Health Law Group
(215) 587-1001
ddatte@postschell.com
|
|
Deborah A. Datte, Esquire Health Law Group (215) 587-1001 ddatte@postschell.com |
|
THE CHARITY CARE CLASS ACTION LITIGATION:
WHAT IT MIGHT MEAN TO YOUR INSTITUTION
THE CHARITY CARE CLASS ACTION LITIGATION:
WHAT IT MIGHT MEAN TO YOUR INSTITUTION
Executive Summary
As of this writing, forty (40) charity care class action complaints have been filed against hospitals across the country asserting a number of common federal and state claims. While the state claims vary by jurisdiction, the factual allegations in support of both federal and state claims are almost identical. The Plaintiff's generally assert that the defendant hospitals and health systems:
While it is unlikely that these cases will be disposed of quickly, the legal theories on which they are based are inherently flawed. The public relations fallout resulting from being named in such a suit, and costs associated with mounting a defense, however, demand that hospitals closely examine their own practices to determine whether improvement is possible. This paper describes the allegations being made in the class action complaints, the industry and regulatory climate that most probably spawned the litigation, and the large-scale implications of the litigation. Being mindful that your organization could be drawn into litigation involving similar allegations, we have developed an assessment process that can be undertaken under the cloak of attorney-client privilege that we would be happy to discuss with you at your convenience.
THE CHARITY CARE CLASS ACTION LITIGATION:
WHAT IT MIGHT MEAN TO YOUR INSTITUTION There is a certain irony to the class action litigation that is plaguing not-for-profit hospitals and health systems nationally. Richard Scruggs, founder of The Scruggs Law Firm out of Mississippi, masterminded the beginnings of the tobacco litigation that, in 1998, resulted in one of the largest class action settlements in American history.1 The settlement resulted in enormous payments to the treasuries of the states and territories that were parties to the Master Settlement Agreement. While not required by that Agreement, many states utilized a portion of the settlement monies to fund uncompensated care provided by hospitals and other health care providers in their jurisdictions. The Scruggs Law Firm is now the architect of lawsuits nationwide that allege that hospitals and health systems are failing to provide adequate levels of uncompensated care and targeting improper collection efforts at the uninsured. The first suits were filed in mid-June against 13 hospitals/systems in 7 states by Scruggs or a law firm that is working with The Scrugg Law Firm. Providers in 20 states are now being forced to defend themselves against similar allegations, and it is likely that providers in all 50 states will eventually be targeted. As of the writing of this article, none of the classes has been certified. A. What Are The Allegations? In each law suit, as few as one individual who received services at the defendant hospital or health system is named as a plaintiff. The named plaintiff or plaintiffs represent an unnamed "class" of plaintiffs composed of the uninsured. While the allegations against each of the plaintiff hospitals and health systems differ slightly based upon the idiosyncrasies of the laws of the states where they operate, for the most part, those allegations fall into the following categories:
The massive litigation effort is nothing if not well organized. The Skruggs Law Firm and the firms with which it is working maintain a website that, among other things, actively recruits plaintiffs to act as the named plaintiff in future class actions using an on-line questionnaire. Press releases are systematically issued with each new round of complaints, ensuring that the litigation is placed before an ever-growing pool of potential representative plaintiffs. The website also contains a powerpoint presentation entitled "Litigation Against Profiteering Nonprofit Hospitals" and copies of press releases and the many complaints filed across the country. B. How Did We Get Here? Neither Section 501(c)(3) of the Internal Revenue Code nor the regulations interpreting it requires a tax exempt hospital to provide charity care in order to obtain or maintain tax exempt status. Rather, the concept of free or discounted care for those unable to pay for that care first surfaced in a 1956 revenue ruling that required that an unspecified level of charity care (that is, free or discounted care) be provided by hospitals as a condition to a grant and continuation of tax exemption. Rev. Rul. 56-185, 1956-1 C.B. 202. By 1969, the Service reversed it prior position on the basis that it was subjective and difficult to administer. Revenue Ruling 69-545 replaced the Service's "financial ability standard" with a community benefit standard, the standard that continues to apply today. Rev. Rul. 69-545, 1969-2 CB 117. The community benefit standard requires that a tax exempt hospital operate a full-time emergency room open to all persons, without regard to ability to pay. The standard also requires hospitals to have a board of directors drawn from the community, maintain an open medical staff, and apply any surplus to improving facilities, equipment, patient care, and medical training, education, and research. The ruling explicitly recognized as exempt a hospital that (a) limited the class of individuals it would serve in non-emergency situations to persons able to pay the cost of that care, either by themselves, or through third-party reimbursement and (b) referred non-emergency patients who could not meet its financial requirements for admission to other institutions that treated indigents. Id. Revenue Ruling 69-545 became the target of an unsuccessful class action challenge shortly after it was published. On appeal, the District of Columbia Circuit upheld the more relaxed obligations for tax exemption described in the 1969 ruling and found that the community benefit standard did not eliminate the financial ability standard, but rather, provided an alternative to that standard.2 Eastern Kentucky Welfare Rights Organization v. Simon, 506 F.2d 1278 (D.C. Cir. 1974). By the mid-1980s, charity care became an issue in connection with the grant of state tax exemptions, most notably in Utah, Pennsylvania, and Vermont. State legislation and common law in many jurisdictions requires the provision of specific levels of charity care by organizations that wish to benefit from exemption from state and local taxes. For example, Pennsylvania's Institutions of Purely Public Charity Act requires that one of several alternative financial assistance tests be satisfied in order to obtain exemption from property, sales and use taxes. By 1991, federal legislation was proposed that would have required exempt hospitals to annually provide charity care equivalent to 50% of the value of their tax exemption. Another bill would have required the provision of charity care equivalent to 5% of an exempt hospital's gross revenues as one of several alternative tests that would have to be satisfied to qualify for exemption. At hearings associated with these bills, representatives of the IRS testified that the community benefit standard espoused in Revenue Ruling 69-545 was a more appropriate measure of charitable status than the financial requirements being proposed. Neither bill was passed. Notwithstanding Revenue Ruling 69-545, courts have examined a hospital's charity care activities as one (but not necessarily the dispositive) indicia of charitable status. See, e.g., Sound Health Association v. Commission, 71 T.C. 158 (1978); Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974). Where charity care is an issue, courts have found that simply establishing a charity care program, without more, is insufficient. The organization must actually provide charity care. Id. Using these court cases as a base, a non-binding IRS Field Service Advice was issued to Exempt Organizations Branch auditors in February of 2001 that concluded that the mere presence of charity care policies was insufficient to satisfy the charity care requirement of the community benefit standard unless the hospital can demonstrate in practice that such policies actually "…result in the delivery of significant health care services to the indigent." IRS Field Service Advice 200110030 (February 5, 2001). Again, this Advice is not binding on either the Service or exempt organizations. It does, however, provide valuable insight into how the IRS may interpret its regulations. In late 2002, a consumer advocacy group brought suit in California against the for-profit, Tenet Healthcare Corporation, claiming that the system inappropriately billed Latino patients full charges while offering discounts to private and government insurance. The case settled for an undisclosed amount, and Tenet agreed to implement a discount policy pending regulatory approval. The Tenet case resulted in a groundswell of press associated with the collection practices of hospitals against the uninsured. In early 2003, the Connecticut Attorney General filed suit against Yale-New Haven Hospital claiming that the Hospital misused "free bed" funds donated by the public. The suit sought a court order requiring the Hospital to provide real and meaningful access to free bed funds for individuals who are unable to pay for their care, notice of the availability of the funds, elimination of barriers to apply for the funds, and elimination of debt collection efforts against those who qualify for free care. In response to the law suit, Yale-New Haven revised its charity care policy to provide for discounts to the uninsured who earn between 250 and 350 percent of the federal poverty level. Many states directly and indirectly regulate the provision of uncompensated care. For example, Illinois's Community Benefits Act requires detailed reporting to the attorney general of uncompensated care and other community benefits. In Pennsylvania, virtually all nonprofit hospitals that are eligible to do so participate in the Hospital Uncompensated Care program under the Tobacco Settlement Act of 2001. These laws, in turn, shape the policies and practices of tax exempt hospitals. Under Pennsylvania's law, "uncompensated care" and related terminology is clearly defined and basic hospital practices are mandated such as assisting eligible individuals to enroll in Medicaid. Importantly, the Pennsylvania's law requires hospitals to actively pursue the collection of claims for all possible sources of payment. Pennsylvania's highly structured program, differentiating between those patients who are unable to pay and those unwilling to pay, requires of its participating hospitals clear institutional policies and practices that directly impacts the relationship of Pennsylvania residents receiving uncompensated care to their charitable hospitals. The treatment of these patients may therefore differ from that of indigent patients in other states. In response to public allegations that hospitals were inappropriately billing the uninsured and, in very rare cases, using collection practices that resulted in patients' loss of homes or filing for protection under applicable bankruptcy laws, the American Hospital Association (AHA) sent a letter to Tommy Thompson in late 2003 requesting relief from the regulatory climate that required hospitals to attempt to recover their charges from the uninsured. The letter stated, in part, that Hospitals believe that patients of limited means should not have to pay full charges simply because they have no coverage. But federal Medicare regulations as written today contain a string of barriers that discourage hospitals from reducing charges or forgiving debt for these patients without potentially running afoul of the law. And our members tell us that past experience with federal regulatory enforcement makes them extremely reluctant to risk it.Plaintiffs' counsel seized on this letter, as well as several member publications issued by the AHA, in crafting the conspiracy counts in the class action lawsuits that include AHA as a named defendant. The plaintiffs argue that AHA advised its members that they are legally required to bill the uninsured full charges and engage in aggressive collection activities, and therefore conspired with its member hospitals to act in the manner alleged in the complaints. Tommy Thompson responded to the AHA's letter in February of this year. In his response, Mr. Thompson stated that the suggestion that federal regulations require hospitals to bill all patients using the same charge schedule and to force the uninsured to pay full charges is not correct and "…certainly does not accurately reflect my policy". He attached policy guidance that he had requested from CMS and the OIG in response to the AHA's letter. The guidance addressed the impact of the Federal Anti-Kickback Statute and the OIG's permissive exclusion authority on the offering of discounts to the uninsured and underinsured. That guidance generally provides that:
The Guidance goes on to stress that until final regulations are promulgated, the OIG will maintain an enforcement policy consistent with the proposed regulations. The Guidance also addressed the safe harbor applicable to waiver of Medicare financial responsibility amounts in the case of beneficiaries who are unable to pay.4 What is not addressed by the OIG's guidance is the application of the usual and customary charges rule by payors other than Federal health care programs. Many private payors have adopted rules similar if not identical to the Medicare program's rules. Absent a modification of those rules or the provider agreement, in situations where a hospital is being paid for any services based upon a percentage of charges, a private payor could argue that the charges on which its payments are based should be reduced to reflect the discounts off of charges enjoyed under the hospital's charity care policy. The Guidance skirted a discussion of Medicare's bad debt rules by stating that the OIG has not issued any regulations requiring hospitals to engage in any type of collection practices, as enforcement of the bad debt rules fall within the purview of CMS.5 Arguably, however, Medicare's bad debt rules would require a hospital to initiate the level of collection efforts against the uninsured as are required to be applied against Medicare beneficiaries under the bad debt rules. See Testimony of Herb Kuhn discussed below. Earlier this year, subcommitees of both the House Ways and Means and Energy and Commerce Committees commenced hearings regarding whether more specific charity care and other requirements should be imposed upon exempt organizations to justify the federal subsidies that their tax exemptions represent. Among the issues being addressed at those hearings is the legal climate that has resulted in the hospital industry's practice of billing the uninsured based upon full charges. Most notable among the individuals testifying before these subcommittees, for purposes of this discussion, were David Bernd, Chairman of the AHA, Lewis Morris, Chief Counsel to the Inspector General, and Herb Kuhn, Director, Center for Medicare Management, CMS. In his testimony, Mr. Bernd described the AHA's Principles and Guidelines associated with hospital billing and collection practices. He addressed some of the issues raised in the complaints associated with disproportionate share and indirect medical education payments, noting that these additional payments under the Medicare program are enjoyed by only a portion of America's hospitals and neither of these payments takes into account uncompensated care provided by those hospitals. He then spoke to the current requirements for hospital tax exemption, supporting the standards espoused in Revenue Ruling 69-545. Mr. Morris' testimony reiterated the positions taken by the OIG in the guidance described above regarding application of the Federal Anti-Kickback Statute and the OIG's permissive exclusion authority. Mr. Kuhn testified that the methods by which a provider determines indigency with respect to non-Medicare patients should be similar to indigency determinations for Medicare beneficiaries. He also stated that in the case of bad debt, the collection efforts aimed at Medicare beneficiaries as a condition to including uncollected amounts on a provider's cost report should be on a parity with the collection efforts utilized in the case of non-Medicare patients, and those efforts should be more than a token effort. He went on to testify that nothing in the regulations requires "aggressive" collection activities. If hospitals wish to offer discounts off of customary charges in connection with a charity care policy, they may do so so long as the full charge for the service is reported on applicable Medicare cost reports. Finally, while conceding that the calculation of the Medicare and Medicaid DSH payments does not include consideration of uncompensated care, Mr. Kuhn stated that these payments to select hospitals amounted to CMS doing its share "…to reimburse hospitals for the treatment of uninsured individuals". Other legal issues unrelated to charity care requirements are implicated by the law suits. In 1986, the Emergency Medical Treatment and Active Labor Act was signed into law. 42 U.S.C. §1395dd. A few years later, EMTALA was amended to add a provision that precluded Medicare-participating hospitals from delaying a medical screening examination or stabilizing treatment to inquire about a patient's method of payment or insurance status. 42 U.S.C. §1395dd(h). EMTALA applies to all Medicare certified hospitals that operate emergency departments, whether for-profit or nonprofit.6 Unlike the tax laws described above, EMTALA contains an explicit, albeit somewhat limited, private right of action. III. Where is the Information Coming From and Who is a Target? The complaints routinely refer to three primary information sources in compiling the factual allegations against hospitals: (1) the hospital's and system's Form 990; (2) organizational websites; and, (3) annual reports. Up to the three most recent Forms 990, or information returns, filed with the IRS by an organization that is exempt pursuant to Section 501(c)(3) of the Code (sans Schedule B) must be provided to anyone who requests it within periods prescribed by IRS regulations. In addition, an organization known as GuideStar maintains a web accessible data base on public charities that includes, in most cases, copies of the organization's Forms 990. The Form 990 provides a wealth of operational and financial information concerning the filing entity. Content from the defendant hospitals' websites claiming charity care and community benefit have been quoted verbatim in many of the complaints. Similarly, many complaints contain references to the defendant organization's annual report which is often included on organizational websites. The complaints appear to target multi-hospital health systems, often the largest in the jurisdiction, with sizable (above $300 million, with many defendant systems reporting in excess of $1 billion) asset bases and multi-million dollar surpluses. In the cases where the complaints do not specifically reference surpluses, total revenue is sited. In some cases, amounts claimed s "charity care" are referenced, together with allegations that these amounts are grossly inflated because they are based on a hospital's charges rather than the cost of care. IV. What Are the Implications for Your Hospital? The impact of this litigation on the hospital industry is far-reaching, not only for those hospitals that are targeted for lawsuits but also for those that are not. Although the core legal theory - that the tax exemption laws create a contract which triggers rights in uninsured patients as third party beneficiaries -- appears highly improbable, the plaintiffs' attorneys are clearly banking on the strength of the public policy debate generated by their allegations and the enormity of the damage potential to carry them through the initial litigation hurdles and place them in a position to ultimately force major financial settlements with hospitals across the nation. They are also, undoubtedly, seeking to file so many cases in federal court that they are able to bring all the cases together through the establishment of multi-district litigation, as was done in the tobacco litigation and, more recently, the class action managed care litigation. However, the hurdles that the plaintiffs will have to overcome in the initial stages are daunting, and those hospitals that become involved in the litigation will want to mount an aggressive attack in the very earliest stages to defeat the plaintiffs' strategy. The plaintiffs are counting on three key elements to obtain leverage to bring the cases together and ultimately force settlements, i.e., federal jurisdiction, standing and class certification. The claim of federal jurisdiction rests primarily on the "federal contract" theory7, a theory which flies in the face of at least a century of legal jurisprudence, and which would have disastrous implications for the enforcement of the tax laws in this country. (If the tax laws are interpreted as creating fixed contractual rights and obligations, as well as third party beneficiary rights, the laws will become rigid, making it practically impossible for the government to continue to either enact new laws or enforce the existing ones). Defeating federal claims at an early stage could result in a dismissal of many hospitals' cases from federal court, potentially forcing the plaintiffs to proceed against that hospital on individual state law theories through the state court system and eliminating the possibility of a hospital's being drawn into multi-district litigation. Pursuing these cases in state court will be significantly less attractive to plaintiffs' counsel. Standing is also a key hurdle that plaintiffs must overcome. Even assuming, for purposes of argument, that a court were to accept the theory that the tax laws create a contract between the government and the tax-exempt entity, the law generally does not confer standing on non-parties to attempt to enforce contract rights between two parties, even where those parties claim that they are the intended beneficiaries of the contract terms. The legal basis for counsels' position that the private individuals who have brought these cases have standing, as "third party beneficiaries" of the so-called federal contracts, to sue the hospitals for "breach" of those alleged contracts is tenuous at best. The final lynchpin of plaintiff's strategy to leverage huge settlements is class certification. Plaintiffs' counsel would not have brought these cases if they were forced to assert them separately on behalf of a series of individuals who did not pay their hospital bills. For the plaintiffs, the power is in the numbers. The key to defeating the class action allegations will be to strip away the rhetoric and untenable legal theories (such as the "federal contract" claim) and expose the core grievance - that specific patients who did not pay their hospital bills should have been better informed of the existence of charity care funds and not subjected to collection actions -- as requiring individualized proof and analysis - not well suited to class action treatment. If the classes are not certified, plaintiffs counsel will be forced to pursue recoveries against the defendant hospitals on a case by case basis - a far less lucrative proposition for plaintiffs' counsel. In addition, depending on individual state law, tax-exempt hospitals may have the benefit of various charitable immunity doctrines, buttressed by a persuasive public policy argument that allowing this opportunistic class action litigation to go forward against them could be financially devastating in defense costs alone, thereby undermining their charitable mission. Each hospital named in a class action suit will be required to examine its own particular situation very carefully to determine whether defenses that may not be generally applicable to other defendants are available to them. The myriad of complaints that have been filed contain largely "cookie cutter" allegations, and the plaintiffs' have made significant, and most likely unfounded, assumptions and inferences about their hospital defendants. However, it would be foolhardy to assume these cases will go away quickly or quietly. The inflammatory nature of the allegations, and in particular the notion of tax-exempt entities "profiteering" at the expense of the needy individuals they are intended to serve, makes them appealing to the press, the public and politicians. Notwithstanding the flawed legal theories, hospitals who are sued face significant financial and public relations burdens arising from those claims. In addition, one cannot overlook the possibility that the state attorneys general may choose to intervene in the pending litigation and/or, utilizing the Scruggs blueprint, bring independent actions akin to the tobacco litigation in the names of their states against hospitals granted state-law exemptions. If nothing else, the pendency of 40+ suits nationally will maintain the issue of treatment of the uninsured in the public eye, making state and federal action, or at least debate, more likely, particularly in an election year. V. Recommendations We recommend that our hospital and health system clients nationally examine their public filings, charity care/financial assistance policies and processes, debt collection policies and practices, and EMTALA compliance policies and practices to assess their potential exposure and to make changes designed to address some of the more salient issues arising out of the class action litigation. While a hospital obviously cannot change the past, it can gather documentation in support of its previously established practices and filed reports. Hospitals should consider reviewing current practices to determine, in light of public sentiment, recent regulatory interpretations, propaganda being issued in connection with the class action litigation, and Congressional review, whether modifications of those practices is appropriate. We have developed a detailed assessment process that is designed to assist hospitals in preparing for a class action attack, provide responses to public and press inquiries, and address some of the policy modifications that are dictated by recent events. We would be more than happy to discuss that process with you, as well any assistance we can provide.
Footnotes
1. Scruggs' prior firm reportedly received $874 million from the tobacco litigation settlements to cover its legal fees and the fees of the firms it worked with.
2. The U.S. Supreme Court ruled that the plaintiffs in the action did not suffer an injury and lacked standing to bring suit, thereby setting the groundwork for the long-standing nature of the ruling. The Supreme Court's ruling in the Eastern Kentucky case will likely become central to the defenses mounted by the hospitals and health systems named in the class action lawsuits. 3. It should be noted that this exclusion authority becomes less and less of an issue as the programs move almost entirely away from cost or charge based reimbursement toward across the board prospective payment systems. 4. The applicable safe harbor applies to hospital inpatient services that are reimbursable under PPS. One of the requirements for taking advantage of the safe harbor is that the hospital not report the foregone amount as bad debt pursuant to Medicare or Medicaid bad debt rules as described below. 5. Medicare requires that in order for bad debt (limited to uncollectible co-pays and deductibles from Medicare beneficiaries for covered services) to be included on a hospital's cost report, the hospital must utilize reasonable collection efforts comparable to the effort applied to non-Medicare patients. 42 C.F.R. §413.80; Medicare Provider Reimbursement Manual, Transmittal 5 (Sept. 12, 2003). Medicare guidance goes so far as to require that the provider issue bills, collection letters and telephone calls or personal contacts to demonstrate genuine efforts, and if non-Medicare accounts are referred to collection agencies, Medicare accounts must be similarly referred. Transmittal 5 @ 11-11. 6. It would be understandable if Congress re-evaluated the prong of the IRS's community benefit standard that relies on the provision of emergency medical services without regard to a patient's ability to pay as being sufficient to establish charitability in light of the application of EMTALA's almost identical requirements to both for-profit and tax exempt hospitals. 7. In those cases where an EMTALA count is included, the class action treatment becomes even more convoluted. EMTALA provides for a private right of action. It is unclear, however, whether the factual allegations associated with the plaintiffs who represent the class would support the EMTALA claims. For example, EMTALA's private right of action requires actual injury to the plaintiff resulting from the violation, and recoveries are based in state personal injury law. The complaints generally do not allege actual injury to the named plaintiffs resulting from a purported delay in treatment. A second basis for federal jurisdiction lies in the counts, contained in a few of the complaints, that the defendant hospital or system breached the federal fair debt collection statute. Again, it is unclear whether the factual allegations will be sufficient to support these counts. |