United States: Not-For-Profit Hospital Class Action Lawsuits Filed

I. Introduction

Beginning in mid-June 2004, the Scruggs Law Firm, a well-known plaintiff’s class action firm that made its name in tobacco litigation, and a consortium of additional local law firms, filed class action lawsuits in federal district courts against some of the largest not-for-profit hospitals and hospital systems in the United States. The plaintiffs are uninsured patients who as consumers allege that these hospitals and systems have harmed them by violating implied and/or express promises, consumer protection laws, federal tax law, the federal Emergency Medical Treatment and Labor Act ("EMTALA"), and state laws governing contracts and charitable trusts, among other violations. Currently, lawsuits have been filed in 17 states1 against approximately 30 health systems and hospitals. The plaintiffs’ law firms have indicated that additional proposed class actions likely will be filed, and the firms have established an on line "litigation site" (http://www.nfplitigation.com), which among other things solicits information to identify potential additional class representatives.

II. Class Action Complaints

On June 16, 2004, four similar proposed class action lawsuits were filed in federal district courts in Florida, Illinois, Minnesota, and Ohio against four health systems and hospitals. The proposed plaintiff class consists of uninsured patients of the named hospitals. The plaintiffs seek monetary damages and injunctive and other equitable relief against the defendant systems and hospitals. Substantively similar proposed class action complaints have since been filed against not-for-profit hospitals and systems in several waves, most recently on July 15, 2004.

Generally, the plaintiffs assert that the defendants have engaged in a pattern and practice of charging uninsured patients significantly more for health care services than they charge insured patients. Moreover, the plaintiffs allege that the defendants pursue aggressive collection techniques against uninsured patients resulting in lawsuits, judgments, garnishments, property seizures, and personal bankruptcies. Many of the complaints allege that the defendants require uninsured patients to sign contracts promising to pay defendants in full for all charges as a condition to admission into their hospitals or emergency rooms, and also assert that the defendants allow certain affiliated non-charitable groups to derive a profit from the defendants’ operations. As a result of unpaid taxes and income from their "for profit operations," the class action complaints assert that the defendants have amassed millions of dollars in cash and marketable securities while neglecting to provide charitable care to the uninsured. Several of the complaints also name the American Hospital Association ("AHA") as a conspirator based upon the trade association’s advice and assistance to the defendants regarding hospital operations generally, and billing and collection practices concerning the uninsured in particular.

The complaints allege causes of action based on the defendants’ federal tax exempt status as charitable institutions pursuant to 26 U.S.C. § 501(c)(3), which requires them to operate "exclusively" in furtherance of a charitable purpose, with no part of their operations (either directly or indirectly) attributable to any non-charitable commercial purpose, and with no portion of the defendants’ earnings inuring to the benefit of any private individual or entity by accepting this favorable tax exemption. The complaints assert that, by reason of their tax-exempt status, the defendants have explicitly and/or implicitly agreed to: (1) operate exclusively for charitable purposes; (2) provide affordable care to all their patients; (3) charge their uninsured patients rates for health care services that are reasonable and not higher than rates charged to their insured patients; (4) utilize their net revenues and assets to provide affordable health care to their uninsured patients; (5) not pursue outstanding health care debt from their uninsured patients through aggressive and unreasonable collection efforts; and (6) provide an emergency room open to all without regard to their ability to pay for such health care services.

Premised on the theory that the uninsured patients are express and/or implied intended third party beneficiaries of the defendants’ agreement with the United States, the complaints assert causes of action for breach of contract, breach of the duties of good faith and fair dealing, and breach of charitable trust and unjust enrichment. Additionally, many of the complaints allege violations of EMTALA, civil conspiracy, and several state law specific violations of consumer protection and other laws.

III. Significance Of Lawsuits

These lawsuits include some creative and novel theories and cover a broad range of legal issues and subjects. By characterizing the cases as class actions and bringing actions in many jurisdictions across the nation, plaintiffs’ counsel attempt to utilize techniques commonly employed in consumer class action litigation to place overwhelming pressure upon the defendants. It may not be a coincidence that the lawsuits were filed about the same time as hearings were being held on Capitol Hill on the charity care practices of not-for-profit hospitals, and on the heels of the oddly defensive reaction of federal agencies’ to the AHA’s request for clarification of federal regulations relating to hospital billing and collection practices.2

The breadth and scope of the proposed class actions, which seek to hold not-for-profit hospitals responsible for national problems surrounding the treatment and billing of the poor and uninsured, could have a major impact upon not-for-profit health systems and hospitals throughout the United States. We expect that plaintiffs’ counsel will push very hard for prompt certification of the purported plaintiff classes in an effort to generate leverage in the hope of forcing a major settlement involving substantial damages and accompanying policy changes.

There are a variety of defenses that are available to the defendants in these cases. As with other large consumer litigation, the most important phase of the litigation is likely the beginning -- where defendants will have the opportunity to contest plaintiffs’ efforts to obtain class treatment of their claims. In this regard, plaintiffs will be required to show that they represent a well-defined class with common claims and injuries. However, individual hospital policies regarding charity care and admissions are likely to vary widely and be individually distinct. Similarly, the claims of loss and damages for individual plaintiffs likely will involve very different issues, facts, and circumstances that are not easily subject to adjudication in the form of a class-action.

The cases also present an important question of whether the plaintiffs even have standing to assert the claims being raised. Thus courts will have to determine whether a not-for-profit hospital’s charitable obligation affords individuals a right of action to challenge alleged short-comings. Substantively, the complaints raise novel theories, and perhaps misstate the law, regarding a not-for-profit entity’s obligations under section 501(c)(3) of the Internal Revenue Code. For example, most practitioners do not think of a grant of tax exemption as creating a contract between the IRS and the exempt entity. Further, courts have long held, and the IRS agrees, that in the context of section 501(c)(3) the term "exclusively" means "substantially." Moreover, in recent years the IRS has focused not on some vague notion of "charity," but on the benefit an exempt hospital affords to the community it serves to determine whether its activities are charitable enough to merit exempt status under section 501(c)(3). Courts will be asked to decide whether a hospital’s charitable contribution or "community benefit" is satisfied given the alleged facts.

Given the potential exposure raised by these lawsuits, any named defendant will want to give them their most serious attention. In order to be successful, it is imperative that defendants in these lawsuits plan and coordinate their responses at the very outset of the litigation. This is particularly so with regard to their efforts to challenge plaintiffs’ attempts to certify a plaintiff-class and thereby gain leverage against defendants.

Obviously, selection of defense counsel is crucial for the defendant not-for-profit hospitals, which have not historically been targeted in this type of litigation. Counsel must have experience in developing appropriate strategies for this type of case, an understanding of the procedural rules that can be employed in defending class-claims, and the capacity to manage and coordinate defense strategies in conjunction with counsel for other named defendants. In this regard, legal counsel should have substantial class action expertise as well as intimate familiarity with the hospital industry and knowledge in the substantive areas of law relevant to the complaints. Proficiency in the requirements on organizations that are exempt from federal and state tax, and that are subject to government health program payment and fraud and abuse rules, will be invaluable. 

Footnotes 

1. These states include: Alabama; Arizona; California; Colorado; Florida; Georgia; Illinois; Louisiana; Minnesota; Mississippi; Missouri; New Jersey; New York; Ohio; Oklahoma; Tennessee; and Texas. 

2 See Reed Smith’s April 7, 2004 Client Memo entitled, "HHS Agencies Issue Industry Guidance on Hospital Discounts," which is available on our website at http://www.reedsmith.com/library/publicationView.cfm?itemid=67538.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions