Hospital Chain Agrees to Settle Fraud Probe

National Medical Enterprises said Thursday that it has tentatively agreed to pay more than $300 million to settle federal and state investigations into allegations of widespread fraud and other misconduct at some of its hospitals.

The proposed agreement would be the largest health care fraud settlement ever won by federal officials, who have made a high priority of cracking down on costly fraud and other misconduct practices in the medical industry.

The joint probe of National Medical was disclosed in a dramatic and widely publicized fashion in September when hundreds of FBI agents led raids on the company’s Santa Monica headquarters and other facilities around the nation.

The agreement, if completed, would resolve all state and federal civil and criminal investigations of the company, National Medical officials said. But it would not rule out the possibility of criminal charges being brought against current or former National Medical employees. Federal investigators have said privately that they were exploring evidence that wrongdoing within the hospital company may have been orchestrated by senior executives who are no longer with the company.

Washington attorney Charles F.C. Ruff, a former Watergate special prosecutor who represents National Medical, declined to say whether the agreement would require the company to acknowledge wrongdoing. “All I can tell you,” he said, “is that the company expects to dispose of all its liabilities--criminal, civil and administrative.”

The settlement follows months of talks between National Medical, the Justice Department and the Department of Health and Human Services, which oversees the Medicare program. A National Medical official said Thursday that the company has persuaded federal agencies not to bar it from Medicare or other federal programs--an action that could have crippled the company.

A Justice Department source said the government was “near agreement” with National Medical but declined further comment. Health and Human Services declined comment.

The company had been reeling since 1991--before the federal probe was disclosed--from widely reported allegations of insurance fraud and patient mistreatment at its psychiatric hospitals. Insurers sued the company, accusing National Medical of submitting nearly $1 billion in fraudulent claims. And in dozens of other lawsuits, patients and former employees accused the company of various misdeeds designed to cash in on patients’ insurance benefits.

Among the more startling of those allegations were claims that National Medical employees sometimes paid “bounty fees” of up to $2,000 a patient to probation officers and clergy members who brought patients to their hospitals. Some patients alleged that they were held in National Medical facilities against their will--even strapped down by leather restraints in “seclusion rooms”--or subjected to unneeded medical tests.

After a management shake-up in June that led to the ouster of company co-founders Richard K. Eamer and Leonard Cohen, new Chief Executive Jeffrey Barbakow moved quickly to resolve the legal problems. National Medical has already paid more than $230 million to settle all lawsuits brought by insurers and most of the patient cases.

To help meet legal expenses, the company has sold 85 of its 135 hospitals and clinics, including the recent sale of 47 psychiatric hospitals to Charter Medical Corp. for $200 million. National Medical’s main focus now is operating 35 general acute-care hospitals, which include Century City Hospital and USC University Hospital in Los Angeles.

The amount of the federal settlement--which is still subject to final negotiations--would surpass any health care or defense fraud settlement in history. The biggest settlement to date in a health care fraud case involved National Health Laboratories, a San Diego medical testing firm that agreed to a $111.4-million settlement in 1992.

Christi R. Sulzbach, National Medical’s associate general counsel, said the company decided to disclose the tentative agreement Thursday as part of a required quarterly financial filing with the Securities and Exchange Commission.

Barbakow conceded that the company does not yet have an agreement in writing with the federal agencies. “But we believe the negotiations have gotten to the point where we could estimate our liability.”

The company estimated that it would cost $375 million to settle all pending state and federal litigation.

Barbakow said he was “very happy” with the amount of the tentative settlement. Ten months ago, he noted, “This company was truly under a deathwatch. . . . After making all the payments for settling these past problems, we’ll be left with a very strong business, an incredibly strong balance sheet and a great management team.”

Barbakow said some former and current employees will remain “under a cloud” as long as state and federal investigations continue. Earlier this year, authorities in Topeka, Kan., indicted two former National Medical employees.

Times staff writer Robert L. Jackson in Washington contributed to this story.