says she expects earnings-per-share growth of 15% in the year ending May, 1992.
Some analysts, however, fear that reaction to investigations could temporarily reduce patient admissions. In Texas, Psychiatric Institutes of America admissions dropped 15% after a series of articles in the San Antonio Express News and the Houston Chronicle detailing allegations of patient “bounty hunting” and other abuses by PIA hospitals, said Alperstein.
In California, PIA’s 12 psychiatric hospitals are not under investigation by state or federal authorities.
But in other states, NME faces a number of private civil suits in addition to the government investigations. Dr. Duard Bok, formerly head of chemical dependency programs at the Psychiatric Institute of Ft. Worth, a PIA hospital, brought suit against the hospital in August for breach of contract and other charges.
The hospital had fired him earlier in August, saying he was “impaired” and has asked a Texas court to order a psychological evaluation of him, his lawyer says.
But Bok says he was fired because he refused to go along with the hospital’s practices, which he says included keeping patients longer than necessary in order to collect more insurance.
NME spokesman David Olson says he can’t comment on pending litigation, but added that under PIA policy, patients are admitted and discharged based on medical need, in consultation with insurance companies.
Several patients have also brought suit in Florida against PIA charging that they were held in one of its hospitals inappropriately to maximize insurance payments.
National Medical Enterprises At a Glance
* Headquarters: Santa Monica
* Employees: 48,500
* Facilities: 37 general hospitals, 86 psychiatric hospitals and substance abuse centers and 29 physical rehabilitation hospitals.
* Southern California general hospitals: USC University Hospital; Century City Hospital; Doctors Hospital of Montclair; Garfield Medical Center, Monterey Park, Los Alamitos Medical Center; Ontario Community Hospital; Placentia-Linda Community Hospital; John F. Kennedy Memorial Hospital, Indio; Alvarado Hospital Medical Center, San Diego.
* Southern California psychiatric facilities: Los Altos Hospital & Mental Health Center, Long Beach; Pine Grove Hospital & Mental Health Center, Canoga Park; Yorba Hills Hospital & Mental Health Center, Yorba Linda; Southwood Psychiatric Centers and Southwood Residential Treatment Center, Chula Vista.
* Financial data
Year ended May 31, 1991:
Revenue: $3.8 billion, down 3% over year earlier
Net income: $272.4 million, up 14% over year earlier
Quarter ended Aug. 31:
Revenue: $984.5 million, up 10% over year earlier
Net income: $71.6 million, up 20% over year earlier
Source: National Medical Enterprises
Specialty Hospital Profits Rise
Operating profits of National Medical Enterprises general hospitals have increased moderately in the last five years, while profits from its specialty hospital group, including psychiatric hospitals and drug and alchohol treatment centers, have more than quadrupled in the same period.
Operating profits in millions of dollars for years ended May 31:
1986 General Hospitals: 163.2 Specialty Hospital Group: 67.2
1987 General Hospitals: 179.6 Specialty Hospital Group: 114.4
1988 General Hospitals: 176.1 Specialty Hospital Group: 160.8
1989 General Hospitals: 167.2 Specialty Hospital Group: 223.9
1990 General Hospitals: 187.4 Specialty Hospital Group: 275.8
1991 General Hospitals: 216.3 Specialty Hospital Group: 320.1
Source: National Medical Enterprises
