Is the collateral source rule applicable to Medicare and Medicaid write-offs? Defense practitioners must be alert to the effort to collect "phantom" damages through claims for the amounts written off by providers.

• Author: Olson, Stephen L.

MORE than half of all jury awards in medical liability cases now exceed $1 million; the average damage award is $3.5 million. (1) These numbers are shocking, and they exhibit perfectly the medical liability crisis now gripping the United States. But the fact that these awards potentially include compensatory damages for medical expenses that were never actually incurred is even more shocking.

Healthcare providers often agree to certain fee schedules with private insurance carriers, under which they accept as full payment less than the amount billed to the patient. The provider then must write off the difference between the amount charged and the amount received. A similar situation occurs when a provider contracts to provide medical services under either of the federal programs of Medicare or Medicaid. In such instances, would a plaintiff be permitted to recover as medical expenses the amount billed or only the amount paid?

When a healthcare provider delivers medical services to a patient covered under either Medicare or Medicaid, the provider must submit its bill to the corresponding agency for reimbursement. (2) The bill must be submitted within one year from the date on which services were provided, and recovery for these expenses can only be sought from the corresponding government agency. However, both Medicare and Medicaid on average pay less than one third of a patient's medical expenses. (3) By operation of law, the healthcare provider must write off the remaining balance, and it cannot collect any further payment on the remaining amount. (4)

A CASE IN POINT

Consider the case of Vernon Taylor, chronicled in Terrel v. Nanda in the Louisiana Court of Appeal. (5) Like many today, Taylor did not have health insurance. He was injured in an automobile accident and taken to the Louisiana State University Medical Center, where he was admitted as a Medicaid patient. There he received surgery on a ruptured disk, but the procedure was unsuccessful, and he subsequently developed quadriplegia. He died less than a year later.

Taylor's medical expenses totaled $1,110,922.82. Since he was admitted as a Medicaid patient, the hospital sent his bills to Medicaid for reimbursement. Medicaid paid the hospital only $164,084.92, and the difference of $946,838 had to be written off by the hospital.

Following Taylor's death, his family sued the hospital for malpractice. One of their claims sought recovery for Taylor's medical expenses. Although Medicaid reimbursed the hospital slightly over $164,000, the family sought recovery of the unadjusted (or billed) amount, $1,110,922.82, as medical expenses.

The plaintiffs did not recover in Taylor's case, and such a recovery would appear to be in total opposition to traditional ideas about compensatory damages. Taylor never paid this amount, nor would he ever have been liable for the written-off difference between the billed and paid amount. There are jurisdictions, however, that would permit recovery of the written-off portion as medical expenses. Through application of an evidentiary doctrine known as the collateral source rule, plaintiffs have successfully excluded the admission of any evidence of the amount written-off by healthcare providers, thus allowing plaintiffs to represent the unadjusted medical bills as expenses actually owed. (6)

COLLATERAL SOURCE RULE

1. Origin

   To appreciate fully how this situation could occur, one must understand the historical origin of the collateral source rule. It can be traced to English common law, but it did not come into favor in the United States until the 1855 U.S. Supreme Court case, The Propeller Monticello v. Mollison. (7)

   That case arose from a collision on Lake Huron between the Monticello, a steamship, and Northwestern, a schooner, in which the schooner sunk and lost its cargo. Gilbert Mollison, the owner of the schooner, was insured, and the insurer compensated him for its loss. When Mollison sued the steamship, its master claimed that the insurance payment satisfied the schooner's loss and relieved the steamship of liability. The Court stated that the insurance contract was "in the nature of a wager between third parties, with which the trespasser has no concern. The insurer does not stand in the relation of a joint trespasser, so that the satisfaction accepted from him shall be a release of others." Therefore, the Court reasoned, the steamship's liability for the collision could not be offset by the insurance payments.

2. Today

   Today, the collateral source rule generally stands for the idea that a jury cannot hear evidence of payments made to an injured person by a source independent of the tortfeasor as a result of the occurrence on which the personal injury action is based. In practice, courts usually apply the rule so that "[c]ompensation or indemnity received by an injured party from a collateral source, wholly independent of the wrongdoer ... will not diminish the damages otherwise recoverable from the wrongdoer." (8)

   However, more than 30 U.S. states have passed some form of legislation to modify or abrogate the collateral source rule. (9) Among these statutes, there are a variety of substantive and procedural differences. For example, a number of states permit the introduction of collateral source evidence in all personal injury tort cases, but others limit such evidence to medical malpractice cases. Some states permit collateral source evidence to be introduced during trial, while others limit introduction to post-verdict proceedings. Alaska, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Michigan, Minnesota and Montana permit mandatory reduction of compensatory damages by collateral source payments in some circumstances. In contrast, Alabama, Arizona, California, Delaware, Georgia, Indiana, Maryland, Missouri, Oregon, South Dakota and Washington allow courts the discretion to reduce damages based on payments received from collateral sources. (10)

   One must look to state law to determine the scope of the collateral source rule, particularly as to whether it excludes evidence of the contractual adjustment made under Medicare or Medicaid. Even in federal diversity case, in which federal law generally governs the admissibility of evidence, (11) federal courts have held that state law should govern, since the collateral source rule is so closely intertwined with state...