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Tax-Exempt Hospitals' Practices Challenged

"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.

The nonprofit North Mississippi Medical Center in Tupelo is exempt from federal, state and local taxes by providing care to "charity patients." (C. Richard Cotton For The Washington Post)

"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.

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.

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