Medical Expenses and the Collateral Source Rule

Originally appeared in the DRI Trial & Tribulations enewsletter

by Andrew DeSimone and Christina Worley

At common law, the collateral source rule prohibits defendants from introducing evidence of compensation received by plaintiffs from outside sources, such as insurance.  It allows a plaintiff to “seek recovery for the reasonable value of medical services without consideration of insurance payments made to the injured party.”  Restatement (Second) of Torts § 920A (1979).  However, in light of modern healthcare schemes, many state legislatures and courts are beginning to abrogate the common law collateral source rule by enacting collateral source statutes.  The following is a general discussion of this emerging law.

I. Collateral Source Jurisdictions

Kentucky is an example of a pure collateral source jurisdiction.  Its Court of Appeals in Schwartz v. Hasty, 175 S.W.3d 621 (Ky. App. 2005), explained why the collateral source rule exists.

First, the wrongdoer should not receive a benefit by being relieved of payment for damages because the injured party had the foresight to obtain insurance. Second, as between the injured party and the tortfeasor, any so-called windfall by allowing a double recovery should accrue to the less culpable injured party rather than relieving the tortfeasor of full responsibility for his wrongdoing. Third, unless the tortfeasor is required to pay the full extent of the damages caused, the deterrent purposes of tort liability will be undermined.

Id. at 627.

As further stated by the Kentucky Supreme Court in Baptist Healthcare Sys. v. Miller, 177 S.W.3d 676 (Ky. 2005), “it is absurd to suggest that the tortfeasor should receive a benefit from a contractual arrangement between Medicare and the health care provider.”  Id. at 683.  The Court determined that the fact that Medicare contracted with the plaintiff’s physician to provide care at a rate below usual the fees should not relieve a tortfeasor from negligence or the duty to pay the reasonable value of the plaintiff’s medical expenses.  Id.

II. Other Jurisdictions

Although the majority of states characterize the difference between the amounts charged by medical providers and the amounts paid to those providers by plaintiffs as “collateral source benefits,” some states believe that characterization ignores the realities of modern health care and the relationship between medical providers and medical payers, especially in light of the Affordable Care Act.

When the plaintiff seeks to recover for expenditures made or liability incurred to third persons for services rendered, normally the amount recovered is the reasonable value of the services rather than the amount paid or charged.  If, however, the injured person paid less than the exchange rate, he can recover no more than the amount paid, except when the low rate was intended as a gift to him.

Restatement (Second) of Torts § 911.

Several courts have recently considered this issue of how to determine the reasonable value of medical services when the injured plaintiff’s medical expense is paid by an insurer or government payor at a discounted rate.  Although the subject is hotly disputed between states without much consensus, jurisdictions that do not adhere strictly to the collateral source rule have typically adopted one of the following two holdings:

(1) An injured person may not recover as economic damages the undiscounted sum of medical expenses stated in the provider’s bill but never paid by or on behalf of the injured person.  This is because damages are awarded to compensate for loss, and therefore recovery is for paid amounts only.

(2) Both the amount billed and the amount paid should be allowed into evidence to enable the jury to determine the reasonable value of medical services at either of those amounts or some amount in between.

a. Jurisdictions that have determined the reasonable value of services provided can only be the amount paid, not billed.

The Supreme Court of California, in Howell v. Hamilton Meats & Provisions, Inc.,257 P.3d 1130 (Cal. 2011), determined that the plaintiff could recover as damages for her past medical expenses no more than the amount her medical providers had accepted as payment in full from plaintiff and her health insurer.  Most notably, in Howell, the defendant moved in limine to exclude evidence of medical bills that neither plaintiff nor her health insurer paid.  Id. at 549.  The defendant argued that because only the amounts paid by plaintiff and her insurer could be recovered, the larger amounts billed by the providers, which had been “written-off,” were irrelevant and should be excluded.  Id.  However, according to the plaintiff, reduction of the medical damages would violate the collateral source rule.  Id. at 550.

The court upheld their previous decision in Hanif that “a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less.”  Id. at 555 (discussing Hanif v Housing Auth., 200 Cal. App. 3d 635, 641 (Cal. Ct. App. 1988)).  The court went on to state that the one exception the court in Hanif  provided  pursuant to the Restatement (Second) of Torts § 911 to its rule for medical services that are gratuitously provided or discounted, would not apply to the case at bar.  According to the Supreme Court of California:

Where a plaintiff has incurred liablity for the billed cost of services and the provider later “writes off” part of the bill because, for example, the plaintiff is unable to pay the full charge, one might argue that the amount of the writeoff constitutes a gratuitous benefit the plaintiff is entitled to recover under the collateral source rule.  But in cases like that at bench, the medical provider has agreed, before treating the plaintiff, to accept a certain amount in exchange for its services.  That amount constitutes the provider’s price, which the plaintiff and health insurer are obligated to pay without any writeoff.  There is no need to determine a reasonable value of the services, as there is in the case of services gratuitously provided.

Howell, 52 Cal. 4th at 559.

Moreover, according to the court, the tortfeasor does not obtain a “windfall” as a result of the injured person’s health insurer negotiating a favorable rate of payment with the person’s medical provider.  Id. at 560.  The Restatement (Second) of Torts notes that the “customary rate” for services governs tort recovery.  However, as the Howell court discussed, there appears to be not one market for medical services but several, with the price of services depending on the category of payer and sometimes on the particular government or business entity paying for the services. Howell, 52 Cal. 4th at 562.  Given this state of medical economics, how a market value other than that produced by negotiation between the insurer and the provider could be identified is unclear.  Id. 

Other jurisdictions have reached similar conclusions.  See Moorhead v. Crozer Chester Medical Center, 564 Pa. 156, 163-64 (2001) (abrogated on other grounds) (holding that that in situations where the exact amount of expenses has been established by contract and those expenses have been satisfied, there is no longer any issue as to the amount of expenses for which the plaintiff will be liable, and therefore as a result, the injured party should be limited to recovering the amount paid for the medical services); Haygood v. De Escabedo, 356 S.W.3d 390, 396 (Tx. 2011) (holding that Section 41.0105 of the Texas Civil Practice and Remedies Code provided that, “recovery of medical or health care expenses incurred is limited to the amount actually paid or incurred by or on behalf of the claimant.”).

b. Jurisdictions that allow evidence of both paid and billed amounts to aid the jury in determining the reasonable value of services provided.

The Supreme Court of Indiana in Stanley v. Walker, 906 N.E.2d 852, 855 (Ind. 2009), considered how to determine the reasonable value of medical services when an injured plaintiff’s medical treatment is paid from a collateral source at a discounted rate.  The court in Stanley found holding the defendant liable for the reasonable value of the services to be the fairest approach.  Id. at 858.  As stated by the court, “given the current state of the health care pricing system where, to repeat, authorities suggest that a medical provider’s billed charges do not equate to cost, the jury may well need the amount of the payments, amounts billed by medical service providers, and other relevant and admissible evidence to be able to determine the amount of reasonable medical expenses.”  Id.  Thus, the Supreme Court of Indiana held that damages based off the “reasonable value of the services provided” is a jury determination to be made based off evidence of both paid and billed amounts including write-offs.  Id.

Additionally, the Supreme Court of Ohio in Robinson v. Bates, 857 N.E.2d 1195 (Oh. 2006), provided the following guidance on the issue:

To avoid the creation of separate categories of plaintiffs based on individual insurance coverage, we decline to adopt a categorical rule. Because different insurance arrangements exist, the fairest approach is to make the defendant liable for the reasonable value of plaintiff’s medical treatment. Due to the realities of today’s insurance and reimbursement system, in any given case, that determination is not necessarily the amount of the original bill or the amount paid. Instead, the reasonable value of medical services is a matter for the jury to determine from all relevant evidence. Both the original medical bill rendered and the amount accepted as full payment are admissible to prove the reasonableness and necessity of charges rendered for medical and hospital care.  The jury may decide that the reasonable value of medical care is the amount originally billed, the amount the medical provider accepted as payment, or some amount in between. Any difference between the original amount of a medical bill and the amount accepted as the bill’s full payment is not a “benefit” under the collateral-source rule because it is not a payment, but both the original bill and the amount accepted are evidence relevant to the reasonable value of medical expenses.

Id. at 1200-1201 (emphasis added).

Other jurisdictions have reached the same conclusion.  See Martinez v. Milburn Enters., 233 P.3d 205 (Kan. 2010) (holding that pursuant to Kan. Stat. Ann. § 40-3117 the jury could consider both the charges assessed by the medical care provider as well as the amount actually accepted to determine the reasonable value of the medical care that the insured received); Bozemand v. State, 879 So.2d 692, 694 (La. 2004) (holding that a Medicaid recipient was “unable to collect the Medicaid “write-off” amounts as damages because no consideration is provided for the benefit.  Thus, plaintiff’s recovery is limited to what was paid by Medicaid.”).

Conclusion

The state courts and legislatures continue to struggle with how to handle claims of medical expenses and how much the injured party is entitled to recover.  As the law progresses, it is possible that the collateral source rule will eventually be completely abrogated.  However, what is certain is that venue plays an important role in assessing the amount of damages an injured party can recover.

Andrew DeSimone litigation practice includes numerous trial and appellate victories in the areas of medical malpractice, health care law, insurance defense, and governmental law.

Christina Worley is a third year student at the University of Kentucky College of Law, J.D. Candidate 2017.

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