Class action lawsuit misses mark, say not-for-profit hospitals

Suit unlikely to address higher payments for uninsured patients 

Mississippi attorney Richard Scruggs has targeted not-for-profit hospitals in his latest class action effort, accusing them of overcharging uninsured patients and using harassment to collect overdue bills.

But while the lawsuits are bringing fresh attention to a long-simmering problem, health policy experts and hospital officials say, they are not likely to help the uninsured.

"This lawsuit is totally baseless, without merit, and will serve only to line the pockets of the trial attorneys," says Cheryl Iverson, vice president for business development at DeKalb Medical Center in Decatur, GA, one of the hospitals named in the actions. "They have only gone after the not-for-profits with the largest cash reserves. All of their allegations are completely contrary to our day-to-day business practices. We in no way use harsh collection practices, and we provide seven times the value of our tax exemption in uncompensated charity care."

Scruggs and several other attorneys, including some who also collaborated with him in his precedent-setting attack on the tobacco industry, filed class action suits June 16 in federal court in eight states against 13 not-for-profit hospital systems.

A week later, the same group filed five more class action suits in three more states and, on July 7, added six new lawsuits, bringing the total number of suits to 27 involving 15 states.

The lawsuits allege that the systems have entered into explicit or implicit contracts with their communities to provide charity care in return for significant tax breaks. The hospitals have breached these contracts, the suits contend, by charging uninsured patients premium prices while negotiating steep discounts with insurers, HMOs, and government payers such as Medicare and Medicaid. Some hospitals also use aggressive tactics to collect unpaid bills, pursuing liens on property, and assessing interest on late payments.

All lawsuits also name the American Hospital Association (AHA) as a "conspirator" with the hospitals for providing "substantial advice to the defendant nonprofit hospitals on billing and collection practices as well as other aspects of hospital operations."

"The defendant nonprofit hospitals and the AHA know full well that the uninsured patients are being charged sticker-shock prices for hospital health care. They know full well that the true fair-market value for their services are the discounted prices they have arranged for those patients with Medicaid and private health insurance. [And] they know full well that they are distorting the figures they are reporting as charity care, and that practices such as taking unpaid hospital charges as both bad debt and charity care is not appropriate," the plaintiffs’ attorneys state in a press release accompanying the lawsuit filings. "The defendant nonprofit hospitals know full well that, given the vast liquid assets they hold, they can afford to honor their contractual obligations with governmental authorities as well as live up their own mission statements. These obligations and those missions are to provide charity health care for uninsured patients, the patient group which needs it the most."

The hospitals also engage in deceptive practices by overstating losses due to investments, and claiming uncompensated care as both charity care and bad debt, Scruggs and colleagues allege.

This is not the first time that attorneys have challenged the practice of charging uninsured patients higher rates than those covered by third-party payers, notes Jay Wolfson, DrPH, JD, professor of public health and medicine at the University of South Florida Health Sciences Center in Tampa.

Over the past decade, Wolfson has published research on the arguments for and against not-for-profit hospitals’ tax-exempt status and on legal challenges to hospital charging structures and billing practices.

"For the most part, the courts have not ruled that pricing practices of hospitals are subject to judicial interaction," Wolfson says. This has occurred because some of the cases used to bring the actions have been so weak that they did not qualify (for example, using a Medicaid patient as a plaintiff — when that person would have no standing as somebody with residual financial liability). The efforts to certify a class have failed, and the individual actions have not succeeded through trial."

The lawsuits are drawing new attention to the relatively hidden fact that hospital charges are often not reflective of the costs it requires to provide a needed service or procedure. For example, health care organizations frequently add to the charge for routine and frequently used health services to offset the high cost of infrequently used, expensive, yet essential services — such as maintenance of trauma and burn units and neonatal intensive care.

Certain health care charges are inflated beyond what it costs to provide the actual service. Third-party payers also negotiate across-the-board discounts for their members. Thus, the charges to insured patients are lower, while the full charge assessed to uninsured patients, in many cases, is unrelated to the cost of care provided.

However, says Wolfson, this is an issue that must be addressed on a societal level.

Burn units, for example, don’t treat enough patients to pay for themselves. But communities have decided that they want these services available and it has been up to the health systems to find a way to pay for them.

"Costs have not been relative to charges for nearly 20 years," notes Wolfson. "And the concept of cost-shifting has been endorsed by many state legislatures as essential to the sustenance of health care organizations. It has been adopted as public policy. It makes sense — particularly as it relates to expensive, essential, less intensely used services — such as burn and trauma and neonatal services."

Hospitals in a tight squeeze

It also is common for large-volume purchasers of certain goods and services to negotiate discounts from the provider of such services, he adds.

"This makes fundamental business sense, the way that early-bird discounts for dinners make sense to some people," Wolfson continues. "But the way charges are constructed and included in complex billing systems may create challenges."

However, the volume discounts given to Medicare, Medicaid, and other private payers are often way below the cost of the goods or services provided, he admits. So, not only are uninsured patients bearing the brunt of paying full charges, their charges also reflect below-cost discounting given to payers that control large portions of the market.

"The prospective payment reimbursement system [used by government payers] and managed care plans literally cap payments regardless of the complexity or actual cost of an individual case," Wolfson says. "Hospitals that have large unfunded bases without any public offset face the problem of cost shifting the losses — since the historical margins enjoyed from old-style Medicare reimbursements disappeared years ago."

The Scruggs lawsuits may lead some hospitals to change their charging structures, but this could actually hurt consumers in the long run, says Timothy D. McBride, PhD, professor of health management and policy at St. Louis University’s School of Public Health.

During managed care’s heyday, hospitals had little power to charge covered patients the same rate, he notes. Managed health plans covered so much of the market that they could force systems to accept slashed fees in return for remaining on preferred provider lists.

Now, however, with many plans facing financial crises of their own, hospitals might be able to force plans to pay more.

But this also could result in substantial increases in premiums, driving more employers to reduce or drop health coverage for the employees or induce employees to give up available coverage.

"The biggest factor driving the increase in the number of uninsured people, in recent years, has been decreases on the employer insurance side — employers are dropping coverage," McBride says. "We have seen pretty good news on Medicaid side, [i.e., the State Children’s Health Insurance Program] has reduced the number of uninsured kids. But the whole percentage is going up, mostly due to drops in employer-sponsored coverage — a combination of employers dropping coverage and employees not accepting the coverage when it is offered to them, but both of those trends are related to price."

Squeezed by reductions in private payer and government-sponsored health insurance reimbursements, hospitals have borne the brunt of rapidly rising health care costs in this country. These lawsuits could induce hospitals to start pushing the burden back onto the taxpayers, McBride says.

"It is a vicious cycle," he notes.

This is a problem that should be addressed at a societal level, says Wolfson. "As more people are without benefits, there are going to be more uninsured, and they require care. The cost of the care they seek has increased due to inflation, pharmaceutical and device costs, and the other forces that increase the costs of health care," he says. "Many not-for-profits are experiencing higher rates of unfunded care, and sometimes they reasonably and truly find that a sizable portion of that population does have the means to afford some payment. Sometimes, they can afford payment of the entire amount. There is a dilemma for many policy pundits as well who allege that some portions of the uninsured population have no difficulty paying for cigarettes, expensive cars, electronic goods, etc., but are unable to pay for health care."

Health care tends to be thought of, by most people, as something that should be a purchasable commodity — until they need it, or someone they know needs it, and then they want it to be readily available and affordable, Wolfson says.

"Communities have to decide how they are going to address the needs of the uninsured," he says. "This means taking responsibility — something communities don’t want to do, unless it is to fund a football stadium. We give lip service but little real credence to being our brothers’ keepers. We are a crisis-oriented culture. We want instant gratification, not investment in the health and welfare and productivity of our communities."

While a societal debate over how to provide health care to the needy may be desperately needed, the problems will not be solved by this avalanche of lawsuits, says Iverson, noting the hospital administration found out about the allegations when they were called by a reporter from The Wall Street Journal. The official legal notification came a week later.

DeKalb Medical Center’s annual tax exemption amounts to about $4.5 million; however, the hospital provides almost $40 million in uncompensated care each year.

"The hospital has a well-established policy of providing charity care to patients who truly cannot afford to pay," she says. "We work with everyone to find out whether they are eligible for any public assistance, or government-sponsored health plans, then we look to see if they meet our guidelines for charity care. If they do, we write it off, they never even get a bill. If they don’t, we offer to set up a payment plan and work with them to see how much of it they can pay."

Even then, only 7% of those patients pay their bills, she says. Ninety-three percent do not pay at all, and the hospital absorbs this as bad debt.

Medicare requires, as a condition of the hospital’s participation, that it make reasonable attempts to collect bad debt, she notes.

The hospital receives no support from county revenues and must find a way to keep the facility running, Iverson says, emphasizing that they do so without threatening the patients who cannot pay. "Some of the people who are uninsured can afford [health coverage] but most cannot," she notes.

Iverson says she believes the hospital will be exonerated, but notes that they have already spent a great deal of money, time, and other resources preparing to defend themselves against the charges.

"I don’t know what the ultimate impact of the lawsuits will be nationwide," she says. "But, whatever the outcome, it will likely be millions of dollars that could have been spent on providing care that will instead be consumed by the legal system."


  • Cheryl Iverson, DeKalb Medical Center, 2701 N. Decatur Road, Decatur, GA 30033.
  • Timothy McBride, St. Louis University, School of Public Health, 3545 Lafayette Ave., St. Louis, MO 63104.
  • The Scruggs Law Firm, PA, 708 Watts Ave., Pascagoula, MS 39567.
  • Jay Wolfson, DrPH, JD, CPH 1126, Dept. of Environmental and Occupational Health, USF College of Public Health, Health Sciences Center, 13201 Bruce B. Downs Blvd., Tampa, FL 33612.