The Collateral Source Rule
The Affordable Care Act (ACA) appears to change settlement planning in fundamental ways.
Attorney Scott Solkoff predicted the following changes during his ACA analysis at the ASNP 2013 Annual Meeting:
- Reduced personal injury verdicts and settlements.
- A different calculus for determining future medical damages based upon health insurance costs.
- Fewer first party special needs trusts (SNTs).
- Reduced demand for Medicare and Medicaid for persons with disabilities under age 65.
In their research paper titled "Potential Effects of the Affordable Care Act on the Award of Life Care Expenses" (see: Affordable Care Act - 1 ), economists Joshua Congdon-Hohman and Victor Matheson suggest the ACA:
- "[M]ay well have indirectly resulted in a great deal of tort reform"; and
- Should simplify and reduce calculations of future medical damages by limiting those costs to "[health insurance] premiums and out-of-pocket limits less any pre-injury expected medical costs and penalties if uninsured."
All three experts acknowledge the importance of the collateral source rule in determining how medical damages will be calculated beginning January 1, 2014 when key elements of the ACA, including the individual mandate and elimination of pre-existing condition restrictions, become effective nationally.
Two recent law review articles address whether and how the ACA will impact the collateral source rule and therefore offer additional insight for settlement planners and structured settlement professionals as well as other personal injury stakeholders:
- Rebecca Levenson (Levenson), "Allocating the Costs of Harm to Whom They are Due: Modifying the Collateral Source Rule after Health Care Reform" (Levenson article), University of Pennsylvania Law Review, Volume 160.
- Ann S. Levin (Levin), "The Fate of the Collateral Source Rule After Health Care Reform" (Levin article), UCLA Law Review, Volume 60.
The Restatement (Second) of Torts 920A(2) defines the traditional, common law collateral source rule (CSR): "Payments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable." Federal Rule of Evidence 411 also adopts the common law CSR.
The common law CSR has two separate but related functions (evidence and damages) which both Levenson and Levin discuss in their articles. The first function prevents evidence of outside payments from being presented to a jury. The second function prevents a jury from reducing a plaintiff's damages by amounts third parties have paid or are expected to pay to plaintiffs. As Levin points out, the CSR damage function also allows a plaintiff to recover medical damages in the amount a medical provider bills (billed charges), whereas the plaintiff ’s health insurer generally pays substantially less based on negotiated reimbursement rates.
Although every state and federal court recognizes the CSR in some form, many states have limited its scope or abolished it completely as a result of tort reform. Plaintiffs in different states and/or different courts therefore can receive widely different damage awards for the same injury because different courts measure medical costs differently.
Traditional Arguments For and Against the CSR
Levenson and Levin each summarize traditional arguments favoring and opposing the common law CSR.
CSR proponents emphasize the deterrence theory of tort law which seeks to punish tortfeasors and deter them from injuring future plaintiffs:
- Defendants should not be unjustly enriched if a plaintiff purchases medical insurance.
- The CSR incentivizes plaintiffs to purchase medical insurance.
- Collateral sources never fully reimburse plaintiffs.
- Subrogation rights reduce and/or prevent double recoveries.
- The CSR promotes independence of jury determinations.
CSR opponents argue the purpose of tort law is compensation for harm not deterrence. They criticize the CSR for:
- Allowing some plaintiffs to recover twice.
- Generating different damage awards for the same injuries in different cases.
- Adding an unjustified element of punitive damages.
- Inflating awards.
- Encouraging claimants to go to trial.
Levin's article provides a case example to illustrate different ways states currently measure the legal cost of medical expenses as a result of CSR variations. The calculation of legal damages is further complicated by six factors Levin identifies as inherent in the payment of modern medical bills - only two of which existed when the CSR was originally promulgated: the amount of the stated bill or damages and the admissibility or legal effect of the insurance payment.
Levin highlights four "additional and complicating evidentiary factors [which] have been added or magnified since the creation of the [CSR]:"
- A lower reimbursement rate.
- Full satisfaction of higher bills without any balance billing.
- The plaintiff's duty to repay his health insurance provider out of any award.
- The plaintiff's cost of procuring health insurance.
Levenson's article analyzes the impact of subrogation which she defines as "a contractual arrangement through which a claimant's primary insurer is reimbursed for its coverage of the claimant's medical costs if the claimant recovers these costs from the tortfeasor." Subrogation poses two CSR-related problems, according to Levenson:
- The cost for health insurers to exercise their subrogation rights; and
- How subrogation reduces an insured plaintiff's award after health insurance set-offs.
As a result, Levenson points out, some jurisdictions have developed set-off rules to limit how awards are reduced post-verdict:
- Make-whole rules ensure plaintiffs' awards are not reduced for collateral benefits before plaintiffs recover some costs of procuring collateral benefits.
- Common funds require non-litigating parties who share an award to pay a portion of the litigation costs including attorney fees.
Medical Damages Under the ACA
Both Levenson and Levin agree the ACA's individual mandate weakens the traditional common law CSR rationale and that medical damages should now be calculated differently. However they do so for different reasons and propose different solutions.
Levin's primary argument for changing the traditional common law CSR is that it calculates medical damages based on medical provider bills instead of the lower negotiated reimbursement rate paid by most health insurers. To achieve fairness and accuracy post-ACA, Levin maintains courts should calculate medical damages using: 1) the negotiated reimbursement rate; and 2) a portion of the premium payments the plaintiff has paid for medical insurance.
Levin believes this approach will continue to hold defendants responsible for harm they caused and also will ensure defendants pay an accurate amount. The premium reimbursement percentage should be based on the extent of a plaintiff's injuries, according to Levin, because it directly correlates with the payment amount a medical insurer will make on the plaintiff's behalf. Levin's uses her case example to demonstrate the results of her proposal.
Levenson's primary argument for changing the traditional common law CSR focuses on two new factors introduced by the ACA: the individual mandate and "the willfully uninsured claimant". The ACA mandates that most Americans acquire health insurance coverage which, Levenson believes, will cause juries to assume plaintiffs are insured. The traditional common law CSR, however, will allow willfully uninsured plaintiffs to hide their lack of health care coverage during trial and during the calculation of damages. The result could be to compensate such plaintiffs assuming "mandatory" insurance coverage they refused to obtain.
The purpose of changing the CSR after the ACA, according to Levenson, should be to align the CSR's outcome with the underlying goal of the individual mandate. Whether and what changes will occur, however, will vary from jurisdiction to jurisdiction depending upon a number of factors which Levenson identifies including the current status of the CSR in a particular state. Levenson insists any changes in the CSR must account for the different groups affected: insured plaintiffs, willfully uninsured plaintiffs and exempt plaintiffs.
Levenson proposes a Model CSR statute which S2KM summarizes as follows:
- For evidentiary purposes:
otherwise inadmissible, collateral source information may be introduced
by the plaintiff if the court determines the plaintiff is:
- Obligated to repay expenses which have been or will be paid or reimbursed; or
- Exempt from obtaining insurance under the ACA.
- After the jury has returned a verdict, defendants may produce evidence that a plaintiff failed to obtain minimum ACA insurance coverage. If the judge so finds, he will reduce the plaintiff's damages for the amount the minimum essential ACA coverage (bronze level) would have reimbursed the plaintiff.
- Although otherwise inadmissible, collateral source information may be introduced by the plaintiff if the court determines the plaintiff is:
- For calculating damages: the judge shall reduce the verdict by the amount of any non-subrogated third party collateral benefits less the amount the plaintiff paid to obtain reimbursement of medical or hospital expenses.
- Neither Levin nor Levenson:
- Directly address whether and/or how the CSR will affect calculations of future medical damages, as opposed to past medical damages.
- Discuss how the ACA's restrictions against pre-existing conditions impact calculations of medical damages.
- Their analyses and proposals are valuable, however, especially related to other ACA analyses referenced above: Scott Solkoff''s ASNP presentation and the research paper written by economists Joshua Congdon-Hohman and Victor Matheson.
- Because of: 1) existing variations in how the CSR is currently applied in states and federal courts; and 2) the substantial dollars at stake; whether and how the ACA and the CSR will interact and impact the analysis, negotiation and proof of medical damages present complex, priority issues for personal injury stakeholders.
- ACA and CSR-related changes create immediate and continuing opportunities and challenges for personal injury settlement planners and their clients.
For S2KM's continuing reporting and analysis of the Affordable Care Act and its impact on settlement planning, see the structured settlement wiki. For more comprehensive analysis about structured settlements and government benefits, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments"(S2P2J).