Popovits & Robinson - Client Advisories

July 2004 - CHARITY CARE LITIGATION

I. The Litigation Wave

Non-profit hospitals are facing a wave of class-action lawsuits challenging their billing and collection practices for the uninsured. Attorneys for the plaintiffs argue that the hospitals force uninsured patients to pay the ''sticker price'' for treatment, while significant discounts are offered to patients who have private health insurance or are Medicare and Medicaid beneficiaries. The attorneys also allege that the defendant hospitals often use predatory methods to collect payment from uninsured patients including garnishment of wages and bank accounts, seizures of homes and personal bankruptcies.

II. The Allegations and Issues

A consistent theme throughout the class action complaints is that hospitals have “overcharged” uninsured and underinsured patients and used inappropriate collection practices to obtain payment. The result, according to the complaints, is that defendant hospitals have earned income that should have been allocated for charity care. A summary of the main allegations is as follows:

The hospitals failed to meet their obligations as tax-exempt organizations;
The hospitals failed to meet their EMTALA obligations;
The hospitals failed to meet their obligations to assess only a fair and reasonable charge for medical care;
The hospitals failed to meet their obligations as a charitable trust; and
The hospitals received unjust enrichment at the plaintiffs’ expense by failing to meet these obligations.

III. The Class Action Plaintiffs

Attorneys for the plaintiffs argue that the plaintiffs have standing (the right to file a lawsuit based on a sufficient stake in the controversy) because the patients named as plaintiffs are the intended beneficiaries of the hospitals’ tax exemption.

The attorney leading the class action charge is Richard Scruggs, who received national prominence in connection with a series of class-action lawsuits against the tobacco industry. According to Mr. Scruggs, non-profit hospital systems and hospitals “have for years spent only a small percentage of their sizable revenues on charity care for the uninsured while reaping the enormous cash windfalls from their tax exempt status.”

IV. Prominent National and Local Defendants

Sutter Health
Sutter Health, a major California non-profit healthcare system headquartered in Sacramento, has over 20 non-profit hospitals that comprise its system. Sutter is one of the largest non-profit healthcare systems in the country. The recently filed complaint alleges that Sutter charges uninsured patients unfair and unreasonable prices that are far in excess of those charged to its insured patients. Specifically, the plaintiffs allege that Sutter spent only 0.6% of its 2002 revenues on charity care -- 40% less than the California statewide average for private hospital companies. In 2003, Sutter reported total patient service revenues of $4.506 billion and profits of $465 million.

American Hospital Association
The American Hospital Association (AHA), which has released guidelines for hospitals relating to debt collection for the uninsured, has also been named in the class actions as a co-conspirator with the defendant hospitals. The complaints allege the AHA aided and conspired with the hospitals to breach their legal obligations through its advocacy efforts on billing and collection. According to a press release from Attorney Scrugg, “the AHA schemes side-by-side with its co-defendants, in implementing numerous other charitable healthcare avoidance tactics, including working with the co-defendant nonprofit hospital systems and hospitals with respect to manipulative accounting techniques and ‘spinning’ the public and governmental authorities away from the wrongdoings being perpetrated by its co-defendants on uninsured patients.”

Resurrection Health Care
A class action was filed against Resurrection Health Care, a Catholic non-profit hospital system, on June 22, 2004. The complaint alleges that Resurrection, “as a self proclaimed charity pursues aggressive collections techniques which often result in lawsuits, garnishments, judgments and bankruptcies against uninsured patients.”

In a similar but smaller scale case, in March of 2004, two former patients sued Resurrection claiming that they were charged up to four times the price that insured patients had to pay for identical procedures at Our Lady of the Resurrection Medical Center. The plaintiffs further allege that the hospital never screened low-income patients to establish whether they qualified for free or discounted medical care. This case is still pending.

Advocate
A group of former patients have filed a class action suit against Advocate Health Care in Oak Brook claiming that they suffered extreme financial hardship as a result of Advocate’s collection practices. The complaint alleges that advocate has engaged “in a pattern and practice of charging inordinate, unreasonable and inflated prices for medical care to its uninsured patients.”

Provena
Provena Health, headquartered in Champaign, is another Illinois provider named in the series of lawsuits. This is the second tax-exempt related challenge Provena has faced this year.

On January 20, 2003, the Champaign County Board of Review recommended to the State of Illinois that it deny tax-exempt status for Provena's Urbana properties, including the main hospital. In a nine-page brief, the Board of Review argued that much of the area inside the hospital is used by outside, for-profit entities to generate personal or corporate profit. The brief also questioned whether Provena provided charity care to all who need and apply for it. The brief cited the hospital's numerous lawsuits filed against patients for nonpayment of bills as well as its use of two collection agencies.

On February 13, 2004, the Illinois Department of Revenue ruled that Provena Covenant Medical Center in Urbana was no longer eligible for its property tax exemption and that the hospital was not a “charitable institution” in part, because of its collection practices. Unless the ruling is reversed, Provena will be required to pay a $1.1 million property tax bill for the 2002 fiscal year.

V. Guidance

On September 11, 2003, the Illinois Hospital Association (IHA) adopted charity care and collection practice guidelines. The guidelines recommend that Illinois hospitals review their current charity care policies and modify them accordingly so the policies are no more restrictive than the following:

The hospital should have a charity care policy to provide medically necessary hospital care for persons meeting financial and documentation criteria.
The hospital should have a means to communicate the availability of care to all patients.
Hospitals financial services and registration staff should understand the policy and be prepared to direct questions to the appropriate hospital representative.
Uninsured patients who can demonstrate family income below 100% of the federal poverty line should receive a full 100% discount. Partial discounts are encouraged for individuals with family income less than 200% of federal poverty guidelines.
When making a financial ability determination, hospitals should consider assets other than income which may be used to meet the patients’ financial obligations.
The hospital should inform the patient of the outcome of their charity care eligibility determination within a reasonable period of time after submitting all necessary documentation.
The hospital’s use of federal poverty guidelines should be updated annually.

VI. Recommendations

In light of this recent waive of class actions, we recommend that all non-profit health care providers carefully review their charity care and debt collection policies and practices. It is unclear how far this waive of litigation will reach. Popovits & Robinson, P.C. is available to review your policies and practices and make specific recommendations tailored to your organization.