AAOS Now

Published 3/1/2003
|
Melissa Young

Tort reform and the Collateral Source Rule

In the legal world, it’s said that “the fastest way to a mistrial is to mention the word ‘insurance’ in front of the jury.”

The saying references the Collateral Source Rule, a central part of American personal injury law since the Civil War. Originally, the Collateral Source Rule was created to prevent a defendant from benefitting from the plaintiff’s receipt of money from other sources, which was triggered by the defendant’s wrongdoing or tort.

In a trial setting, a judge may use the rule to prohibit a defendant from telling the jury about any insurance payments the plaintiff received. Likewise, a judge may deny the defendant’s motion to reduce the jury award by the amount written off by the healthcare provider.

State reform efforts
The tort reform movement has actively targeted the Collateral Source Rule, with varying results. In a 2006 survey of state statutes addressing the Collateral Source Rule, David Schap and Andrew Feeley, authors of (Much) More on the Collateral Source Rule (June 2006), found that 38 states modified the rule in some form to allow the introduction of collateral source evidence in medical liability cases. Twenty states permitted consideration of collateral source offsets during trial, while 14 states required consideration of such offsets after the judgment or award. Six states required the offset to be taken after the jury’s verdict but before entry of judgment by the court.

New Hampshire has eliminated the Collateral Source Rule all together. The jury is allowed to consider evidence of insurance payments as well as the cost of obtaining collateral source payments in medical liability cases. Evidence of government benefits such as Medicare, Medicaid, or Social Security may also be considered by the jury.

At the other extreme, Virginia has neither modified nor eliminated the Collateral Source Rule. In a 2000 case, Acuar v. Letourneau, the Virginia Supreme Court reaffirmed that the rule is alive and well, stating:

A plaintiff who receives a double recovery for a single tort enjoys a windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction one windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer.

By statute, however, Virginia caps damages at $2 million in medical liability cases, and punitive damages are capped at $350,000.

Other states frequently distinguish between collateral source payments made by a private source (such as private health or disability insurance) or by a public source (such as Medicaid, Medicare, or Social Security). The reasoning behind the exclusion of private source payments is that the plaintiff paid for the benefit or bargained with his or her employer for it in lieu of higher wages.

The problem with federal benefits
According to Schap and Feeley’s study, 28 states made some type of exception to the Collateral Source Rule for federal benefits. Where offset is permitted, there is no dispute on the issue of recovery of the expenses paid by Medicare or Medicaid, generally a much lower contractual amount than healthcare providers bill for.

The problems arise when a plaintiff attempts to introduce evidence of the higher amount billed. Unlike private insurance, no right of subrogation (where insurance benefits are reimbursed from any jury award or settlement) exists under federal programs. The difference between amounts billed and amounts paid by these programs is written off by the healthcare providers. Defense attorneys frequently argue that these “phantom” benefits are not paid for by the plaintiff or bargained for between the plaintiff and the employer, but based on federal eligibility guidelines.

These “write off” amounts are included in the plaintiff’s damages, which in turn serve as the basis for a pain and suffering award. Tort reform advocates consider this a double recovery or a windfall. As the dissent noted in Haselden v. Davis, “It is unconscionable to permit the taxpayers to bear the expense of providing free medical care to a person and then allow that person to recover damages for medical services from a tortfeasor and pocket the windfall.”

Impact on tort costs
In March 2008, the Pacific Research Institute released the U.S. Tort Liability Index 2008 Report, which provides a ranking of states’ torts systems. The report measures which states impose “the highest, and the lowest, tort liability costs” by comparing a number of factors, including the laws and procedures of each state, the numbers of cases filed and practicing attorneys, as well as the amount and number of damage awards and settlements.

North Dakota, Alaska, North Carolina, Iowa, and Virginia were the states with the least total tort liability costs, while Montana, Illinois, New York, New Jersey, and Florida had the most total tort liability costs (Fig. 1). Alabama, while ranked first in the overall category, ranked 13th lowest in medical liability costs. Florida, which had the highest total liability of all 50 states, ranked 38th in medical liability costs.

The state with the least medical liability costs, Vermont, ranked 23rd in total tort costs. By contrast, New Hampshire, the state with no Collateral Source Rule, ranked 41st in total liability costs and 31st when only medical liability costs were considered.

With rising healthcare expenses, the calls for tort reform will continue. Although 38 states have modified the Collateral Source Rule, it will remain an active area for reform in the future. The American Association of Orthopaedic Surgeons has issued a position statement that supports the enactment of federal tort reform legislation, including but not limited to a specific cap on non-economic damages and mandatory offset of collateral sources of payment.

The AAOS Medical Liability Committee monitors tort reform on behalf of the AAOS. To learn more, visit the Government Relations section of the AAOS Web site, www.aaos.org

Melissa Young is assistant general counsel for the AAOS. She can be reached at young@aaos.org

Editor’s Note: Articles labeled Orthopaedic Risk Manager are presented by the Medical Liability Committee under the direction of contributing editor Douglas W. Lundy, MD.

E-mail your comments to feedback-orm@aaos.org or contact this issue’s contributors directly.

References:

    1. Acuar v. Letourneau, 260 Va. 192-193

    2. Va. Code. Ann. §§ 8.01-581.15 and 8.01-38.1

    3. Olson, S. Is the Collateral Source Rule Applicable to Medicare and Medicaid Write-offs? Defense Counsel Journal, April 1, 2004

    4. Haselden v. Davis, 579 S.E.2d 293, 296 (2003)