Did the Affordable Care Act End the Collateral Source Rule?

The History

The modern collateral source rule prevents the jury from receiving evidence that a third party paid for expenses incurred by an injured party. The collateral source rule originated in England during the 1820s and was first accepted in the United States in 1854. Robert Hernquist, Arthur v. Catour: An Examination of the Collateral Source Rule in Illinois, 38 Loyola U. Chicago L.J. 169, 176 (2006). The United States Supreme Court adopted the rule in the case of Monticello v. Mollison, 58 U.S. 152, 155 (1854). In that case, the Court held that a defendant's liability “could not be offset by [an] insurance policy” since it was “a wager between third parties.” Id. The Court reasoned that a liable defendant was “bound to make satisfaction of the injury” even if a plaintiff recovered insurance benefits. Id . Since then, many states have adopted a similar form of the rule, excluding evidence of benefits from presentation to the jury.

The main criticisms of the collateral source rule are that excluding such evidence leads to inflated damages awards and a windfall to the claimant. Over the years, a number of justifications for the collateral source rule were given by courts. Historically, most people did not have health insurance or other collateral sources from which to obtain payments for medical care. Joshua Congdon-Hohman and Victor A. Matheson, Potential Effects of the Affordable Care Act on the Award of Life Care Expenses, College of the Holy Cross, Department of Economics Faculty Research Series, Paper No. 12-01 (September 2012). See also William A. Olson, The Collateral Source Rule: Double Recovery and Indifference to Societal Interest in the Law of Tort Damages, 2 U. Puget Sound L. Rev. 197 (1978). As a matter of public policy, the courts did not want to discourage people from obtaining insurance because “it is beneficial to encourage the public to acquire insurance coverage,” if possible, and “the defendant should not be allowed to benefit from the plaintiff's foresight in acquiring insurance.” Hernquis , at 178.

The courts also reasoned that tort law was a deterrent to negligence. Failing to require defendants to pay the full amount of damages caused by their negligence would diminish the deterrent effect. Id. See also Amalgamated Transit Union Local 1324 v. Roberts, 434 S.E.2d 450 (Ga. 1993).

Over time, however, it became commonly known that a health care provider's billed “price” was not the same as the actual cost of the service, or even what the provider expected to receive in full payment. With the ever increasing role played by health insurance (public and private), medical costs were negotiated down and, frequently, the actual payment by the payor to the provider did not reflect the price on the bill or statement of account. Joseph Goldstein, Exerting Their Patients, ABA Journal (May 1, 2009). As one commenter remarked, “The evolution of the nation's health care payment systems” has made the “list price” in a medical bill “meaningless” and “almost entirely a fictitious number.” James McGrath, Overcharging the Uninsured in Hospitals: Shifting a Greater Share of Uncompensated Medical Care Costs to the Federal Government, 26 Quinnipiac L. Rev . 173, 185 (2007); Mark A. Hall & Carl E. Schneider, Patients As Consumers: Courts, Contracts, and the New Medical Marketplace, 106 Mich. L. Rev. 643, 664-665 (Feb. 2008).

Enter the Affordable Care Act

The Affordable Care Act (the Act) (Pub. L. No. 111-148, 124 Stat. 119 (2010)) was passed and signed into law on March 23, 2010. The Act included an individual mandate that went into effect on Jan. 1 of this year, which requires all citizens to have health insurance. With this requirement, and assuming full implementation of the Act, it is now time to question the continued viability of the collateral source rule. Specifically, if the main premise supporting the collateral source rule is a public policy in favor of encouraging people to obtain health insurance, that should now be less of a concern.

With the passage of the Act, it is less likely that juries will see injured parties who do not have health insurance. Moreover, juries “will rarely, if ever, encounter uninsured plaintiffs whose medical bills are paid in full at the billed rate rather than at the lower negotiated rate paid by insurance companies” and/or government insurers, such as Medicaid. Ann S. Levin, The Fate of the Collateral Source Rule After Healthcare Reform, 60 UCLA L. Rev. 736, 742 (2013). This is because everyone is now required by law to be insured, or they must pay a substantial penalty. Therefore, plaintiffs will benefit from and actually pay the lower negotiated costs of health care rather than the artificially inflated prices charged.

The individual mandate eradicates the notion that society should encourage people to purchase health insurance, or that buying insurance was the result of a plaintiff's prudence. Rather, with the individual mandate, the opposite presumption about health insurance should be made: that plaintiffs have at least the minimum level of coverage required by law. Rebecca Levenson, Allocating the Costs of Harm to Whom They Are Due: Modifying the Collateral Source Rule After Health Care Reform, U. Penn. L. Rev. 922, 935 (2012).

As for deterrence of torts, the defendant will still pay the actual cost of the harm caused rather than a fictitious figure, which has nothing to do with the harm caused to the plaintiff. Put simply, the previous justifications for the collateral source rule no longer exist. All Americans must now be insured and all Americans will benefit from the negotiated rates the health care providers will accept as full payment. If the colateral source rule remains in place, the potential for the presentation of misleading evidence exists.

Amounts Billed and Actual Payments

Even before passage of the Affordable Care Act, courts began considering the evolution of health care payment systems concerning medical bills versus actual medical costs or actual damages. Concerns regarding the presentation of evidence to a jury of medical bills that did not represent the actual costs incurred have long been considered, but inconsistently addressed. This is due to traditional presumptions in favor of the injured party over concerns for the tortfeasor. See, e.g., Amalgamate , 434 S.E.2d at 452

In recent years, state appellate courts have started to address the issue and are not permitting evidence of a medical bill that does not reflect the actual amounts paid. For instance, the California Supreme Court held that the plaintiff could only recover what was actually paid through her health insurance and accepted by the provider as full payment because the difference between what was billed and what was accepted was not a collateral source. Howell v. Hamilton Meats & Provisions, 257 P.3d 1130 (Ca. 2001). In another example, the Florida Supreme Court held that the “[R]ecovery for medical expenses [is limited] to the amount of medical expenses that he actually was obligated to pay.” Goble v. Frohman , 901 So.2d 830 (Fla. 2005). The Kansas Supreme Court held that the amount accepted as full payment for medical services is the amount relevant to prove the reasonable value of the medical treatment, but held that the source of payment (health insurance) is inadmissible. Martinez v. Milburn Enterp., Inc. , 233 P.3d 205, 207 (Kan. 2010). The Pennsylvania Supreme Court held that “the injured party should be limited to recovering the amount paid for the medical services.” Moorhead v. Crozer Chester Med. Ctr., 765 A.2d 786, 789-90 (Pa. 2001), abrogated on other grounds by Northbrok life Ins. Co. v. Commonwealth, 949 A.2d 333 (Pa. 2008). The Texas Supreme Court held “the common-law collateral source rule does not allow recovery as damages of medical expenses a health care provider is not allowed to charge.” Haygood v. De Esabedo, 356 S.W.2d 390, 396 (Tex. 2011).

Now, with the implementation of the Affordable Care Act, the assumption will be that all persons have insurance coverage; therefore, all courts should consistently allow only presentation of damages that were actually paid, i.e., the negotiated rate insurance companies pay for the health care provided.

The same holds true for any projected future medical costs related to the injury. This, however, will be somewhat more complex, as insurance plans may change, along with the negotiated rates in the future. Some will likely even argue that future medical costs should be limited to the maximum out-of-pocket expenses allowable under the Affordable Care Act, but this would likely be an overreach. Such limitations might: 1) unjustly shift liability onto a health care insurer who may have a valid lien; and/or 2) shift a burden onto Medicare/Medicaid, which is not allowed under Federal law. Of course, separating out future medical expenses related to the injury litigated versus routine or unrelated expenses is an entirely different issue for consideration.

With the Affordable Care Act in place, if juries assume that every plaintiff is insured, but is ultimately responsible for costs paid by their insurer, the only costs that should be presented as evidence of damages are the costs actually paid to and accepted by the health care provider as full payment. To do anything else seems to allow the potential for perjury or testimony regarding damages not really incurred. Over the next few years, this issue will likely receive a lot of attention from lawyers and judges, alike, as the Affordable Care Act, which is still in its infancy, is implemented and/or revised.

Conclusion

The law of the land has dramatically changed after a slow, but evolving process related to health care payment systems over time. The collateral source rule, long established as it has been, will likely end or be substantially altered along with the other dramatic changes ushered in with the Affordable Care Act.

Spencer A. Bomar is a partner with Carlock, Copeland & Stair, LLP in Atlanta.

The Affordable Care Act has the potential to change dramatically many aspects of America's healthcare system, including access to medical care, insurance coverage for medical expenses, and the actual costs of care. As a side effect, there is a growing belief that the passage of the Affordable Care Act could signal the end of the collateral source rule.

With the enactment of the individual mandate, it may be time to question the premise underlying the collateral source rule: namely, that people need incentives to acquire health insurance and that admitting evidence of collateral source benefits creates a windfall for the alleged tortfeasor. Similarly, there is evidence that the Affordable Care Act may result in the “incurred costs” for healthcare services reflecting the actual costs, and not negotiated rates.

This article explores the possibility that as cases are litigated under the Affordable Care Act, there is an opportunity for a change in the collateral source rule and the corresponding impact on the presentation of damages in personal injury cases.

The History

The modern collateral source rule prevents the jury from receiving evidence that a third party paid for expenses incurred by an injured party. The collateral source rule originated in England during the 1820s and was first accepted in the United States in 1854. Robert Hernquist, Arthur v. Catour: An Examination of the Collateral Source Rule in Illinois, 38 Loyola U. Chicago L.J. 169, 176 (2006). The United States Supreme Court adopted the rule in the case of Monticello v. Mollison , 58 U.S. 152, 155 (1854). In that case, the Court held that a defendant's liability “could not be offset by [an] insurance policy” since it was “a wager between third parties.” Id. The Court reasoned that a liable defendant was “bound to make satisfaction of the injury” even if a plaintiff recovered insurance benefits. Id . Since then, many states have adopted a similar form of the rule, excluding evidence of benefits from presentation to the jury.

The main criticisms of the collateral source rule are that excluding such evidence leads to inflated damages awards and a windfall to the claimant. Over the years, a number of justifications for the collateral source rule were given by courts. Historically, most people did not have health insurance or other collateral sources from which to obtain payments for medical care. Joshua Congdon-Hohman and Victor A. Matheson, Potential Effects of the Affordable Care Act on the Award of Life Care Expenses, College of the Holy Cross, Department of Economics Faculty Research Series, Paper No. 12-01 (September 2012). See also William A. Olson, The Collateral Source Rule: Double Recovery and Indifference to Societal Interest in the Law of Tort Damages, 2 U. Puget Sound L. Rev. 197 (1978). As a matter of public policy, the courts did not want to discourage people from obtaining insurance because “it is beneficial to encourage the public to acquire insurance coverage,” if possible, and “the defendant should not be allowed to benefit from the plaintiff's foresight in acquiring insurance.” Hernquis , at 178.

The courts also reasoned that tort law was a deterrent to negligence. Failing to require defendants to pay the full amount of damages caused by their negligence would diminish the deterrent effect. Id. See also Amalgamated Transit Union Local 1324 v. Roberts , 434 S.E.2d 450 (Ga. 1993).

Over time, however, it became commonly known that a health care provider's billed “price” was not the same as the actual cost of the service, or even what the provider expected to receive in full payment. With the ever increasing role played by health insurance (public and private), medical costs were negotiated down and, frequently, the actual payment by the payor to the provider did not reflect the price on the bill or statement of account. Joseph Goldstein, Exerting Their Patients, ABA Journal (May 1, 2009). As one commenter remarked, “The evolution of the nation's health care payment systems” has made the “list price” in a medical bill “meaningless” and “almost entirely a fictitious number.” James McGrath, Overcharging the Uninsured in Hospitals: Shifting a Greater Share of Uncompensated Medical Care Costs to the Federal Government, 26 Quinnipiac L. Rev . 173, 185 (2007); Mark A. Hall & Carl E. Schneider, Patients As Consumers: Courts, Contracts, and the New Medical Marketplace, 106 Mich. L. Rev. 643, 664-665 (Feb. 2008).

Enter the Affordable Care Act

The Affordable Care Act (the Act) (Pub. L. No. 111-148, 124 Stat. 119 (2010)) was passed and signed into law on March 23, 2010. The Act included an individual mandate that went into effect on Jan. 1 of this year, which requires all citizens to have health insurance. With this requirement, and assuming full implementation of the Act, it is now time to question the continued viability of the collateral source rule. Specifically, if the main premise supporting the collateral source rule is a public policy in favor of encouraging people to obtain health insurance, that should now be less of a concern.

With the passage of the Act, it is less likely that juries will see injured parties who do not have health insurance. Moreover, juries “will rarely, if ever, encounter uninsured plaintiffs whose medical bills are paid in full at the billed rate rather than at the lower negotiated rate paid by insurance companies” and/or government insurers, such as Medicaid. Ann S. Levin, The Fate of the Collateral Source Rule After Healthcare Reform, 60 UCLA L. Rev. 736, 742 (2013). This is because everyone is now required by law to be insured, or they must pay a substantial penalty. Therefore, plaintiffs will benefit from and actually pay the lower negotiated costs of health care rather than the artificially inflated prices charged.

The individual mandate eradicates the notion that society should encourage people to purchase health insurance, or that buying insurance was the result of a plaintiff's prudence. Rather, with the individual mandate, the opposite presumption about health insurance should be made: that plaintiffs have at least the minimum level of coverage required by law. Rebecca Levenson, Allocating the Costs of Harm to Whom They Are Due: Modifying the Collateral Source Rule After Health Care Reform, U. Penn. L. Rev. 922, 935 (2012).

As for deterrence of torts, the defendant will still pay the actual cost of the harm caused rather than a fictitious figure, which has nothing to do with the harm caused to the plaintiff. Put simply, the previous justifications for the collateral source rule no longer exist. All Americans must now be insured and all Americans will benefit from the negotiated rates the health care providers will accept as full payment. If the colateral source rule remains in place, the potential for the presentation of misleading evidence exists.

Amounts Billed and Actual Payments

Even before passage of the Affordable Care Act, courts began considering the evolution of health care payment systems concerning medical bills versus actual medical costs or actual damages. Concerns regarding the presentation of evidence to a jury of medical bills that did not represent the actual costs incurred have long been considered, but inconsistently addressed. This is due to traditional presumptions in favor of the injured party over concerns for the tortfeasor. See, e.g., Amalgamate , 434 S.E.2d at 452

In recent years, state appellate courts have started to address the issue and are not permitting evidence of a medical bill that does not reflect the actual amounts paid. For instance, the California Supreme Court held that the plaintiff could only recover what was actually paid through her health insurance and accepted by the provider as full payment because the difference between what was billed and what was accepted was not a collateral source. Howell v. Hamilton Meats & Provisions , 257 P.3d 1130 (Ca. 2001). In another example, the Florida Supreme Court held that the “[R]ecovery for medical expenses [is limited] to the amount of medical expenses that he actually was obligated to pay.” Goble v. Frohman , 901 So.2d 830 (Fla. 2005). The Kansas Supreme Court held that the amount accepted as full payment for medical services is the amount relevant to prove the reasonable value of the medical treatment, but held that the source of payment (health insurance) is inadmissible. Martinez v. Milburn Enterp., Inc. , 233 P.3d 205, 207 (Kan. 2010). The Pennsylvania Supreme Court held that “the injured party should be limited to recovering the amount paid for the medical services.” Moorhead v. Crozer Chester Med. Ctr. , 765 A.2d 786, 789-90 (Pa. 2001), abrogated on other grounds by Northbrok life Ins. Co. v. Commonwealth , 949 A.2d 333 (Pa. 2008). The Texas Supreme Court held “the common-law collateral source rule does not allow recovery as damages of medical expenses a health care provider is not allowed to charge.” Haygood v. De Esabedo , 356 S.W.2d 390, 396 (Tex. 2011).

Now, with the implementation of the Affordable Care Act, the assumption will be that all persons have insurance coverage; therefore, all courts should consistently allow only presentation of damages that were actually paid, i.e., the negotiated rate insurance companies pay for the health care provided.

The same holds true for any projected future medical costs related to the injury. This, however, will be somewhat more complex, as insurance plans may change, along with the negotiated rates in the future. Some will likely even argue that future medical costs should be limited to the maximum out-of-pocket expenses allowable under the Affordable Care Act, but this would likely be an overreach. Such limitations might: 1) unjustly shift liability onto a health care insurer who may have a valid lien; and/or 2) shift a burden onto Medicare/Medicaid, which is not allowed under Federal law. Of course, separating out future medical expenses related to the injury litigated versus routine or unrelated expenses is an entirely different issue for consideration.

With the Affordable Care Act in place, if juries assume that every plaintiff is insured, but is ultimately responsible for costs paid by their insurer, the only costs that should be presented as evidence of damages are the costs actually paid to and accepted by the health care provider as full payment. To do anything else seems to allow the potential for perjury or testimony regarding damages not really incurred. Over the next few years, this issue will likely receive a lot of attention from lawyers and judges, alike, as the Affordable Care Act, which is still in its infancy, is implemented and/or revised.

Conclusion

The law of the land has dramatically changed after a slow, but evolving process related to health care payment systems over time. The collateral source rule, long established as it has been, will likely end or be substantially altered along with the other dramatic changes ushered in with the Affordable Care Act.

Spencer A. Bomar is a partner with Carlock, Copeland & Stair, LLP in Atlanta.