Delegate John A. Hurson wanted to make Maryland's system for setting hospital rates fairer to poor people. As chairman of the House health committee, he was in a powerful position to make those changes happen.
But he couldn't get several proposals through his own panel. They were watered down or removed from bills after the rate-setting agency and the powerful trade group representing hospitals teamed up against them.
Hurson's experience was a testament to how sacred rate regulation remains in Maryland, more than 30 years after it was created. Maryland is the only state in which government sets hospital rates for all patients, and the system's survival is a tale of ideology, political power, and supporters' assertions that regulation has helped nearly all of Maryland's nonprofit hospitals thrive.
But it's a system that can also fail some of the people it was set up to protect, an eight-month investigation by The Baltimore Sun found.
Regulators pore over reams of data to determine how much hospitals can charge but don't monitor how hospitals collect patient debts. The system enables hospitals to charge rates to all patients to cover their costs of free and unpaid care, yet hospitals have sued 132,000 patients to collect unpaid bills over the past five years and have won at least $100 million in judgments, court records show.
Policies at hospitals for deciding who is eligible for free or reduced price care vary widely. Some patients wind up facing lawsuits even though they have little means to pay their bills, but the hospitals' trade group has fought off efforts in the General Assembly to make these standards uniform, as they are in some other states.
"The hospitals may be nonprofit, but they are very much about the buck," said Hurson, who left the legislature in 2005. "What they have in the rate-setting commission is a life preserver."
Under Maryland law, hospitals can charge interest at the legal maximum of 12 percent a year, starting 60 days after the patient was discharged - twice the rate that can be charged on other consumer debts. They can keep a judgment in force for more than 20 years.
Some hospitals are placing thousands of liens on patients' homes to collect their bills, despite industry guidelines that caution against wholesale use of the practice.
Leaders of the rate-setting commission conceded in interviews that they were unaware of the number of lawsuits and didn't realize that hospitals file liens against patients' homes and garnish their wages over unpaid bills. They could not explain why some hospitals consistently show surpluses or losses on unpaid and charity care when the rate-setting formula is supposed to ensure that hospitals break even over time.
Gov. Martin O'Malley, reacting to The Sun's investigation, called for an "immediate and thorough review of the credit and collection practices" of Maryland's hospitals. The Democratic governor asked the commission to report back to him by early February.
O'Malley wrote to the panel that while the rate-setting system has "provided unparalleled access to needed hospital services" for over 30 years, the state needs to be sure that hospitals are pursuing reasonable debt collection policies.
In 1971, several Maryland hospitals were in financial trouble. Costs had ballooned to well above the national average. Rates were rising sharply, but hospitals were losing money on bills that the poor could not pay.
When the Maryland Hospital Association asked the state for relief, Gov. Marvin Mandel looked for a solution that would give hospitals a financial incentive to care for the disadvantaged while requiring them to control their costs. He called it the "cornerstone of my consumer-protection package."
The result was the creation of the Maryland Health Services Cost Review Commission. Like the Public Service Commission for utilities, it was given the authority to set hospital rates. Part of its charge was to ensure that all patients share in paying for hospitals' costs of charity care and unpaid bills.
The governor appoints the commission's seven members. Although state law says four members can't have "any connection with the management or policy of any" hospital, most have some ties to health care.
The current commission includes the chief executive officer of Holy Cross Hospital in Silver Spring, a medical director at University Specialty Hospital, a former trustee of the Greater Baltimore Medical Center, and a retired physician who is a former high-ranking official at the Department of Health and Human Services, which oversees Medicare and Medicaid. The panel doesn't have a consumer representative.
Elected officials, hospital executives and regulators point to several advantages of rate regulation over a private market. They cite American Hospital Association data showing that the spread between hospital costs and charges in Maryland is the nation's lowest.The system's backers stand by it as the most equitable way to compensate hospitals for the cost of treating the poor.
"We take a more egalitarian approach than the other 49 states, and that requires a pretty significant state regulatory infrastructure," said Carmela Coyle, president of the Maryland Hospital Association.
But some critics say that money, rather than fairness, is the biggest reason that Maryland remains the only state where hospital rates are set for all patients.
About 30 other states that tried various forms of rate regulation abandoned it in the 1980s and 1990s, with several concluding that regulation prevented health maintenance organizations from obtaining significant discounts from hospitals.
Maryland's system took full effect in 1977, when the federal government agreed that Medicare and Medicaid would pay Maryland's regulated rates as long as Medicare's payments in the state didn't grow at a faster rate than the nation's. In 1980, U.S. Sen. Barbara Mikulski, a Democrat, was instrumental in getting this pact written into federal law.
The result of the "Mikulski amendment" is at least $500 million in additional Medicare and Medicaid dollars to Maryland annually, according to Robert B. Murray, executive director of the cost review commission. A big chunk of that money goes to pay hospitals for their costs of charity care and unpaid bills, he said.
"There is a strong interest in keeping this system by the health care industry and the politicians, and anybody else who likes an extra half a billion federal dollars splashing around in the local economy," said Jack Keane, a former Maryland rate-setting official who is now a consultant.
Some experts say that the existence of the Mikulski amendment is a powerful deterrent to changes in the system, even needed ones.
State Sen. George Della, a Democrat who represents South Baltimore, said he has long supported the idea of hospital rate-setting. But Della, who recently helped lower-income elderly constituents sued over hospital bills, said he is among several legislators who have questioned aspects of the system, only to hear from backers of the rate-setting system that any changes might make Medicare's costs grow too quickly and imperil the "Mikulski amendment."
The Maryland Hospital Association carries considerable clout in Annapolis, in large part because its members are critical economic engines in many legislators' districts. The association is quick to point out that small-town and urban hospitals have failed in many states that don't have rate regulation.
"It's been very successful in keeping community hospitals competitive," said House Speaker Michael E. Busch, a Democrat from Anne Arundel County and a member of the University of Maryland Medical System board of directors.
Over the past five years, an average of 41 of Maryland's 47 hospitals have made overall surpluses annually, according to state data. The industry's surplus reached $582 million in 2007.
"The secret sauce really is the fairness, the equity, and the balance that this body creates," Larry Lawrence told the cost review commission in 2006 when he retired as the hospital association's executive vice president.
In 2006, a Republican bill in the General Assembly to scrap the rate-setting system died in committee. In private meetings, legislators warned that going back to a private marketplace would bring in more competition for the same number of patients, said Ed Haislmaier, a research fellow for the Heritage Foundation, a conservative group based in Washington.
Haislmaier, who testified in favor of that bill, calls Maryland's system "a state-sanctioned government cartel operation."
"What you have is a system to make sure nobody goes broke, but on the flip side it means no one does really well, either," he said.
In other states
Some states have acted to regulate hospital debt-collecting practices.
California's Republican governor, Arnold Schwarzenegger, signed a bill in 2006 that makes patients eligible to apply for free care if their incomes are at or below 3.5 times the federal poverty level.
Also, California hospitals may not garnish wages or place liens on primary residences to collect bills from patients who are eligible for free care. Liens can make it more difficult to sell property or refinance mortgages, and also show up on credit scores used to screen applicants for jobs, credit, and rental housing.
"Voluntary guidelines didn't work. Without regulations, hospitals were going after people with overdue bills who in some cases had been out of the hospital for only two weeks. Liens were another burden on them," said former Assemblywoman Wilma Chan, an Oakland Democrat who sponsored the measure.
In 2003, Connecticut passed a law requiring hospitals and bill collectors to include information about free care in all collection notices sent to patients. Hospitals must determine if patients are eligible for free care before they can sue to collect an unpaid bill. Interest rates - for both pre-judgment and post-judgment - are capped at 5 percent for hospital debt, and special hearings are required before wages are garnished.
In Minnesota, more than 50 hospitals signed an agreement with Democratic Attorney General Mike Hatch in 2005 not to sue or garnish wages until they have verified that the patient owes a bill. They must confirm that insurers have been billed, offer the patient a payment plan, and reduce the bill if the patient is eligible for financial assistance.
But in Maryland, similar proposals have been defeated.
In 2005, Hurson proposed that the cost review commission develop a uniform financial assistance policy and require hospitals to use it. Uninsured patients with income below two times the federal poverty level would have been eligible. Hospitals would have been required to give the free and reduced-price care application to patients when they were asked to provide information about their ability to pay the bill.
But at the request of the rate-setting agency and the Maryland Hospital Association, the House health committee amended the bill to require hospitals, not the state, to develop a financial assistance policy.
The section stating when hospitals needed to give financial aid applications to patients was deleted. The bill was amended to leave it up to each hospital how to do it.
Former Gov. Robert L. Ehrlich, Jr., a Republican, signed the bill - which focused mainly on funding community health centers - into law.
Pegeen Townsend, the hospital association's senior vice president for legislative policy, said in a recent interview that the trade group opposed a mandate to offer the applications directly to patients.
"Directly giving them an application based on how they look is unreasonable and not right," she said. When asked why hospitals couldn't give it to all patients, Townsend replied: "Because we have signs posted and a form available."
Referring to rate-setting agency officials, Coyle said it's "not their expertise to be a consumer ombudsman."
Rather than state laws or regulations, hospitals follow voluntary principles on billing and debt collection that were developed by the hospital association in 2003. They include "treating all patients with dignity and respect regardless of their ability to pay."
According to the association, all of its members offer free care to patients with incomes below 150 percent of federal poverty guidelines, which this year is about $33,300 for a family of four, and less than $10,000 in net assets.
But beyond that, policies vary widely, even among hospitals that serve some of the same areas and populations. A charity care application can also be affected if a person owns property, has a job, or has a bank account. And in some instances, hospitals sue and obtain judgments against patients before offering charity care.
Hospital association officials dismiss the changes made in other states, saying the problems there were more severe because charges to the uninsured are higher.
"The way the system works in the rest of the country is Medicare and Medicaid underpaying and everyone else overpaying. What the rate-setting system has done is to not play those shenanigans out individual by individual," Coyle said.
Murray, executive director of the rate-setting commission, said the agency's approach has been to avoid "micro-managing" hospitals through laws or regulations. One exception, however, is a requirement that hospitals submit reports on how they benefit their communities.
"Sometimes we don't see things but the idea is hopefully by collecting a lot of data, it sheds the light of day," he said.
'What is reasonable?'
Leaders of the Health Services Cost Review Commission said in interviews that they were unaware how many hospital debt-collection lawsuits have been filed, or that hospitals filed liens and garnished wages. In fact, they initially said those practices happened only in other states.
"It is the kind of thing that someone would have to tell us because none of our reports would bring up that subject," said Joseph R. Antos, who was appointed to the commission by Ehrlich and reappointed this year by O'Malley. Antos is a scholar at the American Enterprise Institute, a conservative research group in Washington, D.C.
But in response to a request from The Sun, the agency recently provided a 2006 report based on its survey of how hospitals collect debt from patients who qualify for free or reduced-price care.
"While hospitals report that they rarely execute legal action, such steps may include garnishment of wages, putting a lien on a patient's home, and/or a claim on an estate. Hospitals report pursuing legal judgments so that their interests are protected at the time a house is sold or when a patient and his/her spouse is deceased," the report said.
The report also stated that hospital debt collection policies varied widely. Some hospitals said they didn't sue at all. Carroll Hospital Center said it considered the existence of a mortgage "an indicator for suit." Garrett County Memorial Hospital said it might sue if it found that a patient owned two cell phones or was saving to buy a lawn tractor.
Murray said if Maryland has not kept pace with other states on consumer protections, "it's a shame."
"We would not want to fall behind if hospitals in this state are becoming too aggressive with regard to debt collection," he said.
The state's chief health regulator said he was "very disturbed" by The Sun'sfindings.
"We wanted to create a balance of making sure the hospitals had sufficient funds to cover the uninsured but that they did a reasonable job of collection," said John M. Colmers, secretary of the Department of Health and Mental Hygiene. "The question here is, 'what is a reasonable job of collection?' That is something the commission has a right, and if they believe there is a problem, an obligation to look at."
Colmers, who was executive director of the rate-setting agency from 1987 to 1993, said he would prefer the commission to take action, but he would not rule out moving to change state law.
Donald A. Young, the commission's chairman, said the panel needs to examine its system for compensating hospitals for free and reduced-price care and unpaid bills.
Some legislators, citing action in other states, are questioning why the hospital association has opposed state-imposed minimum standards for free and reduced-price care and debt collection.
"The hospitals can't turn anybody away because they don't have insurance. And you think, that is a great system. But then there is this other side of the story. They go after them with these lawsuits. It's the untold story of little people being shuffled around by people much more powerful than they are," Della added.
Reached for comment by The Sun, Mikulski said in a recent letter to Young that she had championed the rate-setting system to "ensure that Marylanders have access to hospital care regardless of insurance status while at the same time controlling health care costs."
"If the Commission finds that some institutions are taking advantage of the letter or spirit of this system at the expense of the uninsured, I expect you to determine the best policy for Maryland following current guidelines and to develop any necessary new policies to stop inappropriate and overly aggressive collections," Mikulski wrote.
To examine debt collection practices by Maryland hospitals, The Baltimore Sun compiled a database of 132,000 collection lawsuits filed by hospitals across the state from January 2003 through June 30 of this year. The Sun also compiled a partial database of judgments after state officials didn't respond to repeated requests for a complete file. The incomplete database contained $101 million in such judgments without counting most judgments of less than $2,000. Reporters reviewed samplings of court files in several busy court districts, observed the collection process play out in the busiest of these courts in Baltimore City, and interviewed lawyers and patients involved in those proceedings. The Sun also obtained five years of financial records and other documents from the Maryland Health Services Cost Review Commission, which over a period of several months provided the newspaper with four different sets of data, each time contending that the previous version contained inaccuracies.
Find videos, a database of judgments, photo galleries, the hospitals' reaction to the series, and previous installments at baltimoresun.com/hospitaldebt
California: Passed law to standardize eligibility criteria for free hospital care; prohibited hospitals from garnishing wages or placing liens on primary residences of patients who are eligible for free care.
Connecticut: Passed law requiring hospitals and bill collectors to include information about free care in all collection notices sent to patients. Hospitals must determine if patients are eligible for free care before they can sue to collect an unpaid bill, and hearings are required before wages are garnished.
Minnesota: Fifty hospitals signed agreement with the state attorney general not to sue or garnish wages until they have verified that the patient owes a bill, confirmed that insurers have been billed, offered the patient a payment plan, and reduced the bill if the patient is eligible for financial assistance.
1969: New York becomes first state to regulate hospital rates. Some 31 states would eventually adopt some form of rate regulation, although only six adopted it fully.
1971: Maryland General Assembly creates Health Services Cost Review Commission. Commision begins regulating hospital rates three years later.
1977: Federal officials agree to participate in Maryland's system and pay higher prices here than in other states. That decision funnels millions of dollars in new Medicare and Medicaid payments every year to the state's hospitals.
1980: Congress makes the arrangement with Medicare and Medicaid permanent by writing it into federal law at the urging of U.S. Sen. Barbara Mikulski, D-Md.
1990s: States start to move away from rate setting, as hospitals complain that it holds down profits and health insurers want to strike deals with hospitals for discounts.
1996: New York scraps rate regulation in favor of a private marketplace, leaving Maryland as the last state to set rates for all patients.
2000: Maryland restructures rate-setting formula.
2005: House health care committee strikes or waters down proposals aimed at establishing statewide standards and practices for offering charity care to hospital patients.