NME Settles 2 Suits, in Talks to Resolve Fraud Probe : Health care: Chairman Jeffrey Barbakow says resolution of the federal investigation into hospital company is top priority.

National Medical Enterprises said Wednesday that it has agreed to pay up to $125 million to settle two of three huge civil lawsuits accusing the company of a massive insurance fraud and is in negotiations with the federal government to resolve a criminal fraud investigation.

The insurance settlement resolves one major liability for the Santa Monica-based hospital concern, but the federal investigation that resulted in a widely publicized nationwide raid on NME properties is potentially more damaging to the company.

NME Chairman Jeffrey C. Barbakow said Wednesday during the firm’s annual meeting that the federal investigation put an “extraordinary spotlight” on the company and that resolving the matter is his top priority. He and other company officials did not elaborate on possible terms of a settlement and cautioned that discussions are preliminary.

A government source confirmed the settlement talks but would not discuss details of the negotiations. “Serious talks are going on and everyone involved would rather have it completed before an indictment,” the source said. “The government has an interest in saving resources, and this is a very expensive investigation.”

The proposed insurance company settlements, the result of court-ordered mediation in Dallas last week, involves allegations by six insurers--including Aetna, Cigna and Metropolitan Life--that NME psychiatric hospitals submitted $740 million in false claims.

NME still faces a third lawsuit filed by a group of 13 insurers--including Travelers, Prudential and Mutual of Omaha--involving similar allegations of widespread insurance fraud. That suit includes financial claims roughly comparable to the Aetna suit.

Travelers and the other insurers are not discussing a settlement with NME at present, said Tom Queen, a Washington attorney representing the group. However, Queen said he was encouraged by NME’s decision.

“‘It appears from the dollar figure in the settlement that NME recognizes the magnitude of its problems,” Queen said.

The settlement announcement created a rush for NME stock and New York Stock Exchange trading was temporarily halted. ME shares rose $2 to $10, a 25% gain.

Since Barbakow took charge of the company in June, NME has moved aggressively to settle scores of lawsuits filed by insurers and former patients over activities at its psychiatric hospitals. The hospital company, with annual sales of $3.7 billion, also operates acute care, physical rehabilitation and substance abuse hospitals.

“Although these lawsuits arise from business practices only in psych, they have cast a shadow over all our business,” Barbakow told shareholders and others at a beachfront Santa Monica hotel. “We can and must put the past behind us.”

Barbakow, a former investment banker who was presiding over his first annual meeting, has moved quickly to replace senior managers closely associated with the company’s past problems. They include co-founders Richard K. Eamer and Leonard Cohen, who retired as managers earlier this year. Others who have departed are John C. Bedrosian, who was fired as executive vice president on Friday, and Nita Heckendorn, an executive vice president who was fired last month after filing a sexual harassment lawsuit against NME.

Upset shareholders asked questions about the liability the company faces from its many lawsuits and about the hefty pay and severance packages granted to Eamer and Cohen in June. Eamer received more than $9 million in total compensation last year and a lump-sum payment of $2.6 million when he left the firm, including $250,000 for five years of consulting services.

Peter de Wetter, a director who heads NME’s compensation committee, gave a spirited and lengthy explanation of the payments. He said the company was contractually obligated to pay all but the consulting fees to Eamer and Cohen. Barbakow later explained that the company needs Eamer and Cohen’s knowledge of key events to help resolve the litigation.

De Wetter seemed to acknowledge that Eamer and Cohen’s past compensation was excessive, saying, “The kind of numbers we’ve been talking about are a thing of the past.”

Barbakow said the settlement with Aetna will allow NME to talk with the insurers about negotiating new managed care contracts.