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As the price of Santa Monica-based health-care giant National Medical Enterprises stock tumbles on the Big Board -- due to allegations of massive billing fraud -- investors are perhaps re-learning a lesson the hard way: Look at top managers and directors of public companies, and the attitudes those selections express.

On July 30, eight major insurance companies filed federal Racketeering Influenced and Corrupt Organizations (RICO) Act charges against NME, alleging the big hospital and psychiatric facilities chain bilked them out of a "substantial portion" of $490 million worth of patient billings.

The insurers charge that NME diagnosed psychiatric patients in such a way as to milk them for insurance payments -- and thus some patients were kept institutionalized when they should have gone home. The accusing insurers, which include such industry giants as Travelers Cos., Massachusetts Mutual and Mutual of Omaha, allege the overcharging reflects a "corporate culture" at NME gone bad.

The $3.98 billion-in-revenues NME denies all the charges, but the company has paid huge fines -- as much as $9 million -- to settle similar charges brought by various states, including Texas. NME did not admit guilt in that settlement, but was ordered by permanent state injunction to change admission procedures.

NME stock is sick; it traded last week in the $14-a-share range, down 37 percent from a $23-a-share 52-week high.

But perhaps NME's bottoming stock price started at the top of NME -- there is plenty to question about the board's make-up, the philosophy that guides selection of board members and the signal both send to NME rank-and-file.

Case in point: A 15-year NME board member is William Banowsky, who in 1986 tipped family and friends on inside information he garnered while a board member at Los Angeles-based retailer Thrifty Corp., then a public company.

Banowsky, as a Thrifty director, learned inside details of the then-pending acquisition of Thrifty by Los Angeles-based utility holding company Pacific Enterprises.

Banowsky quickly passed the news to his close ones -- a blatantly illegal act.

The Securities and Exchange Commission caught wind of Banowsky's tipstering, got $750,000 from him and described his actions as fraud. He signed a consent decree, neither admitting or denying guilt.

Banowsky left the Thrifty board. But NME left him on its board.

What signal does this send to NME employees and senior managers?

"The prevailing view is that you probably don't ask people to stay on boards after they experience those kinds of circumstances because of the potential messages it sends to employees, regulators and shareholders," said Peter Smith King, associate professor at Loyola Marymount University who teaches business ethics.

Added Stan Trilling, head of The Trilling Group in the downtown Los Angeles offices of PaineWebber, "Shareholders and institutions should have asked NME why he (Banowsky) was left on the board. If they didn't get a clear answer, they should have exited the stock."

Another case in point: Two of NME's "outside" directors are A.J. Martinson and Howard Nachtman, doctors who have been retired for 12 and 17 years, respectively. Both are former NME employees.

Yet, as outside directors, they are supposed to represent the interests of shareholders, and keep a sharp eye on Chairman Richard K. Eamer and other management board members.

Of NME's other nine outside directors, two more, James Livingston and Peter de Wetter, are former NME executive vice presidents who worked for Eamer.

Another outside board member, Richard Stever, is former NME senior vice president.

Also on the NME board is Raymond Hay, who became chairman and chief executive of LTV Corp. in 1983, three years before it declared Chapter 11 bankruptcy. Hay now runs his own company.

Another board member, Senior Executive Vice President John Bedrosian, who despite being No. 2 at NME, in the mid-1980s found enough time to become chairman of Valley State Bank. That bank went into federal receivership in 1987.

The outside directors, who also monitor executive pay, have been rewarding to Chairman Eamer.

Although NME stock price has languished for the better part of 10 years -- the stock traded as high $15 a share (adjusted for splits) in 1984, about where it is now -- last year Eamer collected salary and benefits of $17.5 million. About $15.5 million of that was bonuses based on NME's stock performance.

"The overwhelming majority of the (1991) compensation was based on stock options . . . and options are subject to the vagaries of the market," said David Olson, NME spokesman. "Some of those options went back 10 years."

NME is the brainchild of Eamer, who founded the company in 1966, along with Bedrosian and Leonard Cohen, president and chief operating officer.

Eamer's interest in medicine was not scientific or therapeutic; indeed, prior to starting NME he was a lawyer. In 1969, the founding trio took NME public and raised $23 million.

Over the 1960s and 1970s, NME built and acquired numerous hospitals and other health-care facilities, becoming a giant. Fed by a torrent of federal dollars -- the Medicare program for the aged paid health care bills that in previous generations went unpaid -- NME revenues reached $1 billion by 1981.

# posted by Medical Information : 3:16 AM