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Are Nonprofit Hospitals That Sue Poor Patients Breaking the Law?

Jan Lee headshotWords by Jan Lee
Investment & Markets

Medical debts are the single greatest reason that families declare bankruptcy in the United States. In a 2013 a survey, Nerdwallet found that 56 million Americans under 65 have problems paying their medical bills, and more than half of those (35 million) will have their bills referred to collection agencies, the first step to a potential lawsuit from creditors looking to collect on those debts.

The Affordable Care Act (ACA) was supposed to help with that problem when it went into effect in 2014. In addition to ensuring that more people would be covered by cost-reducing insurance plans, it also reinforced older guidelines that required hospitals to have a financial assistance policy in place for low-income patients. These guidelines particularly apply to not-for-profit hospitals (the bulk of the hospitals in the U.S.), which receive hefty tax breaks for their status. Under draft rules established by the Internal Revenue Service, nonprofits are now required to allow more leeway for individuals to apply for financial aid before sending accounts to collection agencies.

Last year, an investigation by National Public Radio and ProPublica found that some nonprofit hospitals were skipping this expected protocol and sending patients to collection agencies, which would then sue them and garnish their wages to recoup the hospital charges. The investigation concentrated on patients who had received medical services prior to 2014 (the start of the ACA), but found that the procedure still appeared to be in place in some nonprofit hospitals when the new Act was put in place.

What's more, some patients who were sued said that they had either never been informed that they could apply for financial aid, or had not been aware that they had qualified for it. Those patients who were sued and received wage garnishment also were required to pay a significant fee to the collection agency, which in turn made it even harder for patients to cover their living expenses and avoid bankruptcy.

Not surprisingly, NPR and ProPublica's story has garnered a fair amount of attention since it aired in December. Medical bankruptcies aren't a new phenomena in the U.S., but there's something about a nonprofit hospital suing and garnishing the wages of its poorest patients that often seems antithetical to its image. It certainly did for one Republican senator from Iowa.

According to Sen. Chuck Grassley, who serves as chair of the Senate Judiciary Committee, nonprofit hospitals that sue patients may be breaking the law.

On Friday, Grassley sent a letter to the St. Joseph, Missouri, hospital that had been highlighted in NPR's broadcast and requested to know why it was suing low-income patients, criticizing Mosaic Life Care's actions as "extremely punitive and unfair to both low-income patients and taxpayers who subsidize charitable hospitals’ tax breaks."

This isn't the first time that Grassley has gone knocking on hospital boardroom doors asking questions. In June 2013, he expressed concern about a report that Kaiser Health News and ABC News published suggesting that some nonprofit hospital CEOs are benefiting from huge bonuses and other benefits in reward for raising profit margins. In April 2014, he pushed for more accountability measures for nonprofit hospitals.

In 2016, the IRS's draft rules will go into effect -- and will tighten the parameters by which a nonprofit can do business. Among other things, the hospital's  financial assistance policy must be on its website in plain, straightforward language (a concern that was highlighted in NPR and ProPublica's story). They must take other steps as well to ensure that patients are fully informed they may benefit from financial aid. If the hospital does not exhaust these steps, it can risk losing its nonprofit status.

The changes will likely be welcomed by many patients who, with or without ACA coverage, still struggle to meet spiraling health care costs.

Image credit: Chris Yarzab

Jan Lee headshotJan Lee

Jan Lee is a former news editor and award-winning editorial writer whose non-fiction and fiction have been published in the U.S., Canada, Mexico, the U.K. and Australia. Her articles and posts can be found on TriplePundit, JustMeans, and her blog, The Multicultural Jew, as well as other publications. She currently splits her residence between the city of Vancouver, British Columbia and the rural farmlands of Idaho.

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