<i>Hoffman v. Travelers</i>

For decades, courts throughout the country interpreting the “reasonable expenses incurred” language in automobile MedPay clauses have distinguished between payments made on an insured's behalf by a private healthcare insurer, and medical services that an insured receives free of charge. The former are deemed to have been “incurred” and recoverable under a MedPay policy because the insured is legally liable for them even though a collateral source made the payment. The latter do not equate to “incurred expenses” because the insured neither paid the expenses nor became legally liable to pay them. The Superior Court of New Jersey detailed the difference in its 1977 decision in Sanner v. Government Employees Insurance Company, in which a National Guardsman sought coverage from his insurer for medical bills he claimed he incurred after receiving free medical treatment in a veterans facility:

[T]here exists a valid distinction between “benefits received by an injured person pursuant to some private medical payment insurance purchased by him and benefits received [from the Federal Government]. Under a private policy the insured becomes liable for, and therefore incurs, the expenses which he must pay if his private carrier for some reason declines to do so; as a serviceman receiving medical treatment to which he is absolutely entitled with no obligation of reimbursement, he does not become liable for the reasonable value of the treatment. Hence, under the private policy, medical expenses are incurred by the insured; when treatment is afforded by the Federal Government with no obligation to reimburse, such expenses are not incurred.

Sanner v. Government Employees Ins. Co., 376 A.2d. 180, 184 (N.J. Super Ct. App. Div. 1977).

Despite the prevalence of jurisprudence interpreting the “reasonable expenses incurred” language to mean those expenses for which an insured becomes legally liable, a gap remained. There was no case law definitively resolving whether an insured “incurred” the full cost of medical expenses when she paid a discounted amount negotiated by her private healthcare provider. That gap closed earlier this year.

Relying on the “free of charge” line of cases, the Louisiana Supreme Court held in Hoffman v. Travelers Indemnity Company of America that a medical expense is “incurred” only “when one has paid it or become legally obligated to pay it.” 144 So.3d 993, 998 (La. 2014). As a result, an insured that is liable to pay only a discounted rate negotiated by its private healthcare insurer does not “incur” the full amount of the hospital bill. Thus, an insured may only recover the discounted rate from her automobile insurer under the MedPay provision of the policy.

Background

The facts of Hoffman are as follows: The plaintiff, Ashley Hoffman, was insured under an automobile insurance policy issued to her by Travelers Indemnity Company of America. Her policy contained a MedPay endorsement that required Travelers to “pay reasonable expenses incurred for necessary medical and funeral services because of bodily injury” caused by an accident and sustained by an insured. After being injured in an automobile accident, Hoffman sought and received treatment at Baton Rouge General Medical Center (“BRMC”). In connection with her treatment, Hoffman signed a hospital form guaranteeing that she would pay BRMC for her treatment at BRMC's current rate:

[I]n consideration of these services rendered to the patient named below, I/we assume responsibility for and guarantee the payment of all Medical Charges in accordance with the Medical Center's then current rate.

BRMC's charges for its treatment of Hoffman totaled $713.67. Because Hoffman was covered under her parents' AETNA health insurance policy, however, BRMC reduced the charges to $485.29 pursuant to its contract with AETNA. BRMC thus charged Hoffman $485.29, which she paid in full. BRMC never sought payment for the full $713.67, nor could it have done so.

Hoffman subsequently filed a claim with Travelers seeking reimbursement for the undiscounted charges from BRMC. In adjusting the claim, Travelers was provided an itemized bill from BRMC that did not reflect the discounted charges. As a result, Travelers issued payment to Hoffman in the amount of $674.73, representing the total charges of $713.67 less $38.94 for a geographical deduction relative to one particular treatment. Hoffman continued to seek payment for the full $713.67. Travelers, however, eventually learned that the BRMC bill had been contractually reduced ' and asserted that it had essentially overpaid Hoffman because she was only entitled to reimbursement of the discounted charges of $485.29.

Hoffman filed a class action suit against Travelers based on Travelers' geographical deduction. Before class certification could be considered, however, Travelers moved for summary judgment, arguing that Hoffman did not have a viable cause of action against it. Travelers argued that in paying Hoffman $674.73, it had satisified the requirement of the policy to reimburse her for the reasonable medical expenses “incurred” inasmuch as the charges had been reduced to $485.29. The trial court denied Travelers' motion, and appeals to the Louisiana First Circuit Court of Appeal and Louisiana Supreme Court followed.

In the Louisiana Courts

The Louisiana First Circuit Court of Appeal and the Louisiana Supreme Court considered the same lines of Louisiana cases; their holdings, however, differed. The Louisiana First Circuit Court of Appeal, for example, affirmed the trial court's denial of Travelers' motion for summary judgment. Hoffman v. Travelers Indemnity Company of America, 121 So.3d 106, 107 (La. Ct. App. 2013). In doing so, it relied on two decisions in which Louisiana courts found that medical expenses were “incurred” when a collateral source paid medical bills on an insured's behalf.

In the first case, Thomas v. Universal Life Ins. Co., 201 So.2d 529 (La. Ct. App. 1967), the plaintiff was injured on the job and received medical treatment paid by his employer's workers' compensation insurer. The plaintiff's private insurer argued that it was only required to pay “expenses actually incurred” under the policy, and because all of the plaintiff's expenses were paid by the workers' compensation insurer, the plaintiff had not actually “incurred” any medical expenses. The Thomas court disagreed with the insurer and found that the plaintiff “incurred” the medical expenses because the hospital expenses and doctor's services were billed directly to the plaintiff, even if he did not ultimately pay for them.

Similarly, in Niles v. American Bankers Insurance Company, 229 So.2d 435 (La. Ct. App. 1969), an insurer argued that an insured did not actually “incur” medical expenses when Medicare paid for all of her hospital expenses. The Niles court, however, found that the hospital expenses were incurred by the insured because the charges were made to the plaintiff's account, and if Medicare had not made the payments the hospital would have required payment from the insured.

The Appellate Ruling

Applying the rationale of Thomas and Niles, the Louisiana First Circuit Court of Appeal in Hoffman held that Ms. Hoffman “incurred” the full, undiscounted BRMC bill because if “Hoffman's health insurer had failed or refused to pay the hospital charges, she remained responsible for the charges as she signed a treatment-authorization form upon being admitted to the hospital ' ” In reaching this decision, the Louisiana First Circuit Court of Appeal distinguished a line of Louisiana precedent holding that no medical expenses were “ incurred” when given free of charge because in those cases “no charges whatsoever were incurred for the medical services provided in those cases.” See Irby v. Government Employee Insurance Company, 175 So.2d 9 (La. Ct. App. 1965); Brackens v. Allstate Insurance Company, 339 So.2d486 (La. Ct. App. 1976); Drearr v. Connecticut Life Insurance Company, 119 So.2d 149 (La. Ct. App. 1960); and Rigby v. Aetna Casualty & Surety Company, 151 So. 119 (La. Ct. App. 1933).

The LA Supreme Court Ruling

The Louisiana Supreme Court, however, overturned the appellate court. Its principle holding, however, was really an affirmation of what Louisiana courts ' and other courts around the country ' have held for decades. It ruled that the term “incurred” in MedPay clauses is unambiguous and means that an insured “has paid [a medical expense] or become legally liable to pay it.” Because the insured in Hoffman had only become legally liable to pay the BRMC's discounted bill, she had only “incurred” $485.29 in medical expenses. In essence, the Louisiana Supreme Court rejected the notion that a contractual reduction obtained through one's private insurer constitutes a collateral source.

Thus, in reimbursing Hoffman $674.73, Travelers had overpaid her by $189.44. In reaching this holding, the Louisiana Supreme Court relied almost exclusively on those cases in which “no charges whatsoever were incurred” and distinguished the Hoffman matter from both Thomas and Niles . Specifically, the Louisiana Supreme Court relied on three Louisiana appellate decisions in which an insured did not “incur” any medical expenses because they were provided for free.

In the first case, Drearr v. Connecticut General Life Insurance Company, 119 So.2d 149 (La. Ct. App. 1960), the insured received medical treatment at a Veterans Administration Hospital and brought suit against his personal insurer seeking reimbursement for $1,038.50 ' the amount of a bill rendered by the VA. The VA made no effort and had no intent to pursue the insured for the indebtedness. The insurer asserted that as a qualified veteran, the insured was entitled to free treatment at the VA hospital and “incurred” no expense in connection with any of the services rendered. The Drearr court agreed with the insurer and held that the insured's claim of incurring any medical expenses was nothing more than a sham:

[T]he court is impressed with the unreality of the position that [the insured] has incurred any expense whose payment by him to plaintiff was never demanded, insisted upon or even expected by plaintiff. The claim of any debt on his part for the expense is a sham or pretense. It lacks that quality of “actuality” which, the policy declares, must characterize the “incurred expense” to support recovery by [plaintiff] from defendant.

As a result, because the VA in Drearr did not have authority to collect for expenses from the insured, “it could not be said that the [insured] incurred any expenses” for his medical treatment.

The other two decisions relied on by the Louisiana Supreme Court are similar to Drearr . In Irby v. Government Employees Insurance Company, 175 So.2d 9 (La. Ct. App. 1965), the insured sought to recover from his automobile insurer medical expense he claimed he incurred when he was involved in an automobile accident while on active duty with the United States Coast Guard. The insured, however, was never charged for the medical services because of his active-duty status and was under no obligation to pay for them. The Irby court agreed with the insurer that an insured who is under no legal obligation to pay for medical expenses could not have “incurred” them:

[A]s used in the policy in suit, the word “incurred” emphasizes the idea of liability and the definition of “incur” is: “To have liabilities (or a liability) thrust upon one by act or operation of law”; a thing for which there exists no obligation to pay, either express or implied, cannot in law constitute an “incurred expense”; a debt or expense has been incurred only when liability attaches.

Likewise, in Brackens v. Allstate Insurance Company, 339 So.2d 486 (La. Ct. App. 1976), the insured was treated at a VA hospital as a qualified veteran free of charge. The Brackens court, therefore, concluded that the insured “has never been liable or obligated for payment of the medical services rendered by the VA Hospital ' he has never, therefore, 'incurred' any medical expense for which payment is due under the medical payments provisions of the insurance contract.”

Based on Drearr, Irby and Brackens, the Louisiana Supreme Court held that Ms. Hoffman could only recover those medical expenses for which she paid or was legally obligated to pay. It was undisputed that BRMC contracted with AETNA for Hoffman to pay a discounted price for medical services, and that BRMC billed and Hoffman paid $485.29 in full payment of her medical expenses. It was further undisputed that BRMC did not seek payment for the $713.67 and that it had no contractual right to do so. As a result, because Hoffman bore no liability for any amount over the $485.29 she paid to BRMC, she did not “incur” the full medical expense of $713.67. Because Travelers had paid her $674.73, Hoffman was not entitled to any additional reimbursement.

The Louisiana Supreme Court held that the appellate court erred in relying on Thomas and Niles. In both of those cases, the insureds were found to have “incurred” the medical expenses because the charges were billed to the insureds, and the insureds were legally liable for those charges. The insureds' failure to pay those charges was not due to a lack of legal responsibility, but, rather because a third party paid the expenses on their behalf. As a result, according to the Louisiana Supreme Court, the rationale in Thomas and Niles is more akin to cases involving the collateral source rule, which prohibits a plaintiff's tort recovery from being reduced because of monies received by the plaintiff from sources independent of the tortfeasor. This was not the case in Hoffman, in which Ms. Hoffman had no legal obligation to BRMC for anything more than her contractually reduced bill.

Conclusion

There is little precedent around the country on whether an insured “incurs” the full cost of medical expenses when paying a discounted amount negotiated by a private healthcare provider. Many jurisdictions, however, have cases in line with Drearr , Irby and Brackens . As a result, Hoffman can be a useful tool to insurers facing claims from an insured for recovery of full amounts of discounted medical bills under a MedPay clause. Insurers in jurisdictions with decisions akin to Drearr, Irby and Brackens may rely on Hoffman to establish that the insured is only entitled to the discounted amount of the medical bill.

Joe M. Wearmouth is an associate and Seth A. Schmeeckle is a shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, which has offices in New Orleans, Baton Rouge, and Houston. The views presented in this article are not necessarily the views of the firm or any of its clients.

For decades, courts throughout the country interpreting the “reasonable expenses incurred” language in automobile MedPay clauses have distinguished between payments made on an insured's behalf by a private healthcare insurer, and medical services that an insured receives free of charge. The former are deemed to have been “incurred” and recoverable under a MedPay policy because the insured is legally liable for them even though a collateral source made the payment. The latter do not equate to “incurred expenses” because the insured neither paid the expenses nor became legally liable to pay them. The Superior Court of New Jersey detailed the difference in its 1977 decision in Sanner v. Government Employees Insurance Company, in which a National Guardsman sought coverage from his insurer for medical bills he claimed he incurred after receiving free medical treatment in a veterans facility:

[T]here exists a valid distinction between “benefits received by an injured person pursuant to some private medical payment insurance purchased by him and benefits received [from the Federal Government]. Under a private policy the insured becomes liable for, and therefore incurs, the expenses which he must pay if his private carrier for some reason declines to do so; as a serviceman receiving medical treatment to which he is absolutely entitled with no obligation of reimbursement, he does not become liable for the reasonable value of the treatment. Hence, under the private policy, medical expenses are incurred by the insured; when treatment is afforded by the Federal Government with no obligation to reimburse, such expenses are not incurred.

Sanner v. Government Employees Ins. Co. , 376 A.2d. 180, 184 (N.J. Super Ct. App. Div. 1977).

Despite the prevalence of jurisprudence interpreting the “reasonable expenses incurred” language to mean those expenses for which an insured becomes legally liable, a gap remained. There was no case law definitively resolving whether an insured “incurred” the full cost of medical expenses when she paid a discounted amount negotiated by her private healthcare provider. That gap closed earlier this year.

Relying on the “free of charge” line of cases, the Louisiana Supreme Court held in Hoffman v. Travelers Indemnity Company of America that a medical expense is “incurred” only “when one has paid it or become legally obligated to pay it.” 144 So.3d 993, 998 (La. 2014). As a result, an insured that is liable to pay only a discounted rate negotiated by its private healthcare insurer does not “incur” the full amount of the hospital bill. Thus, an insured may only recover the discounted rate from her automobile insurer under the MedPay provision of the policy.

Background

The facts of Hoffman are as follows: The plaintiff, Ashley Hoffman, was insured under an automobile insurance policy issued to her by Travelers Indemnity Company of America. Her policy contained a MedPay endorsement that required Travelers to “pay reasonable expenses incurred for necessary medical and funeral services because of bodily injury” caused by an accident and sustained by an insured. After being injured in an automobile accident, Hoffman sought and received treatment at Baton Rouge General Medical Center (“BRMC”). In connection with her treatment, Hoffman signed a hospital form guaranteeing that she would pay BRMC for her treatment at BRMC's current rate:

[I]n consideration of these services rendered to the patient named below, I/we assume responsibility for and guarantee the payment of all Medical Charges in accordance with the Medical Center's then current rate.

BRMC's charges for its treatment of Hoffman totaled $713.67. Because Hoffman was covered under her parents' AETNA health insurance policy, however, BRMC reduced the charges to $485.29 pursuant to its contract with AETNA. BRMC thus charged Hoffman $485.29, which she paid in full. BRMC never sought payment for the full $713.67, nor could it have done so.

Hoffman subsequently filed a claim with Travelers seeking reimbursement for the undiscounted charges from BRMC. In adjusting the claim, Travelers was provided an itemized bill from BRMC that did not reflect the discounted charges. As a result, Travelers issued payment to Hoffman in the amount of $674.73, representing the total charges of $713.67 less $38.94 for a geographical deduction relative to one particular treatment. Hoffman continued to seek payment for the full $713.67. Travelers, however, eventually learned that the BRMC bill had been contractually reduced ' and asserted that it had essentially overpaid Hoffman because she was only entitled to reimbursement of the discounted charges of $485.29.

Hoffman filed a class action suit against Travelers based on Travelers' geographical deduction. Before class certification could be considered, however, Travelers moved for summary judgment, arguing that Hoffman did not have a viable cause of action against it. Travelers argued that in paying Hoffman $674.73, it had satisified the requirement of the policy to reimburse her for the reasonable medical expenses “incurred” inasmuch as the charges had been reduced to $485.29. The trial court denied Travelers' motion, and appeals to the Louisiana First Circuit Court of Appeal and Louisiana Supreme Court followed.

In the Louisiana Courts

The Louisiana First Circuit Court of Appeal and the Louisiana Supreme Court considered the same lines of Louisiana cases; their holdings, however, differed. The Louisiana First Circuit Court of Appeal, for example, affirmed the trial court's denial of Travelers' motion for summary judgment. Hoffman v. Travelers Indemnity Company of America , 121 So.3d 106, 107 (La. Ct. App. 2013). In doing so, it relied on two decisions in which Louisiana courts found that medical expenses were “incurred” when a collateral source paid medical bills on an insured's behalf.

In the first case, Thomas v. Universal Life Ins. Co. , 201 So.2d 529 (La. Ct. App. 1967), the plaintiff was injured on the job and received medical treatment paid by his employer's workers' compensation insurer. The plaintiff's private insurer argued that it was only required to pay “expenses actually incurred” under the policy, and because all of the plaintiff's expenses were paid by the workers' compensation insurer, the plaintiff had not actually “incurred” any medical expenses. The Thomas court disagreed with the insurer and found that the plaintiff “incurred” the medical expenses because the hospital expenses and doctor's services were billed directly to the plaintiff, even if he did not ultimately pay for them.

Similarly, in Niles v. American Bankers Insurance Company , 229 So.2d 435 (La. Ct. App. 1969), an insurer argued that an insured did not actually “incur” medical expenses when Medicare paid for all of her hospital expenses. The Niles court, however, found that the hospital expenses were incurred by the insured because the charges were made to the plaintiff's account, and if Medicare had not made the payments the hospital would have required payment from the insured.

The Appellate Ruling

Applying the rationale of Thomas and Niles , the Louisiana First Circuit Court of Appeal in Hoffman held that Ms. Hoffman “incurred” the full, undiscounted BRMC bill because if “Hoffman's health insurer had failed or refused to pay the hospital charges, she remained responsible for the charges as she signed a treatment-authorization form upon being admitted to the hospital ' ” In reaching this decision, the Louisiana First Circuit Court of Appeal distinguished a line of Louisiana precedent holding that no medical expenses were “ incurred” when given free of charge because in those cases “no charges whatsoever were incurred for the medical services provided in those cases.” S ee Irby v. Government Employee Insurance Company , 175 So.2d 9 (La. Ct. App. 1965); Brackens v. Allstate Insurance Company, 339 So.2d486 (La. Ct. App. 1976); Drearr v. Connecticut Life Insurance Company , 119 So.2d 149 (La. Ct. App. 1960); and Rigby v. Aetna Casualty & Surety Company , 151 So. 119 (La. Ct. App. 1933).

The LA Supreme Court Ruling

The Louisiana Supreme Court, however, overturned the appellate court. Its principle holding, however, was really an affirmation of what Louisiana courts ' and other courts around the country ' have held for decades. It ruled that the term “incurred” in MedPay clauses is unambiguous and means that an insured “has paid [a medical expense] or become legally liable to pay it.” Because the insured in Hoffman had only become legally liable to pay the BRMC's discounted bill, she had only “incurred” $485.29 in medical expenses. In essence, the Louisiana Supreme Court rejected the notion that a contractual reduction obtained through one's private insurer constitutes a collateral source.

Thus, in reimbursing Hoffman $674.73, Travelers had overpaid her by $189.44. In reaching this holding, the Louisiana Supreme Court relied almost exclusively on those cases in which “no charges whatsoever were incurred” and distinguished the Hoffman matter from both Thomas and Niles . Specifically, the Louisiana Supreme Court relied on three Louisiana appellate decisions in which an insured did not “incur” any medical expenses because they were provided for free.

In the first case, Drearr v. Connecticut General Life Insurance Company , 119 So.2d 149 (La. Ct. App. 1960), the insured received medical treatment at a Veterans Administration Hospital and brought suit against his personal insurer seeking reimbursement for $1,038.50 ' the amount of a bill rendered by the VA. The VA made no effort and had no intent to pursue the insured for the indebtedness. The insurer asserted that as a qualified veteran, the insured was entitled to free treatment at the VA hospital and “incurred” no expense in connection with any of the services rendered. The Drearr court agreed with the insurer and held that the insured's claim of incurring any medical expenses was nothing more than a sham:

[T]he court is impressed with the unreality of the position that [the insured] has incurred any expense whose payment by him to plaintiff was never demanded, insisted upon or even expected by plaintiff. The claim of any debt on his part for the expense is a sham or pretense. It lacks that quality of “actuality” which, the policy declares, must characterize the “incurred expense” to support recovery by [plaintiff] from defendant.

As a result, because the VA in Drearr did not have authority to collect for expenses from the insured, “it could not be said that the [insured] incurred any expenses” for his medical treatment.

The other two decisions relied on by the Louisiana Supreme Court are similar to Drearr . In Irby v. Government Employees Insurance Company , 175 So.2d 9 (La. Ct. App. 1965), the insured sought to recover from his automobile insurer medical expense he claimed he incurred when he was involved in an automobile accident while on active duty with the United States Coast Guard. The insured, however, was never charged for the medical services because of his active-duty status and was under no obligation to pay for them. The Irby court agreed with the insurer that an insured who is under no legal obligation to pay for medical expenses could not have “incurred” them:

[A]s used in the policy in suit, the word “incurred” emphasizes the idea of liability and the definition of “incur” is: “To have liabilities (or a liability) thrust upon one by act or operation of law”; a thing for which there exists no obligation to pay, either express or implied, cannot in law constitute an “incurred expense”; a debt or expense has been incurred only when liability attaches.

Likewise, in Brackens v. Allstate Insurance Company , 339 So.2d 486 (La. Ct. App. 1976), the insured was treated at a VA hospital as a qualified veteran free of charge. The Brackens court, therefore, concluded that the insured “has never been liable or obligated for payment of the medical services rendered by the VA Hospital ' he has never, therefore, 'incurred' any medical expense for which payment is due under the medical payments provisions of the insurance contract.”

Based on Drearr, Irby and Brackens, the Louisiana Supreme Court held that Ms. Hoffman could only recover those medical expenses for which she paid or was legally obligated to pay. It was undisputed that BRMC contracted with AETNA for Hoffman to pay a discounted price for medical services, and that BRMC billed and Hoffman paid $485.29 in full payment of her medical expenses. It was further undisputed that BRMC did not seek payment for the $713.67 and that it had no contractual right to do so. As a result, because Hoffman bore no liability for any amount over the $485.29 she paid to BRMC, she did not “incur” the full medical expense of $713.67. Because Travelers had paid her $674.73, Hoffman was not entitled to any additional reimbursement.

The Louisiana Supreme Court held that the appellate court erred in relying on Thomas and Niles. In both of those cases, the insureds were found to have “incurred” the medical expenses because the charges were billed to the insureds, and the insureds were legally liable for those charges. The insureds' failure to pay those charges was not due to a lack of legal responsibility, but, rather because a third party paid the expenses on their behalf. As a result, according to the Louisiana Supreme Court, the rationale in Thomas and Niles is more akin to cases involving the collateral source rule, which prohibits a plaintiff's tort recovery from being reduced because of monies received by the plaintiff from sources independent of the tortfeasor. This was not the case in Hoffman, in which Ms. Hoffman had no legal obligation to BRMC for anything more than her contractually reduced bill.

Conclusion

There is little precedent around the country on whether an insured “incurs” the full cost of medical expenses when paying a discounted amount negotiated by a private healthcare provider. Many jurisdictions, however, have cases in line with Drearr , Irby and Brackens . As a result, Hoffman can be a useful tool to insurers facing claims from an insured for recovery of full amounts of discounted medical bills under a MedPay clause. Insurers in jurisdictions with decisions akin to Drearr, Irby and Brackens may rely on Hoffman to establish that the insured is only entitled to the discounted amount of the medical bill.

Joe M. Wearmouth is an associate and Seth A. Schmeeckle is a shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, which has offices in New Orleans, Baton Rouge, and Houston. The views presented in this article are not necessarily the views of the firm or any of its clients.