“STICKER SHOCK” AND THE HOSPITAL AGREEMENTS

This case is the only one of the cases on this website that involved a pre-litigation settlement. The resolution of this case occurred when Lori Swanson was Deputy Attorney General in charge of addressing issues involving compliance conduct of Minnesota hospitals.

Political utilitarianism evaluates social and political action based on “the most happiness to the most people.” A corollary to this proposition is the measurement of the quality and quantity of happiness when compared to the imposition of the social burden on others. By this measure, the Hospital Agreement stands out as one of the most successful actions taken of the cases referred to in this website.

It was also one of the most difficult to achieve.

In 2003, the Wall Street Journal (WSJ) published a series of investigative pieces surrounding the collection practices of hospitals that charged the uninsured up to five times the amount charged to insurance companies. One article describes the case of Rebekah Nix, a 25-year-old Brooklynite, who entered New York Methodist Hospital without insurance to be treated for appendicitis. She underwent a one-hour laparoscopic surgery for the removal of her appendix and was discharged 42 hours after admission. She incurred a hospital bill of $14,000, and a $5,000 anesthesiologist bill.

The Wall Street Journal discovered that, in contrast to the bill sent to the Ms. Nix, the hospital typically billed the following for an appendectomy: $2,500 to an HMO, $5,000 to Medicaid and $7,800 to Medicare.

The newspaper also reported on Paul Shipman, a 43-year-old furniture salesman who experienced chest pain in 2003. He was taken to Fairfax Hospital in Fairfax, Virginia, where the physicians installed a stent to unblock a coronary artery. Mr. Shipman was uninsured and worried about the medical bills, so he checked out the next day. His total stay in the hospital was less than 24 hours. Mr. Shipman was billed $29,500 by the hospital, $6,800 by the cardiologist, and $1,000 for the ambulance. The total bill was approximately $40,000.

Had Mr. Shipman been covered by Medicaid, the total bill would have been less than $8,000.

The Journal reported what was well-known within the industry but withheld from the public: hospitals set official charges for their services based on a “chargemaster,” but then discount those charges when negotiating with Medicare, Medicaid, or an HMO. The Journal compared the charges to automobile “list prices” or hotel “rack rates”—posted prices that simply start the negotiations but which nobody pays.

By January of 2005, lawyers representing the uninsured had filed over 70 class actions in 40 different courts naming over 600 hospitals as defendants. The lawyers tried their best to be creative: 1) some argued that hospitals, as 501(c)(3) institutions, receive charitable status from the government such that there was an implied contract that the hospital should not abuse the uninsured, 2) some argued that the hospital engaged in deceit because it failed to disclose that the hospital had a charity program or that patients could negotiate on the fees; 3) some argued that the billing structure violated the Fair Debt Collection Practices Act (FDCPA) because the imposition of excess fees was a form of aggressive, abusive, and humiliating collection practices; 4) some argued that the hospital violated EMTALA, which mandates that hospitals provide emergency lifesaving care, because the hospitals required the patient to sign a personal guarantee during the service being rendered, 5) some argued that the hospital is a public accommodation and that the imposition of excessive fees was a violation of the Equal Protection Clause of the Fifth and Fourteenth Amendment because the hospital engaged in invidious discrimination by charging the uninsured, a class of people, different than the insured, and 6) some argued violations of state consumer fraud laws.

Among other things, the hospitals responded by claiming that Medicare and Medicaid mandated that hospitals must require that patients pay deductibles and that, if they implemented a discount system, they could be charged with violation of the anti-kickback rules under federal law.

As of 2005, the hospitals pretty much ran the board on the uninsured, with the courts consistently ruling in favor of the hospitals. (N1). Faced with an avalanche of adverse federal rulings, by February of 2005, the plaintiffs began to voluntarily dismiss their claims. (N2)

According to the Robert Wood Johnson Foundation, there were 41 million uninsured persons in the United States, and 74 million who were uninsured at least part of the year.

In the 2004 legislative session, Deputy Attorney General Swanson, who was appointed by then Attorney General Mike Hatch, drafted legislation to mandate that hospitals could not charge more to uninsured patients than they did to insurers and HMOs. She made a presentation favorable to the bill in a Senate Committee. To her surprise, the industry lobbyists were feeding Q-cards to a Senator—one who was a darling of the liberals—who they prompted to criticize and sabotage the bill at every opportunity. After one or two hearings the bill died. Senators who were defined as “liberal” because of their positions on social issues were comfortable with undermining a bill that dealt with economic fairness.

***

From 2001 to 2005, Attorney General Hatch conducted a series of audits on non-profit hospitals and non-profit HMOs. The reports were an embarrassment to the institutions, showing lavish trips, excess fringe benefits, sweet heart contracts, and overall sloppiness. As a result of the audits, the Attorney General separated HMOs from hospitals, replaced members of the board of directors of hospitals and HMOs, and even terminated officers. Executives in the healthcare industry viewed the audits with great trepidation.

Each of the audits focused on different aspects of a health institution. Some focused on the ratio of administrative costs to actual health services delivered, some focused on excesses in fringe benefits, and some focused on questionable contracts that were issued.

In 2004, Deputy Attorney General Swanson oversaw the audit of Fairview Health Services. In the initial review of the hospital, she became appalled by the disregard the hospital had for fair billing procedures. Swanson was also aware of the courts’ negative attitude to the lawsuits cited earlier which tried to address the issue of discounts for the uninsured.

She was determined to make billing and collections the primary focus of the audit and directed the staff to pay attention to egregious examples of inappropriate billing procedures. One patient was treated for a heart attack and billed $84,997. Another patient treated for a similar heart attack but had a self-insured administrator that negotiated a 47% discount. Another patient was in the hospital for four days and received a bill for $5,912. The insurance company negotiated a discount of 75%, down to $1,430. For the same person, the hospital charged anesthesia costs of $2,795 but negotiated a discount down to $313

Swanson also found the hospital to be lax in its billings. One woman, a former employee of Fairview for 13 years, had same day surgery to repair a fractured arm. She received a $20,000 bill and, thinking it was high, checked the bill. She found she was billed for a surgical kit for an ankle, a surgical kit for the knee, and two penile protheses. Swanson instructed the staff to procure affidavit testimony from dozens of patients who had similar experiences.

Swanson then reviewed Fairview’s charity care costs and found that Fairview classified charity care as those costs that were written off after getting every penny from a patient. Impoverished patients interviewed during the audit stated that they were not aware of a charity program administered by the hospital.

Swanson recalls the story of Gail Nelson, who lived in Iron, Minnesota. Gail was disabled and had only one arm. She was on food stamps, energy assistance, and county assistance. She drove 60 miles from Iron to Duluth each day to work for minimum wage. The cost of mileage offset the income she made, but she took pride in her work and didn’t want to stay at home. Gail had cervical cancer for which she received radiation treatment from Fairview. Gail’s MinnesotaCare policy only covered $10,000 in hospital bills. As a result, in 2003 Gail incurred a bill of $75,000 from Fairview for the radiation treatment. Fairview’s debt collector lied to Gail and told her she couldn’t file for bankruptcy. Lori called Gail, whose story became an important part of the audit.

Swanson also received an affidavit from another patient who also was on MinnesotaCare. She had an angiogram at Fairview in 2003, and her artery collapsed. She was admitted to the hospital and was given contaminated blood, the result of which she had a longer stay. After she was released, Fairview sent her a bill for $150,000. It then garnished $159 of the $189 in her bank account. When she called Fairview’s collection attorney, Richard Sierestad, his office mocked her.

Swanson compiled case after case to document that Fairview had incompetent billing practices, incompetent collection practices, no charity system, and abusive collection agents and lawyers. She continued to gather the affidavits until the evidence was insurmountable concerning the abusive tactics used at the hospital.

The audit closed in early 2005, right when all the above lawsuits filed in court were being voluntarily dismissed by the plaintiffs’ counsel.

Swanson and Hatch were determined that, despite all the court dismissals, they would get Fairview to agree to provide the same discounts to the uninsured that it provided to the insureds. It was called a “Most Favored Nation” provision and required the uninsured to get the same price as the largest insurer or HMO doing business with Fairview.

The negotiations took weeks. Swanson homed in on an argument, apparently not tested in the courts, that the hospital representatives were careful to explain each surgical procedure and require signed authorizations. In this vein, the hospital acknowledged it had a fiduciary relationship with the patient. Swanson also had testimony from patients who inquired, during this authorization process, as to the likely amount of the bill. In each case the patient stated that they were never provided the information, rather the hospital personnel would deftly avoid answering the question. Swanson pointed out detail after detail in every affidavit where she could argue that the hospital had breached its fiduciary obligation. The hospital raised the same defenses as made in the cases cited earlier, but Swanson was quick to point out two important distinctions:

1. The plaintiffs in the federal cases didn’t have confirmation from hundreds of patients who were defrauded, and
2. The plaintiffs never argued the breadth of the fiduciary relationship.

Otto Von Bismarck once said that laws and sausage are two things you do not want to see being made. One should perhaps add certain “regulatory negotiations” to that equation. In the end, after weeks of haggling, the agreement got done.

But it didn’t stop there. Swanson then worked with David Feinwachs at the Minnesota Hospital Association. By the end of April, there was a deal reached with every hospital in Minnesota not to charge a phony price to the uninsured. Minnesota became the only state in America where the uninsured did not have to pay more for services than the Most Favored Nation. The statewide agreement was announced in May of 2005. It has been renewed every two years since that time.

Swanson’s work on this issue demonstrated unswerving tenacity in sticking to the mission. She was blocked by legislators. She was fiercely opposed by lawyers. But she created a situation where it was more attractive for the hospital to settle than it was to have a messy lawsuit.

It is believed that Minnesota is still the only state to have such an agreement.

Footnotes (N)

N1 In re Not-For-Profit Hospitals/Uninsured Patients Litigation, 341 F. Supp.2d 135 (J.P.M.L. 2004); In re Not-For-Profit Hospitals/Uninsured Patients Litigation, 341 F.Supp. 1354 (2004); Peterson v. Fairview Health Sys, No. 04-2973 (D. Minn. 2005); Gardner v. N. Miss. Health Servs.,2005 WL 1312753 (N.D. Miss, May 31, 2005); Lorens v. Catholic health Care Partners, 356 F.Supp. 2d at 832(N.D. Ohio 2005) ; Valencia, 363 F. Supp. 2d at 873; Jellison v. Florida Hospital Healthcare System, Inc., 2005 U.S. Dist. LEXIS 8036 Quinn v. BJC Health Sys, 364 F. Supp. 2d at 105; Amato v. University Pittsburgh Medical Center, 371 F. Supp. 2d at 752 (W.D. Pa. 2005); Burton v. William Beaumont Hospital, 347 F.Supp.2d. 486 (E.D. MI 2004); Kizzire v. Baptist Health Sys, Inc., 343 F.Supp2d 1074(S.D. Ala 2004); Ferguson v. Centura Health Corp., 358 F.Supp.2d. 1014 (D.Co. 2004); Kolari v. N.Y. Presbyterian Hosp., 382 F. Supp. 2d 562 (S.D.N.Y. 2005)

N2 See Dodging a Bullet, Scruggs Has Four Hospital Class-Action Suits Dismissed, 34 Modern Health Care, 14 (2004); A judge ruling in favor of the Yale-Newhaven Hospital stated that 17 class actions had been voluntarily dismissed.

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