For several months, the primary focus for the charity care issues has been in Washington, as federal officials debated the requisite level of charity care that a not-for-profit hospital must provide to justify its tax-exempt status. Increasingly, however, that emphasis is shifting to the states as state legislatures take steps to draw bright line rules for hospital charity care requirements.

Most recently, for example, the Illinois Attorney General proposed the Tax-Exempt Hospital Responsibility Act (HB 5000, 1/23/05), which would require not-for-profit hospitals, with the exception of critical access hospitals, to provide a minimum percentage of free health care services in order to maintain their state tax exemption status. State tax exemptions offer significant benefits and exempt hospitals from payment of state income tax, property and real estate taxes, occupation and sales and use taxes. The bill requires an Illinois tax-exempt hospital to spend at least 8% of its operating costs, as reported in its most recently settled Medicare cost report, on uninsured patients who meet specific income limits. The bill also requires a hospital to submit an annual report, its most recent set of audited financial statements and its Medicare cost report to the Illinois attorney general, who would implement and enforce the law.

The law would require tax-exempt hospitals to provide "full charity care" to any uninsured Illinois resident who applied for charity care and had family income equal to or less than 150% of the federal poverty income guidelines. A sliding scale of discounted care for the first $10,000 of medical services would be required for those uninsured residents with income up to 250% of the federal poverty level. A patient in this second group would be eligible for full charity care on the amount that exceeds $10,000 in any 12-month period.

The Illinois bill defines charity care as "medically necessary services provided without charge or at a reduced charge to patients who meet eligibility criteria." If a patient is entitled to full charity care, the hospital may not bill the patient for any services. Moreover, if the patient is entitled to discounted charity care but cannot pay the remaining amount of the bill, the hospital must offer the patient a reasonable payment plan without interest on the portion that is the patient’s responsibility.

Under the proposed law, Illinois hospitals must affirmatively inform patients of the availability of charity care by posting signs in the hospital reception areas and its business offices, and on its Web site. Further, hospitals must provide individual notice of the availability of charity care to uninsured patients in patient bills and, on a quarterly basis, must publish notice of the availability of charity care in a newspaper of general circulation within the hospital’s service area. All notices must include the Illinois attorney general office’s contact information so that patients may file complaints regarding possible violations of the Tax- Exempt Hospital Responsibility Act.

The Illinois Attorney General is provided several enforcement tools directed to any act, omission, policy or practice that the Attorney General determines violates the Act. The Attorney General may seek to enjoin any improper conduct; remove and replace any officer, director or employee of a tax-exempt hospital who has approved or acquiesced in, directly or indirectly, a violation of the Act; and levy civil monetary penalties ranging from $1,000 - $10,000 for violations of the Act.

To date, HB 5000 has been receiving fleeting support in the General Assembly and at least three Illinois hospitals have delayed their hospital transactions, with the borrowers unable to secure insurance due to the fiscal threat posed by the pending legislation. Several insurers have informally suspended or slowed coverage of Illinois hospital debt in reaction to the proposed legislation. Meanwhile, its companion bill, the Hospital Fair Billing and Collection Practices Act (HB 4999, 1/23/06), has received considerable attention as well, with many amendments currently being negotiated for the legislation. Among other requirements, HB 4999 provides for specific policies and procedures for hospital collection practices along with civil penalties and injunctive relief, and allows the Attorney General authority to enforce compliance.

In the litigation area, there also appears to be a shift to the state level. The federal courts have consistently dismissed individual suits against hospitals for allegedly overcharging their uninsured patients. In recent state court decisions in Oregon and Arkansas, however, courts certified class actions against health systems accused of overcharging uninsured patients by billing patients at the health system’s full charges. The Oregon class excludes patients who received any type of discount or fee waiver under the system’s charity care policies but includes all other uninsured patients, even if the health system had suspended its collection efforts. Turner v. Legacy Health System, Ore. Cir. Ct., No. 0412-12483, 10/4/2005. In the Arkansas case, plaintiffs alleged that Baptist Health Systems charged uninsured patients higher fees than persons covered by insurance or government plans. Haynes v. Baptist Health, Ark. Cir. Ct., 6th Div., No. CV 05-1477, 12/29/05. The class is limited to patients who signed agreements to pay the full amount of fees charged by Baptist and who paid half those amounts or more.

Another new development is that state attorneys general have begun to file complaints against health systems for unfair billing practices. Last month, the Wisconsin Attorney General’s Office announced that it will file complaints against two Milwaukee-area hospitals for overcharging their uninsured patients.

The complaints are expected to allege violations of Wisconsin consumer protection laws for unfairly charging uninsured patients prices far in excess of the discounted prices the hospitals regularly charge most insured patients, and seek to prohibit the hospitals from continuing to charge allegedly excessive prices to uninsured patients.

Generally, individual plaintiffs’ litigation claims attempting to address the issue of charges to uninsured patients are legally weak. The issue itself, however, is being pursued by state governments and state legislatures in ways that are far more challenging and will require thoughtful consideration of the charity care, charge-setting and collection practices of all health care providers.

For more information regarding this topic, please contact Neville M. Bilimoria, David M. Flynn, Erin M. Duffy or any of the Health Law Practice Group attorneys with whom you have regular contact

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, among the 100 largest law firms in the United States, is a full-service firm of more than 600 lawyers. In addition to legal services, Duane Morris has independent affiliates employing approximately 100 professionals engaged in other disciplines. With offices in major markets, and as part of an international network of independent law firms, Duane Morris represents clients across the nation and around the world.