NME to Settle Fraud Case by Paying Record $362-Million Fine : Health care: The accord is not expected to put a serious financial strain on the Santa Monica-based hospital company.


National Medical Enterprises will plead guilty to government charges of Medicare fraud and conspiracy and pay a fine of $362.7 million to settle a sweeping federal investigation, company officials said Tuesday.

The amount of the settlement, expected to be formally announced Thursday, surpasses any previous fine in a U.S. fraud case involving the health care or defense industries. The Justice and Health and Human Services departments have given high priority to the case, which the Clinton Administration is expected to cite as an example of its commitment to combatting health care fraud.

The settlement allows the Santa Monica-based hospital company to put behind it a major public relations problem and move forward in its strategy of focusing on its profitable business of operating general-purpose hospitals. The accord is not expected to pose serious financial problems for the company, which had already set aside a reserve fund of $375 million to cover expected settlement costs.


“This settlement will signify that NME is taking full responsibility for past conduct in certain of its businesses,” said Jeffrey C. Barbakow, brought in last year as president and chief executive to clean up the company’s problems.

Under the settlement, NME’S psychiatric hospital subsidiary will plead guilty to six counts of paying illegal kickbacks to gain referrals of Medicare patients and one count of conspiracy to make such payments. The company said it also has agreed to pay an additional $16.3 million to resolve potential claims in 28 states, including California, in which it operated psychiatric hospitals. The company said it expects to reach a final agreement with state authorities within 60 days.

Also, the company said it will plead guilty to one count of illegal payments and pay a $1-million fine to settle a case involving a general acute-care hospital in New Orleans.

NME also said it has reached a preliminary agreement with the Securities and Exchange Commission to stave off a pending action involving how the company accounted for psychiatric hospital revenue derived from activities included in the federal settlement. The company said it will pay no additional fine, but would consent to a civil order requiring it to adhere to federal securities laws.

The government settlement allows the company to continue participating in Medicare and other federal health care programs. It was not expected that the government would punish NME by barring it from the Medicare program because such a step could have driven the company into insolvency.

Typically, general hospitals rely on Medicare patients for a sizable portion of their revenue.

While the settlement does disclose illegal activities at the New Orleans general hospital, it supports NME’s contention that the federal investigation largely focused on problems in its psychiatric business. As part of efforts to repair its image, the company is selling most of its psychiatric hospitals to Georgia-based Charter Medical Corp. The Federal Trade Commission on Tuesday cleared Charter’s purchase of 30 of the 47 hospitals.

The agreement comes after nine months of discussions that followed a raid last year by hundreds of federal agents of NME facilities nationwide.

The settlement--still subject to approval by a federal judge--would resolve all civil and criminal investigations of the Santa Monica-based hospital chain.

The agreement leaves open the possibility of criminal prosecution of current and former NME employees and doctors affiliated with the hospital operator.

In an indication of the government’s interest in pursuing actions against individuals, a former regional vice president of NME’s psychiatric hospital business pleaded guilty Monday in a Dallas federal court of paying at least $20 million in bribes to gain patient referrals to NME facilities.

Peter Alexis, former “administrator of the year” for NME’s psychiatric division, has agreed to become a government witness.

NME stock rose 50 cents per share to close at $15.50 on the New York Stock Exchange.

Times staff writer Ronald J. Ostrow in Washington contributed to this report.