• Let Them Eat Cake, Just Not For a Pound of Flesh: A Critique of the Application of the Collateral Source Rule in Howell v. Hamilton Meats & Provisions, Inc.
  • May 9, 2011 | Author: Dean P. Petrulakis
  • Law Firm: McCormick, Barstow, Sheppard, Wayte & Carruth LLP - Modesto Office
  • A Critique of the Application of the Collateral Source Rule in Howell v. Hamilton Meats & Provisions, Inc.

    “Let them eat cake,” is normally attributed to Queen Marie Antoinette, although apparently there is no record that these words were ever voiced by her. Nonetheless, the words are attached to a French princess upon learning that the peasants had no bread, reflecting the princess’ obliviousness to the nature of a famine. Although there is no evidence that Marie Antoinette ever said, “Let them eat cake,” historical accuracy often stands aside and applauds blunders of irony - even if apocryphal. We thus remember the Queen for what she didn’t say. Why let the truth stop a good story? The truth may have been asked to stand aside in California once again considering the state’s conundrum surrounding medical costs and the Collateral Source Rule.

    If one listens to the plaintiff bar’s marionnettiste, Scott H.Z. Sumner1, the incredibly callous liability insurers and large, self-insured corporations are at fault: “They are asking trial courts, appellate courts, and the Supreme Court to enable them to steal benefits intended for and negotiated on behalf of the members of a health plan, without having to pay the premiums the plan members invest . . .” (Scott H.Z. Sumner, On Yanez v. SOMA Environmental Engineering and The Collateral Source Rule, Tuesday, June 29, 2010, Los Angeles Daily Journal.) Steal? Really? In addition, Mr. Sumner has argued that “tortfeasors” are advancing “fallacies” “that medical providers’ charge rates are fake.” (Scott H.Z. Sumner, A Return to the Collateral Source Rule After 40 Years, Monday, December 27, 2010, San Francisco Daily Journal; emphasis added.) At the very least, it is requested that the arguments are framed in not such a disingenuous way. It is not the “tortfeasors” who are advancing “fallacies.” It’s academics, like Princeton University Economics Professor Uwe E. Reinhardt, who are advancing the “facts”: Medical providers’ charge rates “are very lengthy and add up to large totals that do not bear any systematic relationship to the amounts third-party payers actually pay them for the listed services.” Those are the facts. Based on those facts, should the plaintiffs in the San Diego County Superior Court case entitled Novak v. Pizza Hut, Inc. really be awarded over $2.4 million as damages for past medical expenses when only a little more than $400,000.00 was actually paid for those medical expenses? And when there was no expectation ever that the entire $2.4 million would have been paid by Medicare, Medi-Caid or private insurers?

    The Collateral Source Rule

    The Collateral Source Rule “ ‘exclude[s] from evidence and the computation of damages the payments a plaintiff receives from a source independent of the wrongdoer. Though oft maligned, a form of the rule has been a part of our jurisprudence since California’s earliest days in the union.’ ” (Smock v. State of California (2006) 138 Cal.App.4th 883, 886.) For purposes of this inquiry, it will be important to remember that the rule derives its earliest articulation in cases of equity and admiralty. (Id.)

    The 1970 Helfend case is a seminal one: “[I]f an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor.” (Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 6 (“Helfend”).)

    The Helfend court concluded “that in a case in which a tort victim has received partial compensation from medical insurance coverage entirely independent of the tortfeasor the trial court properly followed the collateral source rule and foreclosed defendant from mitigating damages by means of the collateral payments.” (Helfend, supra, 2 Cal.3d at pp. 13-14.)

    It’s important to note that the Helfend court highlights why the semantics sometimes encumbered by the Collateral Source Rule cannot unveil the reality that currently permeates medical billing practices in California. In further examining what the Helfend court means by “partial compensation” and “mitigating damages,” one better understands the Helfend court’s holding and its misapplication by current courts.

    On March 11, 2010, the California Supreme Court granted review in Howell v. Hamilton Meats & Provisions, Inc. (2009) 179 Cal.App.4th 686. Howell was the first case to analyze negotiated rate differentials governing medical providers and health plans under California’s Collateral Source Rule. The decision opined that the amount of financial obligation for a plaintiff insured under a health care plan remains the total amount charged by the provider under, importantly, what turns out to be that provider’s subjective and arbitrary, usual and customary rates, not merely the supposed discounted amount actually paid. This means that an injured plaintiff can present to the jury as special damages the amount billed for medical charges by a hospital or doctor no matter what amount was ultimately paid in full for those charges. As can be imagined, this measure of damage can have a significant impact on a prospective jury award, especially when a medical provider charges $50,000.00 for a service, but ultimately is only paid $10,000.00 for that service by those liability insurers and large, self-insured corporations. It not only impacts the amount a plaintiff can collect for special damages, it weighs on the calculation a jury will measure general, or pain and suffering, damages upon.

    Why Do Hospitals Charge So Much?

    The reasons why hospitals charge so much show why damage awards based on their billing practices cannot be a measure of damages in California. Hospitals and doctors demand high rates for their services because managed care insurance companies and government payers do not pay what is charged. (Uwe E. Reinhardt, The Pricing Of U.S. Hospital Services: Chaos Behind A Veil Of Secrecy: An economist’s insights into what causes the variation in pricing, and what to do about it. (Health Affairs 25, no. 1 (2006): 57¿69 at p. 61); see, also, James Hutchinson, Why Do Hospitals Charge So Much? United States Healthcare Finance, (June 2007) www.suite101.com.) Only patients who have no insurance are under this obligation. The amount paid for bills from hospitals and doctors by insurance or Medicare can be as little as 30 percent of the actual charges, with the rest written off as a contractual adjustment. (James Hutchinson, supra, Why Do Hospitals Charge So Much?)

    Prior to 1966, though, the amount charged by hospitals was generally paid by patients and insurers. However, the concept of “charges” changed with the advent of Medicare in 1966. U.S. hospitals now receive about 31 percent of their net revenues from Medicare. Medicare did not have to pay charges. Medicare paid only the “cost” of services provided. Therefore, while the value of hospital services was once measured by what the hospital would charge, Medicare’s existence transformed the way services were calculated. In order for hospitals and doctors to make a profit, each had to increase what it charged patients and insurance companies, above what “costs” Medicare would pay.

    Insurance companies began to acquire discounts from charges with the creation of Managed Care in the 1980’s. It was during this time that Medicare changed its billing practice to the Diagnosis Related Group (DRG) system. Medicare no longer paid hospitals and doctors the “cost” of services provided. It paid medical providers solely on the basis of the diagnosis of the patient. If a patient requires a hip replacement, it does not matter if the patient stays in the hospital two days or seven, or if the hospital “charged” $2,000.00 or $20,000.00, Medicare pays the same amount no matter what the “charges” are. Therefore, payment has nothing to do with “charges.” Value of services could never again be calculated by what a hospital or doctor would charge because charges were merely an inflated methodology used to garner profits from government payers and private insurers. In other words, charges were no longer a representation of value of medical services, much less an illustration of how much a medical service truly cost.

    Medicaid now accounts for about 17 percent of total national spending on hospital care. Medicaid’s payments to hospitals are so inadequate that the loss is normally covered by private insurance companies, as Princeton University Professor Uwe. E. Reinhardt pointed out in his 2006 article for Health Affairs. (Professor Reinhardt, supra, The Pricing Of U.S. Hospital Services at 61.) As Professor Reinhardt states, hospitals receive roughly one-third of their net revenues from private health insurers, which pay hospitals on the basis either of steeply discounted charges (with discounts in excess of 50 percent), negotiated per diems, or flat charges per entire episode (DRGs). (Id.)

    The $1,500.00 X-Ray

    Prices for the exact same medical services can vary by as much as seventeen fold across all hospitals in the United States. (Id. at 57.) In 2004, Doctors Medical Center, in my hometown of Modesto, charged $1,500.00 for an x-ray. That same year, San Francisco General charged $125.00 for a comparable x-ray. (Id. at 58, Exhibit 1.) Even though this price discrepancy exists, some believe their respective client should be awarded whatever amount is charged. Because the “charges” for medical services no longer bear any relationship to payments, in 2004, U.S. hospitals were actually paid only about 38 percent of their “charges” by patients or their insurers. (Id. at 57.)

    All of this begs the question as to how such a capricious pricing scheme by California hospitals and doctors (through no fault of their own) that bears no relationship to the services actually provided could ever provide the basis upon which parties can measure damages upon. The “charges” prescribed by California health care providers bears no objectively verifiable monetary calculation that could ever assist a court or trier of fact, as is required by California law and as is dictated by common sense. (Civil Code section 1431.2, subdivision (b)(1) states: “For purposes of this section, the term ‘economic damages’ means objectively verifiable monetary losses including medical expenses . . .)

    As Professor Reinhardt points out, “[o]verarching the U.S. hospital payment system is each individual hospital’s ‘chargemaster.’ ” (Professor Reinhardt, supra, at 58.) A hospital’s chargemaster is a lengthy list of the hospital’s prices for every procedure performed in the hospital and for every supply item used during those procedures. But, according to Professor Reinhardt, hospital invoices at chargemaster prices “ ‘are insincere, in the sense that they would yield truly enormous profits if those prices were actually paid. The reality is that hospitals accept different payments from different payers for identical services . . .’ ” (Id. at 63.) As Professor Reinhardt explains, because of the use of chargemasters, hospital bills “. . . are very lengthy and add up to large totals that do not bear any systematic relationship to the amounts third-party payers actually pay them for the listed services.” (Id.)

    If a Princeton Professor of Economics concludes that the U.S. hospital payment system is “insincere” and does “not bear any systematic relationship” to actual payment, how could such an artificial payment scheme ever be used to measure damages in a jury trial in California?

    What’s the Objectively Verifiable Monetary Calculation That a Medical Service Should Be Based Upon?

    What happens when the compensation paid to an injured party from a source wholly independent of the tortfeasor is the measure of damages? Put another way, does something prohibit the measure of damages for medical services to be the amount paid rather than the amount charged when, as Professor Reinhardt fittingly points out, the medical charges are “insincere” and, further, the actual prices hospitals and doctors are really paid varies much less in price than “charges” do? (Id. at 57.) Is an x-ray’s value really $1,500.00 just because Doctors Medical Center in Modesto “charges” that much when San Francisco General “charges” $125.00? If, as Professor Reinhardt points out, the actual prices hospitals are paid varies much less in price than “charges” do, can not the amounts that Blue Cross, Aetna or Medicare pays for the identical x-ray be the measure of damages for purposes of a damages calculation for medical services?

    The Collateral Source Rule prohibits mention of payments made by third parties totally independent of the tortfeasor. But the Collateral Source Rule by such prohibition does not define what the measure of those payments are or should be. In the Helfend matter, for instance, the defendant sought to introduce evidence that more than 80 percent of plaintiff’s medical expenses (totaling $1,302.99) had been paid by plaintiff’s Blue Cross insurance carrier and other insurance. (Helfend, supra, 2 Cal.3d at 5.) You will remember that the Helfend case has been much cited by attorneys and courts recently describing what the Collateral Source Rule means. However, Helfend was a 1970 California Supreme Court case that was based on medical services that were incurred by that plaintiff in 1965. Please remember that Medicare’s origin around 1966 changed the concept of medical “charges,” which resulted in those charges becoming less important and culminated in arbitrary and inflated prices solicited by hospitals and doctors in an effort to make some profit.

    Back when Helfend was decided, the costs incurred by the Helfend plaintiff bore at least some resemblance to the amount charged by the hospital. This is because in the pre-Medicare days of Helfend, the amount charged by hospitals was generally paid by patients and insurers as medical “charges” because those “charges” were set to reflect the actual “cost” of services. And in Helfend, it does not appear that the court’s analysis had anything to do with whether or not there should be a reduction to the billed amount of medical services provided to the plaintiff against what was paid. It was, rather, whether or not the defendant should have been able to inform the jury that plaintiff’s medical bills were paid by her medical insurance company (Blue Cross) and other insurance companies in the context of a case involving public entities and public employees. Therefore, the question is if you apply the Collateral Source Rule in the context of medical bills, and the collateral source is fully reimbursed for bills it paid on behalf of a plaintiff and the plaintiff no longer remains obligated on those bills, is not the awarding to plaintiff an amount up and beyond what the collateral source ever paid a windfall gain?

    Notions of Equity

    The Helfend court underscored that although the Collateral Source Rule remains generally accepted in the United States, nevertheless many other jurisdictions have restricted or repealed it. (Helfend, supra, 2 Cal.3d at pp. 6-7.) Because of the long-standing history of this State’s use of the Collateral Source Rule, there is no expectation that the California Supreme Court will write that equitable doctrine out of existence. However, the hope is that the justifications for use of the Collateral Source Rule not be lost in the circumlocution and entanglement that emanates from its service in such cases, whereby labels of equity are used to evoke strained notions of that ideal with no discussion regarding the merits of its application.

    The Collateral Source Rule may be thought of as an exception to the Offsetting Benefits Rule. The Offsetting Benefits Rule is encompassed by Section 920 of the Restatement (Second) of Torts which states that when a defendant’s tortious act causes harm to the plaintiff but also confers a benefit, such benefit should be considered in mitigation of damages to the extent it is equitable.

    For instance, if a plaintiff loses a job and gains employment from a new employer, or sells land to a new buyer, all due to harm inflicted by a wrongdoer, the Offsetting Benefits Rule mandates and California law accepts that we offset the wages and the resales. However, in each of these cases, the payments come from sources independent of the wrongdoer, as is the case involving medical insurance benefits. This begs the question as to why we offset wages and resales but not insurance benefits. (Professor Douglas Laycock (1985) Modern American Remedies - Cases and Materials p. 149.)

    The Collateral Source Rule has in its foundation notions of equity in returning victims of wrongdoing to their rightful position. The traditional argument for restoring plaintiff to his or her rightful position is based on corrective justice: Plaintiff should not be made to suffer because of wrongdoing, and if the plaintiff is restored to his rightful position, he or she will not suffer. (Id. at p. 150.) To do less would leave a part of the harm suffered by plaintiff unremedied; to do more would confer a windfall gain. (Id.)

    Yet, what the Helfend plaintiff encountered has no relation to what some want to profit injured parties now. In Helfend, there is only the indication that plaintiff’s special damages totaled $2,737.99 of which $1,302.99 represented medical expenses. It appears there was only a general jury verdict form which awarded plaintiff $16,400 in general and special damages, as opposed to a special jury verdict form that might have delineated how much of plaintiff’s medical bills were awarded the plaintiff as damages by the jury. We can assume that the defendant in Helfend was not concerned about the amount of medical bills because over 80 percent of those bills had been paid, back when medical bills were calculated to reveal the true cost of medical care. Therefore, the Helfend defendant would plausibly pay for the plaintiff’s medical expenses and the plaintiff would use that money to reimburse his medical insurance company. This makes sense since the plaintiff is theoretically made whole; his or her insurer is made whole and the defendant has to pay only once. (Professor Laycock, supra, at 150.)

    However, when the notions of equity espoused by the Collateral Source Rule which were garnered by the Helfend plaintiff are applied to the Howell v. Hamilton Meats & Provisions, Inc. plaintiff, the Howell plaintiff receives windfall gains that were never contemplated by the Collateral Source Rule, much less representative of the essence of what compensatory damages are all about. In Howell, plaintiff’s past medical expenses totaled $189,978.63. The Howell plaintiff’s medical providers accepted $59,691.73 as payment in full from plaintiff’s health care insurer. The jury awarded the plaintiff $689,978.63 in a special jury verdict form, including economic damages in the amount of $339,978.63, of which the sum of $189,978.63 was for the aforementioned past medical bills. In a post-verdict hearing, the trial court reduced the award by $130,286.90, from $689,978.63 to $559,691.73, based on the payment in full for past medical services by the plaintiff’s health care insurer. The appellate court ruled that the post-verdict reduction of the jury’s economic award for the Howell plaintiff’s past medical expenses violated the Collateral Source Rule.

    But by awarding an injured party money that the injured party will never have to reimburse the collateral source for, one inflates equity into arenas that do not merely restore injured parties to a position they would have been in but for the wrong, but advances injured parties to peaks up and above where they would ever have been but for the wrong. The Howell plaintiff’s hospital and doctors’ charges were subject to those provider’s chargemasters, which, according to Professor Reinhardt, state hospital invoices at prices that are “insincere,” and do not reflect what a particular medical service truly costs. If the Howell plaintiff is allowed to keep the $130,286.90 difference between what was billed by her medical providers and what was actually paid in full for those services, she will be $130,286.90 richer than had her accident never occurred in the first place. These monies are windfall gains, gains never contemplated by equity. Based on the exaggerated billing practices of my hometown hospital, Doctors Medical Center, that charged more than ten times what San Francisco General charged for the same x-ray, the Howell plaintiff may have been charged $300,000.00 by Modesto’s Doctors Medical Center for the same services provided by her hospital totaling $189,978.63. If Doctors Medical Center charges overstated fees based on calculations that bear no relationship to costs of services or expectation of payment, it does not make sense that equity would require payment based on those inflated charges, or that such arbitrary billing practices for the identical procedures should ever be the basis for the calculation of compensatory damages.

    Proper Application of the Collateral Source Rule

    The Collateral Source Rule need not be changed by the Legislature to comport to this analysis. It need only be applied in the manner that its equitable foundations command. For purposes of calculating damages, the amount that the plaintiff would ever have to pay back his or her collateral source represents the total amount of damages for that plaintiff for medical services. The Collateral Source Rule demands that such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor, and this analysis does not change that outcome. This analysis hopefully fashions the equitable doctrine to its intended purpose. When the truth muscles its way back into that equation, we’ll be reminded that it was just such notions of equity that led the peasants of France, and the colonists of America, to throw off the yoke of Royalty.