ABA Journal - May 2009

THE NATIONAL PULSE

Exerting

Their Patients

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 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

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.