Insurers Allege Massive Fraud by NME : 8 Companies File Suit Accusing Hospital Chain of Cheating on Bills

In a sign of the increasingly heated war between those who pay medical bills and health care providers, eight insurance companies Thursday sued Santa Monica-based National Medical Enterprises, accusing the giant hospital chain of fraud in billing hundreds of millions of dollars for its psychiatric hospitals.

Filing under the federal Racketeer Influenced and Corrupt Organizations Act, or RICO, the insurers claimed in a complaint filed in a Washington federal court, that NME “created a corporate culture” that encouraged cheating in collecting payments and that it carried out a “massive fraudulent scheme” to admit patients to psychiatric facilities regardless of need for care.

The suit seeks the return of allegedly fraudulent payments, treble damages and attorneys fees, though no specific figures were cited.

NME, already troubled by declining profits and publicity over government investigations of its psychiatric hospitals in Texas and New Jersey, denied the charges.

The suit is an attempt by insurers to avoid paying legitimate bills, NME Senior Vice President John Bedrosian said in an interview.

“This suit finally brings to the surface the underlying attitude of insurers in not living up to their responsibility to people who are paying premiums,” he said. Last week, NME sued some of the same insurers, charging they failed to pay legitimate charges.

With health care costs soaring, relations between insurers and medical providers have become increasingly acrimonious. Mental health care is just one area insurance companies have targeted for special scrutiny as they attempt to control costs.

Thursday’s charges against NME could become one of the largest lawsuits ever filed against a major health care provider and could be a harbinger of bad news for other hospitals and doctors, who are finding it more and more difficult to collect on bills.

The insurers decision to go to court against NME is “highly significant,” said William Mahon, executive director of the National Health Care Anti-Fraud Assn. “It represents a collective response to what is seen as a collective problem. Companies that feel victimized are joining together and fighting back aggressively,” he said.

The plaintiffs in the suit are Travelers Insurance Co., Prudential Insurance Co., United of Omaha Insurance Co., Massachusetts Mutual Life Insurance Co., Northwestern National Life Insurance Co., Mutual of Omaha Insurance Co. and Time Insurance Co.

Specifically, the 70-page complaint alleges that the hospitals run by NME’s now-merged subsidiary, Psychiatric Institutes of America, charged for services that were either not provided, “grossly inflated,” or unnecessary for medical reasons.

The complaint also claimed that hospital workers were given bonuses for admitting psychiatric patients regardless of medical needs and were penalized if they failed to bring in patients.

The suit charges NME distributed to its hospitals a manual instructing administrators to encourage staff to admit for in-patient care 50% or more of patients who came in for free evaluation services offered by the hospitals.

Bedrosian acknowledged that there had been “problems” in marketing practices at NME psychiatric hospitals in Texas, which he said have been corrected, but that the company had done nothing illegal.

In high-profile hearings by the Texas state senate relating to the investigations last year, witnesses accused the chain of “bounty hunting” to fill its beds and other abuses.

Publicity surrounding the hearings caused a sharp drop in admissions and revenue at NME’s Texas hospitals and cost the company heavily in legal fees.

In June, the company agreed to a $9-million settlement with the Texas attorney general.

The settlement included no finding of wrongdoing, but NME agreed to a series of court-mandated reforms at its psychiatric hospitals.

On Wednesday, the company announced that profit for the year ended May 31 dropped 62%, in part because of the legal costs of defending its hospitals against state and federal investigations of alleged abuses.

NME is also facing a shareholder’s lawsuit, charging that it failed to disclose problems at its psychiatric hospitals that led to a sharp drop in its stock price.