As often happens in our federal system, with 50 independent state legal systems, the answers to this question have varied widely. Some of the largest and most litigious states, such as Pennsylvania and California, have followed a rule that takes into account disparities between billed and paid medical costs, and have limited recoverable medical costs to what a payor (usually not the plaintiff) actually paid for the services in question.
In Moorhead v. Crozer Chester Medical Center, 765 A.2d 786 (Pa. 2001) (since overruled on an unrelated issue), the Pennsylvania Supreme Court held that only the amount actually accepted by a health care provider as payment in full for services rendered was recoverable economic loss in a personal injury action. The amount traditionally recoverable was “the reasonable value of medical services.” Id. at 789. The court relied on the Restatement (Second) of Torts view of damages:
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.
Id. (quoting Restatement (Second) of Torts § 911 cmt. h (1977)).
The Moorhead plaintiff had both Medicare and private insurance. Neither was intended as a gift. To allow a plaintiff to recover sums never actually paid by anyone would be a “windfall”:
Awarding [plaintiff] the additional amount . . . would provide her with a windfall and would violate fundamental tenets of just compensation. It is a basic principle of tort law that damages are to be compensatory to the full extent of the injury sustained, but the award should be limited to compensation and compensation alone. [Plaintiff] never has, and never will, incur the [additional] sum from [defendant] as an expense. We discern no principled basis upon which to justify awarding that additional amount.
765 A.2d at 790 (citations and quotation marks omitted).
The collateral source rule was not implicated because payments were not being reduced. The plaintiff could still recover every penny actually paid. Id. at 790–91.
Similarly, the California Supreme Court applied a “reasonableness” standard to the computation of out-of-pocket damages, concluding that the face value of medical bills—never actually paid—are not ipso facto “reasonable.”
[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. California decisions have focused on “reasonable value” in the context of limiting recovery to reasonable expenditures, not expanding recovery beyond the plaintiff’s actual loss or liability. To be recoverable, a medical expense must be both incurred and reasonable.
Howell v. Hamilton Meats & Provisions, Inc., 257 P.3d 1130, 1137–38 (2011) (emphasis original).
Thus, in Howell, the plaintiff could not recover as past medical expenses amounts in excess of sums actually paid by or on behalf of the plaintiff. Id. at 1145–46. “Plaintiff’s insurance premiums contractually guaranteed payment of her medical expenses at rates negotiated by the insurer with the providers; they did not guarantee payment of much higher rates the insurer never agreed to pay.” Id. at 1144.
The collateral source rule was not implicated because the injured plaintiff had never been obligated to pay the inflated amounts billed. “Having never incurred the full bill, plaintiff could not recover it in damages for economic loss.” Id. at 1143. “The negotiated rate differential lies outside the operation of the collateral source rule also because it is not primarily a benefit to the plaintiff, and to the extent it does benefit the plaintiff, it is not provided as “compensation for [the plaintiff’s] injuries.” Id. at 1143–44. The jury was not told about the source of any reimbursement and the discounts were not “gratuitous,” but rather “for commercial reasons and as a result of negotiations.” Id. at 1139.
Nor did the widespread availability of health insurance—at discounted rates—amount to a “windfall” to a “tortfeasor.” Society has changed, and “[t]he complexities of contemporary pricing and reimbursement patterns for medical providers . . . do not support,” id. at 1141, requiring defendants to pay hypothetical rates that nobody actually paid:
- “Hospital charge setting practices are complex and varied. Hospitals are generally faced with competing objectives of balancing budgets, remaining competitive, complying with health care and regulatory standards, and continuing to offer needed services to the community. . . . Disparities between charges and costs [have] been growing over time.”
- “The rise of managed care organizations, which typically restrict payments for services to their members, has reportedly led to increases in the prices charged to uninsured patients,” therefore “only uninsured, self-paying U.S. patients have been billed the full charges listed in hospitals’ inflated chargemasters.”
- “Because so many patients . . . pay discounted rates, hospital bills . . . would yield truly enormous profits if those prices were actually paid.”
- “[P]rivate health insurers are well equipped to conduct sophisticated arm’s-length price negotiations,” therefore “looking to the negotiated prices providers accept from insurers makes at least as much sense, and arguably more, than relying on chargemaster prices that are not the result of direct negotiation between buyer and seller.”
Id. at 1141–42 (various citations omitted).
Courts in other states have followed this approach:
Haygood v. De Escabedo, 356 S.W.3d 390, 391 (Tex. 2011) (under statute limiting common-law collateral source rule, “recovery of medical or health care expenses incurred is limited to the amount actually paid or incurred by or on behalf of the claimant”; “providers set charges they maintain are reasonable while agreeing to reimbursement at much lower rates determined by insurers to be reasonable, resulting in great disparities between amounts billed and payments accepted”).
Swanson v. Brewster, 784 N.W.2d 264, 279 (Minn. 2010) (under statute limiting common-law collateral source rule, “it would be inconsistent to allow courts to make deductions from an award for money paid by health insurers but not for the amounts an insurer negotiates as discounts”).
Goble v. Frohman, 901 So. 2d 830, 833 (Fla. 2005) (under statute limiting common-law collateral source rule, “contractual discounts . . . constitute amounts which have been paid for the benefit of the claimant” and “for which no right of reimbursement or subrogation exists”).
Dyet v. McKinley, 81 P.3d 1236, 1241 (Idaho 2003) (under statute limiting common-law collateral source rule, provider discounts and write-offs are not recoverable because “the plaintiff has incurred no liability for the charges”) (Dyet was later overruled on an unrelated issue).
Coyne v. Campbell, 183 N.E.2d 891, 891 (N.Y. 1962) (“[w]ith respect to medical expenses . . . the plaintiff must show what he paid the doctor, and can recover only so much as he paid or was bound to pay).
Candler Hospital v. Dent, 491 S.E.2d 868, 869 (Ga. Ct. App. 1997) (“in the event that the plaintiff recovers a special verdict that awards damages for medical expenses previously written off . . . the defendant is entitled to a set-off or credit”).
Kastick v. U-Haul Co., 740 N.Y.S.2d 167, 169 (N.Y. App. Div. 2002) (reduced medical charge “is not an item of damages for which plaintiff may recover because plaintiff has incurred no liability therefor”).
Bora v. Chittenden County Transportation Authority, 2006 WL 4660871 (Vt. Super. Ct. Apr. 14, 2006).
McGowan v. Chase, 2009 WL 9420162, at *2 (Vt. Super. Ct. May 11, 2009).
See also McGee v. River Region Med. Ctr., 59 So. 3d 575, 581 (Miss. 2011) (“the collateral-source rule simply does not apply to the ‘written-off’ portion of the [medical] bill”) (entity writing off bill was also the defendant).
Several states have also abolished the collateral source rule (or its evidentiary effects) altogether. See Ala. Code § 12-21-45; Alaska Stat. Ann. § 09.17.070; Conn. Gen. Stat. Ann. § 52-225a; Fla. Stat. Ann. § 768.76; Mich. Comp. Laws Ann. § 600.6303; Minn. S.A. § 548.36; N.J. Stat. Ann. § 2A:15-97; N.Y. C.P.L.R. 4545. These states also generally fall into this category, although that is not absolutely required.
A second approach to the differential between billed and paid medical costs is to let all the evidence in and have the jury make the determination. A leading proponent of this variant is Robinson v. Bates, 857 N.E.2d 1195, 1200 (Ohio 2006), holding that the collateral source rule (defined by a statute) is not implicated where a health care provider’s medical bill is written down:
The collateral-source rule does not apply to write-offs of expenses that are never paid. . . . The collateral-source rule excludes only evidence of benefits paid by a collateral source. Because no one pays the write-off, it cannot possibly constitute payment of any benefit from a collateral source.
Id. at 1200.
“To avoid the creation of separate categories of plaintiffs based on individual insurance coverage,” however, the court “decline[d] to adopt a categorical rule.” Id. Instead, the court allowed both sides leeway to introduce evidence of what “the reasonable value of medical services” is:
Due to the realities of today’s insurance and reimbursement system, in any given case, that determination [of the reasonable value of medical services] 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.
Id. at 1200–1201 (citations and quotation marks omitted).
Relevant evidence of the reasonable value of medical services may include “[b]oth the original medical bill rendered and the amount accepted as full payment.” Id. While avoiding bright lines, a practical downside of the let-it-all-in approach is expense because in practice it has resulted in both sides offering dueling medical cost experts.
Since Robinson, the highest courts of Massachusetts, Indiana, and Kansas have embraced this approach. In Law v. Griffith, 930 N.E.2d 126 (Mass. 2010), the Supreme Judicial Court of Massachusetts held that the appropriate solution is to allow the defendant to introduce evidence from a particular medical provider regarding the amounts in the range the provider would accept for the services at issue, without specifically identifying the amount actually accepted. Id. at 359–61, 930 N.E.2d at 135–36. See Stanley v. Walker, 906 N.E.2d 852, 858 (Ind. 2009) (“[t]he collateral source statute does not bar evidence of discounted amounts in order to determine the reasonable value of medical services”); Martinez v. Milburn Enters., Inc., 233 P.3d 205, 222–23 (Kan. 2010) (“In short, we embrace the rationale and holding of Robinson. . . . [The collateral source] rule does not address, much less bar, the admission of evidence indicating that something less than the charged amount has satisfied, or will satisfy, the amount billed.”). So have a number of trial courts. Melo v. Allstate Ins. Co., 800 F. Supp. 2d 596, 602 (D. Vt. 2011) (“evidence may be introduced concerning the range of payments that the providers accept for the types of medical services that the plaintiff received”); Sladky v. Progressive Classic Ins. Co., 2006 WL 2246427, at *3 (E.D. Mo. Aug. 4, 2006) (a “reduction in payment reflects the insurance company’s determination that the charges made were higher than what is reasonable” “payment of an amount less than charged might be considered to raise an inference that the charges are unreasonable”) (disagreeing with intermediate state appellate precedent).
The third approach may be considered the most “pro-plaintiff” because it leads to the highest damage awards. Courts employing it view the collateral source rule expansively as including not only sources of payment but also amounts of payment. Therefore, under this third pattern, actual payments play no part in the assessment of special damages. Actual amounts paid to health care providers are not even admissible—only the face amount of medical bills (discounted or otherwise) is permissible evidence. Thus, plaintiffs receive “windfall[s],” amounts not actually paid to anyone, on the theory that “where third-party payments have reduced the plaintiff’s net loss,” “to the extent the defendant is required to pay the total amount there may be double compensation. . . . But it is the position of the law that a benefit that is directed to the injured party should not be shifted so as to become a windfall for the tortfeasor.” Aumand v. Dartmouth Hitchcock Med. Ctr., 611 F. Supp. 2d 78, 91 (D.N.H. 2009) (citation and quotation marks omitted). The rationale for this approach to damages, as discussed by some of its more recent proponents, is as follows:
We agree with the [pro-recovery] cases. . . . [T]he collateral source rule operates to prevent the jury from learning anything about collateral income and [its] evidentiary component prevents defendants from introducing evidence that a plaintiff’s losses have been compensated for, even in part, by insurance. Thus, 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.
Wills v. Foster, 892 N.E.2d 1018, 1033 (Ill. 2008).
[T]he plaintiff is not limited to recovering only expenditures made or obligations actually incurred. The plaintiff may recover the full amount of his or her reasonable and necessary medical expenses, even if those expenses were later discounted and a portion written off by the health care provider. Regardless of how, or even whether, the plaintiff’s obligation to the medical provider was later discharged, the plaintiff became liable for the bills when the services were received; the plaintiff is therefore entitled to recover the value of the services.
Kenney v. Liston, 760 S.E.2d 434, 445 (W. Va. 2014).
Courts have also analogized contractual discounts negotiated with third-party payors to the “gratuitous” medical treatment of the sort discussed in Restatement (Second) of Torts section 920A, comment b (1977).
This recovery-enhancing option is still the majority rule, albeit mostly in smaller states. Some of the reasons, such as “the relative fortuity of the manner in which each plaintiff’s medical expenses are financed,” Wills, 892 N.E.2d at 1030, are ameliorated (if not altogether eliminated) by the advent of relatively universal health insurance. The substantial majority of the cases ignoring real-world payment discounts and write-offs were decided prior to the advent of the current system of national health insurance.
Other courts have applied the billed-amounts-only approach:
Volunteers of America Colorado Branch v. Gardenswartz, 242 P.3d 1080, 1085 (Colo. 2010) (statutory “collateral source rule prevents [defendant] from standing in [plaintiff’s] shoes and enjoying the same discounted medical rates as his insurance company receives”).
White v. Jubitz Corp., 219 P.3d 566, 583 (Or. 2009) (“[t]ying a plaintiff’s claim to the amount that a third party has paid or satisfied undermines the collateral source rule”).
Papke v. Harbert, 738 N.W.2d 510, 536 (S.D. 2007) (“the collateral source rule applies and defendants are precluded from entering into evidence the amounts ‘written off’ by medical care providers”).
Leitinger v. DBart, Inc., 736 N.W.2d 1, 6–7 (Wis. 2007) (“value of medical services made necessary by the tort can ordinarily be recovered although they have created no liability or expense to the injured person”).
Mitchell v. Haldar, 883 A.2d 32, 38 (Del. 2005) (“damages may not be reduced because of payments for treatment paid for by medical insurance to which the tortfeasor did not contribute”).
Baptist Healthcare Systems, Inc. v. Miller, 177 S.W.3d 676, 684 (Ky. 2005) (“we hold that evidence of collateral source payments or contractual allowances was properly withheld from the jury”).
Bynum v. Magno, 101 P.3d 1149, 1157 (Haw. 2004) (“[i]nasmuch as [government medical insurance] are social legislation programs, we conclude that the collateral source rule applies to prevent the reduction of a plaintiff’s award of damages to the discounted amount”).
Covington v. George, 597 S.E.2d 142, 144 (S.C. 2004) (“the actual payment amount is not admissible as evidence of reasonableness of damages because that evidence would violate the collateral source rule”).
Hardi v. Mezzanotte, 818 A.2d 974, 985 (D.C. 2003) (“because any write-offs enjoyed by appellee were negotiated by her private insurance company, a source independent of appellants, they should be included in her damages”).
Wal-Mart Stores, Inc. v. Frierson, 818 So. 2d 1135, 1139–40 (Miss. 2002) (under collateral source rule, evidence of medical “write-offs” is admissible for damages).
Acuar v. Letourneau, 531 S.E.2d 316, 322–23 (Va. 2000) (“portions of medical expenses that health care providers write off constitute ‘compensation’” under collateral source rule).
Lopez v. Safeway Stores, Inc., 129 P.3d 487, 495 (Ariz. Ct. App. 2006) (“plaintiffs are entitled to claim and recover the full amount of reasonable medical expenses charged, based on the reasonable value of medical services rendered, including amounts written off from the bills pursuant to contractual rate reductions”).
Porter v. Toys ‘R’ Us-Delaware, Inc., 152 S.W.3d 310, 320 (Mo. App. 2004) (“medical charges reduced, discounted, or ‘written-off’ as full payment for services pursuant to a contract or agreement between the medical provider and the insurance company or as part of [government] coverage may be subject to the collateral source rule”).
Olariu v. Marrero, 549 S.E.2d 121 (Ga. Ct. App. 2001) (holding, inconsistently with Candler, that a defendant “is not entitled to use a third party’s write-off of medical expenses as a set-off”).
Fye v. Kennedy, 991 S.W.2d 754, 764 (Tenn. Ct. App. 1998) (jury “was not entitled to know that the bill had been partially forgiven”).
McConnell v. Wal-Mart Stores, Inc., 995 F. Supp. 2d 1164, 1169 (D. Nev. 2014) (“[t]hat a medical provider ultimately accepts less than a billed amount, whether from an insurance company or from the victim directly, is not relevant to whether the tortfeasor is liable for the full value of the harm he has caused”).
Reed v. National Council of Boy Scouts of America, Inc., 706 F. Supp. 2d 180, 192 (D.N.H. 2010) (“even if a provider agrees to accept less from the plaintiff himself by ‘forgiving’ all or part of a bill . . . [so] that not all of the billed amount is ever paid by anyone—the collateral source rule would still apply”).
McMullin v. United States, 515 F. Supp. 2d 904, 908 (E.D. Ark. 2007) (in a “typical” case, a plaintiff “would be allowed to recover the full amount of the medical expenses billed, while the plaintiff’s insurer could only recover, though subrogation, the amount it paid. The tortfeasor would be left paying the full amount of medical expenses billed, even though it may result in a windfall to the plaintiff”) (footnote omitted).
Pipkins v. TA Operating Corp., 466 F. Supp. 2d 1255, 1261 (D.N.M. 2006) (“a contractual write off is properly characterized as a contribution from a source collateral to the tortfeasor”).
Finally, Louisiana has followed a fourth path, drawing from both “bright line” approaches. That state allows no recovery for reduced health insurance costs incurred as a result of governmental benefits, but it does not allow reductions for discounts negotiated by third-party payors who charge fees to their subscribers:
Care of the nation’s poor is an admirable social policy. However, where the plaintiff pays no enrollment fee, has no wages deducted, and otherwise provides no consideration for the collateral source benefits he receives, we hold that the plaintiff is unable to recover the “write-off” amount. . . . However, in those instances, where plaintiff’s patrimony has been diminished in some way in order to obtain the collateral source benefits, then plaintiff is entitled to the benefit of the bargain, and may recover the full value of his medical services, including the “write-off” amount.
Bozeman v. State, 879 So. 2d 692, 705–6 (La. 2004).
Medical cost differentials also give rise to two subsidiary points. First, with respect to future medical expenses, whatever rule a state adopts (actual payment only; let it all in; billed amount only) logically applies to the calculation of future as well as past expenses. The law on this point is limited, but what little exists recognizes the parallel nature of the analysis. See Corenbaum v. Lampkin, 156 Cal. Rptr. 3d 347, 362–63 (Cal. Ct. App. 2013) (requiring use of actual payments in the calculation of future expenses).
Second, discovery into damages issues relating to discounted—or undiscounted—medical costs can be enlightening for other reasons. A recent innovation is the advent of advance contractual arrangements between litigants and ostensible “treating” health care providers, whereby such providers are able to charge above-market rates for the medical care of patients (future plaintiffs) referred to them. In exchange for such captive providers being freed from precisely the kinds of discounts and write-offs discussed above, these providers (1) pay “fees” to the organizations that make the referrals, and (2) agree to use pejorative language (such as “defective” and “caused by”) in preparing their medical records. While the “bias of a witness is subject to exploration at trial and is always relevant,” Delaware v. Van Arsdall, 475 U.S. 673, 677 (1986), in practice direct discovery into such arrangements is contentious and obstructed. Thus, another avenue for bringing such practices to light is through “reasonable rate” discovery directed against both the captive providers’ fee structure and the availability of alternative lower third-party payor reimbursement rates.
Keywords: mass torts litigation, health insurance, damages, collateral source rule