The National Pulse

Exerting Their Patients

Spate of lawsuits forces change in not-for-profit hospital billing

Posted May 1, 2009 9:30 PM CDT
By Joseph Goldstein

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Kelly Dermody
Photo by Melissa Barnes

A wave of class action lawsuits masterminded by Pascagoula, Miss., attorney Richard “Dickie” Scruggs against not-for-profit hospitals was going nowhere back in 2005.

The suits’ contention was that not-for-profit hos­pitals bill at higher prices if the patient is uninsured. But the claim wasn’t impressing federal judges, as plaintiffs were discovering in courts across the country.

“Plaintiffs here have lost their way,” wrote federal judge Loretta Preska of the Southern District of New York. “They need to consult a map or a compass or a Constitution because plaintiffs have come to the judicial branch for relief that may only be granted by the legislative branch.”

But since then, many plaintiffs have found their way to state court. There, with friendlier state consumer-fraud statutes, lawyers reached settlements with leading nonprofit hospital systems in more than half a dozen states. Among them are California, Missouri and, most recently, Illinois—where suits against two major Chicago-area hospital systems settled earlier this year.

DISCOUNTS FOR THE UNINSURED

The settlements across the country vary, but one common provision says not-for-profit hospitals will offer uninsured patients discounted rates. Before, un­insured patients might be billed at two, three or more times what the hospital would bill an insured patient, their lawyers say. Many settlements also provide for partial rebates and debt relief on old medical bills.

The lawsuits spurred legislators across the country to consider the charity care policies of hospitals, par­ticularly nonprofit ones, which enjoy tax-exempt status. A 2006 California law, for instance, caps what hospitals may charge many uninsured patients at what the hos­pital would receive were a government program such as Medicare footing the bill.

And a 2008 Illinois law puts the cap at 135 percent of the cost of the medical care. The Illinois law also has a provision that will change hospital collection practices: Hospitals can’t in any one year collect from uninsured patients an amount more than a quarter of the patient’s family’s income.

Also in Illinois, the supreme court is set to review the state’s 2008 decision to revoke the tax-exempt status of a nonprofit hospital in Provena Covenant Medical Center v. Department of Revenue. The department found that the amount of charity care the Urbana hospital was providing—an amount equal to 0.7 percent of its revenue in 2002—didn’t justify the tax exemption that the hospital enjoyed.

From the start, the suits took the bold step of challenging the basic rate structure of the hospital industry. Hospitals establish a price schedule that takes into account that insurers, who represent large numbers of patients, will negotiate a discount. The result is that a hospital’s price list doesn’t reflect what hospitals expect to recoup for a given service. Instead the prices are the hospital’s initial bargaining position from which insurers negotiate down.

So the uninsured were generally billed the list price because they didn’t have anyone to bargain on their behalf. Of course, the uninsured rarely paid those prices. Many qualified for charity care—the free or discounted care that not-for-profit hospitals offer some patients, according to need. And many of those who received bills simply never paid.

According to one study conducted by Sutter Health, a not-for-profit hospital system in northern California that has settled its lawsuit, some 80 percent of uninsured patients paid nothing, says Los Angeles lawyer Jeffrey LeVee, who represented the hospital.

“One of the things that went unnoticed in all the litigation is that most of the hospital systems had very generous charity care systems in place,” says LeVee, a partner at Jones Day. “It really is not true that uninsureds were asked to pay standard rates if those uninsureds were poor.”

Lawyers for uninsured patients say, however, that their clients would often fall through the gaps of charity care policies. These patients would not always be fully advised that they qualified for charity care. Even if advised, many wouldn’t fill out the necessary forms for reasons such as their immigration status, disorgan­ization or stubbornness.

A COUNTING CONUNDRUM

Quantifying how much unreimbursed care not-for-profit hospitals provide isn’t easy. An IRS survey of 544 hospitals states that they reported spending an average 7 percent of their revenue on uncompensated care. But the report notes that some hospitals “appear to overstate” the amount of uncompensated care because they may not value uncompensated care at its cost. Instead a hospital might value it according to the retail price list.

Furthermore, not all the unreimbursed care that hospitals provide is initially offered as charity. Collection agencies have been known to sue uninsured patients over their debt.

The cases organized by Scruggs (who is now in prison for a bribery conspiracy unrelated to the charity hospital litigation) focused on the tax-exempt status of not-for-profit hospitals.

When the plaintiffs shifted their effort to state courts, they were able to take advantage of broadly worded state consumer-fraud statutes.

A case’s success depended largely on how the judge emotionally framed it, says San Francisco lawyer Kelly Dermody, the lead attorney in suits against four nonprofit hospital systems in California, including Sutter Health and Catholic Healthcare West.

“Judges were either very sympathetic to the notion that people who didn’t have insurance shouldn’t be price-gouged relative to people who did, or they were hostile to the notion that uninsured patients—who, as a population, tend not to pay all their bills—would have the chutzpah to sue caregivers who often provide pro bono care,” says Dermody, a partner at Lieff Cabraser Heimann & Bernstein.

In Servedio v. Our Lady of the Resurrection Medical Center, for instance, a Cook County, Ill., circuit judge suggested in 2006 that a hospital within the not-for-profit Resurrection Health Care system could not charge its uninsured patients at a higher price.

“If the allegations in the plaintiffs’ complaint are proven true, it would follow that Resurrection’s prac­tice of giving discounts to all insured patients operates as a de facto ‘usual and customary’ charge, making that which is charged to uninsured patients above and beyond that a breach of contract,” wrote now-retired state Judge Stuart Nudelman in 2005.

In a different case that posed the same question, Galvan v. Northwestern Memorial Hospital, an Illinois appellate court said last year that “the plaintiff ignores the obvious difference between an insured patient and one uninsured. ... In return for the insurance premiums, his insurance company contracts with a hospital for medical services at a reduced rate. The contract benefits the hospital because payment is guaranteed. ... That an uninsured patient is charged a higher rate for medical services is the flip side of the revenue-stream coin.”

In spite of the precedent set from this 2008 appellate decision, Resurrection Health Care chose in January to settle a class action suit with uninsured patients.

The practice of suing not-for-profit hospitals over their billing practices predates the class actions organized by Scruggs. The Resurrection ruling came in a case brought by Alan Alop, a deputy director of the Legal Assistance Foundation of Metropolitan Chicago, who says he began suing not-for-profit hospitals over their bills a decade ago.

Richard Clarke, the president and CEO of the Healthcare Financial Management Association in Westchester, Ill., says one effect of the litigation has been to push not-for-profit hospitals nationwide to make their charity care policies “more formalized than they were in the past. As a result of the formalization, they’ve gotten more liberal.”

But perhaps the most direct effect of the suits was in bargaining leverage for the uninsured, says John Phillips of the Phillips Law Group, a small firm in Seattle that settled with two hospital systems in Oregon.

“The same economies of scale that insurers bring to bear in their negotiation with hospitals,” he says, “are what our litigation achieved for poor and unin­sured patients.”

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