Patient Challenge to Hospital Practices Under the Illinois Consumer Fraud Act Survives Motion to Dismiss, Settles

by guest contributor Alan Alop (Deputy Director, Legal Assistance Foundation of Metropolitan Chicago)

Like most hospitals in America, St. James Hospital in Chicago Heights, Illinois, is a nonprofit, charitable institution.  As a nonprofit corporation, it is exempt from paying state property, sales and income taxes and federal income tax, a status that saves the hospital millions of dollars each year. In return for its tax-exempt status, Illinois law, like many states, requires the hospital to provide free services to low-income patients, a duty known as “charity care.” While St. James Hospital does provide free treatment to some patients, in recent years the amounts provided have dwindled. According to a recent study, in 2004 St. James Hospital provided $6.6 million in charity-care services to the poor; in that same year the hospital’s tax-free status saved it $14.5 million in state and federal taxes.

Also like most hospitals, St. James significantly discounts the charges it bills to most of its patients.  Privately insured patients and patients covered by Medicaid and Medicare receive billing discounts as high as 80%.  Uninsured patients, most frequently the poor, receive no discounts and are expected to pay the full hospital bill.   

Barbara Hill is one of an estimated 45 million Americans who lack health insurance coverage. Employed as a babysitter, Ms. Hill fits within federal guidelines defining indigency.  In 2004 she received  treatment at St. James Hospital for a sprained ankle. The hospital billed Ms. Hill its full, un-discounted charge, and hired a collection agency to collect that amount.  Ms. Hill attempted to apply for a charity care write-off of the bill but the hospital ignored her two written inquiries.  She then brought an action against the hospital, challenging: (1) the hospital’s failure to provide her free charity care; and (2) the hospital’s practice of charging uninsured patients triple or quadruple what it charges insured patients for identical services.  The hospital had the action removed to federal court where, on December 20, 2006, Judge Ronald A. Guzman issued an opinion denying the hospital’s motion to dismiss.  Hill v. Sisters of St. Francis Health Services, Inc., 2006 WL 3783415 (N.D. Ill. Dec. 20, 2006).  On May 30, 2007, the parties entered into a confidential settlement agreement that addressed the plaintiff's concerns.

Legal Claims

The plaintiff’s two main claims were asserted under the Illinois Consumer Fraud Act (“ICFA”).  Plaintiff maintained that the hospital’s failure to allow her to apply for and obtain a charitable write-off of her hospital bill, while accepting the many benefits of its tax-exempt status, constituted an “unfair practice” within the meaning of the ICFA.  Ms. Hill also complained that the hospital committed a second unfair practice in billing her its full, un-discounted charges while billing all insured patients dramatically lower amounts for the same services. Plaintiff filed a jury demand; she sought actual damages for “aggravation and inconvenience,” punitive damages, injunctive relief, and attorney fees.

Litigation

The hospital moved to dismiss the Complaint, raising two major defenses:  (1) the hospital’s actions did not constitute “unfair” acts under the terms of the ICFA; and (2) hospital billing practices are not commercial conduct within the ambit of the ICFA.

To measure the sufficiency of the Complaint’s claims of ICFA unfairness, the Court employed the three-prong test set out in Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417 (2002).  Under the Robinson test, a practice challenged as unfair must (a) violate public policy; or (b) be immoral, unethical, oppressive or unscrupulous; or (c) substantially harm consumers. The Court held that the plaintiff’s allegations that the hospital violated its duties under the charitable organization exemption of the state tax code satisfied the first criterion in the unfair practice analysis. “Illinois courts,” the Court wrote, “have repeatedly held that tax laws in general, and the charitable exemption in particular, express the state’s public policy.”  The Court then examined the second part of the Robinson test.  In the words of the Court:

With respect to the second criterion, which requires the Court to determine whether the alleged practices are oppressive or unscrupulous, plaintiff alleges that St. James:  (1) characterizes itself as a charitable hospital to take advantage of the tax exemption; (2) fails to offer charity care to indigent patients or charity-care write-offs of their bills; (3) rebuffed her attempts to apply for a charity-care write-off; (4) greatly inflates its charges for services provided to indigent, uninsured patients; and (5) persistently tries to collect those inflated bills; and, as a result, (6) creates for indigent patients the Hobson’s choice of forgoing medical treatment or obligating themselves to pay the unreasonable charges.  Those allegations are sufficient to satisfy the second unfair practice criterion.

Finally, the Court ruled that the allegations that the hospital charges uninsured patients significantly more than insured patients satisfied a showing of substantial injury to consumers, the third element of the Robinson standard.  If uninsured consumers are being charged more than insured patients, the Court concluded, “those consumers are being substantially injured.”

The Court also addressed the hospital’s contention that hospital billing practices do not constitute commercial activity within the ambit of the ICFA.  The Court noted that care-related medical decisions, like allegations of negligence, may not constitute commercial activity under the ICFA.  But the court distinguished “the commercial phases of medicine,” and concluded that hospital billing activity fits within the meaning of commercial acts under the ICFA.

Shortly after the case was filed, St. James Hospital took two actions which it claimed had nothing to do with the filing of the lawsuit. First, it enacted a policy of discounting all uninsured patients’ bills by 40%.  Second, it erected several signs in the emergency room and patient accounts department which alert patients to the availability of charity care write-offs.  The court ruling spurred settlement negotiations and led to yesterday's settlement. 

Implications and Comment

Hospitals across the nation may currently be more receptive to improving their charity care procedures than at any time in the recent past as the consequence of a number of confluent events.  Lawsuits such as Hill have been initiated in several jurisdictions, and these cases have generated considerable controversy within the industry. Aggressive local and state taxing bodies have challenged whether some nonprofit hospitals are providing sufficient charity care; at least one Illinois hospital has lost its tax-exempt status.  State legislatures have also played a role; the Illinois legislature, for example, enacted a law which will soon require all Illinois nonprofit hospitals to take critical steps to provide notice to patients of charity care programs (via on-site signage and notices in hospital bills) and to give indigent patients other protections against abusive hospital collection practices.  See Fair Patient Billing Act, P.A. 94-0885 (2006). Hospital trade associations, like the Illinois Hospital Association, have begun to promulgate guidelines for the provision of charity care. In addition, the Attorney General of Illinois has floated a legislative proposal that would set a standard for charity care; Illinois nonprofit hospitals would be required to give a statutorily-prescribed amount of charity care based on their annual budget. In the wake of these developments, some hospitals have voluntarily taken steps to improve their billing and charity care practices for uninsured and indigent patients. Other hospitals will need to be prodded.

Comments

[kayla]

wow that is some crazy stuff. thanks for the post i found it very interesting.

[kayla]

wow that is some crazy stuff. thanks for the post i found it very interesting.

[Brian]

This is a fantastic write-up. It shows the potential power of UDAP laws. I wonder what those who complain about the use of UDAP laws' elastic legal concepts, most prominently, the prohibition of "unfair and deceptive acts and practices," to go after fast-food companies' failures to disclose would think about the claims in this case. The writer of this post ought to try to get it cross-posted on other legal blogs from around the political spectrum.