Charity lawsuits may open the door for more scrutiny

Not-for-profit hospitals are a natural target for allegations that they are failing to serve the indigent community, and the latest lawsuits targeting them are not likely to be the last, according to an expert in health care law. No matter how the lawsuits themselves turn out, they’re turning up the heat on all health care providers and will result in closer scrutiny that many feel they could do without.

Much of the fallout will affect all health care providers, creating a higher standard for billing and collection practices, says Jay Wolfson, DrPH, JD, professor of health care law, finance and policy at the Colleges of Public Health and Medicine at the University of South Florida in Tampa. But the greatest impact will be on not-for-profit institutions, which will be watched very closely from now on.

Wolfson offered advice in a recent audio conference sponsored by Thomson American Health Consultants, publisher of Healthcare Risk Management. Wolfson cautions that risk managers must not take the lawsuits lightly. Even if the particular charges brought in the lawsuits do not result in payouts, the lawsuits could prompt closer scrutiny by state and federal regulators. No one wants that.

Don’t underestimate lawsuits

Wolfson says there is a thin line between the allegations in these lawsuits and behaviors or policies that could be subject to federal investigations regarding kickbacks, fraud, and abuse, he says. And once people start prying into your institution because of the charges in these lawsuits, they may uncover all sorts of other things you’d rather not have to explain.

"The assaults by prominent, successful class action attorneys combined with the attention of state legislators regarding not-for-profit status places not-for-profit health care organizations at jeopardy of challenges to your tax-exempt status, and massive expenditures defending lawsuits and regulatory inquiries," he says. "There’s also the risk of bad press, reduced donations, and reduced revenues."

The attorneys bringing lawsuits are a "formidable foe," Wolfson says, because they have extensive experience in class action lawsuits, including the action against the tobacco industry that yielded them millions of dollars.

Sarbanes-Oxley used as tool for scrutiny

The Sarbanes-Oxley law also injects a new level of accountability for how a not-for-profit’s board performs, and Wolfson warns that community watchdogs and others are using law as a tool to get previously unobtainable information about the institution. Sarbanes-Oxley is the federal law that, among other things, requires greater accountability and disclosure from not-for-profit organizations, and it can create a way for federal regulators to find a cause of action. One can run afoul of Sarbanes-Oxley by not being responsible to communities or constituencies ostensibly being served, so that would fall in line with the allegations about charity care. Regulators also could use the law to find that boards are neglectful of their duties, have conflicts of interest, or misuse assets and engage in self-dealing.

Lawsuits bring unwanted attention

The recent lawsuits are bringing unwanted attention to the way not-for-profits operate, with strong criticism of how some are behaving more like for-profit entities. Critics point to the aggressive competition for contracts, sophisticated and aggressive marketing strategies, and the purchasing of physician practices and other assets. The public perception also is that not-for-profits spend money lavishly, filling boardrooms with expensive wood and exotic art, and then they use "goonlike" collection methods to harass and intimidate the elderly and poor.

Wolfson notes that this is not the first time not-for-profit hospitals have been hit by accusations that they are failing to meet the needs of the uninsured and gouging the patients who can least afford it. About 14 years ago, there was a series of similar actions against Florida hospitals, alleging many of the same things. "All of those cases were thrown out, but it took a lot of time and money," Wolfson recalls. "They’re back now with better attorneys and more money."

The most recent legal claims stem from allegations that not-for-profits are gouging individual patients by requiring they pay full charges without any discount. Wolfson explains that billing practices alone, if patently discriminatory, may create opportunities for legal action, but not-for-profit status raises the bar by adding on obligations and a set of expectations. Bottom line, it’s easier to show that a not-for-profit’s billing practices are discriminatory.

Know when you crossed the line

So how can you know when your own institution has crossed the line? Wolfson suggests looking for these exposures:

  • Patently aggressive efforts to single out uninsured patients from others with balances due.
  • "Goonlike" collection practices that just look bad, whether they’re done by your own employees or an outside collection agency.
  • Failure to create flexible alternatives for payments.
  • Audits that may not clearly distinguish bad debt from charity care.
  • Internal arrangements to cross-subsidize physicians for medically indigent patient care.
  • Inaccurate cost accounting systems that prevent linkage of chargemaster charges with costs.
  • Weakly documented cost-shifting realities — by product lines and payer classes.
  • Direct or indirect tax subsidies, such as property or sales taxes.
  • Legislative appropriations, such as those for trauma care or rural access.
  • Charitable "funds" within the organization, which can create problems when donor funds are not directed to the area specified by the donor.

Charity care, bad debt not the same thing

Wolfson also cautions about blurring the line between charity care and bad debt. Don’t let your finance department shift the debt around, transferring it from charity care to bad debt just to make the numbers look better, if that is not allowed by your state statutes. Many states have very specific definitions of each, he says, and you must adhere to those.

Many institutions have a lot of work to do, he says, but improving your billing and collections practices is job one. "Don’t take anybody’s word for how it works. Get in there and go through the system yourself, see how it’s down, follow a case, see with your own eyes what happens when a bill goes to collections," Wolfson says. "The billing practices we’ve allowed to develop over the years may not be allowed to continue. We have to become patently kinder and gentler in some respects."