Abolishing the Collateral Source Rule?

February 16, 2011

Currently pending before the California Supreme Court is Rebecca Howell v. Hamilton Meats & Provisions, Inc. In Howell, a private insurance covered plaintiff was injured by the negligent driving of an employee of the defendant, Hamilton Meats & Provisions, Inc. Ultimately, a jury awarded plaintiff Howell compensatory damages in the total amount of $689,978.63, which included $189,978.63 for “past economic loss, including medical expenses.” Plaintiff Howell was also awarded $150,000 for future economical loss including medical expenses, $200,000 for past non-economic loss (including physical pain, mental suffering, loss of enjoyment of life, disfigurement, physical impairment, inconvenience, grief, anxiety, humiliation and emotional distress), and $150,000 for “future non-economic loss.” After the verdict was rendered, defendant Hamilton filed a “post-verdict reduction motion” (a.k.a. “Hanif/Nishihama” motion or rule) to reduce the amount of the jury’s award in connection with the plaintiff’s past economic loss, including medical expenses. After a lengthy oral argument between the parties on defendant Hamilton’s post-trial motion, the trial court reduced plaintiff Howell’s net award from the full amount of the medical bills to the amount the providers actually accepted, for a difference of $130,286. See Howell v. Hamilton Meats & Provision, Inc., 179 Cal. App. 4th 686, 692-93 (2009).

Plaintiff Howell appealed the trial court’s decision to the Fourth Appellate District Court of Appeal of California, and on November 23, 2009, the appellate court reversed the trial court’s post-trial reduction order in a monumental opinion that turned the post-trial verdict reduction procedure on its head. In fact, the appellate court ruled that any order reducing a jury-related medical expense award violated the Collateral Source Rule. Going one step further, the appellate court held that post-trial Hanif/Nishihama motions are “unauthorized” under California’s Code of Civil Procedure in that no section of the Code provides for such a procedure. Finally, the court disapproved the Third Appellate District’s opinions in both Hanif v. Housing Authority of Yolo County, 200 Cal. App. 3d 635, 641 (1988) which held that an award of damages for past medical expenses in excess of what the medical care and services actually cost constitutes overcompensation and Greer v. Buzgheia, 141 Cal. App. 4th 1150, 1154 (2006) which approved Hanif and the post-trial verdict reduction procedure nearly two decades later.

The issues upon which Supreme Court review of the Fourth Appellate District’s ruling has been granted are twofold: (1) Is the difference between gross medical bills and the actual amount voluntarily accepted by the medical provider as payment in full from plaintiff’s healthcare insurer – dubbed the “negotiated rate differential” in the Howell decision – a collateral source under the Collateral Source Rule? And, (2) Did the trial court follow proper procedure in determining the reduction of past medical specials portion of the verdict?

Twenty-two years ago, the Third Appellate District Court of Appeal of California held, in Hanif v. Housing Authority of Yolo County, that an award of damages for past medical expenses in excess of what medical care and services actually cost constitutes overcompensation.” The appellate court reasoned that according to select provisions of the California Civil Code, well-established caselaw, and treatises, the purpose of tort law is to compensate a plaintiff and restore him or her back to the place that they were prior to the alleged injury. In short, the Third Appellate District held that a plaintiff is entitled to recover up to and no more than the actual amount expended or incurred for their past medical expenses so long as the amount is reasonable. This defense-favored and oft-cited ruling, has a couple important and distinct aspects that opposing plaintiffs are quick to note in their appellate briefs: (1) California’s Medi-Cal program paid for all the plaintiff’s injury-related medical care and services – thus Hanif is a narrow ruling limited to Medi-Cal cases; and (2) Medi-Cal has subrogation and lien rights limited to the amount of its payment.

Thus, in cases where Medi-Cal was not the third party pocket book, such as private insurer, Hanif was and remains easily distinguishable.

Thirteen years later, however, the First Appellate District held, in Nishihama v. City and County of San Francisco, 93 Cal. App. 4th 298 (2001), that Hanif’s ruling went beyond Medi-Cal cases and applied to private insurance cases as well. Going one step further, the Nishihama court reduced plaintiff’s medical specials award to the amount “actually paid” by his private medical insurer to satisfy the bills. It is this “actually paid” principle that has been argued at nauseam in trial courts throughout the State in post-trial reduction motions commonly referred to as “Hanif/Nishihama” motions. Until Howell, defendants came to rely upon these motions which would often turn upon technicalities such as in Greer v. Buzgheia, 141 Cal. App. 4th 1150 (2006), wherein the defendant’s post-trial verdict reduction motion was denied simply because a pre-trial motion in limine had not been filed and the post-trial motion procedure was deemed unpreserved.

Then, of course, the Fourth Appellate District held in Howell v. Hamilton Meats & Provision, Inc., that the “Negotiated Rate Differential,” i.e., the total cost of medical expenses, and the “negotiated rate” a private insurance company ultimately pays, is a “benefit” within the meaning of the Collateral Source Rule. The Court reasoned that simply because a plaintiff had the foresight to purchase health insurance, the defendant should not get the benefit of such foresight by having special damages jury awards reduced by the negotiated amount the insurance company paid for medical bills.

On appeal to the Supreme Court, the Howell petitioners ask the Court to overturn the Fourth Appellate District’s radical ruling, uphold the twenty-year-old Hanif/Nishihmara procedure, and recognize post-verdict reduction motions as authorized under select provision of the California Civil Code including §§ 3281 (“Every person who suffers detriment from the unlawful act or omission of another, may recover from the person in fault a compensation therefore in money, which is called damages.”); 3282 (“Detriment is a loss or harm suffered in person or property”); 3333 (“For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not”) and § 1431.2, subd. (b)(1). The Hamilton respondents, meanwhile, urge the Court to overrule Hanif and Nishihmara, uphold the newly coined “Negotiated Rate Differential” principle and find that post-verdict reduction motions are not authorized under any California Code or Statute. They finally argue that until the California legislature weighs in on the issue, the Collateral Source Rule applies to any and all “benefits” a plaintiff receives by a third party.

There are several problems, of course, with both parties’ positions. First, the California legislature has yet to “weigh in on the issue” despite the fact that the Supreme Court has urged the branch to do so on two separate occasions within the past decade. See Olszewski v. Scripps; 30 Cal. 4th 798 (2003) (discussing foreseeable adverse ramifications stemming from ruling, Supreme Court asks Legislature to step in); see also Parnell v. Adventist Health System/West, 35 Cal. 4th 595 (2005) (advising respondents to look to the Legislature for relief from the financial pressures that may arise from court’s ruling). Thus, arguments in favor of the Court taking into consideration the possibility that someday the California Legislature might chime in with an unambiguous statute on the matter, are inconsequential.

Second, the position that compensatory damages are limited to the amount “actually paid” by the plaintiff, regardless of the source is also problematic because the primary authority in support of this proposition comes from the recently criticized ruling in Hanif. Indeed, as recently as four months ago, the Third Appellate District in King v. Willmett, 187 Cal. App. 4th 313 (2010) distinguished and criticized Hanif as applying only to Medi-Cal related cases. The Court further distinguished and criticized Nishihama as only concerning the validity of a medical center’s lien and having no application to the collateral source rule. Notably the very appellate district that handed down the Hanif opinion in 1988 is the same appellate district that now criticizes its predecessor panel’s monumental ruling. The King opinion also disfavored its own ruling in Greer v. Buzgheia which it had issued just four years ago in 2006. Interestingly, two months before the King opinion was handed down, the First Appellate District distinguished Hanif in Yanez v. Soma Environmental Engineering, Inc., et al., 185 Cal. App. 4th 1313 (2010) as not addressing or appearing to contemplate situations in which patients covered by private health insurance are charged reduced rates by the provider for their care as an insurance benefit negotiated between the insurer and the health care provider. Both the King and Yanez rulings have been appealed to the Supreme Court. The final outcome of these cases should lie in the Court’s ruling in Howell – presuming, of course, the Court provides further guidance on California’s use of the Collateral Source Rule.

Notably, in each of the arguments proffered by the Hamilton petitioners, the Howell respondents, their respective bars, and a majority of cases cited within their Appellate Briefs, both sides urge the Court not to abolish the Collateral Source Rule. Indeed, the first sentence and point heading from Hamilton’s opening brief states, “the long-standing collateral source rule must be protected.” Likewise in Howell’s answer brief, they argue, “the Supreme Court of California has long adhered to the collateral source rule,” and urge the Court to not back away “even an inch” from it despite the “defense bar’s repeated assaults” on the Rule. While it appears as though everyone agrees the Court should uphold the Collateral Source Rule, things are not always as they seem. Indeed, a closer read of both sides’ appellate briefs reveals that neither side takes a firm stand on whether the Court should uphold or abolish the Rule. In fact, both sides’ arguments overlap and sometimes contradict their strongest positions.

For example, one of Howell’s loudest arguments is that there is no such thing as a “Hanif rule” or “Hanif/Nishihama rule” as it is nothing more than a “judge-made rule,” unauthorized by California’s Code of Civil Procedure, which they submit contains no provision authorizing such motions. Yet, is it not a fact that the Collateral Source Rule itself is a judicially created doctrine? The Association of Southern California Defense Counsel and DRI-the Voice of the Defense Bar noted as much in their amicus brief in support of the Hamilton petitioners. Perhaps in an effort to avoid the obvious conclusion, amicus briefs will provide the Court with interesting food for thought such as “whether a plaintiff should not be allowed to introduce evidence of his/her medical bills in the first place?” Indeed, the defense bar argues that the face amount of a medical bill is inadmissible to prove the reasonable value of the services billed. Of course, just this past summer, in Yanez v. Soma Environmental Engineering, Inc., et al., Justice Banke had a different view:

“… courts have exhibited a markedly heightened regard for the ability of juries to deal with complex and sophisticated legal and factual problems, including heeding limiting instructions in connection with otherwise highly prejudicial evidence. [citations]. If properly instructed juries can handle this kind of potentially prejudicial evidence in very serious—even life and death—cases, surely juries can consider, with proper instruction, evidence of amounts paid to health care providers on the issue of the 'reasonable value' of health care services…"

Yet, if either of these views were accepted, would not the Collateral Source Rule in California be adversely affected? Do all roads currently lead to abolishing the Rule? Fourteen states, including New York, have abolished the Rule. http://ezinearticles.com/?Personal-Injury---What-You-Must-Know-About-the-Collateral-Source-Rule&id=4414716; http://www.articlesbase.com/law-articles/personal-injury-what-you-must-know-about-the-collateral-source-rule-935630.html. Another fourteen states, including California, have modified or carved out exceptions to the Rule. See California Civil Code § 3333.1, subd. (a) (passed by California Legislature in 1975, permits defendant to introduce evidence of a collateral source such as health or disability insurance benefits at trial in medical malpractice cases and as part of the Medical Injury Compensation Reform Act.); see also California Government Code § 985 (passed in 1987, allows public entities to make post-trial [Hanif-type] motions to preclude payment to any collateral source, plaintiffs may still claim any premiums paid to purchase the collateral source as well as attorneys fees). Is it time to abolish the Rule completely and not shied the jury from anything? I believe so. Juries need not and should not be shielded from the truth.

“It is time therefore to trust juries to heed limiting instructions in this context, as in others, and to let juries hear all the relevant evidence on the ‘reasonable value’ of medical services.” Yanez, 185 Cal.App.4th at 1313 (J. Banke concurring).