Indigent Care or Wallet Biopsy?

Tax-exempt hospital charges to uninsured are being questioned

America’s not-for-profit hospitals, which for years have positioned themselves as the leading providers of uncompensated care for the uninsured and underinsured, have come under attack in state and federal courts from critics who say they are greatly overcharging the poor people they claim to be helping.

As of July 22, federal class action lawsuits had been filed against 39 nonprofit hospital systems in 20 states. The hospital systems control some 340 hospitals in total.

In the suits, uninsured patient plaintiffs charge the hospital systems and hospitals with victimizing them by failing to fulfill their obligations to provide government-required charity care in return for tax exemptions. The lawsuits charge the hospitals and health systems with requiring the uninsured patients to pay health care prices that are far in excess of the documented amounts accepted by the health systems and hospitals from their insured patients.

Attorney Richard Scruggs, who first gained national attention for his successful lawsuits against major tobacco companies and whose firm is coordinating many of the hospital lawsuits, says the New York, Cleveland, and New Orleans facilities being sued are among the most profitable in the nation. "All three are leaders in performing wallet biopsies on many of their uninsured patients," he says. "Often, through their screening process placing a priority on the patient’s wallet rather than the patient’s health issue and, in turn, appropriate treatment, New York Presbyterian, Cleveland Clinic, and Ochsner Clinic are able to realize and accumulate their profits because, in direct contradiction of the government obligations, they have for years spent only a small percentage of their sizeable revenues on charity care for the uninsured while reaping enormous cash windfalls from their tax-exempt status."

As an example, Mr. Scruggs says New York Presbyterian is the largest hospital system in the New York City metropolitan area, serving 20% of the area’s patients. In 2002, it comprised some 33 tax-exempt, acute care and community hospitals as well as its own tax-free collection agency. In that year, it had total net assets of $1.358 billion among its tax-exempt acute care hospitals, of which 44% was unrestricted.

Mr. Scruggs says New York Presbyterian and the other hospital defendants require uninsured patients to pay sticker price, while providing significant discounts for health care to patients who either are privately insured or who use third-party payers such as Medicare and Medicaid. As a result, he says, the hospitals "force uninsured patients to pay out-of-pocket the full excessive health care costs, even though these patients are those who can least afford such costs."

He also charges that the hospitals "often employ predatory and goon-like collection methods to extract payment from the numerous uninsured patients whom they force to pay these sticker prices. Indeed, these three defendant nonprofit hospital systems have a sordid history of pushing over the years numerous of their uninsured patients into personal bankruptcy."

According to the suit against New York Presbyterian, the health system’s web site says it "provides charitable and uncompensated care to patients without means," but then requires patients to sign a form contract promising to pay for unspecified and undocumented charges for medical care that are preset by the hospital at its sole discretion.

Mr. Scruggs says New York Presbyterian will not admit a patient into its emergency department for emergency medical care unless the patient agrees to pay in full for unspecified and undocumented charges. And it has an average charge-to-cost ratio of 196.83%, he says, well over the state average of 181.33%.

Another of the attorneys representing uninsured patients in the 39 federal lawsuits, Archie Lamb, who gained national attention suing HMOs on behalf of doctors, says the hospitals’ tax-exempt status "is based on the fact they do charity care. The reality is they inflate the amount of charity care they do by overcharging uninsured patients, then writing off that debt and calling it charity care."

He says he has three goals in filing the lawsuits: to make hospital prices fair, to make hospital collection practices fair, and to bring truthfulness to discussions about charity care and hospital tax status.

Hospitals on the defense

Oklahoma City Integris Health Baptist Medical Center president Stanley Hupfeld, whose hospital was sued by Lamb, says the suit has no merit. "We believe this to be an extortion attempt by some trial lawyers," Mr. Hupfeld explains. "We have for years discounted for our uninsured patients and are very proud to have done that. This organization has been in the practice of offering discounts to the uninsured equal to our best discounts offered to the insured patients. To some extent, this talk about discounting to the uninsured is interesting conversation; but in the real world, it doesn’t matter because we aren’t going to collect anyway. We collect less than 5 cents on the dollar from all private-pay patients, whether those patients are without insurance or are patients who have deductibles."

In a suit against Florida’s Lee Memorial Health System (LMHS), Mr. Lamb says the hospital "uses Enron-style accounting tricks to grossly distort the small amount of charity care it does provide to uninsured patients. LMHS reports this amount of charity care as the amount of gross charges, which are grossly inflated, rather than the actual cost of providing the services."

LMHS director of legal services Robert McCurdy says the lawsuit has no merit because the hospital "does everything it possibly can to see that people who can’t afford to pay get the opportunity to get discounts, paying anywhere from nothing to some proportion of their bill. That’s been going on for years."

He also points out that a task force of residents near the hospital, many of whom were uninsured, concluded earlier this year that LMHS’s discount policies for uninsured patients were liberal and justified. "They can be prudent and solvent, but not gouge the community," Mr. Lamb adds. "There’s a middle ground here, and I’m happy to help them get there."

AHA pulled into fray

The eight most recent suits took a new tack, adding the American Hospital Association (AHA) as a co-defendant with hospitals and health systems in Florida, Georgia, Michigan, New Mexico, New York, Ohio, and Pennsylvania. (In earlier suits, the AHA had been cited in the filings as a co-conspirator with the hospitals.)

Mr. Scruggs says the AHA "has fashioned and promoted to, among others, the administrations and boards of trustees of nonprofit health systems and hospitals, business methods calculated to defeat the rights of uninsured patients even though the co-defendant nonprofit hospital systems and hospitals continue to amass enormous economic benefits from tax exemptions related to providing charitable care to this patient class."

He also accuses the AHA of scheming side-by-side with its co-defendant hospitals to implement "numerous other charitable health care avoidance tactics," including working with hospitals and health systems to manipulate accounting techniques and spinning the public and governmental authorities away from the wrongdoing perpetrated by the hospitals on uninsured patients.

"The facts, as demonstrated in the lawsuits, are clear," Mr. Scruggs says. "The defendant nonprofit hospital systems and hospitals force uninsured patients to pay the gross or sticker price for health care. Consequently, and in direct contradiction of their missions and government obligations, the defendants make the uninsured patients, the patient group that can least afford such expenditures, to pay full excessive health care costs."

In response, AHA president Dick Davidson says the nation’s hospitals "are about people taking care of people, often at the most vulnerable times in their lives. . . . As the national advocate for hospitals, the AHA has consistently supported our members as they have developed fair and compassionate policies to help the uninsured. The AHA has worked diligently to push government by emphasizing and seeking solutions to the issue of helping hospitals serve the uninsured.

"The assault on community hospitals is misdirected and baseless, diverting focus away from the real issue of how we as a nation are going to extend health care coverage to all Americans. When the facts are known, the reality of what’s happening in the communities hospitals serve will be found to be far different than the charges outlined in these lawsuits. We are confident the cases will be easily defeated and the resources of these hospitals will again be freed up to address the important mission each has in contributing to its community."

While many health care lawyers agree with Mr. Davidson that these particular suits with their charges about billing and collection practices ultimately will fail, the issues they raise are not going to go away, and are being raised in Congress even as additional suits are being readied and filed.

Concerns about fraud

In testimony before the House Ways and Means Subcommittee on Oversight, AHA board chairman David Bernd, CEO of Virginia’s Sentara Health Care, addressed the issue of hospital tax status, saying the underpinning for charitable tax exemption is public support for activities that serve the larger good. Since 1969, he said, the promotion of health explicitly has been recognized as a purpose meriting tax exemption. The promotion of health alone is not sufficient, however. It also matters how it is done, when, and for whom.

"The focus is not on what the hospital does but whether those actions respond to community need," Mr. Bernd said. "Providing charity care has been only one way to demonstrate that benefit. The community benefit test is still a sound and viable basis for awarding tax-exempt status to hospitals. It places the focus at the local level and examines the merits of individual situations against the community environment in which they serve. The issue has been and should continue to be whether they are providing public benefit."

OIG: Some misinterpret law

In a February 2004 document, the Health and Human Services Office of Inspector General (OIG) said there is no OIG authority that prohibits or restricts hospitals from offering discounts to uninsured patients who are unable to pay their hospital bills. The document says there have been suggestions that the federal anti-kickback statute and Section 1128(b)(6)(A) of the Social Security Act could prevent hospitals from offering discounted prices to uninsured patients, but the OIG disagrees with this assessment.

"In addition to the two laws, it has been suggested that hospitals are reluctant to give discounts to uninsured patients because the OIG requires hospitals to engage in vigorous collection efforts against uninsured patients," the OIG document stated. "This misperception may be based on some limited OIG audits of specific hospitals’ compliance with Medicare’s bad debt rules. The bad debt rules and regulations, including the scope of required collection efforts, are established by the Centers for Medicare & Medicaid Services. No OIG rule or regulation requires a hospital to engage in any particular collection practices."

According to the OIG, fraud and abuse laws clearly permit waiver of all or a portion of a Medicare cost-sharing amount for a financially needy beneficiary. And under the fraud and abuse laws, the financial need criterion is not limited to indigence, but can include any reasonable measures of financial hardship.

Thus, Medicare cost-sharing amounts may be waived so long as the waiver is not offered as part of any advertisement or solicitation, the party offering the waiver does not routinely waive coinsurance or deductible amounts, and the party waives the coinsurance and deductible amounts after determining in good faith that an individual is in financial need or reasonable collection efforts have failed.

"While every case must be evaluated on its own merits, it is important to note that the OIG has never brought a case based on a hospital’s bona fide discounting of its bill for an uninsured or underinsured patient of limited means," the statement explained.

Coding for payment

At a June 22 hearing of the House Ways and Means Committee’s Subcommittee on Oversight, Southern Medical Health System COO Randy Sucher pointed out that establishing prices for hospital procedures has changed as the practices of insurers and Medicare have evolved.

Before Medicare converted to payment to hospitals based on diagnosis related groups (DRGs) in the 1980s, he said, charges for individual items were calculated as a markup of estimated or actual costs. Individual item costs didn’t matter too much because Medicare and other payers paid their pro-rata percentage of a hospital’s total costs based on a ratio of costs to charges or average cost per day.

But when Medicare adopted DRGs as the basis for payment, it introduced incentives for hospitals to control costs and line-item pricing became even less important because individual item prices have a minimal effect on payments made to hospitals, except in the rare case in which an insurance company or managed care organization pays for certain services based on a negotiated percentage of charges.

To be able to allocate costs for Medicare cost-reporting purposes, identify usage of items involved in providing care to a patient for hospital internal cost-reporting purposes, and provide a detailed bill as often requested by insurance companies, the practice of charging for every individual item consumed by or for patients has continued.

Mr. Sucher said charges now are developed based on detailed analyses of prominent payer fee schedules by procedure code. "If Blue Cross pays $2,400 for an outpatient cardiac catheterization and the standard discount for Blue Cross is 50%, the charge [allocated to major components] may be 200% of the fee schedule amount," he explained. "But the allocation of the intended overall charge to the components of the care is difficult because every case is so different. Health care is not like an assembly line at an auto manufacturing plant. Every patient is different with varying complications, comorbidities, and severity of illness. And all physicians are different in their treatment protocols for each patient, using various supplies, pharmaceuticals, and diagnostic tests. Hospital care is much more akin to great chefs making seafood gumbo, where almost all outcomes are successful, but no two taste or cost the same."

According to Mr. Sucher, one reason hospital charges vary so much from costs is every payer contract includes a provision that for any particular patient, the payer will pay the hospital the lesser of the negotiated rate or the hospital’s customary charges. Negotiated rates generally are a fixed rate that an insurer pays for an average episode of care.

He said hospitals take huge losses on cases when complications occur, or when routine procedures end up requiring expensive additional services. "So hospitals cannot afford to not make money on the low-end cases by having the charges be less than the negotiated rates," he declared. "High charge markups generally help hospitals avoid this Catch 22."

A second reason for high hospital charges, he testified, is the cost-shifting that has occurred for many years in the industry. "To make up for those payers that often pay hospitals below our total cost [Medicare and HMOs included], hospitals must shift some of these costs to payers [generally PPOs] that sometimes pay a percentage of charges. Although these payers usually represent less than 10% of a hospital’s revenue, they can comprise a fair share of hospital profits."

Mr. Sucher maintained that any effort to have hospitals charge all patients the same prices for the same services results in high prices for the uninsured.

At that same hearing, Richard Morrison, the regional vice president for governmental and regulatory affairs for Adventist Health System in Orlando, FL, which owns and operates 38 hospitals in 10 states, explained that hospitals have extensive chargemasters that may list 25,000 or more items, he said, and it’s from that list that hospital bills are created. It also is the basis for information used in the quality assurance process, the utilization review process, cost accounting, and for various reports to state and federal agencies.

He conceded there is little true relationship between health care costs and charges. But, Mr. Morrison said, that situation did not arise arbitrarily and also did not occur overnight. "Rather, the disconnect between costs and charges evolved over the span of nearly 30 years as a result of pressures exerted by the insurance industry, the federal government, and from within the health care industry itself."

Mr. Morrison maintained that charges still have some usefulness even though they vary significantly by institution and have only a passing relationship to cost.

Charges still are required by Medicare and by some insurers. Medicare uses the reported charge to audit cost reports and to calculate outlier payments, and insurance companies use charges to project rates and to calculate some payments. Internally, charges give hospitals some measure of resource consumption.

He said modifying the current charge structure would be a complex task, possible for some institutions that do not have discount-based contracts and don’t have an extensive Medicare population, but more difficult for those with extensive contracts based on discounts.

The final issue for consideration, Mr. Morrison noted, is transparency, and whether there is a better way to provide consumers with a clearer sense of what they will pay for care.

For most outpatient services, it is not a major problem as tests are fairly discrete and outpatient surgery has more predictability. But inpatient care is far less predictable. Within a given institution, Mr. Morrison said, the cost for treating a specific diagnosis can vary greatly. Variances can be attributed to differences in physician practice patterns as well as individuals’ health conditions.