NME Hospital Probed for Alleged Kickbacks : Health care: FBI investigating whether Century City facility gave doctors incentives to influence referrals. Hospital says all was legal.

Back in 1989, Century City Hospital created what it hoped would be a premier center for the treatment of back and spinal injuries. It recruited top-notch orthopedists and neurosurgeons to form the West Coast Spine Institute.

To attract such talent, the hospital--one of Santa Monica-based National Medical Enterprises’ most prominent general hospitals--devised a complicated agreement under which it would help manage the doctors’ practices and also arrange for medical office space near Century City Hospital so the doctors could practice together at one location.

The arrangement never lived up to Century City’s expectations, and now the FBI is investigating allegations that the hospital may have violated federal anti-kickback laws. The investigation focuses on whether assistance offered by Century City was in effect a kind of payment to doctors at West Coast Spine to influence them to refer patients to the hospital, knowledgeable sources told The Times.

Deals similar to the Century City arrangement are common among the nation’s 5,300 general hospitals. But federal regulators have long suspected that many of the deals may be illegal. Now the Clinton Administration, as part of an effort to crack down on abuses that contribute to the spiraling cost of health care, has stepped up investigations of specific deals considered questionable and has signaled that it will test the legality of more cases in court.

Critics charge that doctors involved in such arrangements may make patient referrals based on their own financial interest, and that patients may end up paying more for health care and may not get high-quality care.

Officials of NME asserted that Century City Hospital did not violate any laws in its arrangement with West Coast Spine. “It was a very innovative, cutting-edge concept that turned out to be a very complicated, ill-fated idea,” said Christi Sulzbach, a National Medical senior vice president. “It did not bind these physicians in an exclusive fashion to Century City, and it was not a payment-for-patients relationship.”

The probe of Century City is part of a sweeping federal fraud investigation of National Medical. Century City is the first of National Medical’s general hospitals to be identified as a target of the overall investigation, which focuses mostly on National Medical’s psychiatric hospitals, most of which it has sold.

The company has said that acute care, general hospitals will form the core of its business, and charges of wrongdoings in that segment could further tarnish the company’s image.

Federal law generally prohibits health care providers from giving or receiving financial inducements for referrals of Medicare or Medicaid patients. The law is intended to limit the corruptive influence of money on a doctor’s patient referral decisions so doctors will be more likely to base their referrals on the issues of price and quality.

The FBI is investigating whether Century City Hospital paid kickbacks to some West Coast Spine Institute doctors, in the form of below-market office rentals or remuneration for office overhead expenses, to influence doctors to perform more surgeries at the hospital, sources said.

To recruit doctors, many hospitals pay a portion of the rent on physicians’ medical offices, pay their medical malpractice premiums or guarantee that doctors will receive a minimum annual income, lawyers said. Such practices became widespread in the 1980s as competition in the health care field intensified and hospitals struggled with declining occupancy rates.

There has been confusion within the medical field about which types of hospital-doctor deals fall within the bounds of the law. Health care lawyers say the federal government’s increased enforcement activity--and legislation pending in Congress--should establish clearer standards.

Patric Hooper, a Los Angeles health care lawyer, said the anti-kickback laws have “been a very gray area for some time and have not gotten much clearer.”

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Said one hospital industry official: “The line between what’s legal and what’s illegal is a fuzzy one, but some hospital chains definitely write contracts that, if tested in court, would likely prove to be on the illegal side.”

Health care kickback cases pose a challenge for federal prosecutors because it is usually difficult to demonstrate that financial incentives offered to doctors were intended to influence their referrals.

“These contracts almost never say you’ll be paid for a referral,” one law enforcement source said. “Often there is no evidence of quid pro quo.”

But hospital industry officials and health care lawyers said National Medical gained a reputation during the 1980s for some of the most aggressive physician recruiting practices in the industry.

“National Medical set the standard for how far out on the limb you were going to go,” one San Francisco health care lawyer said. “It became sort of a reverse arms race, where the most aggressive people set the standard.”

But Sulzbach said National Medical began reviewing its hospital-doctor business deals in 1991, following widely publicized reports of problems in its psychiatric hospital business. “I think for the last three years we’ve been the most conservative in the industry,” she said, “to the point where people who run our operation say we’ve been competitively disadvantaged.”

Dr. Elliott Blinderman, president of West Coast Spine Institute, declined to comment.

Sulzbach described the Century City Hospital-West Coast Spine deal as a well-intentioned plan “to enhance our services” for the hospital’s patients.

“There was no commitment from these physicians that they would shift their practices away from UCLA or Cedars or that they would exclusively use Century City Hospital . . . “ Sulzbach said. “Certainly we hoped that if we helped bring together this group of world-class physicians that some of their practice would be at Century City, and our patients would benefit from that. You hope they will be able to use some of the hospital’s services. But that’s part of doing business.”

In the past year, she noted, the doctors finally began practicing together at an office in Century City.

National Medical said in April that it expected to settle all federal and state fraud investigations for about $375 million, which would be the largest fraud settlement ever in the health care industry. Such an agreement would include any possible fraud charges against Century City Hospital.