The California Supreme Court Weighs In On The Application Of The Collateral-Source Rule To Private Insurance Negotiated-Rate Differentials

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by Charles Miller

In a personal injury lawsuit, a plaintiff is entitled to recover her medical expenses. Many insurance plans have negotiated discounts from hospitals and other medical providers. That means that that the hospital bill for an injured person with insurance is often much lower than it would be for an injured person with no insurance. Negotiated discounts in insurance contracts raise an interesting question about the amount of medical expenses that an injured plaintiff can recover in a personal injury case where the injured plaintiff’s medical expenses were reduced pursuant to a negotiated discount.

Under what is known as the collateral-source rule, a defendant generally cannot use compensation that an injured plaintiff received from a source independent from the defendant to reduce the damages that the defendant would otherwise have to pay the plaintiff. For example, a defendant cannot introduce evidence of Social Security Disability benefits received by an injured person to reduce the amount of damages that the defendant must pay to the injured plaintiff.

Courts in Arizona and several other states have ruled that the collateral-source rule precludes a defendant from using a negotiated discount to reduce the amount owed to an injured plaintiff for medical expenses. But the Texas Supreme Court and the California Supreme Court have recently ruled that, despite the collateral-source rule, an injured plaintiff cannot recover the reasonable value of her medical care if she paid a lower amount pursuant to a negotiated insurance discount. See Howell v. Hamilton Meats and Provisions, 52 Cal.4th 541 (Cal. Aug. 18, 2011); Haygood v. De Escabedo, 54 Tex. Sup. J. 1377 (Tex. July 1, 2011).

The Texas Supreme Court and California Supreme Court decisions negatively impact injured insured plaintiffs by allowing a defendant use a plaintiff’s negotiated discount on her hospital bill to award less than the reasonable value of the medical care, the amount that the defendant would have to pay to an uninsured defendant. These decisions, which allow a defendant to unfairly benefit from a plaintiff’s insurance contract, are contrary to the spirit of the collateral-source rule.

There is one important difference between the Texas and California decisions. The Texas Supreme Court also ruled that a plaintiff with a negotiated discount cannot introduce evidence of the full reasonable value of her medical care at trial. Juries often use the amount of medical expenses to assess the seriousness of injuries and tend to award higher non-economic damages (e.g., pain and suffering, mental anguish, etc.) in cases with higher medical expenses. Therefore, the Texas Supreme Court’s decision will likely result in lower non-economic damages to insured plaintiffs with negotiated discounts (because juries will not be permitted to hear evidence of the full reasonable value of their medical care) than to uninsured plaintiffs (where juries will hear evidence of the full reasonable value of the care). The California Supreme Court’s decision appears to contemplate reducing an insured plaintiff’s medical expenses through a post-trial motion instead of preventing a plaintiff from introducing evidence of the reasonable value of her medical expenses at trial. Hopefully, this will prevent the California Supreme Court’s decision from negatively impacting the non-economic damages awarded to insured plaintiffs in the same way that the Texas decision will.