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 
June 17 , 2004 

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.