Doctored Books: provide a glimpse into the underbelly of the non-profit hospital industry,

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Volume 2, Issue 25 | June 21, 2004

F R O M T H E E D I T O R

 

 

Richard Scruggs was a well-known litigator long before he took on Big Tobacco in

1994. But the millionaire Mississippi lawyer whose class-action suits pushed the

cigarette makers into a $286 billion settlement has a new target -- one he says

could be even bigger.

 

Scruggs has filed a barrage of suits against some of the nation's biggest

non-profit hospital chains, alleging they have failed to meet the charitable

obligations imposed by their non-profit status. As Julia Reynolds and David

Montero report, the suits " provide a glimpse into the underbelly of the

non-profit hospital industry, " and accuse the hospital chains of " systematically

defrauding the American public. "

 

 

Read: Doctored Books

 

http://www.motherjones.com/news/update/2004/06/06_300.html

Doctored Books

Richard Scruggs sued Big Tobacco and won. Now, he's taking on some of the

nation's biggest non-profit hospital chains on behalf of the uninsured.

Julia Reynolds and David Montero

May/June 2004 Issue

Richard Scruggs, the Mississippi litigator who took on and beat big tobacco, has

declared war again. This time around he's targeted the non-profit hospital

industry, unleashing a barrage of lawsuits challenging their business and

accounting practices.

 

A team of consultants working under Scruggs' direction has built a mountain of

evidence against 13 of the nation's largest non-profit hospital chains,

including Advocate Health Care Network, Catholic Healthcare Partners (CHP),

Baptist Health South Florida and Provena Health. The claims are revealed in 13

class action complaints filed Wednesday in various federal courts across the

nation and obtained by Mother Jones. The suits provide a glimpse into the

underbelly of the non-profit hospital industry, accusing Advocate and others of

systematically defrauding the American public.

 

The suits seek undisclosed damages, including " revenues in an amount sufficient

to provide the Plaintiffs and the class mutually affordable medical care. "

Scruggs, whose $286 billion settlement against cigarette makers made history and

netted him a fortune, says the new fight will likely be even bigger. Given the

number of plaintiffs, the extent of their holdings, and the ambitious nature of

the damages being sought, Scrugg could be right. And, as in 1994 when he joined

with Mississippi Attorney General Michael Moore in suing the cigarette makers,

Scruggs is hoping to convince several states to join the fight. Because the

class action alleges abuse of public funds and resources, Scruggs is hopeful

that a number of attorneys general " will take notice of this and take action. "

 

Scruggs says the legal argument behind the suits is a fairly simple one. " A

non-profit hospital, in order to obtain freedom from taxation, has to prove that

they provide charity care. " The beneficiary of that care, he says, should be the

poor and uninsured. But the suits' plaintiffs contend that non-profit hospitals

have systematically reneged on their obligation, ignoring charity care in order

to make – and keep – more money.

 

" These are hospitals that are flush with cash… they're just hoarding money, "

Scruggs says. He contends that the liquid assets of the nation's non-profit

hospital chains could actually exceed the liquid assets of all 50 states.

 

What's more, Scruggs argues, the organizations named in his suit have not only

failed to act like the charities they claim to be, they've actually been

overcharging uninsured patients by as much as 200 percent or more. And, he

asserts, they are making a killing along the way.

 

The alleged gouging of the uninsured, the class represented in the complaints,

has turned non-profit hospitals into some of the nation's richest corporations,

with cash reserves and assets collectively totaling billions and possibly

trillions of dollars, Scruggs asserts. And with non-profit hospital executives

earning sky-high salaries, Scruggs says it's an abuse of public trust and public

funds.

 

In addition to the named defendants, the American Hospital Association (AHA) was

named as a conspirator in the complaints. Calls to the AHA seeking comment on

the suit were not returned by press time.

 

Just How Non-Profit?

 

Health care wasn't always the cutthroat business it is today. A century ago,

hospitals were mostly run by religious groups, and nearly all care was provided

on a charity basis. But after the Great Depression, many smaller hospitals were

lagging in facilities and technology, so in 1946 the government passed the

Hill-Burton Act to provide federal funds to hospitals that agreed to provide

free charity care to surrounding communities. In 1972, a 20-year limit was

placed on the free care requirement, and by the early 1990s, huge for-profit

hospital chains -- no longer hampered by charity care obligations -- began to

gobble up community non-profit hospitals and convert them into for-profits

facilities. As health systems consolidated into larger corporations, the

remaining non-profits began to follow suit, acting in many ways just like their

for-profit competitors. They amassed huge reserves of marketable securities and

acquired for-profit subsidiaries such as medical equipment and

insurance companies, even collection agencies. Today, it is not uncommon for

non-profit hospital companies to have reserves of $100 million or more in cash

and securities.

 

In the process, charity care began to slide off the radar. And today,

cash-strapped communities are beginning to question the substantial tax breaks

given to these non-profits. Some have even started to question the hospitals'

claims of providing " community benefits " – an assertion which in the past has

been subjected to very little oversight. In May, for example, members of a grand

jury in Santa Cruz County, California, were outraged to find that a local

hospital owned by Sutter Health claimed that offering day-spa treatments was one

of its community benefits. A county Health Services Agency representative said

she is preparing a letter of rebuttal.

 

The suits filed by Scruggs and his colleagues focus on the non-profit hospitals'

aggressive and misleading collection practices with regard to uninsured

patients. A plaintiff who was treated at Phoebe Putney Memorial Hospital in

Albany, Georgia says she was harassed by a collections agency for months until

her wages were eventually garnished to pay the bill, even though her income was

well below poverty level. It was not until three weeks ago, she alleges, that

the hospital finally offered her financial assistance. Hers is a typical

scenario, according to the former CFO of a non-profit hospital, who chooses to

remain unnamed. " When a patient walks in, there's no effort to distinguish who

can and can't pay, " he says, because discussing finances at such a moment could

be stressful and confusing. " So they sign a guarantee of payment, without even

knowing how much they will be charged. Then the bill is sent. If they don't pay,

the collection effort begins with letters and phone calls.

Then an outside agency is brought in, and they try to get a monthly payment.

The collection agency will even more agressively attempt to contact the patient,

with threatening letters and more calls. If that fails, they file suit and get a

judgment. " The problem with this, he says, is that hospitals don't attempt to

determine early in the process who can and can't pay, so that patients can be

offered charity care and spared the trauma of aggressive collections practices.

" Only after the fact, " says the CFO, " do [hospitals] decide to determine they're

charity. "

 

Hospital officials see nothing wrong with that. In fact, the top industry group,

the Healthcare Financial Management Association (HFMA), advocates using the

collections process to determine who should get charity care. In a recent

" Principles and Practices Board Statement, " the HFMA suggested that " A

provider's collection efforts, including use of outside collection agencies, are

part of the information collection process and can appropriately result in

identification of eligibility for charity service. "

 

To counter criticism, HFMA recently launched a nationwide initiative called The

Patient Friendly Billing Project, aimed at clarifying hospital billing policies

up front with brochures and other tools that " make financial communications to

patients clear, concise, and correct. " An HFMA spokesperson did not respond to

requests for comment.

 

Although a few uninsured patients may find relief in the form of charity care or

payment plans at the end of the collection process, Scruggs says that most will

end up paying even if they can't afford it -- through garnished wages, second

mortgages or liens. Many others, he says, are being forced into bankruptcy.

Harvard law professor Elizabeth Warren, who is the author of several books and

congressional reports on bankruptcy, says that more than 800,000 Americans will

file for bankruptcy this year because of medical debts, mostly from hospital

bills.

 

Uninsured and Overcharged

 

Scruggs' complaint also claims that many of the 13 non-profit defendants

routinely charge uninsured patients more -- sometimes two to three times more –

than insured patients for the same services.

 

Ed Jellison, who is not a plaintiff in the complaint, is a typical example of

overbilling. In 2002, he was treated for a spinal infection at Florida Hospital

in Orlando. The hospital, which is owned by non-profit Adventist Health System,

sent him a bill for $116,634. A spokesperson for the Centers for Medicare and

Medicaid Services said the federal program would have paid only $16,158 for the

same procedure. Today, Jellison and his wife are still negotiating Florida

Hospital after taking out a second mortgage. (As of press time, Adventists

Health System was not a defendant in the Scruggs suit). Scenarios such as the

Jellisons' have spurred the House Energy and Commerce Committee to investigate.

On June 24, five CEOs from the nation's top hospital chains are scheduled to

answer questions under oath about their billing practices. Many of the named

hospitals claim they have already taken steps to overhaul their billing and

collection practices.

 

The bottom line, Scruggs argues, is that non-profit hospitals are making big

money while failing to live up to their community obligations. He estimates

that, even in the darkest days of the recent economic downturn, non-profit

hospitals have been hoarding reserves valued in the trillions. Many in the

non-profit world argue that keeping large reserves and earning interest on them

is simply good business, a prudent hedge against hard times. But Scruggs charges

that building huge reserves betrays the trust of the public.

 

" They are allowing the money changers into the temple, " Scruggs says.

 

Among the counts listed in the class actions are breach of contract, breach of

duty of good faith and fair dealing, consumer fraud and deception, breach of

charitible trust and unjust enrichment. They also call for protective orders

requiring defendants to stop overcharging the uninsured, and to cease aggressive

collection efforts without first informing patients of possible payment options.

More defendants are expected to be named today and throughout the week. And

Scruggs has hinted that the complaints could grow, too, with new counts being

added. " We may find things under stones that we don't expect to, " he says.

 

While the amounts of damages remains unspecified, if the tobacco litigation is

an indicator, Scruggs stands to profit very handsomely if he wins. And the suits

call for the creation of a trust to be funded by defendants for the benefit of

uninsured patients. Still, Scruggs insists he is not trying to " break " the

targeted companies. " Our goal is to get them to change their business practices,

not to bankrupt them. "

 

Julia Reynolds and David Montero are freelance investigative journalists

currently reporting for the Public Radio program Marketplace.

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This article has been made possible by the Foundation for National Progress, the

Investigative Fund of Mother Jones, and gifts from generous readers like you.

© 2004 The Foundation for National Progress

 

 

Will Tacy,

Editor, MotherJones.com