Defending Hospital Collection Cases - Affirmative Defenses

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Author: Alan Alop, LAF
Last updated: October 2005

Affirmative Defenses

(Chapter 7 from Defending Hospital Collection Cases Manual)

Estoppel
Hospital Fails to Process Public Aid or Medicare Application for Eligible Patient
Payment in Full Defense - Medicaid/Medicare
Lack of Medical Necessity
Breach of Statutory Duty Pursuant to State Tax Exemption
Failure of HMO to Pay Due to Insolvency
Duress
Unconscionability

Estoppel

In Michael Reese Hospital v. Sandoval, defendants in a hospital collection case successfully asserted that the hospital was estopped from seeking reimbursement for services rendered. Michael Reese Hospital v. Sandoval, 6 Ill.App.3d 306, 285 N.E.2d at 560 (1st Dist. 1972) (abstract only). Unrebutted testimony of the defendant that hospital personnel had represented that the services would be provided without charge was sufficient to allow defendants to prevail. This defense can be useful where a hospital employee has affirmatively represented that services will be provided without charge, or for a specific amount, or that the state or another third party would assume responsibility for the bill. The assertion of this defense will also likely preclude summary judgment. Vaughn v. Speaker, 109 Ill. Dec. 245, 509 N.E. 2d 1084, 1088 (3rd Dist. 1987). See also dicta,  Providence Hospital v. Dorsey, 634 A.2d 1216, 1219  (D.C. App. 1993) (questioning patient’s liability if patient had informed hospital that a third-party would pay the bill). Click on the link below to view the pleading which includes an allegation of reliance on the hospital's representation.

Pleading for Estoppel Affirmative Defense Claim

Hospital Failed to Process Public Aid or Medicare Application for Eligible Patient

Frequently a patient is eligible to have the hospital bill paid by public aid or Medicare. Hospitals often fail to properly process applications for payment through the Department of Healthcare and Family Services (HFS) or Social Security and sue the patient for collection after it is too late to have the state or the federal government pay the bill. [23]

After interviewing your client, have them sign a Medicaid Claim Inquiry form (3437) and send the form to the Department. The Department will then issue a “Notice of Decision on Medicaid Inquiry.” This document will aid you in presenting the defense.

A hospital's failure to process a public aid or Medicaid application, where it had reason to know the patient might be eligible for such benefits, may provide an affirmative defense under several theories:

Breach of Statutory Duty

The hospital may be under a statutory duty to bill HFS (and process all necessary paperwork) if a patient is eligible for such coverage. Failure to process the application may constitute a breach of a statutory duty, thus precluding recovery. For example, Illinois Dept. of Healthcare and Family Services (formerly Illinois Dept. of Public Aid) regulations, 89 Ill. Admin. Code, 140.12 (h)(1) provides as follows:

If a provider [e.g. hospital] accepts an individual eligible for medical assistance from the Department as a Medicaid recipient, such provider shall not bill, demand or otherwise seek reimbursement from that individual or from a financially responsible relative or representative of the individual for any service for which reimbursement would have been available from the Department if the provider had timely and properly billed the Department. For purposes of this subsection, "accepts" shall be deemed to include:

  • An affirmative representation to an individual that payment for service will be sought from the Department;
  • An individual presents the provider with his or her medical card and the provider does not indicate that other payment arrangements will be necessary; or
  • Billing the Department for the covered medical service provided an eligible individual.

After interviewing your client have them sign a Medicaid Claim Inquiry form (3437) and send the form to the Department. The Department will then issue a "Notice of Decision on Medicaid Inquiry". This document will aid you in presenting the defense.

Payment

If the hospital could have sought and obtained reimbursement for its charges from a governmental source, argue that this constitutes payment of the bill. See Estate of Wade v. Rehabilitation Institute of Chicago, 156 Ill. App. 3d 844, 846-47, 510 N.E.2d 99, 101 (1st Dist. 1987), where this was characterized as a "feeble attempt at an affirmative defense" as the charges in that case were not eligible to be covered by public aid.

Estoppel (or "detrimental reliance")

The hospital is arguably estopped from collecting from the defendant where the defendant has relied on the hospital to properly process and forward the public aid application. Knickerbocker Hospital v. Downing, 317 N.Y.S. 2d 688 (1971); Mt. Sinai Hospital v. Kornegay, 347 N.Y.S.2d 807(1973); Brooklyn Hospital v. Criss, 349 N.Y.S.2d 488 (1973).

Breach of Fiduciary Duty/Negligence

The hospital's failure to process a HFS application or otherwise assist patients in this regard may constitute breach of a fiduciary obligation to the patient, or negligence.

In Decatur Memorial Hospital v. Cowick, (Clearinghouse #45,196 B) (Illinois Cir. Ct. 1989) the hospital submitted a claim to the state Medicaid agency and the claim was denied. Later the state agency reversed itself and asked the hospital to resubmit the claim. The hospital refused to resubmit the claim and instead brought an action against the patient to recover for its services. The court did not allow the hospital to recover for the services that Medicaid would have paid.

See Banks v. Sec. Indiana Family and Social Services Administration, 997 F.2d 231 (7th Circ. 1993); Serafini v. Blake, 213 Cal. Rep. 207 (Cal. Super. 1985); O'Neil v. Montefiore Hospital, 202 N.Y.S. 2d 436 (1960). See also Mt. Sinai Hospital v. Korneqay, 347 N.Y.S.2d 807 (1973); Shaw v. Tait, Clearinghouse No. 30,025 B (N.Y. Sup. 5/6/80); and Amsterdam Mem. Hosp. v. Cintron, 384 N.Y.S.2d 225 (1975).

Breach of Duty to Mitigate Damages

The hospital's failure to secure payment from a governmental entity which may be responsible for the bill may constitute a violation of the hospital's normal obligation to mitigate damages. See Grauer v. Valve and Primer Corp., 47 Ill. App. 3d 152, 361 N.E.2d 863(2d Dist. 1977).

Click on the links below to view documents necessary to present an affirmative defense claim related to the hospital's failure to process public aid or medicare for an eligible patient.

Pleading, Hospital's Failure to Secure Payment From HFS Constitutes Negligence/Breach of Fiduciary Duty
Pleading, Hospital Breaches Statutory Duty to Secure Payment From HFS
Pleading, Estoppel by Virtue of Hospital's Failure to Secure Payment from MANG
Defendant's First Request for Production of Documents
Interrogatories, Sets One and Two
Memorandum in Support of Affirmative Defenses Fiduciary Relationship, Estoppel and Mitigation
Memorandum in Opposition to Plaintiff's Motion to Strike
Illinois Department of Healthcare and Family Services, Medicaid Claim Inquiry

Payment in Full Defense - Medicaid and Medicare

Medicaid

Where a hospital seeks reimbursement from public aid for a Medicaid eligible patient, express statutory authority and a body of case law has developed which bar the hospital from seeking payment from the patient. See 305 ILCS 5/11-13; Ill. Admin. Code title 89, Sec. 140.12(h) (1993).

Federal regulations require every provider of medical services in a Medicaid program to execute a provider contract with the state Medicaid agency. 42 CFR § 431.10. The regulations further require this contract to contain standard terms and provisions:

A state Plan must provide that the Medicaid agency must limit participation in the Medicaid program to providers who accept, as payment in full, the amounts paid by the agency... 42 CFR §  447.15.

The provider contract and 42 CFR § 447.15 thus preclude the hospital from:

  • Seeking Payment Beyond the Medicaid Amounts (i.e asking patients to supplement the Medicaid portion of the bill). For example, the hospital cannot ask the medicaid patient to pay the difference between the normal hospital bill and the medicaid rate. But this provision does not bar the hospital from seeking normal co-payments. See Public Health Trust of Dade County School Board, 693 So.2d 562, 566 (1996).
  • Billing for non-covered services. If Medicaid refuses to pay a portion of the hospital bill because Medicaid deems it “medically unnecessary," the hospital may not seek to collect it from the patient.
  • Billing the patient where the hospital was at fault. For example, if Medicaid refuses to reimburse the hospital because the hospital has filed the Medicaid claim untimely, the hospital cannot seek to have the patient pay that bill. See Serafini v. Blake, 213 Cal. Reporter 207 (Super. 1985).

In Evanston Hospital v. Hauck, 1 F.3d 540 (7th Cir. 1993), a hospital accepted payment from Medicaid for a patient. When, shortly thereafter, the patient won a multi-million dollar tort award, the hospital attempted to refund the Medicaid funds to the federal government so it could sue the patient for a larger amount of money. The court did not permit the hospital to do this, ruling that the hospital could not pursue the patient once it accepted the Medicaid payment. See also Society of the New York Hospital v. Mogensen, 319 NY Supp.2d 258 (1971) (court held that a hospital could not bill a patient for services rendered where the patient had prior Medicaid authorization).

A similar case arose in Glengariff Corp. v. Snook, 471 NYS2d 973 (N.Y. 1984). There a nursing home sued the son of a patient based on his agreement to pay the nursing home its fees. After he placed his mother in the nursing home the son applied for medicaid coverage for his mother and medicaid did pay the nursing home a substantial sum. But the nursing home then sued the son for the rest of the bill even though he had paid for the period up to the point medicaid coverage kicked in. The court ruled that the federal regulatory scheme precluded the nursing home from seeking additional funds from the son. It said that if it allowed the guarantee signed by the son to waive the payment in full rule then every provider would soon use that approach, in direct contravention of public policy. The case was dismissed.

In the case of Sparks v. Sawaya, 459 N.E.2d 901(Ohio App 1983), a doctor accepted a patient initially as a private paying patient. Later he agreed to treat her as a Medicaid patient, but still asked her to pay him $260 in connection with a childbirth. The patient sued the doctor for the $260 she had paid him and for punitive damages. The appellate court ruled that once the doctor accepted the patient on a Medicaid pay basis he could not ask her to pay anything. The court awarded the patient her $260 but no punitive damages.

In the case of Banks v. Sec. Indiana Family Social Serv Administration, 997 F.2d 231 (7th Cir. 1993), the Seventh Circuit Court of Appeals ruled that two Medicaid recipients were not entitled to notice and a hearing when their Medicaid claims were denied. They were not entitled to due process protections because the Court stated that the payment in full regulations would prevent a provider that had not submitted the proper forms to the Medicaid agency from seeking reimbursement from the two patients. See also "Defending Against Suits by Medical Providers", 1986 Special Summer Ed. Clearinghouse Rev. 454.

Medicare

Like Medicaid, Medicare provides that once a hospital accepts Medicare reimbursement for a patient the hospital may not pursue the patient for further payment. 42 U.S.C. § 1395cc(a)(1)(A); 42 C.F.R. § 489.21(a). See also Evanston Hospital v. Hauck, 1 F.3d 540, 544 (7th Cir. 1993) and Rybicki v. Hartley, 792 F.2d 260 (1st Cir. 1986).

Lack of Medical Necessity of Services Provided

In certain cases it may be possible to argue that a particular procedure provided by the hospital was not medically necessary and therefore the hospital may not recover for such service. If, for example, the hospital takes a chest x-ray of a patient hospitalized for a hangnail removal, the patient should not be required to pay for the unnecessary x-ray. The issue of whether the hospital bears the burden of proving the medical necessity of services rendered, in order to recover for such services, is not resolved. Some judges may buy the contention that the hospital's burden to establish the reasonableness of its charges also encompasses the burden of showing the medical necessity of each charge. Some courts may allow the defendant-patient to raise this issue as an affirmative defense; and some may not allow it at all. See Sherman Hospital v. Wingren, 169 Ill. App. 3d 161, 164, 523 N.E.2d 220, 222 (2d Dist. 1988); Dreyer Medical Clinic v. Corral, 227 Ill.App.3d 221, 591 N.E.2d 111, 115 (2d Dist. 1993), and Estate of Wade v. Rehabilitation Institute of Chicago, 156 Ill. App. 3d 844, 848, 510 N.E.2d 99, 100 (1st Dist. 1987). The Third District Court of Appeals has recently held that the defense of lack of medical necessity will only be recognized where the physician who requested the challenged services was an employee of the hospital; the court suggested that hospitals should not be penalized if a non-employee physician requests unnecessary hospital services. Sisters of the Third Order of St. Francis v. Summerson, 217 Ill. App. 3d 377, 577 N.E. 2d 177 (3d Dist. 1991).

Occasionally an insurer will deny coverage to an insured patient on the grounds that the hospital services which were rendered were not medically necessary. If this is your client's situation it puts the defendant in a hospital collection action in an excellent litigation position: if the insurer can demonstrate that the services were indeed unnecessary, then the hospital should not be able to recover for providing such services. On the other hand, if the hospital can persuade the trier of fact that the services were medically necessary, the insurer must pick up the tab. So let the plaintiff/hospital and the third-party defendant/insurer fight this one out themselves. To place your client in this enviable position you will need to file an affirmative defense against the hospital and a Third-Party Complaint against the insurer. Click on the links below to view a sample pleading and supporting memorandum for the affirmative defense of lack of medical necessity.

Pleading, Affirmative Defense Lack of Medical Necessity
Memorandum in Support of Affirmative Defense of Lack of Medical Necessity

Hospital Has Breached Statutory Duty Imposed by Charitable Tax Exemption

Most non-profit private hospitals are exempt from ad valorem state taxes. In return for such status, the hospitals are generally required by the taxing authority to use their facilities for 'charitable' purposes. Arguably this encompasses the provision of free services to those unable to pay. The hospital's breach of this statutory duty may constitute an affirmative defense to the collection action.Jackson County v. State Tax Commission, 8 Clearinghouse Rev. 372 (No. 13,286A).

Discovery should be done to determine if the hospital's by-laws or articles of incorporation provide that the hospital is to render charitable services for the poor; if the hospital routinely seeks payment from the indigent it may violate a fiduciary duty to implement the purposes of the corporation and/or may also constitute an ultra vires act. Also ascertain whether the hospital has obtained private donations or grants expressly reserved for provision of services to the poor. If so, the hospital may be contravening its fiduciary duty to use such money as directed. At the minimum you may be able to persuade the hospital to use such funds to cover your client's bill.

In the early nineties the State of Pennsylvania sued some hospitals for failing to provide enough free services to earn their exemption from property taxes. Texas enacted a law in 1993 that requires hospitals to provide charity care and community services equal to 5% of patient revenues in order to retain their tax exemption. No such action has occurred in Illinois. See The Reporter, "Profits, Reform Threaten Tax Breaks for Non-Profit Hospitals," December, 1993. In the 2004 legislative session of the Illinois legislature, a bill was introduced which would require non-profit hospitals to provide free care to patients whose income is within 100% of federal poverty guidelines. The bill passed the Senate unanimously but the session ended before it could be considered by the House. But the Illinois Hospital Association, on  September 11, 2003, adopted a “Report of the Task Force on Charity Care Policies and Collection Practices for the Uninsured.” These are recommendations for all Illinois hospitals, among which are that free service be provided to uninsured patients whose income is within 100% of federal poverty guidelines. Click on the links below to view a sample pleading for the affirmative defense of charitable exemption and supporting memoranda.

Pleading, Affirmative Defense Charitable Exemption
Memoranda in Support of Tax Exemption Affirmative Defense

Failure of HMO to Pay Due to Insolvency

Occasionally an HMO will bite the dust--declare bankruptcy or fold. Those insured by the HMO may face hospital bills that should have been paid by the HMO but were not. Illinois law at 215 ILCS 125/2-8 does not allow hospitals or other providers to take any form of collection action against patients facing these circumstances.

Duress

In rare instances the common law doctrine of duress may provide an affirmative defense to a hospital collection case. Consider the following facts from an unreported case:

The mother of a twenty-one year old is called to the hospital one night; her son has been hit by a car. The hospital admissions representative tells the woman: “You must sign this document if you want to see your son." The woman signs, believing she had no choice. The document was a guaranty agreement calling for the woman to pay for the adult-child’s hospital expenses. It is later ruled unenforceable as the mother was deemed to have signed under duress.

In Illinois, common law duress exists where an individual is induced by an unlawful act or wrongful threats to make a contract under circumstance which deprive the person of the exercise of free will. First Security Bank of Glendale Heights v. Bawoll, 120 Ill.App.3d 787, 458 N.E.2d 193, 198 (2d Dist. 1983).

Unconscionability

Illinois has a long history of recognizing a common law defense of unconscionability. The argument can be made that charging indigent and uninsured patients three times the charges imposed on the insured “shocks the conscience” and is unconscionable. Click on the links below to view a sample pleading for the affirmative defense of unconscionability and supporting memorandum.

Pleading, Affirmative Defense Unconscionability
Memorandum in Support of Affirmative Defense of Unconscionable Conduct

[23]  See 89 Ill.Admin. Code Section 140.20(c) for time limits on the submission of certain hospital claims to HFS.

Related Documents

Pleading for Estoppel Affirmative Defense Claim
Pleading, Hospital's Failure to Secure Payment From HFS Constitutes Negligence/Breach of Fiduciary Duty
Pleading, Hospital Breaches Statutory Duty to Secure Payment From HFS
Pleading, Estoppel by Virtue of Hospital's Failure to Secure Payment from MANG
Defendant's First Request for Production of Documents
Interrogatories, Sets One and Two
Memorandum in Support of Affirmative Defenses Fiduciary Relationship, Estoppel and Mitigation
Memorandum in Opposition to Plaintiff's Motion to Strike
Illinois Department of Healthcare and Family Services, Medicaid Claim Inquiry
Pleading, Affirmative Defense Lack of Medical Necessity
Memorandum in Support of Affirmative Defense of Lack of Medical Necessity
Pleading, Affirmative Defense Unconscionability
Memorandum in Support of Affirmative Defense of Unconscionable Conduct

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