When Tim Gardner was born at the hospital here 53 years ago, it was just "one little building on the hill" in a town best known as Elvis Presley's birthplace.
From those humble beginnings, North Mississippi Medical Center has grown into the largest non-metropolitan hospital in the country, a booming enterprise with a complex of glass and marble buildings and 40 satellite clinics stretching into Alabama and Tennessee. The company, incorporated in Delaware, has nearly $300 million in the bank and "exceptional profitability," according to one Wall Street rating agency.
And it pays no taxes. As one of 4,800 nonprofit U.S. hospitals, North Mississippi Medical Center is exempt from federal, state and local taxes in return for providing care to "charity patients."
But when Gardner, who is uninsured and suffers from heart trouble, asked for more time to pay off a $4,500 bill, the response came in the form of a summons. The hospital sued him for the balance plus $1,100 in legal fees.
Billing tactics under fire
Now Gardner and hundreds like him are at the center of a nationwide battle over whether nonprofit hospitals — often flush with cash, opulent buildings and high-paid executives — are fulfilling their mission as charitable institutions. Since last spring, a phalanx of trial lawyers who made millions suing asbestos makers and tobacco companies have been targeting tax-exempt hospitals, accusing them of gouging the poor.
"I was paying the best I could," said Gardner, who on his $18,000-a-year cook's salary had managed to pay $1,000. "I'm not trying to run. At the end of that week I was going to pay them some more."
Forty-six suits have been filed in 22 states, including one against Virginia's Inova Health System, alleging the hospitals violate their tax-exempt status by charging uninsured patients the highest rates and employing abusive tactics to collect.
"Their goal is to discourage these uninsured patients from returning," said Richard F. Scruggs, the lead attorney. "If they paid taxes, I couldn't complain. But these hospitals are given freedom from taxation for doing something."
Included in the cases is a California hospital with $1 million in an offshore bank account, another in Louisiana that owns a luxury hotel and health clubs, and a Georgia hospital that flew its executives on private jets to meetings in the Cayman Islands and Florida's Amelia Island. Because private insurers and the government negotiate deep discounts for their clients, the uninsured are usually the only ones charged the list price — up to six times as much as for insured patients.
Hospitals cry foul
The American Hospital Association (AHA), which is a co-defendant in many suits, says hospitals are among the most generous businesses in the nation and it is unfair to blame them for a larger societal problem.
"Mr. Scruggs is seeking to use the courts to reform the health care system," said AHA executive vice president Rick Pollack. "We don't think lawsuits are the answer to the problem of the uninsured."
Scruggs does not disagree, but he is pessimistic that politicians will tackle a system in which 45 million people are without insurance and those with coverage are paying double-digit premium increases.
"Where you have entrenched, vested, financial interests versus no organized national effort on behalf of patients, the effort is not likely to succeed in Congress," said Scruggs, the brother-in-law of Sen. Trent Lott (R-Miss). "Courts have traditionally stepped in to the breach as a safety net when the political branch couldn't act."
The legal fight has been slow going. A federal panel of judges refused Scruggs's request to consolidate the cases, and a handful of courts has rejected the argument that uninsured patients have legal standing to pursue hospitals for possible Internal Revenue Service violations.
Deal falls through
Last summer, it looked as though Scruggs was on the verge of scoring an early win. North Mississippi Medical Center was ready to deal and sent to the bargaining table former state attorney general Mike Moore, the man who helped Scruggs extract a multibillion-dollar settlement with Big Tobacco.
In the tentative settlement the former allies crafted, North Mississippi agreed to provide free care for patients earning less than 200 percent of the poverty level (about $18,000) and low-priced care for those with incomes up to 400 percent of poverty. The hospital said it would issue refunds to patients in those categories who were treated in the three previous years and would revise its collection practices, according to court documents.
The deal, Scruggs proclaimed, would be a national model, eliminating $150 million in charges over a 10-year period.
Because the hospital collects less than 4 percent of what it charges indigent patients, North Mississippi estimated the cost at $1 million a year, an amount Fitch Ratings Ltd. deemed "relatively immaterial" for a business that bills $1 billion annually and collects about $650 million.
"After reviewing the proposed settlement, there seemed to be little reason to pursue the lengthy litigation of the issue since the proposed discounts are very reasonable," chief executive John Heer said in a news release at the time.
Before approving the deal, however, U.S. District Judge Michael P. Mills ordered the two sides to tighten conflict-of-interest provisions governing relationships between the hospital and its board members.
Little progress has been made since.
Gerard Wages, the hospital's chief operating officer, said in a telephone interview that since word of the tentative agreement got out, North Mississippi has seen its volume of charity care jump, with patients traveling from outside the region for care and some locals "bypassing other hospitals." Some area businessmen have also told him they or their workers were considering dropping insurance to take advantage of the reduced rates in the settlement, he added.
Wages acknowledged that Scruggs's firm has discussed ways to temper those developments, but no final decision has been made.
Collectors come calling
For people such as Kathy Millican, 50, nothing has changed. After an emergency hysterectomy, she was flooded with bills totaling more than $11,600, she said. With her husband making $12 an hour hauling rocks, the best Millican and her mother-in-law could do was send in periodic checks for $50 or $100.
Bill collectors began calling at odd hours, suggesting she put it all on a credit card or deliver a bank note. After her second request for charity care, the hospital forgave $700 but added $1,000 in finance charges. Last week, she delivered a large plastic bag bulging with medical bills to Scruggs's office and joined the lawsuit.
"I knew they wanted their money, but I didn't know how I could get blood out of a turnip," she said.
Now Scruggs, whose triumph over the tobacco industry was depicted in the movie "The Insider," is back on war footing. From his offices above Oxford's historic square, he coordinates a legal team that includes some of the best-known trial lawyers in Chicago, San Francisco, New York, Atlanta and Missouri.
"This is like moving a mountain," he said during a pause in a blur of conference calls, meetings and even a photo opportunity.
Detractors say the hospital suits are just Scruggs's latest money-and-publicity grab. It is noteworthy, they say, that he has yet to win a round in court. So far, the judges have concluded "it's between those institutions and the revenue service," Mitchell said.
The board chairman boasted that North Mississippi provided $26 million in charity care last year.
Care costs, charges at issue
But the term "charity care" can be misleading. In most instances, the figure is based on the sticker price for a procedure rather than the much lower amount it accepts from private insurers and Medicare or Medicaid.
"The biggest gimmick they use is charges versus payment," said Rims Barber, a community activist with the Mississippi Human Services Agenda. "They'll bill $1,000 for something, but if Medicare only pays $600 the hospital will write off $400 as charity."
In 2003, the AHA reported that its hospitals provided $25 billion in "uncompensated care costs," which represents charity care and bad debt, adjusted according to a formula to approximate the actual cost of providing the care.
A former Mississippi tax commissioner, at Scruggs's request, calculated that North Mississippi Medical Center's tax exemption was worth about $29 million. IRS filings for fiscal 2003 show that Wages, then the CEO, was paid more than $600,000, in a state where the average salary was $33,000.
Pollack, of the AHA, said nonprofit hospitals need competitive salaries to attract good managers.
All of that galls state Rep. Jamie Franks Jr. (D), who has experienced firsthand North Mississippi's collection procedures. When his wife gave birth to a son last summer, a clerk told him the family could not leave until he paid $1,200. Although he has insurance, Franks had to hand over his debit card and then spent months trying to get reimbursed by his insurers.
"We see people every day wanting to file for bankruptcy, and the main reason is the medical bills from North Mississippi," he said.
Franks is co-sponsoring a bill to bring in a hospital to compete with North Mississippi.
The business practices of nonprofit hospitals are under attack on several fronts. The IRS is said to be investigating management's compensation, and Congress conducted hearings last summer on price-gouging claims. Scruggs and his team, recognizing the federal cases may not work, have begun refiling the suits in state courts.
Gardner, the cook who is a plaintiff in the North Mississippi suit, was surprised to learn that the hospital where he was born pays no taxes, charges uninsured patients higher rates and then picks on people such as him, "a guppy in the overall picture," as he put it.
"Why do they take somebody who is visibly not having an easy time paying but is trying, and kick them when they're down?" he asked. "It's just wrong."
Research editor Lucy Shackelford contributed to this report.