MMHA 6300 Week 11 Board Ethics Brief Example

Should Prairie Crest Health System Keep Suing Patients? A Legal and Ethical Brief for the Board of Directors

Student Name

Walden University

MMHA 6300: Law and Ethics in Healthcare

Instructor Name

Month Day, Year

Should Prairie Crest Health System Keep Suing Patients? A Legal and Ethical Brief for the Board of Directors

Summary for Directors

Recommendation. Prairie Crest Health System should stop filing lawsuits and seeking wage garnishment against patients for unpaid hospital bills, except where a patient has refused to apply for financial assistance after documented outreach and has income above 400% of the federal poverty level. It should screen every unpaid account for financial assistance eligibility before any collection step and report the results to the board each quarter.

Three reasons. First, the current practice exposes Prairie Crest's tax exemption, because federal rules require reasonable efforts to determine assistance eligibility before extraordinary collection actions, and a review of sample accounts suggests those efforts are not consistently made. Second, the lawsuits recover little money: about 1.4% of the system's bad debt last year. Third, suing low-income patients conflicts with the charitable purpose that justifies the exemption and with commitments the system has made to patients.

Background

Prairie Crest, a fictional nonprofit system with three hospitals, refers accounts unpaid after 120 days to an outside collection agency. Accounts that remain unpaid after another 120 days and exceed $1,500 are reviewed by the agency's attorney, who files suit in county court. Last year the system filed 1,140 suits. Most ended in default judgments, and about 380 led to wage garnishment orders. Three representative histories illustrate the pattern: a warehouse worker with a $4,800 balance after an appendectomy, whose wages were garnished at 25%; a part-time home health aide, uninsured, sued for $2,300 after an emergency visit; and a retired couple with Medicare and no supplemental plan, sued for $6,100 in coinsurance. None of the three had applied for financial assistance; the records show that two were mailed an application, and none was called. All figures are illustrative.

Legal Framework: Section 501(r)

Since 2010, tax-exempt hospital organizations must meet additional requirements for each hospital facility they operate (26 U.S.C. § 501(r)). Each facility must adopt a written financial assistance policy that states eligibility criteria, the basis for calculating amounts charged and how to apply, and must widely publicize it (26 C.F.R. § 1.501(r)-4). It must limit charges to patients eligible for assistance to amounts generally billed to insured patients.

Most relevant here, a hospital facility may not engage in extraordinary collection actions against a patient before making reasonable efforts to determine whether the patient qualifies for financial assistance (26 C.F.R. § 1.501(r)-6). Lawsuits, wage garnishment, liens and reporting to credit agencies all count as extraordinary actions. In practice, those efforts mean three things: no such action until 120 days have passed since the first bill after discharge; a letter, sent at least 30 days ahead, that lists the actions Prairie Crest might take and encloses the plain-language summary of its assistance policy; and a real attempt to explain the assistance program to the patient by phone or in person, including where to get help with the form. If a patient applies within the application period, collection actions must stop while the application is processed.

Prairie Crest's 120-day waiting period meets the first element, but the sample histories suggest the oral outreach is not being made, and the agency's notice letter does not include the plain-language summary. These are the details an IRS examiner would check. Failure to meet section 501(r) can lead to excise taxes and, in serious cases, loss of exemption for the facility.

Legal Framework: HIPAA and EMTALA

Under HIPAA, Prairie Crest may share patient information as needed to get paid, and collection is part of getting paid (45 C.F.R. § 164.506). Disclosing the information needed to file a collection suit is therefore permitted, but the disclosure should be limited to the minimum necessary: dates of service and amounts, not clinical detail. The agency's court filings should be reviewed to confirm that they do not attach itemized bills listing diagnoses.

EMTALA bears on collection at the front end. Emergency screening and stabilizing care cannot be held up while staff ask how the patient will pay (42 U.S.C. § 1395dd). A patient who fears being sued may delay coming to the emergency department, and staff conversations about past balances at registration can, if they delay care, put the hospital in violation of the statute. Front-desk scripts should be reviewed with that in mind.

What the Evidence Shows About Hospital Lawsuits

Suing patients is not universal among hospitals. A study of Virginia hospitals found that about a third of them filed suits against patients in a single year and that a small number of hospitals accounted for most of the cases, with many lawsuits ending in wage garnishment (Bruhn et al., 2019). Research on charity care has also found that nonprofit hospitals, on average, devote a smaller share of their expenses to charity care than for-profit hospitals do, despite the value of their tax exemptions (Bai et al., 2021). Directors should assume that legislators, journalists and the system's own community are aware of this research and will ask how Prairie Crest compares.

Ethical Analysis

Justice. A fair system distributes the burden of unpaid care according to ability to pay. Lawsuits against patients who would likely qualify for assistance shift that burden onto those least able to bear it, while recovering very little (Beauchamp & Childress, 2019).

Beneficence. Prairie Crest exists to improve its patients' health. Wage garnishment for a medical bill can push a household into choices between rent and medication, and fear of being sued deters people from seeking care they need. Those harms undercut the purpose the system exists to serve.

Professional and institutional commitments. The ACHE Code of Ethics asks executives to work to ensure that people have access to needed care and to act in ways that merit the community's trust (American College of Healthcare Executives, 2022). The American Hospital Association's Patient Care Partnership, which Prairie Crest distributes at admission, tells patients that the hospital will help them with billing questions and identify sources of financial assistance (American Hospital Association, 2003). A collection practice that skips that help breaks a promise the system made in its own brochure.

Options Considered

The board has three realistic options. It could continue the current practice and fix only the 501(r) notice gaps; this addresses the tax risk but not the ethical one. It could end all lawsuits and garnishments; this is the simplest position to explain publicly but gives up a tool for collecting from patients who can pay and choose not to. Or it could adopt the recommendation above: screen every account for assistance, end suits against patients below a defined income level and allow narrow exceptions with documented outreach. The third option protects the exemption, honors the system's commitments and keeps a limited remedy for real nonpayment.

Recommendation and Monitoring

Adopt the third option, effective at the start of next quarter, with these conditions:

1. Amend the financial assistance policy to use presumptive eligibility screening, drawing on available income data, for every account before referral to the collection agency.

2. Require documented oral outreach and the full 30-day notice before any extraordinary collection action, and require the chief financial officer's written approval for each lawsuit.

3. Instruct the agency to dismiss pending suits against patients found eligible for assistance and to release related garnishments.

4. Review front-desk scripts so that no conversation about past balances delays emergency care.

5. Report each quarter to the board: number of accounts screened, number found eligible, number of extraordinary actions, amounts recovered and any patient complaints. The board should revisit the policy after one year with that data.

References

Additional requirements for certain hospitals, 26 U.S.C. § 501(r) (2023).

American College of Healthcare Executives. (2022). ACHE code of ethics. American College of Healthcare Executives.

American Hospital Association. (2003). The patient care partnership: Understanding expectations, rights and responsibilities. American Hospital Association.

Bai, G., Zare, H., Eisenberg, M. D., Polsky, D., & Anderson, G. F. (2021). Analysis suggests government and nonprofit hospitals' charity care is not aligned with their favorable tax treatment. Health Affairs, 40(4), 629-636. https://doi.org/10.1377/hlthaff.2020.01627

Beauchamp, T. L., & Childress, J. F. (2019). Principles of biomedical ethics (8th ed.). Oxford University Press.

Billing and collections, 26 C.F.R. § 1.501(r)-6 (2024).

Bruhn, W. E., Rutkow, L., Wang, P., Tinker, S. E., Fahim, C., Overton, H. N., & Makary, M. A. (2019). Prevalence and characteristics of Virginia hospitals suing patients and garnishing wages for unpaid medical bills. JAMA, 322(7), 691-692. https://doi.org/10.1001/jama.2019.9144

Examination and treatment for emergency medical conditions and women in labor, 42 U.S.C. § 1395dd (2023).

Financial assistance policy and emergency medical care policy, 26 C.F.R. § 1.501(r)-4 (2024).

Uses and disclosures to carry out treatment, payment, or health care operations, 45 C.F.R. § 164.506 (2024).