Sick of Hospital Bills

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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.

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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.