By Jeff Jones
Special to the UCBJ
The collateral source rule bars a defendant in a personal injury case from introducing evidence of payments or benefits the plaintiff received from a third-party for the plaintiff’s damages.
The issue typically revolves around the introduction of medical bills by the plaintiff to prove damages caused by the negligent acts or omissions of the defendant. The rationale underlying the collateral source rule in personal injury cases is that the defendant should be responsible for the total damages the defendant caused, without regard to any payments made by the plaintiff’s medical insurance.
Or put another way, the defendant should not benefit from the fact that the plaintiff chose to carry medical insurance which ultimately helped pay for the medical expenses incurred as a result of the defendant’s conduct. However, the reality of how medical costs are billed, versus the amounts that are actually paid to the medical providers, creates an interesting issue that the Tennessee Supreme Court recently addressed.
As is well known, the total medical bills charged by a medical provider are frequently reduced or written off, typically due to negotiated agreements between the medical providers and the health insurers. Medical providers nearly always accept, as payment in full, the lesser amount. This reduction is almost always substantial, typically exceeding 50 percent of the total bill. Therefore, the amount actually paid by the plaintiff (through deductibles and co-pays), combined with the payments made by the plaintiff’s medical insurance, is usually only a fraction of the total amount actually billed by the medical provider.
Despite the variance between the amounts billed versus amounts paid and accepted, under the collateral source rule the trial court excludes from the jury evidence of any payments made by the plaintiff’s medical insurance carrier. Thus, when calculating the damages due from the defendant to the plaintiff, the jury is only able to consider the total medical bills charged by the medical providers, and is never made aware of the amount of the discount or write-off. In practice, this essentially allows the plaintiff to receive compensation from the health insurance carrier to pay the medical bills, without lessening the amount the plaintiff can recover from the defendant for medical bills.
This state of affairs has been accurately described by many in the legal profession as creating a “legal fiction” whereby a plaintiff is able to present evidence to the jury of the total medical bills charged by the medical providers, while on the other hand actually owing only a fraction of that total to the providers.
In practical effect, a plaintiff who prevails in the case receives a windfall in the form of the difference between the total medical bills charged and the amount paid to satisfy those bills. In addition, while only “reasonable and necessary” medical expenses are recoverable, most states have statutes which, in conjunction with the collateral source rule, create a presumption that the total amount of the medical bills, not including any reductions or write-offs, is reasonable.
Though the collateral source rule has been around for more than a century in most jurisdictions, in more modern times part of the rationale for keeping the collateral source rule is driven by the way personal injury plaintiffs typically finance their lawsuits. As most of us know, most every lawyer that handles personal injury cases works for the plaintiff on a contingent fee basis, where the lawyer’s fee is a percentage of the total amount recovered for the plaintiff.
Thus, the argument goes that this windfall helps the plaintiff pay his/her attorney without having to dip into the recovery for the plaintiff’s actual damages. Additionally, where health insurance has paid all or part of the medical bills incurred as a result of the personal injury, the health insurer typically enjoys the right of subrogation against the plaintiff’s recovery in the personal injury suit. (Subrogation is the right of the insurer to be reimbursed from the plaintiff’s recovery in the suit for the amounts it paid on behalf of the plaintiff.) While the amount of the subrogation is often subject to negotiation between the plaintiff and the insurer, in theory and practice health insurers typically take a significant portion of the plaintiff’s award.
Currently, the collateral source rule is controversial and subject to a great deal of criticism. Much of this criticism comes from corporate and insurance interests, which see the abolition of the collateral source rule as a way to reduce the overall value of each individual lawsuit, which would in theory reduce the overall number of lawsuits filed.
The collateral source rule has also come under fire as being an outdated doctrine given the growing disparity between the total bills charged and the amount actually paid by insurers and accepted as payment in full by medical providers. Decades ago the amount the insurers paid the medical providers was much closer to the total bill charged. Over time the amount of the medical bills charged and the amount paid by the insurers to satisfy the bill has widened substantially. Thus, the windfall effect described above has become exacerbated.
Some states have modified or reduced the impact of the collateral source rule in personal injury cases. However, Tennessee courts have long adhered to the pure form of the collateral source rule, with limited exceptions such as in medical liability suits. Last year in the case of Dedmon v. Steelman, W2015-01462-SC-R11-CV (2017), the Tennessee Supreme Court was asked to revisit the collateral source rule in personal injury suits.
In Dedmon, the defendant argued that the definition of “reasonable” medical charges under the Tennessee Hospital Lien Act, T.C.A. sec. 29–22–101, et seq., should be applied to personal injury cases in Tennessee. In the case of West v. Shelby County Healthcare Corp., 459 S.W.3d 33 (Tenn. 2014), the Tennessee Supreme Court held that “reasonable charges” for medical services under the Tennessee Hospital Lien Act are the discounted amounts a hospital accepts as full payment from patients’ private insurers, not the full, undiscounted amounts billed to patients. West, 459 S.W.3d at 46. In Dedmon, a lengthy forty-five page opinion, Justice Holly Kirby, writing for a unanimous court, rejected the suggestion to use the Hospital Lien Act standard in personal injury cases and held that the pure collateral source rule still applies in personal injury cases in Tennessee.
In Dedmon, the court analyzed the collateral source rule at great length, including its history and application in various jurisdictions across the United States. As if to highlight the discrepancy between the amount charged for medical services versus the amount paid by insurance, Justice Kirby noted the total medical bills charged were $52,482.87, and that the plaintiff’s health insurer actually paid only $18,255.42 to fully satisfy the bills. While recognizing this disparity, Justice Kirby also pointed out the difficulty of pinpointing the exact cause of the disparity, stating that:
[The court] does not pretend to fully understand medical economics or the pricing of medical services in today’s environment. Even without a full understanding, however, it is evident that medical expenses cannot be valued in the same way one would value a house or a car, pegging the ‘reasonable value’ at the fair market value, that is, the amount a buyer is willing to pay. Health care services are highly regulated and rates are skewed by countless factors, only one of which is insurance.
Dedmon at p. 38.
After an exhaustive analysis, the Supreme Court ultimately left the collateral source rule intact in Tennessee in personal injury cases. Thus, the total charged medical bills will continue to drive the value of personal injury cases in Tennessee.
This may not be the last word however. The Tennessee legislature could abolish the collateral source rule by statute, a move which would no doubt draw a constitutional challenge from the plaintiff’s bar. The outcome of such a challenge is unclear. Certainly, the Tennessee Supreme Court appears interested in preserving and protecting the traditional collateral source rule. In any event, for now the pure collateral source rule remains the law of the land in Tennessee.