Limiting Windfall Damages

As many consumers of medical care can attest, a medical provider's “usual and customary” rates as shown on its invoices are often several times higher than the amount the provider agrees to accept as payment in full from health insurers and others. In Howell v. Hamilton Meats & Provisions Inc., 52 Cal. 4th 541 (2011), the California Supreme Court recently decided a recurring issue concerning such damages in personal injury cases: whether the plaintiff can recover as damages the undiscounted “usual and customary” rates that medical providers bill for the plaintiff's medical care, or only the discounted amounts that providers accept as full payment for that care. The Supreme Court held the plaintiff may recover only the discounted amount, stating that the plaintiff “may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received ' .” Id. at 566 (emphasis added).

Howell was one of 2011's most important damages cases. It will have a significant impact on personal injury damages in California and may offer a model for challenging windfall damages in other states. Yet it leaves unanswered numerous questions that are likely to challenge the appellate courts in 2012 and beyond.

California Rejects Majority Rule

The stakes at issue in Howell were huge because medical providers often accept steep discounts from their invoiced rates. For example, in an early decision addressing this issue, Nishihama v. City of San Francisco, 93 Cal. App. 4th 298 (2001), the amount billed ($17,168) was about four times the amount accepted from the patient's insurer ($3,600). In Howell, the difference was about three-fold (almost $190,000 billed, but about $60,000 paid).

According to a conservative estimate in an amici curiae brief filed in Howell by the insurance industry, the difference between the undiscounted and discounted amounts could aggregate in California to a difference of more than half a billion dollars per year. Brief for American Ins. Ass'n et al. as Amici Curiae Supporting Defendant/Respondent, Howell v. Hamilton Meats & Provisions Inc., 52 Cal. 4th 541 (2011) (No. S179115). Another amicus estimated that the difference could amount to almost $3 billion per year. Brief for Allstate Ins. Co. as Amicus Curiae Supporting Defendant/Respondent, Howell v. Hamilton Meats & Provisions, Inc., 52 Cal. 4th 541 (2011) (No. S179115), 2010 WL 3777417 at *19-20.

Moreover, the result in Howell was by no means preordained. In embracing the discounted rate as the measure of damages, the California Supreme Court bucked the trend among other state courts of allowing recovery of the “usual and customary” rates for medical services even in cases where the provider has agreed to accept a steeply discounted payment. See Howell, 52 Cal. 4th at 566 n.10. Indeed, the analysis adopted in Howell has been characterized as “a distinct minority view.” Lopez v. Safeway Stores, Inc., 212 Ariz. 198, 206 (Ct. App. 2006). Howell may thus offer a template for challenging the majority view.

Discounted Bills Are Admissible, Undiscounted Bills Are Not

The holding in Howell seems intuitive. After all, the plaintiff's recovery of amounts no one has paid or will ever pay for the plaintiff's medical care would be a windfall to the plaintiff. In other states, a majority of courts to decide the issue have granted the plaintiff a windfall recovery of the undiscounted bills, reasoning that the collateral source rule bars evidence of the discount. See Howell, 52 Cal. 4th at 566 n.10. The Howell court rejected this result, holding instead that evidence of the discounted amount was relevant and admissible on the issue of past medical expenses, and evidence of the undiscounted amount was irrelevant and inadmissible on that issue.

The collateral source rule generally bars attempts to reduce the plaintiff's damages award by amounts received from sources independent of the tortfeasor. But, as the Howell court explained, the rule only applies to “damages the plaintiff 'would otherwise collect from the tortfeasor.'” Id. at 548. The collateral source rule does not allow a plaintiff to recover as damages sums in excess of the plaintiff's actual damages. Thus, where the medical provider has by agreement accepted an amount less than the billed amount as full payment, the plaintiff “never incurred liability” for the billed amount and the billed amount is not a damage “plaintiff would otherwise have collected from the defendant.” Id. at 548-49.

After dispatching plaintiff's collateral source rule arguments, the Howell court focused on the key issues of detriment and reasonable value. The court explained that damages are awarded to compensate for detriment suffered, and that detriment requires “'a loss or harm suffered in person or property.'” Id. at 551 (quoting Cal. Civ. Code ' 3282). The court, in holding that the provider's billed rate is not a detriment if no one is required to pay it, stated, “[I]f the plaintiff negotiates a discount and thereby receives services for less than might reasonably be charged, the plaintiff has not suffered a pecuniary loss or other detriment in the greater amount and therefore cannot recover damages for that amount.” Id. at 555 (emphasis added).

The court also explained that reasonable value is a ceiling on medical damages, not a floor. A plaintiff may recover as damages “no more than the reasonable value of the medical services received ' .” Id. at 555 (original emphasis). There should be no recovery for unreasonable medical expenses. As Howell explained, “reasonable value is a term of limitation, not of aggrandizement.” Id. at 553.

Prior to Howell, trial courts in California were arguably required to admit evidence of the amounts billed for past medical expenses. See Olsen v. Reid, 164 Cal. App. 4th 200, 204 (2008) (“Even the cases holding that a plaintiff is entitled to the lesser amount of damages ' have approved of the jury's hearing evidence as to the full amount of plaintiff's damages.”); Greer v. Buzgheia, 141 Cal. App. 4th 1150, 1157 (2006) (Evidence of the amounts billed for plaintiff's medical care “gives the jury a more complete picture of the extent of a plaintiff's injuries.”).

Howell flipped this rule on its head. The court held that, because the plaintiff had not suffered detriment in the full billed amount, that amount was not relevant to show the amount of past medical damages, and was not admissible on that issue. “Where the provider has ' accepted less than a billed amount as full payment, evidence of the full billed amount is not itself relevant on the issue of past medical expenses.” Howell, 52 Cal. 4th at 567 (emphasis added). And, of course, only relevant evidence is admissible at trial. Cal. Evid. Code ' 350.

Rather than submit evidence of the billed amount, the plaintiff should instead submit evidence of the paid amount. “[W]hen a medical care provider has ' accepted as full payment for the plaintiff's care an amount less than the provider's full bill, evidence of that amount is relevant to prove the plaintiff's damages for past medical expenses and, assuming it satisfies other rules of evidence, is admissible at trial.” Howell, 52 Cal. 4th at 567. Thus, evidence of the amount paid for past medical expenses, not the amount billed, is relevant to establish past medical damages in California.

Is Evidence of Undiscounted Bills Admissible for Other Purposes?

Although decisively breaking ranks with the majority of courts on the measure of damages for past medical expenses, the California Supreme Court left numerous issues unresolved.

The court expressly declined to decide whether evidence of the full billed amount might be relevant “on other issues, such as noneconomic damages or future medical expenses.” Howell, 52 Cal. 4th at 567. Defendants appear to have strong arguments on this point. Evidence of the undiscounted amount should be irrelevant to prove future medical expenses or noneconomic damages for the same reason it is irrelevant to prove past medical expenses ' the plaintiff has not incurred a detriment based on the full billed amount. This is especially true as the increasing availability of health insurance further reduces the relevance of the undiscounted amount charged for health care services. See 42 U.S.C. ' 300gg (health insurance available to everyone regardless of preexisting conditions.) Since the full billed amount is irrelevant because it can't be recovered for past medical damages (as Howell holds), it should be equally irrelevant as a basis for seeking any other kind of damages.

Can Plaintiffs Recover for Gratuitous Medical Care?

As it is widely understood in a number of states, the collateral source rule applies to gratuitous services and allows a plaintiff to recover the value of donated medical care. See Howell, 52 Cal. 4th at 557-58. California law on this point is unclear. See Id. at 558. However, the Howell court expressly declined to decide the issue. Id. at 559.

More than 40 years ago, in Helfend v. Southern California Rapid Transit District, 2 Cal. 3d 1 (1970), the California Supreme Court suggested the collateral source rule applied to unpaid services only when rendered “with the expectation of repayment out of any tort recovery.” Id. at 7, n.5. But in Arambula v. Wells, 72 Cal. App. 4th 1006 (1999), the California Court of Appeal declined to follow the Helfend dictum. The Arambula court instead held the collateral source rule allowed recovery of “gratuitous payments (including moneys to cover lost wages) by family or friends to assist tort victims through difficult times.” Id. at 1008. The Arambula court reasoned that any other rule would conflict with the policy of encouraging charity.

In Howell, the Supreme Court recognized the conflict between Helfend and Arambula, but left it to be resolved another day. The Howell court explained that the rationale for allowing recovery for gratuitous care ' an incentive to charity ' did not apply to the facts before it involving commercially negotiated price agreements between medical providers and health insurers.

Following Howell, the California Court of Appeal confronted this issue in Sanchez v. Strickland, 200 Cal. App. 4th 748 (2011). The Sanchez court held that a plaintiff may recover damages for past medical expenses that have been written off so long as the medical provider has “(1) rendered medical services to a plaintiff, (2) issued a bill for those services, and (3) subsequently written off a portion of the bill gratuitously.” Id. at 769. Applying this rule, the court concluded that the plaintiff could recover the $7,020 balance that had been “gratuitously” written off by the medical provider.

But Sanchez arguably conflicts with Howell on this issue. Howell held that the gratuitous care exception (where recognized) reflects the policy of encouraging charity. Yet the Sanchez court discussed no facts showing that, in writing-off the $7,020 balance, the medical provider acted with a donative intent. Instead, the provider wrote-off the $7,020 balance only because it lacked a contract allowing for reimbursement. But if donative intent were shown by the absence of a contract guaranteeing payment (as Sanchez suggests), then every write-off would arguably reflect a donative intent. Such an exception would consume the Howell rule. As a result, Sanchez may not be the final word on this issue in California.

Howell's Significance

The Howell decision promises to reduce potential medical damages in California by hundreds of millions of dollars a year, but leaves important questions unanswered, including whether undiscounted medical bills are admissible for any purpose, and whether plaintiffs can recover damages for gratuitous medical care. These issues are likely to challenge the California appellate courts in the future.

And the Howell decision may have ramifications far beyond California, as it offers a template for challenging windfall medical damages claims in other states.

David Axelrad, a member of this newsletter's Board of Editors, and Robert Wright are partners in the civil appellate law firm Horvitz & Levy LLP, resident in Encino, CA.

As many consumers of medical care can attest, a medical provider's “usual and customary” rates as shown on its invoices are often several times higher than the amount the provider agrees to accept as payment in full from health insurers and others. In Howell v. Hamilton Meats & Provisions Inc. , 52 Cal. 4th 541 (2011), the California Supreme Court recently decided a recurring issue concerning such damages in personal injury cases: whether the plaintiff can recover as damages the undiscounted “usual and customary” rates that medical providers bill for the plaintiff's medical care, or only the discounted amounts that providers accept as full payment for that care. The Supreme Court held the plaintiff may recover only the discounted amount, stating that the plaintiff “may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received ' .” Id. at 566 (emphasis added).

Howell was one of 2011's most important damages cases. It will have a significant impact on personal injury damages in California and may offer a model for challenging windfall damages in other states. Yet it leaves unanswered numerous questions that are likely to challenge the appellate courts in 2012 and beyond.

California Rejects Majority Rule

The stakes at issue in Howell were huge because medical providers often accept steep discounts from their invoiced rates. For example, in an early decision addressing this issue, Nishihama v. City of San Francisco , 93 Cal. App. 4th 298 (2001), the amount billed ($17,168) was about four times the amount accepted from the patient's insurer ($3,600). In Howell, the difference was about three-fold (almost $190,000 billed, but about $60,000 paid).

According to a conservative estimate in an amici curiae brief filed in Howell by the insurance industry, the difference between the undiscounted and discounted amounts could aggregate in California to a difference of more than half a billion dollars per year. Brief for American Ins. Ass'n et al. as Amici Curiae Supporting Defendant/Respondent, Howell v. Hamilton Meats & Provisions Inc. , 52 Cal. 4th 541 (2011) (No. S179115). Another amicus estimated that the difference could amount to almost $3 billion per year. Brief for Allstate Ins. Co. as Amicus Curiae Supporting Defendant/Respondent, Howell v. Hamilton Meats & Provisions, Inc. , 52 Cal. 4th 541 (2011) (No. S179115), 2010 WL 3777417 at *19-20.

Moreover, the result in Howell was by no means preordained. In embracing the discounted rate as the measure of damages, the California Supreme Court bucked the trend among other state courts of allowing recovery of the “usual and customary” rates for medical services even in cases where the provider has agreed to accept a steeply discounted payment. See Howell, 52 Cal. 4th at 566 n.10. Indeed, the analysis adopted in Howell has been characterized as “a distinct minority view.” Lopez v. Safeway Stores, Inc. , 212 Ariz. 198, 206 (Ct. App. 2006). Howell may thus offer a template for challenging the majority view.

Discounted Bills Are Admissible, Undiscounted Bills Are Not

The holding in Howell seems intuitive. After all, the plaintiff's recovery of amounts no one has paid or will ever pay for the plaintiff's medical care would be a windfall to the plaintiff. In other states, a majority of courts to decide the issue have granted the plaintiff a windfall recovery of the undiscounted bills, reasoning that the collateral source rule bars evidence of the discount. See Howell, 52 Cal. 4th at 566 n.10. The Howell court rejected this result, holding instead that evidence of the discounted amount was relevant and admissible on the issue of past medical expenses, and evidence of the undiscounted amount was irrelevant and inadmissible on that issue.

The collateral source rule generally bars attempts to reduce the plaintiff's damages award by amounts received from sources independent of the tortfeasor. But, as the Howell court explained, the rule only applies to “damages the plaintiff 'would otherwise collect from the tortfeasor.'” Id. at 548. The collateral source rule does not allow a plaintiff to recover as damages sums in excess of the plaintiff's actual damages. Thus, where the medical provider has by agreement accepted an amount less than the billed amount as full payment, the plaintiff “never incurred liability” for the billed amount and the billed amount is not a damage “plaintiff would otherwise have collected from the defendant.” Id. at 548-49.

After dispatching plaintiff's collateral source rule arguments, the Howell court focused on the key issues of detriment and reasonable value. The court explained that damages are awarded to compensate for detriment suffered, and that detriment requires “'a loss or harm suffered in person or property.'” Id. at 551 (quoting Cal. Civ. Code ' 3282). The court, in holding that the provider's billed rate is not a detriment if no one is required to pay it, stated, “[I]f the plaintiff negotiates a discount and thereby receives services for less than might reasonably be charged, the plaintiff has not suffered a pecuniary loss or other detriment in the greater amount and therefore cannot recover damages for that amount.” Id. at 555 (emphasis added).

The court also explained that reasonable value is a ceiling on medical damages, not a floor. A plaintiff may recover as damages “no more than the reasonable value of the medical services received ' .” Id. at 555 (original emphasis). There should be no recovery for unreasonable medical expenses. As Howell explained, “reasonable value is a term of limitation, not of aggrandizement.” Id. at 553.

Prior to Howell, trial courts in California were arguably required to admit evidence of the amounts billed for past medical expenses. See Olsen v. Reid, 164 Cal. App. 4th 200, 204 (2008) (“Even the cases holding that a plaintiff is entitled to the lesser amount of damages ' have approved of the jury's hearing evidence as to the full amount of plaintiff's damages.”); Greer v. Buzgheia , 141 Cal. App. 4th 1150, 1157 (2006) (Evidence of the amounts billed for plaintiff's medical care “gives the jury a more complete picture of the extent of a plaintiff's injuries.”).

Howell flipped this rule on its head. The court held that, because the plaintiff had not suffered detriment in the full billed amount, that amount was not relevant to show the amount of past medical damages, and was not admissible on that issue. “Where the provider has ' accepted less than a billed amount as full payment, evidence of the full billed amount is not itself relevant on the issue of past medical expenses.” Howell, 52 Cal. 4th at 567 (emphasis added). And, of course, only relevant evidence is admissible at trial. Cal. Evid. Code ' 350.

Rather than submit evidence of the billed amount, the plaintiff should instead submit evidence of the paid amount. “[W]hen a medical care provider has ' accepted as full payment for the plaintiff's care an amount less than the provider's full bill, evidence of that amount is relevant to prove the plaintiff's damages for past medical expenses and, assuming it satisfies other rules of evidence, is admissible at trial.” Howell, 52 Cal. 4th at 567. Thus, evidence of the amount paid for past medical expenses, not the amount billed, is relevant to establish past medical damages in California.

Is Evidence of Undiscounted Bills Admissible for Other Purposes?

Although decisively breaking ranks with the majority of courts on the measure of damages for past medical expenses, the California Supreme Court left numerous issues unresolved.

The court expressly declined to decide whether evidence of the full billed amount might be relevant “on other issues, such as noneconomic damages or future medical expenses.” Howell, 52 Cal. 4th at 567. Defendants appear to have strong arguments on this point. Evidence of the undiscounted amount should be irrelevant to prove future medical expenses or noneconomic damages for the same reason it is irrelevant to prove past medical expenses ' the plaintiff has not incurred a detriment based on the full billed amount. This is especially true as the increasing availability of health insurance further reduces the relevance of the undiscounted amount charged for health care services. See 42 U.S.C. ' 300gg (health insurance available to everyone regardless of preexisting conditions.) Since the full billed amount is irrelevant because it can't be recovered for past medical damages (as Howell holds), it should be equally irrelevant as a basis for seeking any other kind of damages.

Can Plaintiffs Recover for Gratuitous Medical Care?

As it is widely understood in a number of states, the collateral source rule applies to gratuitous services and allows a plaintiff to recover the value of donated medical care. See Howell, 52 Cal. 4th at 557-58. California law on this point is unclear. See Id. at 558. However, the Howell court expressly declined to decide the issue. Id. at 559.

More than 40 years ago, in Helfend v. Southern California Rapid Transit District , 2 Cal. 3d 1 (1970), the California Supreme Court suggested the collateral source rule applied to unpaid services only when rendered “with the expectation of repayment out of any tort recovery.” Id . at 7, n.5. But in Arambula v. Wells , 72 Cal. App. 4th 1006 (1999), the California Court of Appeal declined to follow the Helfend dictum. The Arambula court instead held the collateral source rule allowed recovery of “gratuitous payments (including moneys to cover lost wages) by family or friends to assist tort victims through difficult times.” Id. at 1008. The Arambula court reasoned that any other rule would conflict with the policy of encouraging charity.

In Howell, the Supreme Court recognized the conflict between Helfend and Arambula, but left it to be resolved another day. The Howell court explained that the rationale for allowing recovery for gratuitous care ' an incentive to charity ' did not apply to the facts before it involving commercially negotiated price agreements between medical providers and health insurers.

Following Howell , the California Court of Appeal confronted this issue in Sanchez v. Strickland , 200 Cal. App. 4th 748 (2011). The Sanchez court held that a plaintiff may recover damages for past medical expenses that have been written off so long as the medical provider has “(1) rendered medical services to a plaintiff, (2) issued a bill for those services, and (3) subsequently written off a portion of the bill gratuitously.” Id. at 769. Applying this rule, the court concluded that the plaintiff could recover the $7,020 balance that had been “gratuitously” written off by the medical provider.

But Sanchez arguably conflicts with Howell on this issue. Howell held that the gratuitous care exception (where recognized) reflects the policy of encouraging charity. Yet the Sanchez court discussed no facts showing that, in writing-off the $7,020 balance, the medical provider acted with a donative intent. Instead, the provider wrote-off the $7,020 balance only because it lacked a contract allowing for reimbursement. But if donative intent were shown by the absence of a contract guaranteeing payment (as Sanchez suggests), then every write-off would arguably reflect a donative intent. Such an exception would consume the Howell rule. As a result, Sanchez may not be the final word on this issue in California.

Howell's Significance

The Howell decision promises to reduce potential medical damages in California by hundreds of millions of dollars a year, but leaves important questions unanswered, including whether undiscounted medical bills are admissible for any purpose, and whether plaintiffs can recover damages for gratuitous medical care. These issues are likely to challenge the California appellate courts in the future.

And the Howell decision may have ramifications far beyond California, as it offers a template for challenging windfall medical damages claims in other states.

David Axelrad, a member of this newsletter's Board of Editors, and Robert Wright are partners in the civil appellate law firm Horvitz & Levy LLP, resident in Encino, CA.