THE NATIONAL PULSE
Spate of lawsuits forces change
in not-for-profit hospital billing
BY JOSEPH GOLDSTEIN
AWAVE OF CLASS ACTION LAWSUITS MASTER-
minded 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
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
PHOTOGRAPH BY MELISSA BARNES
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,
Kelly Dermody, lead attorney in suits against four nonprofit
hospital systems, says how judges framed a case was key.