Measuring Damages Paid by Insurance
By: Paul T. McBride
The collateral source rule provides that when a plaintiff’s injuries are paid for by insurance, a jury may not be told about the insurance payments. Instead, the plaintiff may recover the full cost of medical treatment provided to him without any reduction for the fact that an insurance company, rather than the plaintiff, paid the medical bills. The rationale for this rule is that the defendant, who caused the injury, should not be allowed to benefit from the fact that the injured plaintiff happened to have insurance. Accordingly, the defendant must pay to the plaintiff the full cost of the medical services provided, even though some or all of the services were paid for by the plaintiff’s insurance company.
For Example: Joe Adams is injured in a car accident through the negligence of Joy Jefferson. Joe is treated for several weeks at Mercy Hospital. His total medical bills are $150,000. Joe signs an agreement when he enters the hospital acknowledging that he is responsible to pay any bills which his insurance company does not cover. Joe’s health insurance carrier is PacifiCare. PacifiCare has an pre-existing agreement with Mercy Hospital which establishes rates it will pay for certain procedures. The pre-existing agreement provides that Mercy will accept the rate reimbursements as payment in full for care provided to a PacifiCare insured. When the $150,000 bill for Joe’s treatment is submitted to PacifiCare, it pays $30,000. This amount, $30,000, is the negotiated rate for the procedures afforded to Joe, and so constitutes payment in full. Therefore, Mercy Hospital cannot seek to recover the unpaid amount from Joe.
Joe sues Joy for his injuries. Joy admits liability. She disputes damages. She claims she is only liable for $30,000, the amount paid by Joe’s insurance company as payment in full for his medical treatment. Joe claims he is entitled to recover $150,000, i.e. the stated cost of his medical treatment. Who is correct?
The California Supreme Court ruled on this question on August 19, 2011, when it issued its opinion in Howell v. Hamilton Meats & Provisions, Inc., 2011 DJDAR 12533. The facts of Howell are essentially those of our Joe Adams/Joy Jefferson scenario, above. The Supreme Court ruled that where the health care provider accepts as payment in full, with no further recourse against the patient, the negotiated fees from the insurance carrier for the patient’s treatment, the amount actually paid by the insurance company sets the limit of the defendant’s liability to the plaintiff. Thus, in our scenario, Joy has to pay $30,000, not $150,000. This decision was endorsed by six of the seven Justices. Only Justice Klein dissented.
In his dissent, Justice Klein argued the majority’s decision confers an unwarranted benefit on the defendant merely because the plaintiff has insurance. If the plaintiff did not have insurance, he would be financially responsible for the entire $150,000 medical bill, and the defendant would therefore be liable to the plaintiff for this entire amount. Instead, the defendant reaps a $120,000 windfall simply because she hit an insured, versus an uninsured, motorist.
Justice Klein admitted the $150,000 bill was probably inflated, and that the hospital did not truly expect anyone to pay this full amount. However, he suggested an evidentiary hearing should have been held to establish the “reasonable” value of the services provided to the plaintiff, which presumably would be somewhere between the $30,000 discounted payment by the insurance company and the $150,000 face amount of the medical bill.
The majority opinion viewed Justice Klein’s suggestion as simply unworkable. It spent several pages discussing health care pricing in California to prove its contention that there is no such thing as a “reasonable” cost for health care in this state. It noted that market forces are but one of several factors behind health care prices, and that the 80% “discount” obtained by PacifiCare in this case is relatively common for large insurance carriers. To prove its point that there is no consistency or, indeed, rationality, in health care pricing, the majority noted the “list” price charged for a simple chest X-ray, prior to any negotiated discounts with insurance providers, ranges from as low as $200 to as high as $1,500 at various hospitals in California.
The Supreme Court decision establishes a bright line rule limiting recovery to the amount actually paid by the insurance company when the provider accepts the insurance payment as payment in full. It reserved for a later day how to treat the situation of the uninsured patient who is, at least in theory, liable for the full, albeit inflated, amount of the medical bill.