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Measuring Medical Expense Damages and the Role of the Collateral Source Rule

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Two recent rulings illustrate the widely varying responses courts have taken in confronting an emerging national issue: how to measure damages for past medical expenses when the hospital’s treatment charges, before discounts and write-offs, dramatically exceed the sums actually paid for the health care provided. Although a seemingly simple question, courts around the country have struggled with squaring modern medical pricing and billing procedures driven by the pressures of private medical insurance and government health services programs with tort law concepts, such as the collateral source rule, developed to address different circumstances.

In Kenney v. Liston, 760 S.E.2d 434 (W.Va. 2014), the West Virginia Supreme Court confronted this question in the context of a claim brought by a motorist who had been hit by a drunk driver. Although the plaintiff’s invoiced medical bills totaled more than $70,000, pursuant to contract the plaintiff’s health care insurer paid the medical providers a substantially lower sum with the unpaid portions of the bills “written off.” Even though the providers were never paid or owed the full invoiced amount, the West Virginia Supreme Court determined that the plaintiff could nonetheless recover that entire sum, including the charges discounted or written off, as compensatory damages. In reaching this conclusion, the Court leaned heavily on the collateral source rule’s preclusion of the use of benefits from other sources to reduce a tortfeasor’s liability. The “very purpose” of the collateral source rule is to “prevent a defendant from reaping” a windfall from benefits intended for the plaintiff. With its focus fixed on ensuring that the tortfeasor bear the consequences of his wrongdoing, the Court found that contractual price reductions and write-offs not only constitute benefits, but actually should be seen as “third-party payments” on behalf of the plaintiff. Even if these cost discounts arise by operation of government benefit programs, such as Medicare or Medicaid, rather than through private insurance obtained by the plaintiff, the entire invoiced cost of the medical care provided may be recovered as the plaintiff’s compensatory damages.

In contrast to Kenney, the Delaware Supreme Court’s decision in Stayton v. Delaware Health Corp., 117 A.3d 521 (Del. 2015) recognized that the vast difference between the billed charges and the sums actually paid to the plaintiff’s medical providers by Medicare arises from current health care pricing practices. Because “the realities of today’s healthcare economy diverge from the traditional underpinnings of the collateral source rule,” attempts to fit current medical bills with their ubiquitous price reductions into the collateral source rule’s framework fail as a matter of practicality. Far from being a “third-party payment,” as the Kenney Court held, Medicare price discounts are “paid by no one.” These reductions arise from agreements intended to benefit not the individual plaintiff but health care payors, in this case the federal government and U.S. taxpayers. Because these medical pricing arrangements do not implicate the collateral source rule, the Stayton Court held that “the determination of damages ought to proceed under the principle that a plaintiff is entitled to compensation sufficient to make her whole, but no more.” To value the medical care incurred, the court should “treat the amount paid by Medicare as dispositive of the reasonable value of healthcare services” and preclude a plaintiff from claiming as compensatory damages written-off sums that the plaintiff and her insurer have “not paid and will not be required to pay” because outlays for such expenses “will never occur.”

In its ruling that recoverable damages include only the amounts actually paid to the plaintiff’s health care providers, the Delaware Supreme Court’s Stayton decision provides a solid conceptual framework that other courts will likely adopt. Rejecting application of the collateral source rule to medical expenses written off, and instead fixing recoverable damages at the amount actually paid to the medical providers recognizes the market value of the treatment provided and makes the injured plaintiff whole. Failure to adapt the measure of health care damages to account for current medical billing practices threatens to undermine fundamental principles of compensatory damages and bloat damage awards based on valuations that virtually no one actually pays.