The National Pulse
Who Pays Hefty Hospital Tabs?
Suits Claim Tax-Exempt Status Creates Duty to Provide Affordable or Free Care for Needy
Posted Jan 25, 2005 5:56 AM CDT
By Terry Carter
Famed Mississippi plaintiffs lawyer Richard F. “Dickie” Scruggs probably should be tooling around the Gulf of Mexico on his 120-foot yacht, or zipping to the French Riviera in his Gulfstream jet. After all, he’s slain several giants and made his dollar. On top of successes in asbestos and other litigation, Scruggs took a nearly $1 billion cut in the tobacco litigation settlement several years ago.
“He could have done like some of the others and bought himself an island and retired,” says Charles Rehberg, a certified public accountant and former hospital executive who is Scruggs’ latest whistle blower behind a spate of class actions against not for profit hospitals.
Scruggs says he was skeptical at first when a friend asked him to read a letter proposing the litigation. It was written by Rehberg, the administrator for a private surgery practice in Albany, Ga., and his boss, Dr. John Bagnato.
They had an ax to grind in another matter, and this was a way to battle their foes. Bagnato is chief of surgery at a hospital that, he says, was working to keep him from opening an ambulatory surgery center of his own.
“I figured it was just some parochial dispute between a doctor and a hospital administration in Georgia,” Scruggs says. “Until I read the letter. They’d researched the not for profit hospital business model nationwide and their arguments were well reasoned.”
Since June, Scruggs and more than a dozen other lawyers around the country joining him in the effort have sued 50 hospital groups in 26 states, in both federal and state courts. The class actions claim that the not for profit hospitals are violating their tax exempt status by charging uninsured patients many of them indigent premium prices while negotiating deep discounts with private insurers and Medicare and Medicaid.
Scruggs argues that hospitals are obligated to provide charity to the uninsured, but instead they charge higher prices and use aggressive collection practices against those who can’t pay.
The approach is much like the one that was successful in tobacco litigation: Build a compelling public relations campaign juxtaposing the detailed plights of individual plaintiffs with the huge cash reserves and lavish lifestyles of executives employed by the defendants.
There is one big difference from tobacco and asbestos litigation. These are contract cases with no pots of punitive damages at the end of the rainbow. The crux of the argument is that, in return for tax breaks, nonprofit hospitals have an explicit or implicit contractual obligation with government to provide free or discounted treatment to the needy.
“This litigation is diversionary and does nothing to advance a solution to that problem,” says Christine A. Varney, a Washington, D.C., lawyer representing the American Hospital Association, which has been brought in as a co defendant in suits against hospital groups. “There are 44 million uninsured, and we’ve got to figure out who pays for it. Neither of their [contract] theories is going to survive a nanosecond of judicial scrutiny,” says Varney.
Scruggs already has encountered some harsh judicial scrutiny. A federal judge in the Eastern District of Virginia recently made it clear to Scruggs he was not interested in micromanaging or setting hospital pricing, prompting Scruggs to drop the complaint. Shipman v. Inova Health Care Services, No. 1:04cv910. Scruggs says he will bring the Virginia case back in state court.
Shortly after that, the federal Panel on Multidistrict Litigation refused to consolidate 28 cases pending in 21 federal district courts, saying it was unpersuaded there were sufficient common questions of fact. In re Not for Profit Hospital/Uninsured Patients Litigation, No. 1641 (Jud.Pan.Mult.Lit., Oct. 19).
Then, on Oct. 21, a federal judge in the Northern District of Alabama cited the doctrine of res judicata when she granted a motion to dismiss a class action filed there. The judge said the plaintiffs should have raised most of their claims when the hospital sued them in state court to collect past due medical bills. Nor did their allegations of economic damages support a claim under a federal emergency treatment law, the court said. Kizzire v. Baptist Health System, No. CV 04 HS 1247 S.
Health Care Redux
This is not the first time Scruggs has gone after health care providers. In 1999 he teamed up with David Boies to bring class actions against HMOs, alleging their coverage and treatment decisions were based on saving money and not on medical need. When The Wall Street Journal reported that the suits were going to make claims under the Racketeer Influenced and Corrupt Organizations Act, the stock of several HMOs took a dive. But when a federal judge in Miami denied a request for class action status in the first suit filed, the effort against HMOs dived, and the cases were quickly settled for small amounts of money for the plaintiffs. O’Neill v. Aetna, Master File No. 00 1334 MD Moreno.
And that gives pause to some who hear that Scruggs got into the more recent hospital litigation almost solely for humanitarian reasons.
“I’d hesitate to call anybody in this area altruistic,” says Lester Brickman, a Benjamin N. Cardozo School of Law professor and critic of mass tort litigation and contingency fees. “If Scruggs sues, it’s serious. He struck out on the HMO suits, but he caused them an enormous hit. Even though he lost, that gives him the credibility to go at these businesses and say, ‘I’m going to sue you, so let’s talk settlement, otherwise your options are under water.’ ”
But D.C. based tort reform lawyer lobbyist Victor E. Schwartz, who has faced Scruggs repeatedly on the other side of issues, recalls that Scruggs was brought into a case a few years ago to help a manufacturer of hip replacements avoid bankruptcy while making good on damages from defective products. “Scruggs is much more multifaceted than a lot of personal injury lawyers and he’s developed some statesman like aspects,” Schwartz says.
Scruggs says he is careful not to inflict such damage on the hospitals, and that he has spent time brainstorming with other lawyers to develop legal theories and remedies that “won’t uproot the medical system. Eighty five percent of the hospitals in the country are involved, and we’ve got to be careful that the cure isn’t worse than the disease.” The not for profit hospital industry got a wake up call last February, just as Scruggs was learning of the issue, when the Illinois Department of Revenue revoked the tax exempt status of Provena Covenant Medical Center in Urbana. Provena has begun paying more than $1 million a year in property taxes.
That resulted from a complaint by the Champaign County Board of Review that many outside, for profit entities were operating within the hospital making corporate profit. The board also claimed Provena was not providing charitable care for patients who needed it and was aggressively pursuing payment from them.
The practices at the heart of the litigation are industry wide. Scruggs says he has built his cases using consultants who have in-depth knowledge from working in the hospital industry, including Rehberg in Georgia, and expects to bring similar scrutiny around the country.
At Issue: Who Pays?
“What really stuck in my craw is that I asked several former hospital administrators working with us why they go to such efforts to sue and get liens and garnishment on minimum wage earners to collect so little,” Scruggs says. “They told me, ‘Look, we don’t want them coming back. We want to make sure that next time they go to somebody else’s hospital.’”
And Scruggs argues that the AHA is brought into these suits because it is the “hub of the wheel for these business practices.”
The AHA’s lawyer says that the only thing lodged in Scruggs’ craw is “nonsense.” “I’d like to see a hospital administrator say that under oath,” says Varney. “What some people say in chit chat is quite different from what they’ll say under oath. Statistics show clearly that hospitals are treating the uninsured in emergency rooms and that they’re getting good health care. Again, the question is who pays.”
The AHA tried to blunt attacks on the tax exempt status of many of its members last December, but that may have backfired. In a letter to Tommy G. Thompson, secretary of the U.S. Department of Health and Human Services, AHA President Richard J. Davidson asked Thompson to offer the hospitals relief from federal regulations that make it “a practical requirement” for them to bill all patients at the same rates, including the uninsured.
“Hospitals believe that patients of limited means should not have to pay full charges simply because they have no coverage,” the AHA’s president wrote, asking for help in getting around Medicaid regulations that prevent them from giving discounts to the uninsured.
Thompson’s response was a shocker. In a letter to Davidson, he said that “charging the uninsured the highest rates is a serious issue” and went on to note that “the Office of the Inspector General informs me that hospitals have the ability to offer discounts to uninsured and underinsured individuals and cost sharing waivers to financially needy Medicare beneficiaries.”
“They miscalculated by asking for an immunizing letter and got a surprise,” says Scruggs.
“Actually, that letter was helpful,” says Varney. “It’s politically disingenuous to say there was no confusion there. ... We’re glad some of the confusion has been cleared up.”