Legal to Sue, Wrong to Sue? A Nonprofit Hospital's Decision on 212 Lawsuits for Unpaid Medical Bills
Student Name
American College of Education
HLTH5603: Legal and Ethical Decision Making in Healthcare Administration
Module 4 Assignment
Instructor Name
January 31, 2028
The Proposal
A 350-bed nonprofit hospital in a mid-sized Southern city, a composite written for this assignment, paused lawsuits against patients during a period of financial stability. After two years of operating losses, the revenue cycle department proposed resuming them. The proposal identifies 212 accounts with balances over $1,000 that have been in collections for more than a year, totaling about $1.4 million, and recommends filing suits in general district court, followed by wage garnishment where judgments are obtained. The department estimates that about 40 percent of the balance could eventually be recovered, roughly $560,000, less legal costs.
The chief financial officer supports the proposal as necessary and lawful. The chief nursing officer and the director of community benefit oppose it. The chief executive has asked for an analysis that separates the legal question from the ethical one and makes a recommendation. The difficulty is not that the proposal breaks a rule; it is that it may keep every rule and still betray the reason the hospital exists.
The Proposal Is Lawful
State law permits creditors, including hospitals, to sue for unpaid debts and to garnish a portion of wages after a judgment, subject to federal and state limits on the amount that can be garnished. For a nonprofit hospital, federal tax law adds conditions. Section 501(r) of the Internal Revenue Code requires tax-exempt hospitals to maintain a written financial assistance policy, to limit charges to eligible patients and to refrain from extraordinary collection actions, which include lawsuits and wage garnishment, until they have made reasonable efforts to determine whether the patient is eligible for financial assistance (Internal Revenue Service [IRS], 2024). Those efforts include notification periods and written notice before collection action begins.
The revenue cycle department reports that each of the 212 accounts received the required notices and a plain-language summary of the financial assistance policy, and that the notification periods have passed. Assuming those records are accurate, the proposed lawsuits and garnishments would comply with state law and federal tax requirements. The legal question has a clear answer: the hospital may proceed.
The Ethical Problem
Three features of the 212 accounts raise ethical concerns that the legal analysis does not reach. The first is who the patients are. A review of the accounts found that 131 of the 212 patients live in ZIP codes with median household incomes below the county median, and 74 had income information on file suggesting they would likely have qualified for financial assistance had they completed the application. The notices were sent, but many were returned undeliverable or never answered, which is not the same as a considered decision to forgo assistance. Nationally, medical debt is concentrated among people in poorer areas; Kluender et al. (2021) estimated that 17.8 percent of individuals had medical debt in collections in 2020, with mean amounts much higher in the poorest ZIP code deciles than in the richest.
The second is the hospital's mission and tax exemption. The hospital's tax exemption rests on the expectation that it provides benefit to its community, and its mission statement commits it to serving all people, especially the poor and vulnerable. Suing patients who were probably eligible for charity care converts a community benefit obligation into a collection strategy. The third is the effect of the action. Wage garnishment can threaten a worker's ability to pay rent and buy food, and the published experience of hospitals that sued patients in large numbers shows that such practices attract public scrutiny once documented; a study of Virginia hospitals found that a substantial share sued patients and garnished wages for unpaid bills in a single year (Bruhn et al., 2019). The law asks whether the hospital followed the procedure; ethics asks whether the people being sued are the people the procedure was meant to protect.
Principles in Tension
Beauchamp and Childress (2019) describe justice in health care in terms of fair distribution of benefits and burdens, and the proposal distributes the burden of the hospital's losses onto patients least able to bear it. Stewardship is also an ethical obligation, however. A hospital that cannot cover its costs cannot serve anyone, and the chief financial officer's argument that uncollected bills are a real loss, borne ultimately by other patients and staff, is not a cynical one. The choice is not between an ethical option and a greedy one; it is between two obligations that the hospital cannot fully satisfy at the same time.
Weighing them requires looking at magnitude. The expected net recovery, about $560,000 less legal costs, is less than 0.2 percent of the hospital's annual operating budget. The harm to the 74 patients who were likely eligible for assistance, and to the hospital's standing in its community, is large relative to that sum.
The Choice
The recommendation is to decline the proposal as written and adopt a narrower one. The hospital will screen all 212 accounts for presumptive eligibility for financial assistance using available income data, including public benefits enrollment and third-party income estimates, and write off balances for patients who qualify. For the remaining accounts, it will offer interest-free payment plans capped at a small percentage of monthly income. Lawsuits will be filed only against patients whose documented income exceeds 400 percent of the federal poverty level and who have declined a payment plan, and wage garnishment will not be used against any patient.
This choice has costs. The hospital will recover less money, the finance committee will record a larger charity write-off and the chief financial officer will have to explain a smaller improvement in the operating margin. The choice also has benefits that are harder to count: it aligns the hospital's collection practice with its mission and the purpose of its tax exemption, and it avoids the reputational harm that other hospitals experienced when their lawsuits became public.
The recommendation will be reviewed after one year against three measures reported to the board's community benefit committee: the amount recovered through payment plans, the number of accounts written off as financial assistance after screening and the number of lawsuits filed under the narrower criteria. If recoveries through payment plans approach what the lawsuits were expected to yield, the policy will have cost little; if they fall far short, the board will revisit the balance with evidence rather than assumption.
Conclusion
The revenue cycle department's proposal to sue 212 patients and garnish their wages is lawful. It is also, for a nonprofit hospital whose mission is to serve the vulnerable, ethically wrong in its current form, because it falls hardest on patients who were probably eligible for the assistance the hospital exists to provide. When the lawful option and the ethical one part ways, an administrator has to choose, and choosing the ethical path means accepting a real financial cost. The narrower policy recommended here accepts that cost deliberately, and the next modules will turn the reasoning into a written decision and a policy with an owner and consequences.
References
Beauchamp, T. L., & Childress, J. F. (2019). Principles of biomedical ethics (8th ed.). Oxford University Press.
Bruhn, W. E., Rutkow, L., Wang, P., Tinker, S. E., Fahim, C., Overton, H. N., & Makary, M. A. (2019). Prevalence and characteristics of Virginia hospitals suing patients and garnishing wages for unpaid medical bills. JAMA, 322(7), 691-692. https://doi.org/10.1001/jama.2019.9144
Internal Revenue Service. (2024). Requirements for 501(c)(3) hospitals under the Affordable Care Act: Section 501(r). U.S. Department of the Treasury.
Kluender, R., Mahoney, N., Wong, F., & Yin, W. (2021). Medical debt in the US, 2009-2020. JAMA, 326(3), 250-256. https://doi.org/10.1001/jama.2021.8694
How this HLTH 5603 Module 4 example is structured
HLTH 5603 Module 4 often forces a choice where the lawful option and the ethical one part ways; your classroom's instructions decide the case. This example first establishes, carefully, that the proposed action is lawful, because the module's tension disappears if it is not. It then examines the action ethically, using the hospital's mission, the principle of justice and evidence on who carries medical debt. The choice is stated plainly with its costs, and the paper does not pretend that the ethical option is free. The conclusion describes what the hospital gives up and gains by choosing it.
HLTH5603 Module 4 questions, answered
What does HLTH5603 Module 4 usually ask for?
HLTH5603 Module 4 often presents a situation where the lawful course of action and the ethical one diverge and asks students to analyze both and make a choice. Many sections expect the legal analysis to be accurate and the ethical analysis to use a named framework or principles. Your classroom's instructions decide the case and the format.
Can a nonprofit hospital sue patients for unpaid bills?
Generally yes, under state law, but tax-exempt hospitals must first meet federal requirements under Section 501(r), including maintaining a financial assistance policy and making reasonable efforts to determine a patient's eligibility before taking extraordinary collection actions such as lawsuits or wage garnishment.
How do I argue that a lawful action is unethical?
First establish clearly that the action is lawful, so the conflict is real. Then identify the specific facts that raise ethical concerns, apply named principles or the organization's own mission and weigh the harms and benefits honestly, including the costs of the ethical alternative. Recommend a specific course of action rather than leaving the choice open.
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