Are nonprofit hospitals preying on the uninsured?

Coast-to-coast lawsuits allege unfair billing and collections

To the attorneys, the question of whether nonprofit hospitals are living up to their mission to provide health care to those who can’t afford it is purely a consumer-protection question. But to a physician who blew the whistle on one hospital, it’s much more of a human question.

"How ethical is it to charge sky-high prices to someone who is uninsured and can’t pay? Totally unreasonable charges to someone who can’t pay it? Significantly discount prices to someone who has insurance, but then harass and hound and sue and bankrupt those uninsured patients?" asks John Bagnato, MD, an Albany, GA, physician who exposed what he believes are unfair practices by scores of nonprofit hospital systems throughout the country.

He and a partner in his surgical practice delivered their findings earlier this year to Mississippi attorney Richard Scruggs, known for his tobacco and asbestos litigation, touching off the flurry of litigation.

Pricing and collection methods are two of the factors that have led to the filing of 49 lawsuits against 370 nonprofit hospitals in the United States. The cases have added to a growing debate over charity care provided by the nation’s nonprofit hospitals, which represent 85% of the industry.

"Just as the tobacco case looked on its surface to be complex, [the hospital lawsuits] are about one simple issue with three points," says Ridgeland, MS, attorney David L. Merideth, MD, JD, MBA, one of the attorneys working with Scruggs. "The nonprofit, tax-exempt hospitals are overcharging uninsured patients while conspiring with the American Hospital Association [AHA] to profit and hoard billions of dollars while suing the uninsureds [to collect medical charges]."

Contacted by Medical Ethics Advisor for comment, AHA president Dick Davidson forwarded a prepared press release in which he stated, "This assault on community hospitals is misdirected — diverting focus away from the real issue of how we as a nation are going to extend health care coverage to all Americans." The AHA is named as a defendant in some of the lawsuits, which ask for damages, attorneys’ fees, and free care to the uninsured poor.

Davidson’s statement describes the reality of nonprofit health care as "far different from the charges outlined in these lawsuits," and he expresses confidence that the cases will be "easily defeated."

Nonprofit or community hospitals emerged in their current form in the 1940s, with the Hill-Burton Act, which exchanged tax exemption or government funding for free care to uninsured people. Merideth says what began as "a truly charitable, above-board system has, over the last 50 years, morphed from the nonprofit idea to a for-profit system."

Nonprofit hospitals are seen as easy targets, observers say, because they usually are visible and well funded, conduct business in a way that appears identical to for-profit hospitals, and enjoy the benefits of tax exemption.

Some experts in health care law say that while some of the practices alleged in the lawsuits seem overly harsh toward the uninsured, they are not actually illegal.

Have nonprofits abandoned their mission?

The plaintiffs in the lawsuits allege that nonprofits have abandoned the mission that created their nonprofit, tax-exempt status in the first place — to provide health care to everyone in their communities who is in need of it. In doing so, Bagnato says, they are creating an ethics breach that can’t be defended, even if the legal arguments are debatable.

"The ethical situation boils down to this one weird phenomenon — the uninsured patients, the ones who cannot afford health insurance for whatever reason, is the one group charged the most by nonprofit hospitals," he says. "They’re the only group charged full price."

Not so, according to the hospital industry. Every patient, insured or not, is charged the same; what ends up being paid, however, depends on whether an insurer or the government (Medicaid, Medicare) has negotiated a lower rate.

The U.S. House Energy and Commerce Subcommittee on Oversight and Investigations in late 2004 released findings of a yearlong investigation of for-profit and nonprofit hospitals’ billing and collections practices. According to Congress Daily (, the investigation found that overall, hospitals were charging uninsured patients at rates higher than those charged to other segments of the population.

Subcommittee Chair Jim Greenwood (R-PA) stated during a meeting on the investigation, "An average working man or woman treated at a hospital can be stuck with a bill that is double what managed care or government programs pay. Then, to add insult to injury, they are sometimes aggressively pursued for these inflated debts. This situation is unfair and unjust."

The Sarbanes-Oxley public accounting reform act, passed in 2002, is seen by both sides as a new safeguard to patients. Nonprofits are under clearer, tighter regulation and must demonstrate their eligibility for nonprofit, tax-exempt status.

Several hospital executives testified before the subcommittee that they have modified their billing policies since the House investigation began and blamed the initial billing practices on an unclear section of Medicare and Medicaid regulations. In a February 2004 letter, Health and Human Services Secretary Tommy Thompson wrote, "Nothing in the Medicare program rules or regulations prohibit such discounts" to the uninsured. He also said that hospitals should "take action to assist the uninsured and underinsured, and therefore end the situation where, as you said in your own words, uninsured Americans and others of limited means are often billed and required to pay higher charges."

According to the AHA, debt from unreimbursed care totaled $22.3 billion at 4,927 U.S. hospitals in 2002, the last year for which data are available. While hospitals cannot collect a large part of the debt because many patients cannot afford to pay, some debt results from patients with health insurance who fail to pay out-of-pocket expenses not covered by their policies, the AHA points out.

Hospitals pursue collection of unpaid bills from all patients — the uninsured who owe entire charges for hospitalization, or the insured who owe out-of-pocket charges — and if even a fraction of the balances due is collected, it defrays at least some of the debt.

But at least one member of the House subcommittee says the issue goes beyond billing practices and debt collection.

Rep. Diana DeGette (D-CO) says, "It would be easy for this body to simply blame hospitals for overaggressive bill collection. But that would miss the larger point: Too many Americans are unable to pay for health services because they do not have health insurance."

Collection practices legal; are they ethical?

Newspapers in major cities have, in recent months, profiled numerous uninsured individuals whose financial security has been ravaged by aggressive collections practices that followed hospitalization. The Boston Globe recently profiled an uninsured stroke victim in Massachusetts, for example, who was billed more than $40,000 in itemized expenses for a diagnosis for which the same hospital bills Blue Cross/Blue Shield $8,000.

Merideth says the aftermath of the lawsuits and Thompson’s letter to hospitals assuring them that they could give discounts based on ability to pay comes down to the fact that "hospital CEOs and executives got caught with their hands in the cookie jar, and they know it. The best evidence of this is that when they smelled litigation, they started changing their [billing and collection] practices."

Merideth says he believes an argument could be made that nonprofit hospitals were charging premium prices to uninsured patients in an effort to drive them to other hospitals.

"[The lawsuits] are not about willy-nilly giving out free care to people," he says. "It’s about the responsibility to let people know that when they are at a charity hospital, they might be due care at a reduced rate."

Money isn’t the only cost, MD says

Bagnato says high fees and stressful collections after the care is received are not the only troublesome things he sees in nonprofits’ handling of uninsured patients.

"Physicians and nurses see it every day — people being discouraged from seeking medical care," he says. "I saw a patient just the other day — a woman who had put off getting a mammogram because she was afraid of what the hospital would charge her. By the time I saw her, she had locally advanced breast cancer."

Bagnato says he could better accept high bills if they were linked to actual cost.

"But it’s never linked to cost, and that’s a peculiar thing," he observes. "If we could make health care reflect the tenets of our capitalistic market, we could correct a number of problems in our health care crisis."

Mark Rukavina, director of The Access Project, a national resource center that works with local groups on health care issues, documented the actual experiences of the uninsured through a survey it conducted in 2000 of uninsured people who had received care in local nonprofit institutions.

In the 24-site survey of nearly 7,000 uninsured respondents, 60% said they needed help paying for their medical care, and 46% said they owed money to the facility where they received care.

But Rukavina expressed concern that the pending lawsuits could damage hospitals’ abilities to deliver care to their constituents.

"Scrutiny of billing practices is good, but you have to consider that [the lawsuits] are taking on a vital service — one that we want to preserve, not bring down," he points out.

Scruggs’ team already has won a settlement with one hospital system — one that wasn’t even named in any of the suits. Tupelo-based North Mississippi Health Services agreed to start providing free care to poor, uninsured patients. Scruggs said under the settlement, patients who earn up to 200% of the federal poverty level will get free health care.

The AHA was not a party to the settlement, and said it would have no bearing on the other pending lawsuits.


  • Howard Markel, MD, PhD, Center for the History of Medicine, 100 Simpson, Box 0725, Ann Arbor, MI 48109.
  • John Bagnato, MD, Surgeon, Albany, GA. E-mail:
  • Dick Davidson, President, American Hospital Association, One N. Franklin, Chicago, IL 60606. Phone: (312) 422-3000. E-mail:
  • David L. Merideth, MD, JD, MBA, 407-B W. Parkway Place, Ridgeland, MS 39157. Phone: (601) 856-7799. Web site:
  • Mark Rukavina, Director, The Access Project, 30 Winter St., Suite 930, Boston, MA 02108. Phone: (617) 654-9911.