National Medical Enterprises Inc., which has been plagued by charges of fraud, patient mistreatment and other abuses at its psychiatric hospitals, appears close to divesting most of that business.
Santa Monica-based NME said Friday that it is in "serious negotiations" to sell 51 of its psychiatric facilities to Charter Medical Corp., the nation's largest private operator of psychiatric hospitals.
Charter, based in Macon, Ga., said it is reviewing operations at most of NME's 61 psychiatric facilities but that no definitive sales agreement has been reached.
NME's sale of the psychiatric division has been expected.
If the deal goes through, NME will rid itself of an operation that has been the subject of hundreds of costly lawsuits from insurers, patients and shareholders.
NME's psychiatric division is still the target of a Justice Department criminal investigation, disclosed by authorities last August, into alleged billing fraud and other irregularities.
The firm has said previously that it wants to focus on its core business of general acute care hospitals, which generated about 65% of NME's $2.35 billion in sales last year. NME recorded a $287.4-million loss for its second quarter ended Nov. 30 to cover the cost of divesting its psychiatric unit.
Christi R. Sulzbach, NME's senior vice president, said the companies decided to disclose the negotiations because "there were rumors out there . . . and we didn't think there would be much chance of keeping this confidential."
The sale of most of the psychiatric business would be "an important step forward in the company's future evolution," Sulzbach said.
Wall Street seemed to welcome the news. NME stock was up 87.5 cents to $16.375 on the New York Stock Exchange, while Charter rose $1.50 to $24 on the American Stock Exchange.
For Charter, the acquisition would be in line with a company strategy just the opposite of NME's. The Georgia firm wants to tighten its focus on the mental health business and last year sold 10 of its general hospitals to Quorum Health Group for $340 million.
The deal would increase by about two-thirds Charter's already dominant presence in the psychiatric business. It now operates 75 psychiatric hospitals in the United States, England and Switzerland. Charter has also been trying to broaden its range of psychiatric services by purchasing physician groups comprising psychiatrists, outpatient treatment centers and long-term care facilities.
"There's an awful lot of consolidation going on in the acute care side of the business, and you're seeing the same thing in mental health," said E. Mac Crawford, Charter's chairman and chief executive.
"That's not to say bigger is better in health care . . . but you have to have a local network that has strong information systems to reduce your overhead and generate efficiencies," Crawford said. By establishing a network of services, Charter could take its plan to insurance companies and employers and contract with them to provide a whole range of mental health services for a lump sum.
Buying NME's hospitals would also move the company into the Northeast and Mid-Atlantic markets and into some California cities where it has no operations. Charter currently operates 10 hospitals in California.
NME officials would not discuss a possible sale price, but the firm's Nov. 30 financial statement lists the value of the psychiatric unit's assets at about $254 million. NME officials said the legal troubles in the division have reduced its market value.