SICK OF HOSPITAL BILLS

By DAREN FONDA Anne Berryman/Albany; Alice Jackson-Baughn/Jackson; Leslie Whitaker/Chicago

RICHARD SCRUGGS IS CORPORATE America's worst legal nightmare. In the 1980s and early '90s, he made millions litigating asbestos claims and went on to national fame for beating Big Tobacco, representing the whistle-blower Jeffrey Wigand, subject of the movie The Insider. Scruggs' tobacco suits netted his practice an estimated $1 billion, money that bought him toys, from a $100,000 Bentley to a Falcon jet--and turned him into the dart-board face of tort reform. At 58, he works out of a small firm in Oxford, Miss., with his son Zach and two other lawyers. Scruggs has given up the Bentley for a more modest BMW. "He got it out of his system," an associate says. And Scruggs insists that his latest crusade--against nonprofit hospitals he says are gouging the poor--isn't about the money, at least not for himself. "It would be greedy for those of us who made a lot of money off tobacco not to use it for endeavors like this," he says.

Since June, the courtly Scruggs and a group of other trial lawyers, including ex-tobacco litigators, have filed 48 class actions against more than 400 nonprofit hospitals, including some of the largest and most prestigious health-care providers in California, Illinois, New York and Texas. They have anted up $1.5 million of their own funds to pursue the cases. More suits are being filed almost weekly, all with a similar complaint: that the hospitals are charging the uninsured grossly inflated prices, dispensing a tiny fraction of their revenues in charity care, engaging in abusive collection tactics and, in some cases, using accounting gimmicks to mask their wealth and enrich executives. "It offends my sense of justice that they've gotten away with this," Scruggs says in his gentle Mississippi drawl.

The tricky thing about Scruggs' challenge is that he's taking on widespread industry practices, not just a handful of allegedly corrupt hospitals. The hospital industry's main lobbying group, the American Hospital Association (AHA), says the cases are "without merit." The main contention of the lawsuits is that nonprofit hospitals aren't spending enough on charity care--a condition of their tax breaks. But the AHA points out that hospitals spent $22.3 billion on uncompensated care last year and billions more in "community benefits." The trial lawyers, the AHA insists, are diverting focus from the real crisis: a record 45 million Americans without insurance, ERs clogged with indigent patients and costs rising faster than Medicaid and Medicare reimbursements.

Yet Scruggs and Co. are riding a wave of challenges to the nonprofit-hospital sector. The IRS is probing dozens of those institutions over questions of excessive CEO pay, insider transactions, sweetheart loans and conflicts of interest on hospital boards. Congress recently held hearings on hospital billing and abusive collection tactics. The attorneys general in Illinois and Mississippi have been investigating similar issues. In Mississippi, the U.S. Attorney recently sued Baptist Health Systems, accusing it of paying kickbacks to doctors and filing fraudulent cost reports. (Baptist denies the charges.) Bills are also pending in California and Illinois that would clamp down on some collection tactics and force hospitals to provide more charity care.

A big issue in the Scruggs lawsuits and the state probes is soaring hospital charges. You've heard of the $10 aspirin? It's that pricey because hospitals mark up costs an average of 232%--as much as 673% at the 100 priciest institutions, according to a recent study by the Institute for Health and Socio-Economic Policy. Hospitals do this largely because insurers negotiate discounts off the list price, creating incentives to inflate charges. That expensive aspirin also subsidizes other items and services--a widespread practice.

Yet the uninsured are typically the only ones forced to pay sticker price. The lawsuits complain that hospitals then aggressively pursue patients for the full charge, sometimes garnishing wages, placing liens on homes, and in some cases lumping the bad debt into their calculation of charity care, a controversial accounting practice. "There's nothing charitable about it," contends Scruggs, noting that medical debt is a leading cause of personal bankruptcy.

In 2001, Laverne Dumas, one of the plaintiffs in a suit against Provena Mercy Center in Aurora, Ill., went into the hospital for a severe sinus infection and was sent a $12,338 bill that included $650 a day for the room and $6 for each ibuprofen pill. Uninsured and living mainly on her husband Joe's $800-a-month pension at the time, she says she tried to negotiate a payment plan, but the hospital refused. Provena won a judgment, and today the couple pays $100 in monthly installments, with scant hope of paying off their $27,000 in hospital bills (owed not just to Provena). Says Joe, 63: "We didn't go in expecting charity, but we didn't expect exorbitant prices either."

Was Provena overly harsh? Patrick Coffey, a lawyer for Provena, says the Dumas signed forms promising to pay their bills and "agreed that the charges were fair. We reject the notion of any legal basis or merit to their claims." But the state of Illinois revoked a tax exemption for a Provena hospital based on findings that the hospital wasn't providing enough charity care; Provena is appealing.

The AHA says hospitals must set the same charges for everyone. Secretary of Health and Human Services Tommy Thompson wrote to the AHA in February, however, saying the suggestion that hospitals must charge list prices "is not correct and certainly does not accurately reflect my policy." A Texas hospital administrator is blunt about why hospitals pursue the medically indigent: "The driving force is to badger them so they don't come back."

Scruggs was vaguely aware of such problems but didn't have the basis for a case until a couple of whistle-blowers from Georgia contacted him last March. Dr. John Bagnato and Charles Rehberg, the administrator of Bagnato's private practice, had spent hundreds of hours probing hospital finances--particularly those of Phoebe Putney Memorial, a hospital in Albany, Ga., where Bagnato was chief of surgery. Bagnato's private practice, Albany Surgical, had tried to open an outpatient surgery center across the street from Phoebe, and eventually he and Rehberg suspected the hospital of meddling in state rules that had blocked the plan. (Phoebe denies interfering.) Inspired, the pair began investigating hospital finances. The deeper they delved, the more they became convinced that Phoebe and other nonprofits weren't living up to their charity mission.

Probing Phoebe's IRS tax filings, they found that CEO Joel Wernick was paid $707,000 (including benefits) in Phoebe's 2002 fiscal year and had an interest-free loan from the hospital for $85,300. The filings also showed that Phoebe had more than $300 million in net assets and reported offshore entities in the Cayman Islands worth some $15.5 million. At the same time, Phoebe had sued citizens in the Dougherty County area, one of the nation's poorest, hundreds of times over a five-year span, making the hospital one of the region's most litigious parties. Phoebe garnished the wages of patient Virginia Franklins, 49, even though she made $7 an hour pressing men's dress shirts and had no house or car to her name. After that, Franklins says, "I couldn't afford to pay my bills." She now lives off welfare, caring for a 13-year-old niece as well.

Phoebe says there's nothing improper about its finances or executive compensation. The offshore entities are legal investment and insurance vehicles that have saved the hospital money, officials say. On its website, Phoebe notes that it spends $46.6 million on charity care, and officials stress that patients are informed by hospital signs and other means that they may be eligible for free or discounted care. CEO Wernick, who repaid the loan, calls the class action against Phoebe frivolous. It implies hospitals "are indifferent to the plight of the uninsured," Wernick continues. "That's just not the case."

Bagnato and Rehberg say they are not on a vendetta against Phoebe, though their feud with the hospital took some ugly turns. Aiming to draw attention to what they felt were unscrupulous practices, they sent faxes to local politicians and businesses last fall and winter, including one that showed a cartoon of a fat "Phoebe Exec" puffing on a cigar, with a caption saying, IS THERE REALLY CORRUPTION AT PHOEBE? Around the same time, they say, their office at Albany Surgical was bugged. Rehberg's wife Wanda reports coming home one day and finding the door lock jammed. She saw a phone-company employee outside attempting to install a line that the couple had not requested. Rehberg and Bagnato don't accuse Phoebe of bugging their office or orchestrating other surveillance, and a hospital spokeswoman denies any involvement. But Phoebe slapped Rehberg and "coconspirators" with a defamation suit for sending the faxes, claiming they harmed the hospital's reputation.

Rehberg, meanwhile, says Phoebe tried to intimidate him by sending a couple of private eyes to accost him in a parking lot last month. According to a complaint Rehberg filed with the FBI, the men jumped out of a Jeep, claimed they were former FBI agents, blocked his vehicle and demanded he come with them to sign documents granting him "immunity" from lawsuits in exchange for cooperation. "Think about your wife Wanda and family," Rehberg says he was told, and "keep quiet about all this." A father of 8-year-old twin girls, Rehberg, 44, a former hospital CFO, had never faced anything like this. Phoebe admits it sent the men but denies trying to strong-arm Rehberg.

The Georgians tried to enlist government authorities to their cause but failed. Then Bagnato called an old medical-school friend from Mississippi, David Merideth. Also a lawyer, Merideth suggested talking to Scruggs and asked Bagnato to write up his findings, at that point encompassing dozens of hospitals, in a letter. "I knew we were onto something really good when I gave Dickie the letter and he kept studying it," Merideth recalled. Scruggs was outraged by the accumulation of hospital wealth and seemingly abusive collection efforts. "He wouldn't give it back to me for a while," says Merideth. "When he finally did, he said, 'Wow.'" Two weeks later, Rehberg and Bagnato chartered a plane to Mississippi and presented their research to Scruggs, including tales of conflicts of interest, of executives paid to head both the hospital and for-profit subsidiaries, and plenty of stories of aggrieved patients. By June, the suits were flying. "These hospitals claim they're charities but operate like for-profit businesses," says Scruggs. "We aren't challenging hospitals that are going broke."

Some veterans of the health-care business say the lawsuits are misguided. "Nonprofits can't deliver health care to their community by losing money," says Stephen Shortell, dean of the U.C. Berkeley School of Public Health. Moreover, to folks who do physically and emotionally draining health-care work, the notion of hospitals' hoarding their wealth and targeting the poor is insulting. "There's a lot of outrage over the suits," says Stephen Weyl, a New Hampshire lawyer and hospital-industry consultant.

In fact, many hospitals are revising their charity policies. In California, Sutter Health--a 27-hospital chain accused of spending less than 2% of its revenues on charity care--enhanced its policy last year, giving free care to patients earning up to 200% of the federal poverty guidelines. Provena has broadened its charity-care eligibility, and the AHA has been urging its 4,700 member hospitals to sign new charity and billing guidelines. Scruggs has already notched one victory. In Mississippi, the nation's largest rural hospital system settled with him last month, agreeing to provide an estimated $270 million in debt relief and discounts for patients, even though it wasn't sued. Scruggs calls the deal with North Mississippi Health Services a model, and says he would drop his challenges to hospitals that agree to similar terms.

So far, Bagnato and Rehberg have got nothing but trouble for their efforts. Bagnato says he's being "shut out" from surgery business decisions at Phoebe and suspects the hospital of "politely but pointedly directing patients away from Albany Surgical and me in particular." Phoebe calls that claim abhorrent. But Bagnato is convinced, "If they could get away with firing me, I think they would." Rehberg, who filed counterclaims against Phoebe last week, now has the same security guard who protected Jeffrey Wigand. "Given a choice," Rehberg says, "I prefer to sit in back and observe. But I can't quietly tolerate injustice." Neither, apparently, can Scruggs. --With reporting by Anne Berryman/Albany, Alice Jackson-Baughn/ Jackson and Leslie Whitaker/Chicago