Some hospitals seize patients' tax refunds

Duluth, Minn.-based Essentia Health collects only about 20% of the $125 million its patients owe for self-paid services, deductibles and cost-sharing.

To boost those collections, the 11-hospital, not-for-profit system takes advantage of a Minnesota law allowing it to seize state tax refunds from people who have unpaid bills. Under the law, five of its rural hospitals can use the “revenue recapture” program since they lease facilities from state or local governments.

In 2018, the tax refunds it intercepted totaled more than $500,000, a small percentage of Essentia’s nearly $4 billion in total patient revenue.

“We get excited about anything we recover,” said Melanie Wilson, Essentia’s vice president of revenue services. “We invest a lot of money to serve those communities. This is just a small way to balance our commitment with their commitment back to us.”

Under little-known laws, Minnesota and a number of other states allow hospitals and other healthcare providers, such as ambulance companies, to take patients’ tax refunds over multiple years to cover unpaid bills. These states include Alabama, Kansas, Oregon, South Carolina and Wisconsin. A bill to establish a similar system in Georgia passed the state House but died in the Senate last year due to concerns about the impact on low-income patients.

Hospitals must file claims with the state revenue department, which then takes available refund amounts in taxpayers’ accounts and sends the money to the hospital.

The state laws generally limit this recovery process to providers that are owned by or affiliated with city, county or state government entities. In some states, laws written many years ago to let public agencies like the courts collect unpaid penalties and fees from debtors’ tax refunds were later broadened to include public healthcare providers.

But some private, not-for-profit hospital systems with a tenuous connection to government are using this mechanism to recover unpaid medical debt. In Minnesota, they include Allina Health, CentraCare Health and Essentia.

There, providers have collected $91.2 million over the past five years from 272,000 tax refund seizures, according to the Minnesota Department of Revenue. That averages about $335 per seizure, though amounts ranging from around $50 to several thousand dollars may be taken.

In South Carolina, private not-for-profits using the state’s “setoff debt” program include Prisma Health, Lexington Medical Center and Spartanburg Regional Healthcare System. North Carolina-based Atrium Health and Beaufort Memorial also have used the South Carolina law to recover debts owed by patients from that state. 

Fourteen hospitals and systems grabbed $84.6 million in tax refunds in 2017 alone, according to the South Carolina Department of Revenue. Individual seizures average about $540.

These laws offer an attractive way for hospitals, which face tough challenges collecting patient responsibility charges from uninsured patients and those in high-deductible plans, to recover relatively small unpaid amounts without going through a costly, time-consuming legal collection process. 

Nationally, hospitals collect only about 6% of bills owed by self-pay patients, and 15.5% of bills individually owed by insured patients, according to a 2017 analysis by Crowe Horwarth.

Hospital leaders say they use the tax refund seizure process as a last resort, after trying to work with patients on charity care, financial aid and payment plans. Very few patients object once they realize why their tax refund was seized, because they know they owe the medical debt, they add.

“We’ve never received a complaint about this program, to my knowledge,” Essentia’s Wilson said. “I attribute that to our doing so much communication upfront and allowing people so many options.”

But consumer advocates caution that the process of seizing tax refunds may violate consumers’ due process rights, such as receiving meaningful notice and the opportunity to appeal. There generally is no impartial process for verifying the validity or accuracy of the bill, or for determining whether the patient’s refund included government assistance that is exempt from collection, such as Social Security.

“My clients move around a lot and it doesn’t appear they are receiving notices,” said Fred Pfeil, a staff attorney with South Carolina Legal Services. “The first time they find out is when they file their taxes and see their refund is being offset.”

Due process is lacking in these situation, said Galen Robinson, litigation director at Mid-Minnesota Legal Assistance, who’s considering a legal or legislative challenge to his state’s revenue recapture program, adding, “I think it’s an abuse.”

Beyond that, some hospital leaders fear seizing tax refunds could trigger political blowback. Indeed, after the Post and Courier newspaper in Charleston, S.C., wrote about the practice in April, a conservative South Carolina Republican lawmaker filed a bill to abolish it, calling the system unfair. The bill died, however.

Intercepting refunds may be particularly problematic if the public perceives that prosperous private health systems are using the state tax system as a revenue collection arm.

“What used to be small county hospitals have moved to private status,” said Schipp Ames, vice president of communications at the South Carolina Hospital Association. “The water gets a little muddy about the debts they’re collecting. And the optics aren’t great.”

Some observers question whether private systems are stretching these laws. “I don’t think it’s legal if they aren’t a government entity,” said Spartanburg, S.C., attorney Ken Anthony, whose class-action challenge against South Carolina’s setoff law 20 years ago prompted hospitals to adopt more rigorous notification and appeals procedures. “I don’t think some of these public-private partnerships will pass the test.”

A spokesman for South Carolina Attorney General Alan Wilson said his office hasn’t examined the legality of these hospital practices.

Indeed, some hospital systems that have taken patients’ tax refunds are distancing themselves from the practice.

Greenville Health, now part of Prisma Health—which collected $24.6 million through South Carolina’s “setoff debt” program in 2017—has “exited” the program, said Prisma Chief Financial Officer Terri Newsom. Its governmental arm, Greenville Health Authority, is “winding down” its setoff collection efforts. Prisma reported fiscal 2018 net patient revenue of $3.9 billion, according to Modern Healthcare’s financials database.

Sanford Health said it’s not filing any new claims under the Minnesota revenue recapture program, even though one of its rural facilities, Sanford Worthington Medical Center, recovered $9,700 on 16 claims in 2018. Those claims pre-date Sanford’s acquisition of the city-owned hospital in 2008. Sanford reported $3.4 billion in patient revenue in 2018.

“Sanford wants to make sure we’re doing the right thing for patients,” said Mike Beyer, the system’s senior director of patient accounts. “But this is a dissatisfier for patients if they’re expecting a tax refund and we’re taking it away from them.”

Many smaller rural hospitals, however, see collecting unpaid bills through patients’ state tax refunds as helpful to their financial survival.

Last year, Lawrence Medical Center in Moulton, Ala., snagged $226,000 through the state’s tax refund “intercept” system. The 44-bed county-owned hospital in the northwest part of the state had net revenue of $14.8 million, with an operating margin just under $500,000.

“It was a big deal for us,” said CEO Dean Griffin, whose hospital started using the 5-year-old system last year. “We’re getting by but we’re struggling because reimbursement rates in Alabama are so low. That $226,000 has certainly helped us.”

Griffin said he sends a list of patients who haven’t paid bills in more than 180 days and who don’t qualify for charity care to the Association of County Commissions of Alabama. The association forwards the intercept request to the state revenue department, with the association collecting a $25 fee from the taxpayer’s refund on top of the hospital’s claim.

Under the Alabama system, patients receive mailed notice that their tax refund has been placed in escrow, and they have 30 days to request a hearing with the hospital to contest the fund seizure.

But only a small percentage of patients whose tax refunds are docked ask for a hearing, Griffin said. “Most of the time they just call to verify what it was for. They’re usually very understanding. Sometimes they’ll set up a payment plan to pay the amount they still owe.”

The intercept system is much easier than turning over unpaid bills to a private collection agency, and a growing number of Georgia public hospitals are participating, he added.

Bigger hospital companies are also exploiting the refund seizure systems, taking advantage of historical links to municipal or county hospitals that now may be mostly formal.

Atrium Health, a not-for-profit originally established as the municipal Charlotte-Mecklenburg Hospital Authority in North Carolina, capitalized on its status as a public entity to snare $5.4 million from South Carolina patients’ refunds in 2017. The South Carolina law allows public providers in other states to use its setoff system. Atrium reported $5.9 billion in revenue in 2018.

“This process is used as a last resort, and only after exhausting all other avenues to settle a patient’s account and ensuring that the patient can but has refused to pay the debt,” Atrium said in a written statement.

Allina Health, which reported revenue of $4.3 billion in 2018, uses a provision of the Minnesota revenue recapture law allowing licensed ambulance services, public or private, to seize refunds for unpaid bills. It’s garnered nearly $5.7 million from more than 15,000 claims over the past five years.

Mark Anderson, director of finance for Allina Health Emergency Medical Services, acknowledged that the statutory provision originally was written to help struggling volunteer ambulance services in rural parts of the state. Still, Allina has used the system in its Minneapolis-St. Paul service area.

Allina only seeks a patient’s tax refund after repeated letters and at least one phone call to the patient to try to work out a payment arrangement, he said. It first makes sure the person doesn’t qualify for charity care or financial assistance and has the ability to pay. Anderson wasn’t sure if the letters specifically warn people that their tax refunds may be seized.

“The typical ambulance bill is about $2,000, and taking people to court isn’t very cost-effective,” he said. “No one wants to create hardships for anyone, but some individuals just don’t cooperate.”

CentraCare, a six-hospital system serving central Minnesota, has collected $3.2 million over the past five years, on nearly 9,800 claims by two of its small rural hospitals whose buildings are leased from local government.

“We make sure our patients are well aware of the (revenue recapture) program, and many have told us they rely on the program to pay their bills,” said Kathy Parsons, vice president for revenue cycle and risk contracting at CentraCare, which reported $1.5 billion in revenue last year.

Consumer advocates aren’t sold. They say these state laws need to be reconsidered because the process lacks adequate protections against people’s money being taken wrongly.

“The government is putting a lot of faith in hospitals doing the right thing,” Pfeil of South Carolina Legal Services said.

Ames, of the South Carolina Hospital Association, said his organization is willing to discuss reform legislation, including addressing whether larger, private, urban hospitals should be able to use the setoff program. “There needs to be a clear understanding of when this can be used,” he said.

But Essentia’s Wilson argues that more states should establish tax refund seizure laws for medical debts, and the system should be available to more providers.

“People say everyone should have healthcare, but when it comes to the priority of paying, we are placed at the very bottom, below the joys of life,” she said. “This is just a small way to ensure that people who can pay should pay.”