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Lawsuits indict hospital charity care

David L. Merideth, M.D., J.D., M.B.A.

By Christopher Guadagnino, Ph.D.

The number of such federal lawsuits nationwide is approaching 50 and includes Philadelphia’s Albert Einstein Medical Center and the Jefferson Health System, the Hospital of the University of Pennsylvania, and Children’s Hospital of Philadelphia, while David L. Merideth, M.D., J.D., M.B.A., co-counsel in the Scruggs lawsuits, says the number will continue to grow. A local Pittsburgh-area attorney has filed similar lawsuits against the UPMC and West Penn Allegheny health systems and related hospitals.

The tone of the lawyers’ rhetoric is harsh. A Scruggs press release announcing the lawsuits said that hospitals engage in business methods calculated to defeat the rights of uninsured patients, and that they perform “wallet biopsies” on uninsured patients by gouging them with exorbitantly inflated prices, in some cases up to 300 percent more than for insured patients. If and when the uninsured patient can’t pay, says Scruggs, nonprofit hospitals often intimidate and harass uninsured patients through “goon-like and predatory collection tactics that frequently scar the patient for life, including the trauma of personal bankruptcy.” These billing and collection tactics, he adds, often discourage uninsured patients from seeking health care at the hospitals, in turn enabling the hospitals to further avoid their government obligation to provide charitable health care to the uninsured.

Intensifying public scrutiny and the emergence of lawsuits over charity care practices burdens hospitals at an already difficult time. A Centers for Disease Control and Prevention report released this May noted that increasing numbers of uninsured and limited Medicaid reimbursements are placing a third of the nation’s emergency departments at risk of closing or eliminating emergency services.

Pa.’s nonprofit hospitals are struggling to meet their charity care missions in the face of various pressures, including the absence of public hospitals in the state, reimbursements not keeping pace with rising costs, malpractice costs spiraling, a nursing shortage, and rising nurse and physician recruitment costs. According to PHC4 data, 70 percent of Pa. hospitals lost money on patient care and 48 percent lost money overall in 2003.

While some consumer advocates applaud the lawsuits as filling a void for the voiceless uninsured population, others believe the lawsuits are neither an appropriate nor fruitful avenue of redress because they do not address the more fundamental problem of lack of health insurance, and they threaten to further weaken a fragile safety net as hospitals struggle to balance their legal, ethical and pragmatic obligations.

Other analysts question the legal merits of the lawsuits, doubtful as to whether Pa. hospitals are violating any federal or state laws in their charity care practices, or whether individuals as plaintiffs have legitimate standing in a complaint against hospital compliance with such laws. Hospitals have already begun to fight the lawsuits on these grounds.

Federal regulators have recently attempted to reduce hospitals’ reluctance to offer discounted care to some patients, a practice which hospitals fear may violate Medicare regulations and the federal anti-kickback statute. The federal response removes some, but not all, of the concerns, and still leaves room for uncertainty as to whether hospitals can offer discounted care to some uninsured patients without inviting regulatory reprisals.

A key ethical question is whether it is just for hospitals that offer free or discounted care to uninsured indigent patients to issue full charges to uninsured patients who do not meet indigence guidelines, for example, a patient who has assets exceeding 200 or 300 percent of the federal poverty level. A full bill for complex inpatient procedures could easily bankrupt such a patient.

The lawsuits’ threat to hospitals remains serious, and their intimidation factor alone may be enough to leverage settlements. It was the Scruggs and company lawsuits that successfully leveraged a multi-billion-dollar settlement against tobacco companies. One nonprofit Mississippi health system that was targeted by Scruggs – but not yet actually sued – agreed in early August to a $150 million settlement to avoid costly litigation, while the Scruggs team is using that agreement as a model to hammer out settlements from other health systems.

Hospital trade groups are taking the issue seriously. The American Hospital Association (AHA) – which has been named as a “co-conspirator” in the national suits – and the Hospital & Healthsystem Association of Pennsylvania (HAP) have both recently released guidelines to help member institutions review and clarify their policies, offering benchmarks for charity care, financial aid, and billing and collection practices.

HAP maintains that Pa.’s nonprofit hospitals are fulfilling their charity care obligations and, in its guidelines to hospitals, recommends that institutions make a clear, concise statement of its charity care policies available to the public. Data on actual practices are murky, however. Although 25 hospitals throughout Pa. were contacted for this article and requested to provide information on their charity care policies, only five provided the information.

Lawsuit Allegations

Many nonprofit hospitals are intentionally failing to fulfill their government-mandated obligation to provide charitable care to the uninsured in exchange for tax-exemption, specifically, by charging “full sticker price” to uninsured patients who, unlike patients with insurance plans that negotiate steep discounts from full hospital charges, have no such advocate, according to Merideth, a Mississippi attorney who is co-counsel with Scruggs. “To our knowledge, there is no reason not to believe that all hospitals are engaging in these practices to a certain degree, although some are worse than others,” he says, noting that, “The most egregious big boys in the corporate health care world came to our attention initially, and we are methodically working our way down to other hospitals.” Those with “egregious liquid assets will more readily come on the radar screen,” he adds.

Even though hospitals have charity care policies in place, Merideth – who was an emergency medicine physician for 15 years – says those policies are either deficient, inadequately implemented, or poorly communicated to the patient. An uninsured patient coming to the emergency room, for example, agrees to sign an admission agreement to be responsible for the bill without knowing what that bill will be, amounting to an open-ended promise to pay, says Merideth. A charity care notice sign is too passive a process to be effective in helping to connect uninsured patients with any financial help that the hospital may have available, he notes.

“The patient then gets a billing notice and that debt is handed off to a collection agency that has the incentive to hound these people with extreme measures,” Merideth says, like making physical collection contact, garnishing bank accounts and putting liens on real estate and personal property. “Tax-exempt hospitals are thinking ‘profit,’ not ‘patient,’” he adds.

The lawsuit against Jefferson alleges that Einstein has inflated charges for uninsured patients for the purpose of boosting subsidies received from federal and state governments, “gaming” the system to inappropriately maximize payments. It notes that the Jefferson Health System operates one of the most “profitable” hospital systems in the U.S., with net assets over $1.6 billion that were “accumulated because the Jefferson Health Defendants have enjoyed tax exemptions as ‘nonprofit’ charitable institutions while charging their patients anything but charitable rates.”

The “grossly inflated price to the uninsured” complaint is the highest profile allegation of the lawsuits, while there are also other allegations, including charges that nonprofit hospitals are hoarding billions of dollars in cash and assets which otherwise should be available to provide charity care, are providing discounted care to entities affiliated with their board of directors, and are allowing noncharitable for-profit physician groups and service providers to derive profit from their tax-exempt hospitals.

Merideth says that a recent settlement with the six-hospital North Mississippi Medical Center represents “a beautiful template of what we hope to achieve.” Under the settlement, the health system’s affiliates agreed never to attempt to collect more than 10 percent of an individual patient’s annual income in a given year, while uninsured patients with household incomes under 200 percent of the federal poverty level will receive free care for a $10 copayment per inpatient or outpatient admission; and a sliding scale of discounted Medicare rates for inpatient, outpatient and physician clinic services (or no more than 51 percent of full hospital charges where there is no Medicare rate) will apply to those with incomes up to 400 percent. The discounts do not apply to professional fees of physicians who are not employed by the health system.

The health system also agreed to apply the discounts retroactively for three years to uninsureds who file for the refunds. Further, it has agreed to formalize its existing policy against engaging in aggressive collection techniques such as placing liens against personal property or reporting the patient’s inability to pay medical bills to credit reporting agencies, and will provide expanded notice of its charity care policy and provide financial counseling to uninsured patients regarding their medical bills.

Merideth says that North Mississippi already had a charity care discount policy in place, but notes that the discounts agreed to in the settlement are more generous to the patient than those under the old policy.

Federal lawsuits mirroring the Scruggs complaints have been filed against UPMC and West Penn Allegheny health systems by Jeffrey Suher, Esq., a Monroeville personal injury attorney, on behalf of uninsured clients he says were not eligible for Medicare or Medicaid and were never given an option other than being billed full hospital charges. Suher’s goals are to ensure that hospital bills to the uninsured do not exceed what the Medicare and Medicaid programs would pay, and that a trust is created which would contain any monies that hospitals have acquired “in violation of their nonprofit status.”

In the Public Interest?

Some advocates are unsure whether hospitals have adequate incentives to fulfill their charity care policies, and they maintain that the existence of such a policy does not mean that it works effectively. “People can get denied two or three times before being accepted into a charity care program,” according to Kate Robinson, executive director of the Consumer Health Coalition, a Pittsburgh-based advocacy group. Because of misunderstandings in the application process, uninsured persons who are sick and discouraged, and who have traditionally had difficulty navigating the system, often have to reapply for charity care with the help of an advocate before they are approved, while hospital charity care policies may incorrectly assume a proactive implementation, says Robinson.

The lawsuits are an appropriate tool to bring accountability to hospitals regarding their billing and collection practices related to the uninsured, Robinson believes. On health care matters, she says, “The public does not have one cohesive, coordinated voice. Hospitals do. Managed care companies do. We, the public, are struggling to counteract powerful lobbyists and huge alliances within the industry. The only viable option right now is litigation.”

Other consumer advocates prefer to diagnose how well Pa. hospitals are fulfilling their charity care programs, before declaring the lawsuits to be in the public interest. “There is a woeful lack of information and a failure to quantify what their charity care obligation is. The system is not set up to have a clearly enunciated quid pro quo for how much hospitals need to provide in exchange for their tax exemption,” according to Michael Campbell, executive director of the Pennsylvania Health Law Project.

Campbell says he is aware of uninsured patients who have been bankrupted by huge hospital bills, and notes that there are over 95,000 people on the waiting list for adultBasic, the state’s health insurance program for uninsured, low-income individuals who earn too much to qualify for Medicaid. “There are huge gaps in terms of insurance coverage and peoples’ access to health care. I don’t know if these lawsuits get at that problem, but the problem still desperately needs to be addressed,” says Campbell.

Still other analysts – outside the hospital industry – believe the lawsuits will weaken an already fragile health care safety net, and that only a more systemic solution will be effective. “Pennsylvania’s hospitals are teetering under the burden of too many uninsured. A solution is not going to happen by saying, ‘Please be more generous,’” says Arthur Caplan, Ph.D., director of the Center for Bioethics and Trustee Professor of Bioethics at the University of Pennsylvania. “Morally, it’s time to figure out ways to get more insurance entitlements, through state Medicaid reform, into the hands of people and stop making them beg at the ER door,” he adds.

Caplan says it is no longer farfetched to expect administrators of nonprofit hospitals, if pressed to provide more charity care than their institutions are already providing, to decide that they no longer wish to shoulder expectations not faced by their investor-owned competition and give up their nonprofit status. “Since Pa. has no public hospitals, that would be a complete disaster,” Caplan notes.

At the same time, Caplan believes that it is becoming ethically untenable for hospitals to issue full charges, which he says have no relationship to the actual cost of care and are driven by artificial factors such as the incentive to recapture federal and state outlier and bad debt reimbursements –calculation of which is indexed to the charges. Caplan says that the practice is generally recognized as the only pragmatic way to get enough money to the nonprofit hospital sector under the current system to keep them viable. In that respect, he says, the uninsured public is being overcharged so that hospitals can continue to provide charity care for the poor. “But having an ethically duplicitous system of charges corrodes the whole system,” he says, adding, “I don’t see any real alternatives except reform from above – going after the uninsured problem in a serious way.”

If the billing and collection lawsuits “broke the back of being able to make full charges,” says Caplan, “I think hospitals wouldn’t be able to regain enough income to cover the number of people they currently do.”

Policy Guidance and Legal Concerns

In a move that may help to insulate hospitals from increasingly intense public scrutiny related to their charity care practices, if not exposure to the lawsuits, both the national and Pa. hospital associations have issued detailed guidance on the subject.

A member advisory sent by the AHA in Dec. 2003 noted that concerns about aggressive hospital collection practices and charges paid by the uninsured was threatening the bond between hospitals and their communities. The advisory attached a “Statement of Principles and Guidelines” on hospital billing and collection practices, which offered a checklist of actions to take and invited hospitals to review and revise their written policies and actual practices.

According to the AHA, 3,000 of the nation’s 5,000 hospitals have thus far signed a commitment to those principles, which include a pledge to “assist patients who cannot pay for part or all of the care they receive,” and to “balance needed financial assistance for some patients with broader fiscal responsibilities in order to keep hospitals’ doors open for all who may need care in a community.” The checklist of recommended actions included items such as:

· Making widely known specific information about what they charge for services, the availability of financial counseling to patients about their hospital bills, and sources of financial assistance, including hospital-based subsidies.

· Having policies with clear criteria to offer discounts to patients who, after receiving financial counseling from the hospital, are eligible for such discounts.

· Implementing written policies about when and under whose authority patient debt is advance for collection.

The advisory also detailed legal and regulatory roadblocks to hospitals’ efforts to assist patients of limited means, such as lack of guidance from the government on how hospitals can avoid violating the federal anti-kickback law if they forgive or reduce debts for patients who do not meet the hospital’s indigence guidelines.

Medicare billing rules, according to the AHA advisory, require each hospital to maintain a uniform charge structure that applies to all patients, and Medicare bad debt rules require hospitals to demonstrate that they made reasonable collection efforts that were comparable for all types of patients – including sending collection letters, making telephone calls and personal contacts, and initiating court action to obtain payment. Through a series of reviews and audits, the AHA maintained, the U.S. Department of Health and Human Services Office of Inspector General (OIG) has created an expectation that hospitals must be aggressive in their collection efforts or risk losing Medicare reimbursement for bad debt losses.

This February, the OIG responded to these concerns by stating that the federal anti-kickback law does not prohibit discounts to uninsured and underinsured patients who are unable to pay their hospital bills – defined by a reasonable set of financial need guidelines that are based on objective criteria appropriate for the local region and uniformly applied. The OIG also noted that such discounts will not impact a hospital’s reportable charge structure, and that no OIG rule or regulation requires a hospital to engage in any particular collection practices.

In a teleconference this June, the Centers for Medicare & Medicaid (CMS) said that providers have flexibility in applying discounts for reasons other than indigence and can give prompt-pay and courtesy discounts, regardless of the patient’s ability to pay, in accordance with the Stark rules issued in March, according to a memo published by the Healthcare Financial Management Association, which noted that the hospital community still awaits these guidelines in writing.

It was, and still is, reasonable for hospitals to be cautious about how they discount care or ease collection practices in light of Medicare and anti-kickback laws, and recent federal guidance only partially mitigates that reluctance, according to Andrea Kahn-Kothmann, Esq., a senior associate with the law firm of Reed Smith LLP in the Health Care Group of the firm’s Philadelphia office. Hospitals now have assurance by the government that discounts to patients based on appropriate and documented financial need will not impact a hospital’s uniform charge structure and hence, their outlier payment calculation, she notes. But the OIG’s statement that federal anti-kickback law does not prohibit discounts to uninsured and underinsured patients based on need amounts to little more than a moderation in tone by antifraud enforcers – potentially changing the context of enforcement actions, but not relaxing actual laws or regulations governing a hospital’s exposure to enforcement actions based on inappropriate discounting, she adds.

On the subject of collection efforts, the government also merely softened its tone without changing the laws or regulations, perhaps making it more embarrassing for it to dock a hospital’s bad debt reimbursement if a hospital eases its collection practices – but still leaving the original collection guidelines intact, says Kahn-Kothmann. In order to seek Medicare bad debt payments, a hospital still has to engage in uniform collection efforts for all patients and has to demonstrate that a real effort to collect was made. If a patient can pay and refuses, any good business person is going to use appropriate collection measures, she adds.

Pa. Guidance and Practice

HAP issued its own set of charity care and financial aid guidelines this July. The document outlined various laws with which Pa.’s nonprofit hospitals must comply, including the requirement that they provide a community benefit under the federal 501(c)(3) tax exemption law, which does not prescribe any minimum charity care requirement and is fulfilled simply by providing health care services, according to Paula Bussard, HAP’s senior vice president of policy and regulatory services. At the state level, Pa.’s Act 55 of 1997 – The Institutions of Purely Public Charity Act – requires hospitals and other nonprofit entities wanting to qualify for state tax-exemption to meet five particular requirements: advancing a charitable purpose, donating or rendering gratuitously a substantial portion of its services, benefiting a substantial class of persons, relieving the government of some burden, and operating entirely free from private profit motive, says Bussard.

Pa.’s Act 77 of 2001 – the Tobacco Settlement Act – permits hospitals treating large numbers of uninsured patients to qualify for uncompensated care payments if they have a charity care policy that articulates eligibility thresholds and addresses patients’ financial status, and if that policy is adequately posted in waiting rooms or admissions offices. A hospital also has to have a plan in place to serve the uninsured which indicates that it accepts all individuals regardless of ability to pay for emergency medical services, that it will take reasonable steps to seek collection of a claim either from the individual or other insurance, and that it will work to help individuals obtain other sources of health care coverage, if available. About 178 general acute care hospitals, out of a total of around 250 hospitals in Pa., qualify for Act 77 uncompensated care money, says Bussard, who notes that other Pa. hospitals have these policies but do not have a sufficient amount of uncompensated care to qualify for Act 77 funding.

HAP’s charity care guidelines emphasize that hospital boards review their charity care policies and provide guidance on how to make sure that hospital employees receive proper education on the policies, that the guidelines and eligibility criteria are communicated clearly to patients and community organizations working with the uninsured, and that bill collection policies do not intimidate people from seeking emergency care.

Among HAP’s specific recommendations are that hospitals should:

· Offer financial assistance to uninsured patients who are at or below the federal poverty level or higher, depending on geographic cost of living differences in the state, and consider offering assistance to those who earn more than the federal poverty level.

· Consider applying sliding discount scales for defined categories of services to those deemed eligible for financial aid, using uniform, objective criteria.

· Limit expected payments from patients eligible for financial assistance to amounts that do not exceed rates paid by Medicare, Medicaid or other insurers – absent any regulatory prohibition.

· Consider giving financial assistance on a case-by-case basis to patients who have exhausted their insurance benefits and/or who exceed financial eligibility criteria but face extraordinary medical costs.

· Inform patients that they may receive a bill for full hospital charges if they do not pursue the hospital’s financial aid policy prior to their service. That bill should explain that patients may still contact the hospital to review their eligibility for financial aid.

· Establish collections practices based on a patient’s ability to pay and work with each patient to establish a reasonable payment plan.

· Limit taking legal action against individuals only when there is evidence that the patient has income or assets to meet his or her obligations.

HAP’s guidance does not set specific income-to-discount ratios for hospitals, and Bussard notes that institutions may bill full hospital charges to uninsured patients who do not meet a hospital’s financial aid eligibility criteria, although she says that rarely, if ever, do those without insurance and without financial aid eligibility pay full charges, and that most institutions will work out acceptance of payment that is far below what is charged.

The Mississippi settlement being used as a template by the class action attorneys is more specific, restricting hospital bills to rates at or below those paid by Medicare for uninsured patients with incomes below 400 percent of the federal policy level, above which it does not proscribe hospitals from issuing bills for full hospital charges.

It is not yet clear to what extent hospitals in Pa. are meeting HAP’s guidelines, and aggregate information remains difficult to obtain. HAP has requested that hospitals sign a “confirmation of commitment” to its charity care and financial aid guidelines, although Bussard said she did not have a state tally. Of the five hospitals that provided information about their charity care policies for this article – out of 25 that were solicited for the information – all are providing some form of discounted care as per HAP’s guidelines.

UPMC maintains that its charity care policies conform to Medicare regulations and recently published CMS and OIG guidance provisions. According to 2000 census data, approximately 33 percent of households in the Pittsburgh region have incomes less than $25,000 and potentially qualify for UPMC’s charity care guidelines – set at 200 percent of the federal poverty level. UPMC says that it: proactively identifies charity care discount opportunities for uninsured and underinsured (“self-pay”) patients thoughout the care cycle – from pre-registration to 120 days after the patient is discharged from the hospital, makes independent indigence determinations for each patient, allows for discounts if the balance is too high – typically over $1,000 – based on their ability to pay in light of income and liquid assets, starts making calls and sending letters for outstanding bills 30 days after discharge, and turns bills over for collection 120 days after discharge.

The West Penn Allegheny Health System (WPAHS) says it provides financial assistance and counseling in advance to all patients for scheduled services with expected out of pocket expenses greater than $500 and to all patients upon request, and offers discounts from charges for income levels up to 400 percent of federal poverty levels or in cases of catastrophic medical conditions, where individuals may exceed the income threshold but experience an unexpected and expensive illness which would substantially drain their assets. WPAHS does not pursue patients for assets “that are necessary for their day-to-day living,” such as homes or annuities. For patients who do not meet the preceding criteria or who are unwilling to apply for the charity care program, WPAHS says it will extend an uninsured/underinsured courtesy allowance so that the rates that the patient ultimately pays are closer to the rates enjoyed by commercial insurance carriers, albeit still higher, in recognition of the higher costs to monitor and collect payment from these types of accounts. WPAHS also offers prompt payment discounts for balances greater than $100, for payments made within 14 days of date of service or first billing. Extended payment plans are also made available with no- and low-interest options administered by external agencies, including a 20-month program offering no credit bureau reporting on accounts with balances greater than $1,500.

Erie’s Saint Vincent Health System says it offers financial counselors who proactively contact patients regarding their medical bills, who qualified 680 accounts for charity care in fiscal 2004, translating into more than $3 million in care, and who helped 566 uninsured patients qualify for the Medicaid program. The institution’s charity care discounts apply to uninsured and underinsured patients earning up to 300 percent of the federal poverty level.

Lehigh Valley Hospital and Health Network (LVHHN) uses trained financial counselors to assist patients in obtaining health insurance coverage from private and publicly funded sources, as well as the hospital’s charity care program, and says that its institutions’ charity care sliding scale exceeds many other institutions by offering 100 percent free care to uninsured patients with household incomes up to 200 percent of the federal poverty level. Additionally, LVHHN declares that it does not employ abusive or inappropriate practices when trying to collect patient bills. Vaughn Gower, LVHHN’s senior vice president and chief financial officer, serves on HAP’s CFO Advisory Group and was part of the team that helped write HAP’s new guidelines.

Grand View Hospital in Bucks County applies a sliding fee scale to its charity care discounts for uninsured or underinsured patients not otherwise eligible for Medicaid. A patient with an income level at or below 100 percent of the federal poverty level is generally eligible for free care, with discounts available for patients with incomes up to 300 percent of the poverty level. Payment plans options are tailored to the specific circumstances of each patient, and patient debt is advanced for collection only when a patient has either ignored the hospital’s attempts to assess their situation, refuses to work with the hospital to assess their eligibility for special programs or charity care, or until a patient violates a payment plan drafted to address the individual needs of that patient.

Legal Skepticism

As hospitals review and perhaps revise their charity care policies, the impact of the lawsuits remains to be seen, although some are skeptical that they can successfully reach trial.

Kahn-Kothmann questions whether individual plaintiffs have legitimate standing to sue hospitals for breaching an implied contract with the government to provide charity care in return for tax exemption. “They’ve received care. Absent any horribly humiliating collection practices, I don’t see the harm to patients,” she says. The Albert Einstein Medical Center and Jefferson Health System have filed a motion to dismiss the lawsuit based on lack of plaintiff standing, among other grounds, arguing that it is the responsibility of Congress, state legislatures and administrative agencies, not a federal court jury, to establish health care policy and determine how to address the societal problem of the uninsured.

It will be harder for plaintiff attorneys to fulfill the “similarly situated” requirement of class action status for all plaintiffs in the charity care lawsuits than it was for the tobacco lawsuits because each charity care complaint will entail different plaintiff circumstances, whereas tobacco company policies affected all smokers alike, believes William Maruca, Esq., a partner in the Pittsburgh office of Fox Rothschild LLP. Maruca also believes that it is a stretch to expect that individual plaintiffs will be granted standing based on an alleged breach of contract between hospitals and government.

By asserting that uninsured individuals are being charged inflated amounts, the lawsuits also conflate “uninsured” with “financially needy,” making it difficult to assess how widespread any alleged harm to patients is being caused by hospital billing and collection practices, says Maruca. It will require a judgement call on the part of hospitals to determine what constitutes indigence, Maruca adds, while hospitals still have the right to collect from those able to pay – even if uninsured.

One comment

  1. Screwed For Life Because of Hospital?

    It appears that West Penn Allegheny and perhaps other hospital systems blatantly lied to the author of this article. Do some research in the Allegheny County courts alone. “Nonprofit” West Penn Allegheny has sued literally hundreds of patients and put liens against homes, family farms, and other properties. I personally know of at least one family that never even received a bill from WPAHS before they were sued, so they have no idea what the alleged “charges” were for. Shameful.

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