Industry analysts last week applauded a tentative multimillion-dollar settlement between National Medical Enterprises and the federal government, saying the pact-the largest ever in the healthcare industry-would liberate NME from its legal woes and position the hospital chain to pursue growth through acquisitions.
The company said it was setting aside $375 million to end the federal government's criminal and civil investigation of suspected fraud and to settle any remaining disputes with state governments. NME didn't disclose the exact amount of the federal settlement, but the Wall Street Journal reported that it was $300 million.
However, it's still unclear whether the settlement of this issue would avert further legal actions against NME's former or current employees. The company has been accused during the past three years of fraudulently billing payers for unnecessary psychiatric care and, in some cases, of virtually kidnapping patients to gain reimbursement (See chart).
Spokesmen for the Justice Department and HHS' inspector general's office declined comment on NME's announcement, and they said no statements would be forthcoming from the agencies until the matter is resolved.
At $300 million, the deal would easily be the largest healthcare fraud settlement reached with the federal government and also would be among the largest of any industry with the government. The current healthcare record is $111.4 million, which San Diego-based National Health Laboratories paid in December 1992 to settle charges that it fraudulently billed Medicare and Medicaid for unnecessary blood tests.
The largest settlement between the government and a hospital or hospital system occurred in 1991, when Sacred Heart Hospital in Hanford, Calif., agreed to pay $3.3 million to settle Medicare false-billing charges.
Christi Sulzbach, NME's senior vice president for public affairs, said the company expects to negotiate terms of the settlement in the next 60 days. She said NME executives earlier last week determined that they could estimate what the ultimate resolution costs would be in achieving a settlement.
"From a timing standpoint, reaching an agreement prior to the end of the fiscal year allows NME to start the new fiscal year with a clean slate," Ms. Sulzbach said. NME's fiscal year ends May 31.
In earnings data reported for the third quarter ended Feb. 28, NME said it included an estimated $375 million addition to the reserve for discontinued operations, less estimated income tax benefits of $120 million, to cover costs of all federal and state investigations.
As a result, the company recorded a net loss for the quarter of $164.3 million, or 99 cents per share, compared with net income of $54.2 million, or 31 cents per share, in the year-ago quarter. Net operating revenues for the third quarter dropped 9% to $720.3 million.
News of the settlement elevated NME stock $1.13 on April 14, the day of the announcement, to close at $16.88 in New York Stock Exchange trading.
Ms. Sulzbach said the company expects to begin its new fiscal year concentrating on its acute-care hospital business.
"On the domestic front, we will look to grow through alliances or acquisitions that will help strengthen markets in which we already operate (hospitals)," Ms. Sulzbach said. She identified the New Orleans area and California and Florida, where NME is well-entrenched, as possible areas of expansion.
The company now operates 34 acute-care hospitals and retains only five psychiatric hospitals. It recently completed the sale of 46 psychiatric facilities to Charter Medical Corp. for $200 million.
The company is studying whether to divest itself of other "non-core" hospital-related assets such as its chain of freestanding dialysis centers and its long-term-care subsidiary in the United Kingdom.
Ms. Sulzbach dismissed speculation that NME is realigning its business operations to prepare the company for the selling block.
Industry analysts agreed with Ms. Sulzbach's forecast.
Mary C. Fleckenstein, a healthcare analyst at Seattle-based Ragen MacKenzie, said the settlement is "a huge positive" for NME. She said it appears the company is intent on remaining in the business and isn't planning on selling itself to another company. "Their balance sheet is strong enough to handle this and get the whole mess behind them."
Andrew Feinman, healthcare analyst for First Albany Corp., an Albany, N.Y.-based investment banking firm, said the settlement "solves many legal problems for NME, essentially." He noted that the company will have to begin to make acquisitions of acute-care hospitals domestically and internationally to catch up with other larger healthcare systems already ahead in the integration game.
However, Mr. Feinman said plans to expand NME won't preclude selling the company later. "If somebody out there makes them an offer too tough to ignore, (Chief Executive Officer Jeffrey C. Barbakow) understands that his responsibility is to his shareholders."