THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS: ELIMINATING WINDFALLS AND DOUBLE RECOVERY

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1 THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS: ELIMINATING WINDFALLS AND DOUBLE RECOVERY INTRODUCTION Jane is walking down a sidewalk when a vehicle driven by John barrels onto the sidewalk and strikes her, causing injuries. Jane is a Medicaid recipient. She has qualified for Medicaid and makes no payments for the program s services. She receives treatment for her injuries at a hospital that serves Medicaid patients. As a Medicaid patient, she owes nothing for the treatment. The medical providers file for reimbursement through Medicaid and receive the established rate for the services provided. Whether Jane will file a claim against John and her possibilities for recovery if she does, depend on the state s approach to the collateral source rule. The collateral source rule provides that benefits or payments received on behalf of a plaintiff, from an independent source, will not diminish recovery from the wrongdoer. 1 It involves both a substantive and evidentiary component. 2 The substantive component is a rule of damages. 3 It bars reduction in the award for the amount the plaintiff received from the collateral source. 4 The evidentiary component excludes any evidence of collateral sources or benefits provided to plaintiff because the jury may improperly use that evidence. 5 The rule may exclude evidence of collateral sources, 6 preventing a jury 1. Bynum v. Magno, 101 P.3d 1149, 1154 (Haw. 2004) (citing Ellsworth v. Schelbrock, 2000 WI 63, 7, 235 Wis. 2d 678, 7, 611 N.W.2d 764, 7). 2. Arthur v. Catour, 833 N.E.2d 847, 852 (Ill. 2005) (citing JAMES A. FISCHER, UNDERSTANDING REMEDIES 77 (Matthew Bender Publishing, 1999) (discussing the traditional approach of the collateral source rule)). 3. Id. 4. Id. 5. Id. 6. See Patrick W. Fitzgerald & Kevin S. Marshall, The Collateral Source 223

2 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 from considering collateral sources to reduce a plaintiff s damages. In Jane s case, the collateral source at issue is Medicaid s payment made on her behalf. How states treat this collateral source has a significant impact on Jane s decision whether to pursue recovery against John and on the amount of her recovery. Two criticisms of the collateral source rule are of particular importance: a windfall to the plaintiff and double recovery by the plaintiff. 7 A state may exclude all consideration of the Medicaid payment and award her the full amount a provider bills for a service, resulting in a windfall to Jane. Also, if Medicaid does not seek reimbursement for their payment, Jane gets the benefit of the Medicaid services and the medical expense damages, resulting in double recovery. An approach that avoids both of these consequences is one that limits Jane s recovery to the amount Medicaid paid and requires reimbursement of Medicaid, resulting in neither double recovery nor a windfall. However, under this approach, Jane might never file a claim against John because Medicaid satisfies her obligations for medical expenses and the suit may put her in a worse position after payment of attorney s fees. 8 This leaves Medicaid without reimbursement and lets John off the hook completely, resulting in a windfall to the responsible party. This Note proposes an alternative that eliminates both the windfall and double recovery without discouraging the Medicaid plaintiff from pursuing an action against the responsible party. This Note focuses on the award of damages for past medical expenses to a Medicaid plaintiff when Medicaid has satisfied the plaintiff s obligations for medical expenses. Part I is an overview of the collateral source rule and the states variations on the rule. Part II explains the problems with existing approaches. Part III recommends a change to the evidentiary component of the collateral source rule that eliminates windfalls to plaintiffs and defendants through determination of a real reasonable value. Part IV recommends protections for Medicaid reimbursement Rule and Its Abolition: An Economic Perspective, 15 KAN. J. L. & PUB. POL Y 57, 58 (2005). 7. See infra pp See infra pp

3 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS that prevent double recovery by Medicaid plaintiffs and provide for fair reimbursement to the Medicaid program. It is possible to protect the interests of injured Medicaid recipients, support the Medicaid program, and maintain the substantive component of the collateral source rule. 9 Allowing a jury to determine the reasonable value of plaintiff s medical services and requiring reimbursement of Medicaid for amounts paid on plaintiff s behalf achieves all these goals. If states adopt this proposal, Jane will seek recovery from John and receive the real reasonable value of her medical expenses with a direct reimbursement to Medicaid for payments it made on her behalf. This approach eliminates Jane s potential windfall and double recovery while protecting Medicaid. I. COLLATERAL SOURCE RULE AND APPLICATION In the United States, the collateral source rule appeared as early as Historically, cases have dealt with a collateral source s payment of an amount the plaintiff would have otherwise been liable to pay. 11 For example, in Helfend v. Southern California Rapid Transit District, the court found that the collateral source rule prevented a reduction in damages based on compensation received by medical insurance. 12 The plaintiff s insurance is a source collateral to, or separate from, the defendant, and therefore barred by the collateral source rule. The rule attempts to reconcile two competing interests: limiting compensation to the amount necessary to make a plaintiff whole and avoiding a windfall to a wrongdoer See generally Arthur, 833 N.E.2d at 852 (citing FISCHER supra note 2, at 77) (defining the substantive component of the collateral source rule as preventing reduction in plaintiff s award by amount[s] the plaintiff received from the collateral source ). 10. See Propeller Monticello v. Mollison, 58 U.S. 152, 155 (1854) (finding that an owner held liable for damages to another s boat could not have the damage award reduced by the amount the damaged owner received from his insurance policy). 11. Helfend v. S. Cal. Rapid Transit Dist., 465 P.2d 61, 63 (Cal. 1970) (considering if there was error in excluding evidence that the plaintiff received payment from collateral sources). 12. Id. at James P. Morceri & John L. Messina, The Collateral Source Rule in Personal Injury Litigation, 7 GONZ. L. REV. 310, 310 (1972). 225

4 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 A number of rationales support the collateral source rule. Some argue that plaintiffs should benefit from the years they invested in insurance premiums and the defendant should not receive those benefits. 14 Others argue tort deterrence----- deterring unreasonably dangerous conduct by making wrongdoers pay for the harm they cause. 15 Still others argue that defendants should be liable for the full amount of damages caused by their wrong-doing, independent of the financial situation of the victims. 16 Additionally, the rule may provide some compensation for plaintiff s attorney s fees. 17 The combination of collateral sources provided to the plaintiff along with the recovery from the defendant might result in a recovery greater than the plaintiff s costs. 18 According to proponents, however, it is better for that benefit to go to the plaintiff than the defendant because, if any party should profit, it should be the injured party. 19 Without the rule, the plaintiff s recovery depends on his or her level of insurance instead of the nature of the injuries. 20 A defendant that actually committed a wrong receives a windfall if his or her liability is reduced by the amount plaintiff receives from collateral sources. 21 Finally, the rule encourages individuals to purchase and maintain insurance because, as plaintiffs, they receive the benefits of the insurance rather than having it passed on to the liable defendant. 22 Opponents point out that the rule may result in double recovery for the plaintiff. 23 Plaintiffs receive both the benefit of a collateral source, such as insurance or Medicaid, to satisfy their 14. Helfend, 465 P.2d at Bozeman v. State, , p. 12 (La. 7/2/04); 879 So. 2d 692, 700 (citing Morceri & Messina, supra note 13, at 312). 16. Robinson v. Bates, 160 Ohio App. 3d 668, 2005-Ohio-1879, 828 N.E.2d 657, at 34 (citing Pryor v. Webber, 263 N.E.2d 235, 238 (1970) (finding that plaintiffs were entitled to recover amounts written off by private insurance). 17. Helfend, 465 P.2d at RESTATEMENT (SECOND) OF TORTS 920A cmt. a (1979). 19. Robinson, 828 N.E.2d at Bynum v. Magno, 101 P.3d 1149, 1162 (Haw. 2004). 21. Haselden v. Davis, 579 S.E.2d 293, 295 (S.C. 2003). 22. See Pac. Gas & Elec. Co. v. Super. Ct. of Contra Costa County, 33 Cal. Rptr. 2d 522, 525 (Cal. Ct. App. 1994). 23. Christian D. Saine, Note, Preserving the Collateral Source Rule: Modern Theories of Tort Law and a Proposal for Practical Application, 47 CASE W. RES. L. REV. 1075, 1079 (1997). 226

5 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS obligations and receive the benefit of a damage award paid by the defendant. The purpose of compensatory damages is to attempt to put the injured person in a position equivalent to his or her position prior to the tort. 24 If double recovery occurs, plaintiffs are overcompensated because the double recovery places the plaintiffs in a better position than they were before suffering the injury. 25 Another critique of these double recoveries is that they are increasing the cost and availability of insurance. 26 Opponents have also argued that the rule is too rooted in a punitive or deterrence theory of tort liability... [which is] a weak justification. 27 A. Statutes Impacting the Collateral Source Rule and Medicaid Some states have changed or eliminated the collateral source rule statutorily. 28 These statutes contain a variety of provisions that limit the scope of the common law rule and directly impact Medicaid. 29 Some of the statutes are specific to medical malpractice actions 30 and others are broader. 31 One approach allows a defendant to introduce evidence of collateral sources and, in response, the plaintiff can introduce evidence of payments they made to receive those collateral sources. 32 The judge or jury can then weigh that information along with the collateral source. Another statute specifically limits admission of evidence to amounts actually paid by the plaintiff or amounts unpaid for which the plaintiff or any third 24. Moorhead v. Crozer Chester Med. Ctr., 765 A.2d 786, 790 (Pa. 2001). 25. Saine, supra note 23, at Id. at Id. at See Bozeman v. State, , p. 8 (La. 7/2/04); 879 So. 2d 692, 698 (citing Deborah Van Meter, Louisiana s Collateral Source Rule: Time for a Change?, 32 LOY. L. REV. 978, 978 (1987)). 29. See infra notes CAL. CIV. CODE (a) (Deering 2007) (allowing for the introduction of collateral source evidence when the action is against a health care provider based upon professional negligence ); N.Y. C.P.L.R (McKinney 2007); ARK. CODE ANN (a)(1)(B) (2006); MASS. GEN. LAWS ch. 231, 60G (2000); 735 ILL. COMP. STAT. ANN. 5/2-1205(3) (West 2003) (providing for reductions in recovery when negligence or wrongful act is on the part of a licensed hospital or physician ). 31. ME. REV. STAT. ANN. tit. 24, 2906 (2000); FLA. STAT. ANN (2005); IOWA CODE (2) (1998). 32. CAL. CIV. CODE (a); IOWA CODE (2). 227

6 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 party shall be legally responsible. 33 Other states are more specific and subtract from the recovery plaintiff s contribution or payment to obtain collateral sources for a one or two year period before the action. 34 Other states provide for reduction of the damage award post-verdict by the amount of plaintiff s collateral sources. 35 A similar provision requires a reduction, but the maximum amount of the reduction is fifty percent of the total judgment. 36 Subrogation or reimbursement rights of collateral sources against a plaintiff may also play a role in plaintiff s available recovery. Some states do not allow the use of collateral sources to reduce the damage award when those sources also have a subrogation or reimbursement right. 37 Others include collateral sources with reimbursement or subrogation rights, but specifically provide that once the collateral source reduces the award, liens or subrogation rights against plaintiff or defendant for those collateral sources are statutorily barred. 38 For instance, a state might not allow reduction for payments made by an insurance company if that insurer can subrogate those payments from plaintiff s recovery; 39 or a state might allow the reduction for the insurance company s payment, but bar its subrogation claim. 40 Collateral sources might be forced to timely pursue their claims or waive them. 41 One such provision requires plaintiff s attorney, within ten days of the verdict, to notify collateral sources of the verdict. 42 The collateral sources must then give notice to the court within thirty days of their intent to recover from the plaintiff. 43 They waive their rights if they do not give notice ARK. CODE ANN (a)(1)(B). 34. MASS. GEN. LAWS ch. 231, 60G(b); 735 ILL. COMP. STAT. 5/2-1205(4). 35. MASS. GEN. LAWS ch. 231, 60G(a)-(b); FLA. STAT (1); 735 ILL. COMP. STAT. 5/2-1205; ME. REV. STAT. ANN. tit. 24, ILL. COMP. STAT. 5/2-1205(3). 37. FLA. STAT (1); 735 ILL. COMP. STAT. 5/2-1205(2). 38. MASS. GEN. LAWS ch. 231, 60G(c); CAL. CIV. CODE (b) (Deering 2007). 39. FLA. STAT (1). 40. MASS. GEN. LAWS ch. 231, 60G(c) 41. ME. REV. STAT. ANN. tit. 24, 2906(6) (2006). 42. Id. 43. Id. 44. Id. 228

7 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS Many states specifically address Medicare or Medicaid characteristics by statute. A Massachusetts law excludes as a collateral source any source whose right of subrogation is based in any federal law. 45 It goes on to specify that a plaintiff may recover amounts paid by that source. 46 California courts have reached the same result as the Massachusetts provision in their interpretation of a medical malpractice statute and its application to Medicaid. 47 Under Florida s statute, damage awards are reduced by collateral sources. 48 However, Medicaid is not considered a collateral source under Florida law. 49 This means that damage awards are not reduced by the amount Medicaid paid on the plaintiff s behalf even though the award would be reduced by the amount paid by other collateral sources. A contrary provision in Maine includes benefits under Medicaid, but requires an order that the defendant will indemnify the plaintiff for any subrogation claim. 50 And still another variation allows consideration of previous payment or future right of payment to the plaintiff for losses incurred, but excludes payment from a state or federal program or from assets of the claimant or the members of the claimant s immediate family. 51 Such a statute would preclude adjustments to recovery for Medicaid payments because Medicaid is a federal program. 52 The collateral source rule may also affect legal fees. For example, in Florida, when calculation of attorney s fees is based on a percentage of the award, the attorney s fee award is calculated on the recovery after it is reduced for collateral 45. MASS. GEN. LAWS ch. 231, 60G(c). 46. Id. 47. Brown v. Stewart, 181 Cal. Rptr. 112, 120 (Cal. Ct. App. 1982) (finding that CAL. CIV. CODE did not allow use of Medicaid payments to reduce award in medical malpractice actions). 48. FLA. STAT. ANN (1) (2005). 49. Id (2)(b). 50. ME. REV. STAT. ANN. tit. 24, 2906(3). 51. IOWA CODE (1) (1998). 52. Cf. Wildner v. Wendorff, 723 N.W.2d 451, No , 2006 Iowa App. LEXIS 981, at *4 (Iowa Ct. App. 2006) (decision without published opinion) (finding that was not implicated when evidence of Medicaid was admitted to establish the actual expense rather than to reduce plaintiff s recovery). 229

8 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 sources. 53 Florida law also requires that those seeking reimbursement for amounts paid on behalf of the plaintiff pay their pro-rata share of the legal fees and costs based on their percentage of the total pre-reduction damage award. 54 States have enacted a variety of statutes to address Medicaid s claim to any recovery. In Mississippi, a recipient pursuing a claim against a third party must notify the state Medicaid agency that he or she is taking action, providing the state Medicaid agency the opportunity to join. 55 The State also has the right to pursue a third party without the plaintiff because acceptance of Medicaid is an assignment of rights to the state Medicaid agency. 56 This parallels federal requirements that states pursue liable third parties responsible for injuries Medicaid has covered. 57 Any amount recovered is allocated in the following order: attorney s fees, Medicaid s interest, and what remains to the recipient plaintiff. 58 A slightly different New Jersey law requires notice to the state Medicaid agency of the action, but also requires notice of any recovery and prompt payment to the agency with a deduction for the Medicaid agency s pro-rata share of counsel fees and costs. 59 B. Discounts Arrangements between insurance companies and service providers involving discounted rates for services have become increasingly common. 60 For example, a plaintiff with health insurance suffers a broken leg in a car accident and receives x- rays, the services of a physician, and a cast. The health insurance company likely has set rates for each of the services that are lower than the amount billed to an uninsured plaintiff. 61 A 53. FLA. STAT (3). 54. Id (4). 55. MISS. CODE ANN (2) (2006). 56. Id (1). 57. See 42 U.S.C. 1396a(a)(25)(A) (2000). 58. MISS. CODE ANN (2)(a)-(c). 59. N.J. STAT. ANN. 30:4D-7.1(b) (West 1997). 60. Robinson v. Bates, 160 Ohio App. 3d 668, 2005-Ohio-1879, 828 N.E.2d 657, at 28 (citing Koffman v. Leichtfuss, 2001 WI 111, 21, 246 Wis. 2d 31, 21, 630 N.W.2d 201, 21). 61. See Lopez v. Safeway Stores, Inc., 129 P.3d 487, 491 (Ariz. Ct. App. 2006) (discussing how medical bills of almost $59,700 were satisfied for $16,837 because of reduced rates healthcare providers contractually agreed to with the 230

9 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS jurisdiction observing the collateral source rule would not reduce the award by the amount the insurance company paid on behalf of the plaintiff because it is a collateral source benefiting the plaintiff. 62 But, beyond that traditional situation, it is difficult to decide what to do with the difference between the amount billed and the discounted rate paid to satisfy the obligation. 63 Some states have treated the difference as an additional benefit to the plaintiff based on his or her decision to purchase insurance. 64 Other states have focused on the amount paid to satisfy the plaintiff s obligation and refused to admit evidence of the full amount billed. 65 Still others have claimed reasonable value, but deemed the amount actually paid by the collateral source to be the maximum reasonable value. 66 C. Application of the Rule to Medicaid Medicaid is different from most other collateral sources because recipients do not pay for the benefit. 67 It is a jointly administered program of the federal and state governments and provides medical assistance to low-income individuals. 68 In 2003, plaintiff s medical insurance carrier); see also Arthur v. Catour, 803 N.E.2d 647, 648 (Ill. 2004) (discussing how medical bills of $19, were satisfied for $13, because of the insurer s contractual agreements with healthcare providers). 62. See Acuar v. Letoureau, 531 S.E.2d 316, 320 (Va. 2000) (discussing settled law on the collateral source rule that damages from personal injuries for negligence are not reduced because the injured has received compensation from insurance). 63. See generally Lopez, 129 P.3d at 496 (finding that amounts recovered in excess of amount insurance company paid could be recovered by the plaintiff); see generally Moorhead v. Crozer Chester Med. Ctr., 765 A.2d 786, 791 (Pa. 2001) (finding that plaintiff could only recover the amount required to satisfy the obligation because the plaintiff was never responsible for those amounts). 64. Acuar, 531 S.E.2d at 322; Robinson, 828 N.E.2d, at (accepting the contractual analysis of other courts). 65. Coop. Leasing, Inc. v. Johnson, 872 So. 2d 956, 960 (Fla. Dist. Ct. App. 2004) (finding the plaintiff was not entitled to recover the difference in Medicare s payment and the total amount billed). 66. Hanif v. Hous. Auth., 246 Cal. Rptr. 192, 197 (Cal. Ct. App. 1988). 67. Bozeman v. State, , p (La. 7/2/04); 879 So. 2d 692, 705 (distinguishing Medicaid from Medicare because Medicaid is provided without any consideration for the benefits, while Medicare is funded by involuntary beneficiary payments). 68. Waldman v. Candia, 722 A.2d 581, 584 (N.J. Super. Ct. App. Div. 1999) (citing 42 U.S.C. 1396a-1396u (Supp. 1998)). 231

10 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 Medicaid served more than fifty-two million people. 69 Qualifications are determined at the state level and vary among the states. 70 Some of the mandatory services for Medicaid recipients include inpatient and outpatient hospital services, laboratory services, and nursing facility services. 71 The discounts of private insurance have their counterpart in Medicaid. Doctors treat Medicaid patients and receive reimbursement under a predetermined rate schedule. 72 That amount is generally less than what that provider would usually charge for that service in the open market. 73 States have broad discretion in setting the rates. 74 The rates must only be sufficient to enlist enough providers so that covered services are available at least to the extent that comparable care and services are available to the general population. 75 Providers are required to accept the reimbursement amount as payment in full for the plaintiff s obligations. 76 The difference between the amount the provider would generally charge for the service and the reimbursement amount from the government is written off by the medical provider. 77 This written off amount presents a dilemma similar to the discounts under private insurance. In Bozeman v. State, the Louisiana Supreme Court identified three broad approaches to the collateral source rule that are applicable when considering collateral sources, including 69. EARL DIRK HOFFMAN, JR. ET AL., OFFICE OF THE ACTUARY, CENTERS FOR MEDICARE & MEDICAID SERVICES, DEP T OF HEALTH AND HUMAN SERVICES, BRIEF SUMMARIES OF MEDICARE & MEDICAID 21 (2006). 70. DEP T OF HEALTH AND HUMAN SERVICES, CENTERS FOR MEDICARE AND MEDICAID SERVICES, MEDICAID-AT-A-GLANCE 1 (2005). 71. Id. at Haselden v. Davis, 579 S.E.2d 293, 296 (S.C. 2003). 73. See id. at 294 (discussing the $51, difference between the $24, Medicaid paid in medical expenses and the $77, billed for those services). 74. HOFFMAN, supra note 69, at Id. 76. See id. 77. Bozeman v. State, , p. 2 (La. 7/2/04); 879 So. 2d 692, 693 (explaining that under Medicaid a healthcare provider is required to accept as full payment an amount determined by a fee schedule which is invariably lower than the amount normally charged resulting in a write-off of the difference meaning the difference is never owed to the provider). 232

11 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS Medicaid: reasonable value, actual amounts paid, and benefit of the bargain Reasonable Value Under the reasonable value approach, plaintiffs may receive the amount billed for their expenses, which could include the amounts written off. 79 The Mississippi Supreme Court commented that the defendant does not get a break on damages just because it caused permanent injury to a poor person. 80 The Court took the position that the plaintiff could receive the excess amount over what Medicaid paid. 81 Other states use the term reasonable value, but have determined that damages cannot exceed the amount actually paid. 82 The outcome of the later approach is equivalent to actual amount paid. 2. Actual Amount Paid Using the actual amount paid approach, a plaintiff cannot receive the amounts written off based on the idea that the plaintiff was never liable to pay those amounts. 83 In a dissent, Justice Burnett of the South Carolina Supreme Court characterized the amount between billed and paid as phantom money. 84 The Pennsylvania Supreme Court called it an illusory charge because the plaintiff is never obligated to pay that amount to the provider. 85 Both opinions indicate these amounts should not go to a Medicaid plaintiff Benefit of the Bargain The benefit of the bargain method, taken by Louisiana, permits plaintiffs to receive the amount billed, including the 78. Id. at Id. 80. Brandon HMA, Inc. v. Bradshaw, 2000-CA SCT ( 29) (Miss. 2001). 81. Id. 82. Hanif v. Hous. Auth., 246 Cal. Rptr. 192, 195 (Cal. Ct. App. 1988). 83. Bozeman, 879 So. 2d at 702 (citing Dyet v. McKinley, 81 P.3d 1223, 1239 (Idaho 2003)). 84. Haselden v. Davis, 579 S.E.2d 293, 296 (S.C. 2003). 85. Moorhead v. Crozer Chester Med. Ctr., 765 A.2d 786, 791 (Pa. 2001). 86. Id. at 791; Haselden, 579 S.E.2d at

12 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 amount in excess of amounts paid by private insurance and Medicare. 87 For those covered by private insurance and Medicare, the outcome is similar to the reasonable value approach, allowing plaintiffs to receive the amount billed for their expenses. However, because the Medicaid plaintiffs paid no consideration for the service, the court excludes amounts above that paid by Medicaid. 88 II. EXISTING APPLICATIONS ARE FLAWED FOR MEDICAID PLAINTIFFS These varying approaches only address past medical expense damages and evidence admitted to prove those damages. But, the actual amount of the medical expense award may be significantly different depending on the approach. Additionally, the amount of recovery in other areas may be influenced by which evidence is admitted under each approach. For example, the admitted evidence may drastically influence other damages computations such as pain and suffering. 89 Consider Haselden v. Davis. 90 The plaintiff had billed medical expenses over $77,000 for services provided by Medicaid for less than $25, The medical expense award alone could be $50,000 higher or lower depending on the state s application of the collateral source rule. 92 Additionally, consider the impact those differing amounts might have on a jury determining pain and suffering. A jury might return greater pain and suffering damages if the higher amount is admitted to the exclusion of the lower amount, 93 or they might return greater pain and suffering 87. Bozeman, 879 So. 2d at Guilbeau v. Bayou Chateau Nursing Ctr., , p. 16 (La. App. 3 Cir. 5/17/06); 930 So. 2d 1167, 1179 (citing Bozeman, 879 So. 2d at ) (distinguishing the Medicare case before it from Bozeman which established the rule for Medicaid). 89. See generally Dyet v. McKinley, 81 P.3d 1223, 1240 (Idaho 2003) (discussing how pain and suffering damages might be inflated by admission of a higher billed amount) S.E.2d Id. at See id. 93. See Dyet, 81 P.3d at 1240 (discussing how pain and suffering damages might be inflated by the higher number). 234

13 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS damages based on the knowledge that the plaintiff was forced to seek public assistance by the defendant s conduct. 94 The different approaches taken by the states all have drawbacks. Reasonable value may result in a windfall to the plaintiff. The actual amount paid approach results in a windfall to the defendant and may reduce reimbursement to Medicaid. And, benefit of the bargain has the same drawbacks as actual amount paid, but only for Medicaid plaintiffs. A. Reasonable Value The reasonable value approach parallels the traditional collateral source rule. Evidence of payments made on a plaintiff s behalf are excluded, and evidence of the amount plaintiff was billed is admitted. 95 This may result in a windfall to the plaintiff. Recall the earlier hypothetical. Assume Jane suffered injuries with an amount billed of $75,000, but Medicaid paid only $25,000 to satisfy that entire obligation. Jane then sues John for her injuries and submits the billed value as evidence of her medical expenses. Evidence of the $25,000 paid by Medicaid to satisfy the obligation is excluded. Jane gets the $75,000. Even if Medicaid seeks reimbursement for the $25,000 they paid, Jane still comes away with a $50,000 windfall. This approach is especially troublesome in the Medicaid context because the plaintiff has essentially paid nothing for the benefits he or she received. 96 Unless time spent qualifying for Medicaid and general taxes paid are treated as consideration, the services are free. 97 Therefore, Medicaid plaintiffs benefit from a free government program, funded through taxpayer dollars See Loncar v. Gray, 28 P.3d 928, 933 (Alaska 2001) (discussing the plaintiff s desire to inform the jury about Medicaid for increase in damages associated with humiliation of accepting public assistance). 95. Id. at Haselden, 579 S.E.2d at, See Bozeman v. State, , p. 2 (La. 7/2/04); 879 So. 2d 692, at 702 (Burnett, J., dissenting) (discussing plaintiff s argument that Medicaid is financed by taxes he paid during his working life). 98. Haselden, 579 S.E.2d at 296 (Burnett, J., dissenting) (distinguishing Medicaid from insurance and Medicare because recipients do not pay for the benefit). 235

14 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 B. Actual Amount Paid Flaws exist in the actual amount paid approach because Medicaid reimbursement amounts used by the state as the upper limit for recovery do not reflect the reasonable value of the service. This approach also discourages plaintiffs from seeking recovery. As previously discussed, determination of reimbursement rates is a state responsibility. 99 The government has room to negotiate. The actual amount paid also represents the superior bargaining position of the government. Reimbursement rates under Medicaid reflect the government s ability to negotiate lower reimbursement rates for services. In exchange for agreeing to the lower rates, the provider can treat patients covered by Medicaid and have some security in payment. 100 While the reimbursement rates represent a value for a service, they are not the real reasonable value of the service received and do not accurately reflect the cost of the rendered service. A system that limits recovery to the actual amount paid also discourages Medicaid patients from seeking recovery from the responsible tortfeasor. An injured Medicaid recipient has no reason to pursue the responsible defendant if their only award will be an amount owed to Medicaid for their services. Consequently, Medicaid will never receive the money they paid for injuries caused by the tortfeasor because the injured party never files suit. Returning to the earlier hypothetical, if Jane s case was isolated to past medical expenses and limited to the amount Medicaid paid on her behalf-----the actual amount paid-----then she would have the potential to end up in the negative or simply come away with nothing after paying attorney s fees and costs. If Medicaid paid $25,000 for Jane s medical expenses and Jane files suit against John for her medical expenses, the maximum award to her using an actual amount paid approach is $25,000. If Medicaid seeks reimbursement for the amount they paid on her behalf, she is going to owe Medicaid $25,000 and potentially owe her attorney $5,000 (assuming a modest 20% 99. Hoffman, supra note 69, at McAmis v. Wallace, 980 F. Supp. 181, 182 (W.D. Va. 1997) (describing structure of state s Medicaid program, contracting, and fees). 236

15 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS contingency fee) in legal fees. 101 This is all in addition to the time and effort spent pursing the case. Then, Jane may end up with none of the damage award and may owe her attorney $5,000 for winning her lawsuit. 102 In a situation where an attorney takes a contingency fee out of the gross recovery, Jane would have been better off never filing suit against John. 103 In a situation where an attorney takes a contingency fee out of the recovery after subrogated claims are satisfied, the attorney never takes the case because an attorney would not take a case without any potential recovery. 104 Without her suit, John is not held responsible for medical expenses he caused, and Medicaid is unlikely to recover the $25,000 it paid. Alternatively, if Jane were in a jurisdiction that statutorily requires the state Medicaid agency to pay its pro-rata share of legal fees, her best-case scenario is coming out even on medical expenses, assuming no loss from the inconvenience of pursuing the claim. It is possible that Medicaid may not seek reimbursement, and absent statutory obligations for the plaintiff or defendant to automatically reimburse Medicaid, Jane could walk away with a $20,000 windfall ($25,000 award minus legal fees) and receipt of medical services without charge. This double recovery is not ideal either. Combining actual amount paid with statutory reimbursement to Medicaid gives the plaintiff no incentive to pursue the responsible party. If the injured plaintiff never files suit, Medicaid receives no reimbursement unless Medicaid pursues the claim itself. And, actual amount paid without statutory reimbursement gives the plaintiff a windfall MODEL RULES OF PROF L CONDUCT R. 1.5(c) (requiring a contingency fee agreement be in writing indicating the method of determining the fee including the percentage and expenses to be deducted from recovery) See HERBERT M. KRITZER, RISKS, REPUTATIONS, AND REWARDS 41 (Stanford University Press 2004) (noting that contingency fees are usually based on the gross recovery, but some lawyers calculate recovery after deducting payments to subrogated interests) See id. (contingency fees are usually based on gross recovery) See id. (some lawyers calculate recovery after deduction for subrogated claims). 237

16 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 C. Benefit of the Bargain The benefit of the bargain approach is appealing because it relies on the idea that a person makes an investment and should receive the benefits of that investment. 105 The better rates and payments on the plaintiff s behalf-----collateral sources-----were part of the bargain and should not benefit the defendant tortfeasor. This approach protects the interest of plaintiffs with private insurance. 106 They pay for health insurance and should receive all the benefits of that coverage. This approach treats the difference in the actual amount paid and amount billed as a benefit of the plaintiff s bargaining rather than a windfall. 107 The result is similar to that under a reasonable value approach for a plaintiff with private insurance. However, a Medicaid plaintiff receives a very different result under this theory. For a Medicaid plaintiff, this approach carries with it the same problems as the actual amount paid approach. Medicaid recipients have not paid consideration for the program and are limited in their recovery to the amounts actually paid by Medicaid. 108 As previously discussed, this discourages suits by Medicaid plaintiffs. 109 Ultimately, all three approaches are flawed when applied to Medicaid plaintiffs. Reasonable value has the potential for significant windfalls to a Medicaid plaintiff. Actual amount paid and benefit of the bargain both discourage Medicaid plaintiffs from pursuing an action against the responsible party and may also result in less, or no, reimbursement to Medicaid. III. REAL REASONABLE VALUE The current reasonable value approach focuses on the amount billed to the plaintiff and excludes evidence of the amount paid to satisfy the plaintiff s obligations. The actual 105. Joel K. Jacobsen, The Collateral Source Rule and the Role of the Jury, 70 OR. L. REV. 523, 532 (1991) (citing Helfend v. S. Cal. Rapid Transit Dist., 465 P.2d 61, 66 (Cal. 1970)) Lopez v. Safeway Stores, Inc., 129 P.3d 487, 496 (Ariz. Ct. App. 2006) See generally Eric Kades, Windfalls, 108 YALE L. J. 1489, 1511 (1999) (discussing how prudent planning with consideration of the legal environment can erroneously be labeled a windfall) Bozeman v. State, , p. 22 (La. 7/2/04); 879 So. 2d 692, See supra pp

17 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS amount paid approach focuses on the amount Medicaid paid. Reasonable value should be a factual determination based on the relevant evidence, not a choice between amounts paid or amounts billed. 110 The jury should consider the actual amount paid and the amount billed. 111 This results in a real reasonable value. Allowing admission of both pieces of information for purposes of the collateral source rule also refines the continuing debate over whether to admit this evidence for other reasons. 112 Additionally, this approach maintains the substantive component of the collateral source rule to prevent reduction in the plaintiff s award by collateral sources. 113 Focusing on a real reasonable value allows a jury to resolve a question of fact: What is the reasonable value of this medical service? The differing amounts still have meaning and contribute to a jury s determination, but they are not individually the single determinant of recovery. 114 Finding the real reasonable value also reduces the focus on written off amounts. The real reasonable value of the services received is the proper focus in determining the amount of recovery, rather than the plaintiff s or defendant s right to receive or avoid paying this difference. Using both pieces of evidence provides a better determination of reasonable value. First, the jury should consider the amount Medicaid paid to satisfy the obligation as it represents the amount Medicaid was able to negotiate to satisfy 110. See generally Jacobsen, supra note 105, at 523 (arguing that evidence of collateral sources should be available to the jury to respect their role as the judge of the facts ) The South Carolina Supreme Court appeared to adopt this approach, at least to the extent of admitting both pieces of information in Haselden v. Davis, 579 S.E.2d 293 (S.C. 2003). Just one year later, however, the court excluded the actual amount paid in a different case, citing jury confusion as a justification. Covington v. George, 597 S.E.2d 142, 144 (S.C. 2004) See generally Loncar v. Gray, 28 P.3d 928, 933 (Alaska 2001) (discussing a plaintiff s argument the jury should know about Medicaid because the humiliation of public assistance goes to pain and suffering); see also Dyet v. McKinley, 81 P.3d 1223, 1240 (Idaho 2003) (discussing a defendant s argument that excluding amounts paid by Medicaid gives the jury and inflated sense of the injury that may result in higher pain and suffering damages) See supra note See Wildner v. Wendorff, 723 N.W.2d 451, No , 2006 Iowa App. LEXIS 981, at *4 (Iowa Ct. App. 2006) (decision without published opinion). 239

18 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 that obligation. Second, the jury should consider the amount billed which represents the amount that plaintiff would have paid for their care had they not been a Medicaid patient. Returning to the earlier hypothetical, Jane will argue that the amount billed is the reasonable value because it is what she would have paid if she received the service without Medicaid. The amount billed represents the provider s usual charge for the service: the market value of that service without other influences considered. Giving her less than this amount because she used Medicaid passes along a benefit to the defendant because he injured a Medicaid patient rather than an uninsured person. 115 Jane will further argue to the jury that John should not benefit from Jane s willingness to apply for Medicaid coverage. In contrast, John will argue that the plaintiff never paid this amount, was never obligated to pay this amount, and should not receive this amount. 116 The cost of her care was the amount Medicaid paid and she should receive no more. Any amount above what Medicaid paid on her behalf puts her in a better position than before her injury, resulting in a windfall. 117 John will also try to distinguish Jane from plaintiffs who paid for the benefits through insurance rather than receiving services free from a government program. These are both compelling arguments a jury can use in finding the real reasonable value of the service. An additional benefit to this approach is that it resolves an underlying problem with the collateral source rule s exclusion of any evidence of Medicaid for any reason. Depending on the circumstances, defendants and plaintiffs may want evidence of Medicaid excluded. The real reasonable value approach allows a judge to consider the admissibility of evidence of Medicaid for substantive reasons rather than enforcing a blanket exclusion under the traditional collateral source rule See Brandon HMA, Inc. v. Bradshaw, 2000-CA SCT ( 29) (Miss. 2001) (finding that the defendant did not get a break on damages just because it caused permanent injury to a poor person ) See Haselden, 579 S.E.2d at 296 (Burnett, J., dissenting) See generally id. at 297 (arguing that it violates compensatory damage law to award plaintiff damages when no entity is liable for them). 240

19 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS Defendants may argue that excluding the lower amount paid by Medicaid gives the jury an inflated sense of the injury plaintiff suffered, which could increase other areas of damages such as pain and suffering. 118 Plaintiffs may also argue the jury should know about Medicaid because the humiliation of accepting public assistance for their injuries may increase pain and suffering damages. 119 The Medicaid payments may be important for plaintiff or defendant in proving pain and suffering, 120 but under the traditional collateral source rule this evidence would likely be barred because it is evidence of a payment to the plaintiff that a jury might use to reduce recovery. 121 The collateral source rule could eliminate Medicaid from consideration in this separate area of damages. At a minimum, the judge would likely engage in a difficult balancing between its probative value in determining pain and suffering damages and its potential prejudice. 122 Removing an automatic bar on Medicaid amounts paid or amounts billed helps alleviate these concerns. It allows the judge to consider arguments regarding alternative reasons for excluding such evidence. This way, the judge can evaluate admission based on these substantive issues rather than barring or admitting based on the collateral source rule, which is unrelated to separate issues in the case. The relevant information is available to the jury, assuming it is not excluded for other reasons, and the attorneys have an opportunity to debate the merits of the information to determine real reasonable value. The real reasonable value approach eliminates the evidentiary component of the collateral source rule, but maintains the substantive component. 123 Defendant s obligation 118. See Dyet v. McKinley, 81 P.3d 1223, 1240 (Idaho 2003) Loncar v. Gray, 28 P.3d 928, 933 (Alaska 2001) Id.; see also Dyet, 81 P.3d at See Bynum v. Magno, 101 P.3d 1149, 1154 (Haw. 2004) (citing Ellsworth v. Schelbrock, 2000 WI 63, 7, 235 Wis. 2d 678, 7, 611 N.W.2d 764, 7) (defining the collateral source rule as a benefit[] or payment[] received on behalf of a plaintiff, from an independent source, will not diminish recovery from the wrongdoer ) See generally id. (discussing balancing the probative value of evidence of Medicaid payments against its potential to prejudice the jury) See supra note

20 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 is not automatically reduced by any amounts paid on plaintiff s behalf. Instead, Medicaid payment evidence is only admitted as a factor to determine the defendant s obligation. 124 Two additional elements should be presented to the jury in order to reinforce the limitation on the use of the Medicaid payments to determine real reasonable value. First, the jury should know that Medicaid would take reimbursement for its payments out of any amount awarded to the plaintiff. 125 This discourages the jury from reducing the Medicaid payments because of the assurance that plaintiff will not actually keep those amounts. Second, the judge should instruct the jury that the purpose of the Medicaid payment information is only to assist in determining value along with all other appropriate information, not to reduce the award. This will provide guidance to the jury on the appropriate use of the Medicaid information and discourage violation of the collateral source rule. The real reasonable value approach allows a jury to consider the relevant evidence and make a factual determination rather than tying them to one amount or the other. Also, the admission of the Medicaid evidence refines the debate about whether the exclusion of Medicaid s existence affects other elements of the case. Finally, this approach maintains the substantive component of the collateral source rule because the jury uses the evidence to determine reasonable value rather than to reduce the award. 126 IV. STATE MEDICAID AGENCY NOTICE AND REIMBURSEMENT Determining a real reasonable value only resolves the windfall problem that results when a plaintiff receives more than the reasonable value of the service. The second problem regarding awards to Medicaid plaintiffs is double recovery. Medicaid plaintiffs should not receive a damage award for 124. See Lagerstrom v. Myrtle Werth Hosp., 2005 WI 124, 27, 285 Wis. 2d 1, 27, 700 N.W.2d 201, 27 (finding evidence of collateral source is admissible to determine reasonable value, but the court must instruct the jury not to reduce reasonable value based on the payments) See id. (finding that if evidence of collateral sources is presented to the jury, the parties must be allowed to furnish evidence of reimbursement obligations) See supra note

21 2007] THE COLLATERAL SOURCE RULE AND MEDICAID PLAINTIFFS services provided by Medicaid in addition to receiving those services from Medicaid free of charge. There must be a mechanism... to enable public health service agencies to recoup some portion of their outlays, when possible, in order to ensure that the less fortunate can in [the] future have access to medical care that they cannot otherwise afford. 127 Such a mechanism is both possible and practical. States should require plaintiffs seeking recovery for medical expenses paid by Medicaid to notify the state Medicaid agency of the legal action. States should also require an automatic reimbursement from the defendant to Medicaid for Medicaid s portion of the medical expenses with a pro-rata deduction for legal costs. 128 This is very similar to the statutory requirements in both Mississippi and New Jersey. 129 This requirement in every state would increase Medicaid s recovery of reimbursement, thereby helping maintain a fund created with taxpayer dollars. Also, by requiring payment of the reimbursement to Medicaid directly, there is no potential for double recovery by plaintiff. 130 The notice requirement allows the Medicaid agency to join the case and allows for a better opportunity to track when it is entitled to recovery. This ensures compliance with federal law, which requires states take all reasonable measures to ascertain the legal liability of third parties to pay for care and services available under the plan Ferguson v. IHB Realty, Inc., 821 N.Y.S.2d 848, 852 (N.Y. Sup. Ct. Kings County 2006) See generally UTAH CODE ANN (1)(a) (2007) (requiring written consent from the state before pursuing any third party to recover for medical cost the state has provided) MISS. CODE ANN (2) (2006) (requiring notice and option to intervene, but outlining an order to allocate recovery instead of automatic reimbursement); N.J. STAT. ANN. 30:4D-7.1(b) (West 1997) (requiring notice and immediate reimbursement from the plaintiff after recovery) See generally Saine, supra note 23, at 1103 (arguing that direct payment from the defendant to the insurance company as reimbursement for insurance payments to the plaintiff eliminated double recovery by the plaintiff) U.S.C. 1396a(a)(25)(A) (2000). 243

22 THOMAS JEFFERSON LAW REVIEW [Vol. 30:223 A recent ruling by the U.S. Supreme Court, in Arkansas Department of Health and Human Services v. Ahlborn, makes Medicaid s involvement at an early stage even more important. 132 The Court found that states could only seek reimbursement of settlement proceeds designated by the parties for medical care. 133 If the Medicaid agency is unaware of the settlement discussions, it cannot protect its interest and the medical expense portion of the settlement may be lower than desired. 134 Making the reimbursement an automatic payment from the defendant to the state Medicaid agency eliminates the continual criticism of the collateral source rule for double recovery by the plaintiff. 135 The plaintiff is limited to receiving the real reasonable value of the services minus the amount paid by Medicaid. The reimbursement also financially supports Medicaid. The General Accounting Office estimated that Medicaid spending would continue to accelerate even faster than spending in Medicare and Social Security. 136 The three programs combined are expected to make up half of all federal spending by 2013, resulting in a choice among increasing debt, tax increases, and budget cuts. 137 As the largest source of funding for medical and health-related services for America s poorest people, sustaining the program is imperative. 138 While these reimbursements to Medicaid may not head off the forecasted financial problems with the program, it provides a much needed alternative funding source for the program U.S. 268, 284 (2006) (finding that states cannot put a lien on portions of settlement beyond those designated for medical care) Id See Ferguson v. IHB Realty, Inc., 821 N.Y.S.2d 848, 851 (N.Y. Sup. Ct. Kings County 2006) (discussing the implications of Ahlborn and finding that if a government agency has an opportunity to intervene and does not they are relegated to recoup only to portions designated for medical expenses) See generally Saine, supra note 23, at 1079 (discussing the frequent criticism of the collateral source rule for double recovery) General Accounting Office Report, GAO , Bureau of the Public Debt s Fiscal Years 2003 and 2002 Schedules of Federal Debt 4-5 (2003) Id Hoffman, supra note 69, at