Theory and practice of collateral source rule

Overlawyered has a post today, "Plaintiff seeks phantom damages 6 times greater than actual costs”, citing to an article on the Colorado Civil Justice League blog.

It seems the CCJL is critical of a recent decision by that state's Supreme Court, Volunteers of America Colorado Branch v. Gardenswartz, 242 P.3d 1080 (Colo. 2010), because that case would apparently allow a plaintiff in a currently pending action to seek as medical expenses an amount six times the amount actually expended on his behalf. The discrepancy stems from the difference between the amount billed for medical treatment and the amount that the treater accepts in settlement of the bill. Although the Volunteers of America case turns on the interpretation of Colorado statutes and the CCJL article concerns a proposed amendment to the Colorado statutes that would overturn that result, the subject of the case, the collateral source rule, is of interest to tort reformers, lawyers, judges, and other shapers of public policy all over the country.

In Illinois, the collateral source rule was recently explained (and reaffirmed) in Wills v. Foster, 229 Ill.2d 393, 892 N.E.2d 1018 (2008). In Wills, the Illinois Supreme Court explained (229 Ill.2d at 399):

"'Under the collateral source rule, benefits received by the injured party from a source wholly independent of, and collateral to, the tortfeasor will not diminish damages otherwise recoverable from the tortfeasor.'" [citing Arthur v. Catour, 216 Ill.2d 72, 78, 833 N.E.2d 847 (2005), and quoting Wilson v. The Hoffman Group, Inc., 131 Ill.2d 308, 320, 546 N.E.2d 524 (1989).] As set forth in section 920A(2) of the Restatement (Second) of Torts (Restatement (Second) of Torts § 920A(2), at 513 (1979)), the rule provides that, "Payments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable." The rule has been described as an "established exception to the general rule that damages in negligence actions must be compensatory." 25 C.J.S. Damages § 172 (2002). Although the rule appears to allow a double recovery, the appellate court correctly noted that, typically, the collateral source will have a lien or subrogation right that prevents such a double recovery.

It is the lien or subrogation rights of third parties -- that vary widely from state to state -- that make sweeping generalities about the collateral source rule difficult to formulate.

In a rational world, the collateral source rule would be easy to understand and apply. Consider: Dan Driver is cruising down Main Street with one hand on the wheel and the other on his smart phone, texting his strong views about boycotting Donald Trump to NPR. Thus distracted, he fails to see (1) the light turn red on Main Street and (2) Peter Pedestrian entering the crosswalk, with the Walk light, attempting to cross the street directly in Driver's path. Happily, Pedestrian survives the collision. The hospital charges $50,000 to fix Pedestrian up. Pedestrian writes a check. When Pedestrian sues Driver for negligence, what part of his medical bills, if any, may he hope to recover against Driver?

No one would quibble with Pedestrian's right to recoup his entire $50,000 outlay. There's no "collateral" source in that example at all; Peter can recover what Peter paid. But what if Pedestrian had armed himself with health insurance? In our rational world example, the entire $50,000 hospital bill is now paid by the insurance company. Under the collateral source rule, Pedestrian can still recover the entire $50,000. Why should he be penalized for having the foresight to procure health insurance? Not everyone may see the fairness in such a rule... until the proposition is flipped around: Why should Driver obtain a windfall because he had the good luck to hit an insured person?

It's when we leave the rational world and rejoin the real one that things get complicated.

If Peter had insurance in the real world, the hospital bill might have been $75,000 and the insurance company might have paid $30,000. If Peter had no insurance, the hospital bill might have been $150,000 and Medicaid might have paid $12,000. Eventually. (We can defer to another time the very real question of why a hospital would bill a person who has no insurance more for the same services than it would bill a person who has insurance.) If Peter's accident was in Illinois, the private insurer might have subrogation rights; Public Aid would assert a lien. If Peter were a senior citizen, the hospital bill might have been still another amount. Medicare would pay some small fraction -- which may or may not bear some relation to the eventual Medicare lien.

With the hospital bill a moving target, the collateral source rule becomes a little harder.

In trying to figure out what amount plaintiffs like Peter Pedestrian get to present in damages cases, courts in various states have come up with three distinct approaches. The Wills court, citing Bozeman v. State, 879 So.2d 692, 701 (La.2004), identified these as (229 Ill.2d at 404): (1) actual amount paid; (2) benefit of the bargain; and (3) reasonable value.

Under the actual amount paid approach, as the name suggests, the court focuses "on the objective of compensatory damages as making an injured party whole," allowing the jury to hear only the amount actually paid by whatever source -- plaintiff, insurer, public aid. The theory, as the Wills court explained, "the written-off [or contractually adjusted] amounts are not damages incurred by the plaintiff." (229 Ill.2d at 405.)

Courts using the the benefit of the bargain approach distinguish between plaintiffs who have paid some consideration for the benefit received from the collateral source (e.g., insurance premiums) and those who have not (e.g., Medicaid recipients). The Wills court explained (229 Ill.2d at 406), "Under this approach, courts allow plaintiffs who have private insurance to recover the full amount of their medical expenses because they have bargained for the benefits they received. These courts also hold that plaintiffs whose bills are paid by Medicaid may not recover the reasonable value of their medical expenses and are limited to the amount paid by Medicaid. The courts distinguish between Medicare and Medicaid recipients, holding that, unlike Medicaid recipients, Medicare recipients should be treated the same as those with private insurance because Medicare recipients pay for their coverage through compulsory payroll taxes." The Illinois Supreme Court noted that this approach as been criticized as "discriminatory" and because it "undermines the collateral source rule by using the plaintiff's relationship with a third party to measure the tortfeasor's liability." (229 Ill.2d at 406-407.)

But, in Wills, the Illinois Supreme Court explained that this state follows the "reasonable value" approach. Most states follow this approach, the Wills court stated, although even here there is a majority and minority position. The minority position, the court stated (229 Ill.2d at 408), allows a plaintiff to seek only what was actually paid; however, the "vast majority of courts to employ a reasonable-value approach hold that the plaintiff may seek to recover the amount originally billed by the medical provider." (229 Ill.2d at 410.)

But is that "reasonable?" Well, in Illinois, "a paid bill constitutes prima facie evidence of reasonableness." (Wills, 229 Ill.2d at 403.) After Arthur v. Catour, 216 Ill.2d 72, 833 N.E.2d 847 (2005), however, some defendants suggested that it would be appropriate to also introduce the actual paid bills. There are states that allow both sets of bills to come in. See, Martinez v. Milburn Enterprises, Inc., 290 Kan. 572, 233 P.3d 205 (Kan. 2010) (both the amount billed and the amount actually paid would be admissible and the "finder of fact shall determine from these and other facts the reasonable value of the medical services provided to plaintiff"). But, by statute, Kansas prohibits insurers from issuing "contracts of insurance in Kansas containing a 'subrogation' clause applicable to coverages providing for reimbursement of medical, surgical, hospital or funeral expenses" (233 P.3d at 229).

In Illinois, however, where subrogation is a fact of life, Wills explained (229 Ill.2d at 218) that, in Arthur, "this court made clear that the collateral source rule 'operates to prevent the jury from learning anything about collateral income' (emphasis added) and that the evidentiary component prevents 'defendants from introducing evidence that a plaintiff's losses have been compensated for, even in part, by insurance.'" Under Wills, "defendants are free to cross-examine any witnesses that a plaintiff might call to establish reasonableness, and the defense is also free to call its own witnesses to testify that the billed amounts do not reflect the reasonable value of the services. Defendants may not, however, introduce evidence that the plaintiff's bills were settled for a lesser amount because to do so would undermine the collateral source rule." (229 Ill.2d at 218.)

Tort reformers, like the Colorado group in today's Overlawyered post, have serious problems with the collateral source rule. But the problems in the application of the collateral source rule are at least as much the fault of irrational medical billing practices as anything.