National Medical Enterprises Inc. shares lost 30% of their value Friday as some analysts predicted that the company--the subject of a massive federal criminal probe--is likely to face a backlash from insurers and doctors.
The stock fell $3.375 a share to close at $7.75. It was the most actively traded issue on the New York Stock Exchange Friday, with nearly 8.1 million shares changing hands.
Some observers said the Santa Monica hospital firm may not be the only company suffering from the backlash of Thursday's federal raid on National Medical's offices and psychiatric hospitals.
The site of federal agents carting away truckloads of documents from National Medical couldn't have come at a worse time for the psychiatric hospital industry, which is being squeezed by insurers and employers who question the value of their services and are sharply cutting back payments.
National Medical may currently be stronger financially than some of its competitors, and a company spokesman asserted that the firm and will survive its many legal problems.
"We do not believe (the raid) has had such an impact that our future is imperiled," said Maris Andersons, National Medical's executive vice president and treasurer.
Health care analysts said the raid, part of an investigation of allegations of false billing and diagnoses, as well as possible illegal payments to doctors referring Medicare patients to National Medical facilities, is certain to hurt National Medical's operations, which include acute care and rehabilitation hospitals that have not been implicated in the federal probe.
"They're facing litigation from insurance companies and patients, and it's awfully difficult for a company to succeed in managing a business when they're fighting on so many fronts," said Sharon Wagoner, a health care analyst at Argus Research in New York.
Wagoner said publicity over the problems at National Medical's psychiatric unit could spill over into its other operations. "Doctors won't send them there, and patients don't want to go to a place that's getting bad press."
Despite its legal problems and losses in its psychiatric hospital division, several analysts said the company's other businesses have been faring well. "Financially, they remain strong," said Mary C. Fleckenstein, an analyst with the investment firm Ragen McKenzie in Seattle.
National Medical's Andersons said Friday that the firm's balance sheet "is probably the strongest . . . we've had in the history of the company."
He said the company generated $398 million in cash flow from operations for its fiscal year ended May 31. It reported net income of $160 million on revenue of $3.76 billion for the year.
Meanwhile, the raid on National Medical comes just as the the mental health industry is trying to prepare for a new national health plan that may sharply limit payments for psychotherapy, health care professionals said.
Dr. Daniel Borenstein, a Los Angeles psychiatrist and associate clinical professor at UCLA's Department of Psychiatry, said the legal problems of National Medical are likely to spill over to the rest of the psychiatric industry.
"People don't always separate a particular entity or part of the country from the rest," Borenstein said. "They may well get the impression that all psychiatrists and psychiatric hospitals are out to rip off the system."
Another managed care consultant and doctor, who asked that his name not be used, said there is "great apprehension" in the psychiatric industry about President Clinton's evolving health reform plan. After the National Medical raid, mental health officials "are concerned that fraud and abuse linked with mental health services may undermine support for appropriate and meaningful mental health benefits."
Psychiatric hospital operators have been seriously hurt by managed care health plans that have restricted use of mental health facilities. Insurers have been making it tougher to get approval for admission to mental-health and substance-abuse facilities, negotiating lower rates with providers and limiting coverage.
Those changes are making it harder for psychiatric hospitals--any of which reaped hefty profits in the 1980s--to stay in business. In Southern California, Community Psychiatric Centers, a Laguna Hills-based psychiatric hospital chain, closed facilities in Westwood and Brea about two weeks ago.