Pink envelopes will bring good news in the mail next month to about 3,700 down-on-their-luck Minnesotans: A charitable organization will be paying off their medical debts.

Fergus Falls-based CA Foundation on Tuesday announced a donation to another nonprofit organization, RIP Medical Debt, that will buy $3.5 million in medical debts for pennies on the dollar and retire them.

The goal is to help out a few Minnesotans, and also use publicity of the donation to teach others about their rights under the state's fairly unusual agreement with hospitals and health systems when it comes to debts, said Jeff Smedsrud, a managing director and primary donor to the foundation.

"We'd like to see Minnesota become the first medical-debt-free state," he said.

Only 2% of Minnesotans have delinquent medical debts that have been turned over to collection agencies, compared with 9% nationally, according to a report by the Urban Institute in Washington, D.C. However, that statistic could be masking a larger problem in the state, especially amid rising health care costs and health plans with large deductibles and cost-sharing requirements.

The institute bases its calculations on data from one of the largest U.S. credit rating agencies, but Minnesota hospitals and their debt collectors have agreed in a deal with the state attorney general not to report patients with unpaid bills to these agencies. The deal doesn't apply to clinics, but still likely suppresses Minnesota's medical debt rate in this widely cited report.

RIP Medical Debt won't take specific requests, and instead will retire medical debts that it can take on from providers and collectors willing to sell them at steeply discounted rates. The organization will target Minnesotans with household incomes below four times the federal poverty level who have substantial debts related to unavoidable rather than elective medical procedures. Notifications should arrive by mail in the first full week of August.

Smedsrud said this is the third donation by his foundation to New York-based RIP, which has reportedly resolved $9.5 billion in U.S. medical debt. He said it is irritating when collection agencies obtain medical debts at discounted rates but then demand full price from struggling patients.

"It's so unfair that we have fundraisers for people we know and church socials and we raise $5,000 for their medical debt, and nobody knows that the hospital has sold that $5,000 of medical debt for $500 or $200," he said. "And if you knew it was $200, you'd pay it."

Minnesota's hospital agreement offers additional protections, including that health care providers must charge uninsured patients the same discounted rates offered to insured patients. Medical providers also must offer reasonable payment plans before suing patients to obtain debts.

The agreement doesn't address the tactic of denying patients access to nonemergency medical care over debts. Allina Health used that policy as a last resort to collect from patients until publicity prompted the Minneapolis-based medical provider to suspend the practice.

Stephanie Beesing of Glencoe, Minn., was in her ninth month of pregnancy when her local provider alerted her that it was no longer going to provide her with nonemergency medical care because of $4,100 in unpaid bills. A last-minute deal extended her access through pregnancy, and then generous Minnesotans sent money to resolve her medical debts.

Smedsrud created two online insurance marketplaces, HealthCare.com and Pivot Health, and later created the Colon Cancer Coalition after his own costly cancer battle. He said he met cancer patients at fundraising events who were trying to reduce chemotherapy sessions because they couldn't afford them. Smedsrud believes that hospitals lose when they get tough on medical debts because their patients avoid care and get sicker.

"Is a hospital better off financially just making that debt go away?" he asked. "Because it will then treat patients earlier ... and result in better outcomes, for which it will get rewards and bonuses" from insurance companies.

Hospitals responded in 2020 by increasing their amount of charity care to $176 million while decreasing their bad debt expenses to $473 million, according to a report from the Minnesota Hospital Association.

"These figures represent our dedication to providing necessary health care services to all individuals, regardless of their financial circumstances," said a statement from the association. "Minnesotans need to know if they require hospital care in Minnesota, our hospitals and health systems will provide it."

Charity care could soon increase even more in Minnesota. State lawmakers this summer required that medical providers screen all patients for financial assistance eligibility before pursuing collection of debts. The screening requirement takes effect Nov. 1.