Are Nonprofit Hospitals Betraying Their Mission?

Dec. 16, 2004 -- -- Charles Rehberg, a business manager at a small surgery clinic in Albany, Ga., was leaving the office one evening last August when he says he was suddenly confronted by two men.

They said they were ex-FBI agents who had been hired to investigate him, Rehberg said. He said they told Rehberg they wanted him to go with them, but didn't say where.

When he refused, Rehberg said one of them told him: "If you're not smart enough to do this for yourself, you should think about your wife, Wanda, and your lovely family."

Rehberg knew why they had come. He and another physician at the clinic, John Bagnato, had been investigating the finances of Phoebe Putney Memorial Hospital, a local nonprofit institution. Now the two men were there to investigate him on behalf of the hospital.

Nonprofit hospitals get a tax exemption for helping the community, but critics say some are instead engaging in "uncharitable practices." The probe Rehberg and Bagnato began would eventually open hundreds of other nonprofit hospitals across the country to scrutiny.

What they found was that at the same time as Phoebe charged uninsured patients -- often working poor -- full and extremely high prices for care received, and then used legal but aggressive collection practices to collect their debts, the hospital was sitting on millions of dollars of cash reserves and made tens of millions in profits.

The men alleged that Phoebe's actions were more common among nonprofit hospitals than most people think -- that the hospitals were taking advantage of the uninsured.

Turning Over Stones

Phoebe is in many ways the crown jewel of the small city in which Rehberg and Bagnato live. It's widely recognized for its community service and its first-class care.

Bagnato is Phoebe's chief of surgery. Several months ago, he asked his office manager, Rehberg, to research a business plan for his practice. They discovered the hospital was flush with millions of dollars, and they say the hospital was often victimizing those people it was supposed to help.

Uninsured patients who entered Phoebe Putney would be called upon to sign a form guaranteeing payment in full when they left. And then when they couldn't pay, the hospital would pursue even the poorest patients with aggressive collection practices.

"When you see people who come to the hospital in need and they leave only to be preyed upon by these exorbitant bills, frankly it's ethically wrong," Bagnato told ABC News' "Primetime." "And I think it's morally corrupt."

1,000 Percent Markup

James Michael Paul says he had no insurance when he went to the hospital in severe pain.

He says doctors took several X-rays, a process that took an hour and 15 minutes, told him there was nothing wrong, and sent him on his way. The bill was $3,000.

He says it was loaded with shockingly high charges. For example, one charge was $1,200 for a dye injection. The manufacturer's list price is $110.

Phoebe's chief executive officer Joel Wernick told "Primetime" the hospital's prices don't "reflect the actual cost in the same way as the services that are being provided." In other words, the $1,200 reflects more than the cost of the material -- it also involves its distribution and use.

But still, the uninsured have to pay these charges. At a private hospital across town, an insurance company would have paid about $700 for the same procedure.

That's because the government and insurance companies negotiate large discounts off those prices, and the uninsured don't have anyone to negotiate for them.

Virginia Franklin had her wages garnished over a $1,200 hospital bill, even though she was making near minimum wage.

Rehberg says Phoebe Putney's pricing is driven by a unique logic. "The intent is the psychological intent to cause those patients not to come back," he said. "What the hospitals would really like is that those uninsured patients just go somewhere else."

In a separate interview, Wernick countered, "it is not a big secret in Albany, Ga., that Phoebe Putney takes care of everybody who walks through the door."

Living Well

Bagnato and Rehberg say they were even more astonished that while the hospital was squeezing the poor for every penny it could get, it was astonishingly wealthy.

Phoebe Putney made a $34 million profit last year -- tax-free, due to its nonprofit status.

Wernick's compensation package was $600,000, and Phoebe-Putney spent a combined $2 million yearly in travel expenses, according to government filings. A board retreat last year was at the Ritz-Carlton at Amelia Island in Florida.

Phoebe Putney spent $90,000 so executives could check out the company's insurance accounts in the Cayman Islands. And to get there, they chartered a private jet belonging to the law firm of celebrity attorney Johnnie Cochran -- at a cost of $14,000 a day.

When "Primetime" asked about the expenses, Wernick said, "The only time we travel is for business-related purposes and [we] use the most appropriate means to do so."

Bagnato and Rehberg were stunned by what they had discovered, and widened their probe. They found many other nonprofit hospitals have large cash reserves and profits.

Hospital Reacts

The trouble for Bagnato and Rehberg began, they say, when they went public with everything they found about Phoebe Putney. That's when the private investigators showed up.

The hospital acknowledges hiring the men, but denies any intimidation occurred.

Then Phoebe sued Rehberg for racketeering and fraud.

The men had hoped government agencies would investigate Phoebe Putney and come to their aid. But nothing happened.

Only when a small-town lawyer named Dick Scruggs from Oxford, Miss., heard about their struggle, did they find some help.

Scruggs cast a long shadow: He was the first lawyer to successfully sue Big Tobacco.

An Image Issue

When he heard about Bagnato and Rehberg's troubles, Scruggs said, "it just offended my sense of fairness."

He enlisted other high-powered lawyers, including another veteran of the tobacco wars, Randy Hopper, and filed lawsuits against 400 hospitals in 23 states, charging they are hoarding money and violating the purposes of their tax exemptions.

"We think they should do what they've told the government and told the IRS that they're about, which is that they are going to help and treat the needy, not engage in Soprano-like collection practices," Hopper said.

In a statement to "Primetime," the American Hospital Association called the lawsuits "misdirected -- diverting focus away from the real issue of how we as a nation are going to extend health care coverage to all Americans."

Phoebe is among the hospitals being sued, but Wernick says its large profits and cash reserves are a sign of a healthy hospital, and that it would never take advantage of the uninsured.

He says Phoebe spent $50 million on charity care last year -- but Bagnato said the figure is part of "a deliberate game of deception."

"They have all these names for all these different amounts. It just looks like smoke and mirrors," he said.

Claims of Responsiveness

Scruggs' critics say he's a billionaire trial lawyer just looking for a new deep pocket to attack. He said the last thing he wants to do is put the hospitals out of business.

"The amount of money that's involved here to the hospital is minuscule," he says. "They collect virtually nothing from the men and women we represent. We're not asking them to write these people a big check, we're simply saying don't go after them for money you'll never collect anyway."

Meanwhile, Wernick said his hospital only aggressively pursues debtors as a last resort. He also said Phoebe aggressively reaches out to the uninsured to let them know the hospital is willing to help them with their bills.

Phoebe put ABC News in touch with some of the patients who had been helped, but "Primetime" spoke to others who said they were never made aware of financial assistance.

Shown a brochure touted by Wernick, Franklin said, "I have never seen any of these brochures. Nothing like this. Nothing."

Phoebe has dropped its lawsuit against Rehberg, but Rehberg has countersued, claiming libel, slander and false imprisonment.