The collateral source rule and medical expenses: anticipated effects of the Affordable Care Act and recent state case law on damages in personal injury lawsuits.

• Author: Geslison, Benjamin A.

THE UNITED STATES Supreme Court's 5-4 decision in National Federation of Independent Business v. Sebelius (1) was one of the most anticipated Supreme Court decisions in recent years. The primary issues--the breadth of the commerce clause, the necessary and proper clause, Congress's taxing power, and the expansion of Medicaid--involve significant constitutional questions and consequences for the health care industry in the United States. But the effective result of "universal coverage" may, and should, have significant consequences for another industry--personal injury lawsuits--where a significant driver of verdicts and settlements is the amount of medical expenses that are legally recoverable and admissible as evidence. The most recent study by the U.S. Department of Justice, Bureau of Justice Statistics reported that personal injury plaintiffs filed approximately 15,624 personal injury lawsuits in the state courts of the 75 most populous counties in the country in 2005, (2) with a median recovery of about $33,000. (3) The most recent study of federal courts reports that 1,464 personal injury lawsuits were tried before a judge or jury in federal courts in the 2002-2003 fiscal year (4) with an estimated median recovery of $150,000-200,000. (5) As 96% of personal injury suits never reach trial, (6) it is immediately apparent that a tremendous amount of money is paid for medical expenses in personal injury verdicts and settlements.

With President Barack Obama's reelection, the future of the Patient Protection and Affordable Care Act, the centerpiece legislation of his first term, now appears secure. The Act, signed into law in March 2010, includes a number of provisions intended to make insurance more accessible to currently uninsured Americans. Provisions including the individual mandate (the legal requirement that an individual purchase health insurance or be taxed for the failure to do so), and the requirement for insurers to offer the same premiums and coverage to all similarly-situated applicants despite preexisting conditions, as well as the establishment of health insurance exchanges and federal subsidies, are aimed at reducing the number of uninsured residents by as much as 30 million by 2019. (7) If these estimates prove accurate, the total percentage of American residents who use health insurance to pay their medical expenses will increase to 93%. (8)

As the number of uninsured residents in the United States declines, and as payment for health care services becomes almost exclusively the territory of health insurers, and not patients, a number of traditional and more recent tort rules are likely to be, and should be, impacted. More specifically, the collateral source rule, which disallows a tortfeasor from reducing his damages liability when the injured party's medical expenses are covered by insurance or another collateral source, may become almost a mere truism because virtually everyone will be covered. Even when the collateral source rule is not directly implicated, the presentation of evidence and award of damages in personal injury suits are likely to be impacted. As health insurance becomes not just common, but the exclusive method of transacting for health care services, the relevance of the "list price" of health care services could dwindle to almost nothing. This is especially true in the world of personal injury lawsuits and medical expenses, which constitute a large percentage of the damages for those suits and serve as gauges for settlements of these claims. As health insurance becomes almost universal, the so-called "list price" of health care services should not be the gauge of damages awarded for past or future medical expenses for much longer.

1. Health Care Insurance and the Collateral Source Rule

   1. Historical Evolution of Health Care Insurance

      Before 1920, health insurance as we would recognize it today did not really exist in the United States. In 1929, the precursor to Blue Cross was founded in Dallas, Texas, when a group of teachers contracted with Baylor University Hospital to pre-pay for hospital services. (9) By 1930, between 1.5 and 2 million people--less than 2% of the U.S. population--had some form of medical prepayment or health insurance arrangement, (10) In 1939, the first plan for physician services--the precursor to Blue Shield--began in California and Michigan. (11) Between 1940 and 1960, the market for private health insurance grew dramatically from a total enrollment of under 20 million in 1940 to 122.5 million in 1960. (12)

      In 1965, government joined the insurance market with the creation of Medicare and Medicaid, which extended health insurance to the elderly and low-income applicants, and by 1970, covered 20.5 million and 9.7 million respectively. (13) This supplemented the roughly 159 million Americans that had private health insurance by then. (14) From 1970 to 1980, the number with private health insurance grew to 187.4 million residents, or roughly 80 percent of the population. (15) According to the U.S. Department of Health and Human Services, the percentage with private health insurance then declined steadily until 2007, when it sat at 67 percent. (16) In 2009, when the nascent Affordable Care Act was being debated and working its way through Congress, the Department of Health & Human Services estimated that 43 million people were relying on methods other than health insurance to pay for health care expenses. (17)

      The key to the Affordable Care Act's expansion of coverage is the individual mandate, which requires all Americans who have not been exempted to purchase health insurance or pay a tax penalty. (18) The Act supplements the individual mandate with an employer mandate, which requires that businesses with more than fifty employees offer coverage or pay a fine. (19) In addition, the Act mandates that dependent children be allowed to remain on their parents' health insurance plan up to age 26. (20) The Act prohibits lifetime limits for insurance coverage, as well as denial of coverage based on preexisting medical conditions, and restricts annual coverage limits. (21) The Act also provides tax credits and subsidies available to individuals making up to 400% of the poverty level, creates health insurance exchanges across the country, where consumers can shop around for insurance plans, and significantly expands Medicaid. (22) In sum, if administered as intended, near "universal" coverage will exist in the United States.

   2. The Collateral Source Rule

      As alternate sources for payment of medical expenses became more common, a judicial rule called the "collateral source rule" emerged and took firm root in U.S. tort law. The collateral source rule forbids reduction in a tortfeaser's liability due to benefits received by the plaintiff from a collateral source, whether an insurance company, charity or some other source. The rationale behind the rule is that a wrongdoer should not receive the benefit of insurance that was independently procured by the injured party, and to which the wrongdoer was not privy. As one court explained, "a defendant owes to the injured compensation for injuries, the proximate cause of which was his own negligence, and the payment by a third party cannot relieve him of this obligation." (23) The result of applying the collateral source rule is that an injured plaintiff (or the subrogated insurance carrier) may recover from the tortfeasor money that an insurer has paid to medical providers on his or her behalf.

      Advocates of the collateral source rule have long argued that if anyone benefits from collateral source payments, it ought to be the injured party, not the tortfeasor--especially when the collateral source benefits came from consideration that the injured party paid, in the form of insurance premiums. (24) Moreover, due to litigation costs, collateral source payments may not over-compensate injured parties much, if at all. (25) Opponents of the rule, on the other hand, "criticize the rule for allowing plaintiffs to recover twice for the same injury," and argue that the rule has a "tendency to diminish the jury's factfinding role by concealing facts relevant to the calculation of damages." (26)

      As explained below, one thing seems reasonably clear: when invoked under the current health care billing and payment rubric in the United States, the rule has facilitated damage awards and settlement amounts that far exceed the actual amounts that injured parties sustained in medical expenses. Also clear is that the rule has been invoked in situations where it does not technically apply, such as to the difference between list price and actual price for medical services.

2. Health Care Billing Practices

   As health insurance coverage has grown in the United States, the practice for billing and payment for health services, especially those covered by health insurance, has gotten extremely complex and largely opaque to the consumer of health care services. In contrast to the billing and payment practices of many industries, there are actually two "prices" for health care services, First is the "list price," which might be crudely analogized to the "sticker price" for an automobile. List price is simply a starting point. (27) From the list price, the health care providers then negotiate with the insurers, including Medicare and Medicaid, to...