Medical firm to plead guilty in fraud probe
$362.7 million fine would set record

By Bill Lodge / Staff Writer of The Dallas Morning News
Published 06-29-1994

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

The settlement with the Santa Monica, Calif.-based hospital firm, expected to be announced Wednesday, surpasses any previous fine in a U.S. fraud case involving the health care or defense industries. One day earlier, a former Dallas executive for National Medical' s psychiatric division admitted making at least $20 million in bribes to referring physicians and other health care professionals. Peter Alexis, former "administrator of the year" for Psychiatric Institutes of America, pleaded guilty to conspiracy and false-statement charges Monday before U.S. District Judge Joe Kendall in Dallas. Company spokeswoman Diana Takvam said the timing was coincidental and followed a preliminary settlement reached earlier this year.

Under the settlement, National Medical's psychiatric hospital subsidiary will plead guilty in Washington, D.C., to six counts of paying illegal kickbacks to gain referrals of Medicare patients and one count of conspiracy to make such payments.

Investigators have accused National Medical of accepting patients who did not need treatment and keeping them against their will until their insurance coverage ran out. Complaints from some of those patients over the last few years touched off federal and state prosecutions.

The federal charges cover bribes and kickbacks at six hospitals, in California, Colorado, Indiana, Missouri, Texas and New Jersey, from 1986 to 1991.

The company said it also has agreed to pay an additional $16.3 million to resolve potential claims in 28 states, including Texas, where it operated psychiatric hospitals.

It expects to reach a final agreement in those cases within 30 days.

More than 100 private lawsuits have been filed since 1991 against the hospital management company, alleging insurance fraud, overtreatment and malpractice.

In Texas, most of the private lawsuits involved patients at Brookhaven Psychiatric Pavilion in Farmers Branch, Psychiatric Institute of Fort Worth and Willowbrook Psychiatric Institute in Waxahachie. Those hospitals since have been sold, along with most of National Medical's other 61 psychiatric hospitals. "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.

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

The settlement includes $364.2 million in civil restitution and penalties, $33 million in criminal fines and $4.5 million in contributions to federally funded mental health programs.

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

In May, the company announced that it had reached a preliminary agreement with federal authorities and had set aside a reserve fund of $375 million to cover expected settlement costs.

Prosecutors said this case provided the best window yet on misconduct in medicine.

In the medical world, said Paul E. Coggins, the U.S. attorney in Dallas, "Practices that are illegal have been accepted and tolerated, very much akin to the climate that pervaded the savings and loans." Oliver "Buck" Revell, special agent in charge of the Dallas FBI office, said federal investigators do not believe that the scandals involving National Medical and Psychiatric Institutes are isolated. "We believe there are others," Mr. Revell said. "We will likely find similar problems in other major health-care institutions.

"People shouldn't conclude that it's only NME and that this is the end of the game. This is only the beginning of the process."

He said the FBI has been working with the U.S. Postal Inspection Service on a health-care fraud task force in Dallas for six months, along with investigators for the Department of Health and Human Services, the Defense Department and the Veterans Affairs Department.

Mr. Revell noted that the continuing investigation is nationwide in scope.

"What's happening in Dallas is happening elsewhere," Mr. Revell said. "We are really mounting a full-court press."

Federal officials have estimated that fraud swallows 10 percent of the nation's health care expenses, or $80 billion to $100 billion a year. With savings and loan prosecutions winding down, the Clinton administration has made the policing of health care fraud a high priority.

The settlement was disclosed after the market closed Tuesday. The company's shares closed up 1/2 at 151/2, on volume of 728,300 shares. The stock hit a low of 73/8 after last August's raid by federal agents, but has gradually moved up since.

To pay for the settlement, National Medical took a charge of $255 million in April to reflect the after-tax effect. As a result, it posted a fiscal third-quarter loss of $164.3 million, or 99 cents a share, compared with net income of $54.2 million, or 33 cents, for the year-earlier quarter.

Contributing to this report were The Los Angeles Times, The New York Times and Bloomberg Business News.