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At The Non-Profit Bar

Just as necessity is the mother of invention, outrage may inspire new legal thinking.

The latest outrage is that charity hospitals around the country are charging poor and uninsured patients their highest retail rates, while the insured--and presumably better off patients--receive steep discounts for the same health care services. Adding insult to the outrage are hospitals that use abusive collection methods against those charity patients who can't pay on time, if at all. As the hospitals run up legal collection costs, they tack those onto the bill as well.

You'd expect that kind of treatment from a loan shark, but a charity hospital? Apparently things are so bad in this corner of the non-profit sector, plaintiffs have filed more than 70 lawsuits against hospital groups in state and federal courts, many of them led by famed tobacco class action lawyer Richard Scruggs. According to the ABA Journal, however, basic contract theory has blunted the legal attack on this outrage. Scruggs and his clients are trying to argue that there is an implied contract between each charity hospital and the government in which the hospitals have agreed to provide free or discounted service to the poor in exchange for the advantages of tax exemption. But the American Hospital Association's lawyer (and a former FTC attorney) Christine Varney was quoted saying such implied contract theories will not "survive a nanosecond of judicial scrutiny."

She may be legally correct, but does that make it right? The federal courts have dismissed these contract theory cases on the grounds that a Section 501(c)(3) tax exemption doesn't create a contract, and even if it did, it doesn't create a right that private citizens can enforce with a lawsuit. A Colorado court even ruled that the plaintiffs were wrong to assume the federal tax exemption required charity hospitals to provide health care services to the indigent.

Huh? Courts have come up with many other ways to justify the exemption. A Florida court thought the contract theory was so untenable it threatened to impose Rule 11 sanctions against the plaintiffs for pursuing presumably frivolous arguments. How is fairness frivolous?

So where does that leave the indigent and uninsured patients? They are in a legal no man's land. They face liens and foreclosures because they can't pay the charity hospitals, but the law says they don't have standing to sue. Yet those with the right to sue--the IRS and the state attorneys general--haven't come to their defense. Meanwhile, the so-called charity hospitals continue to enjoy millions of dollars in tax exemptions while still charging premium rates to poor people.

What to do? Some say reform the health care system, but that will take years. Can't the law respond to a fundamental unfairness simply by reinterpreting certain concepts to reflect the times? The authoritative English jurist Sir Edward Coke thought so when he noted that "the law makes use of a fiction where equity subsists." In other words (mine), "to be fair, let's pretend that indigent patients can sue the charity hospitals." That was easy. It even makes sense under the law of third party beneficiaries.

We now say that there is a contract made between a hospital and the state and federal governments, and the bargain is made so that indigent, uninsured and underinsured patients have access to free or discounted medical care. As the intended beneficiaries of the contract, they have the right to enforce it by going to court. The answer to the federal judge who asked, "Are you prepared to let private citizens sue the Red Cross if they think the charity is not complying with the tax code?" is "Yes" if the Red Cross starts charging fees for disaster relief.

Outrageous conduct demands a determined response. Congress may respond, but not any time soon. The IRS is missing in action. Even if every one of the state attorneys general responded, the result would likely be uneven. In the meantime, a little bit of Sir Coke's legal fictionalizing could jump-start a response to a genuine outrage. Why not? If we're willing to accept the legal fiction that a corporation such as Microsoft is a person just like you and me, then we should be willing to accept a new legal fiction that charity hospitals should provide charity care.

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Bruce D. Collins

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