Three years after Sarbanes-Oxley went into effect to regulate publicly traded companies, its complex requirements are making their way into the non-profit sector – and health care lawyers are advising hospitals to pay attention.

For non-profit hospitals and their attorneys, Sarbanes-Oxley is a “wake-up call,” said Boston health care attorney Paul Barrett, who is a partner at Donoghue, Barrett & Singal.

Over the past few years, class actions involving uninsured patients have been filed in more than 20 states, claiming that non-profit hospital systems unfairly charge excessive rates to indigent patients and haven’t provided enough “charity care” to justify their tax-exempt status.

In addition to this surge in litigation, a movement toward increasingly regulating non-profit hospitals and encouraging improved accountability has been picking up steam in state legislatures, attorney generals’ offices, the IRS and the Senate Finance Committee.

“The pressure is coming from all angles and kinds of players,” said Chicago health care attorney Frederic J. Entin, former general counsel of the American Hospital Association.

While only two specific provisions of the law apply directly to non-profit organizations, health care attorneys are advising their hospital clients to consider adhering to a number of other more stringent requirements in the Act.

“We suggest that clients look at Sarbanes-Oxley as one source of best practices,” said Entin, who practices with Foley & Lardner.

Barrett agreed: “If something is considered best practices, you don’t want to be cited in any public relations piece as not complying with it.”

Stricter Rules

Two provisions of Sarbanes-Oxley apply directly to non-profit entities: (1) the whistleblower provision, which says that an organization can’t fire an employee for reporting illegal activities involving a federal issue; and (2) the document retention provision, which requires organizations to keep and maintain documents after they become aware of an investigation.

But the rules of SOX are starting to reach beyond that in the non-profit world.

Last year, California enacted a significant non-profit accountability law that has been compared to Sarbanes-Oxley, although hospitals avoided being covered through swift lobbying action.

But other state laws encouraging non-profit accountability have been enacted over the past few years – and even stricter controls for non-profit hospitals and boards are on the radar screen in several states, including New Jersey and Rhode Island.

Further, many state attorney generals – most recently in Illinois – are pushing proposals to force tax-exempt hospitals to spend a certain amount of funds on indigent care in order to justify their non-profit status.

The “charity care” class action suits – pioneered by Oxford, Miss. plaintiffs’ lawyer Richard Scruggs, who was involved in the big tobacco litigation – claim that non-profit hospitals’ sending bigger bills to uninsured patients than they do to insurance companies amounts to overcharging and breach of contract.

These cases have met with some success. As of Jan. 1, a non-profit hospital system in Oregon had settled a case, agreeing to give the plaintiffs and future patients discounts similar to those given to insurers.

However, several federal courts have rejected the suits. For example, a U.S. District Court in New York dismissed a charity care class action. Scruggs has refiled some claims in state court, where success has been mixed, according to Entin.

But regardless of their success or failure, the suits raise the question of whether non-profit hospitals are abusing their tax-exempt status.

Furthermore, the Senate Finance Committee, led by Sen. Charles Grassley, R-Iowa, has been looking into the issue as well.

Barrett said that Sarbanes-Oxley has led to increased enforcement of long-standing IRS regulations that affect tax-exempt organizations, and that it’s only a matter of time before the non-profit sector will have additional compliance requirements.

Regulations for non-profits are “on a parallel track with Sarbanes-Oxley. The increasing set of responsibilities just isn’t going away,” he said.

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