Medical Malpractice Report

By: Kevin M. Lesperance kml@hennlesperance.com Henn Lesperance PLC

& Andrea S. Nester asn@hennlesperance.com Henn Lesperance PLC

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The Collateral-Source Rule and Medical Malpractice: Post-Greer Legislation Limiting Recoverable Damages

Even if you are fortunate enough to have avoided the experience of an adverse jury verdict, most defense practitioners are well aware of Michigan’s statutory collateral-source rule. Generally, the term “collateral source” refers to compensation for injuries from a source independent of the tortfeasor. Insurance proceeds are a very common “collateral source.” The statutory collateral-source rule entitles the defense to a post-verdict reduction from the judgment of collateral-source proceeds if certain conditions are met.

Historically, however, parties operated under a somewhat different system. As was stated in the Supreme Court’s concurring opinion in Greer v Advantage Health, the common-law collateral-source rule “was first recognized in 1854, at about the same time the theory of liability based on fault was established.” Pursuant to the rule’s common-law form, “an injured party was allowed to retain the proceeds of insurance paid to him or her as a policyholder and recover a second time from a tortfeasor.” In other words, Michigan’s common-law rule “provides that the recovery of damages from a tortfeasor is not reduced by the plaintiff's receipt of money in compensation for his injuries from other sources.” The original intent of the common-law rule included punitive and deterrent objectives.

However, in 1986, as part of a more global move to enact comprehensive tort reform in Michigan, “the Legislature abrogated the common-law collateral source rule for tort claims when it enacted MCL 600.6303 . . . .” In contrast to the common-law, the statutory version permits the “reduction of a plaintiff's award for past economic damages by payments from collateral sources after a verdict has been rendered.”

Statutory collateral source rule

As indicated above, the collateral-source rule codified at MCL 600.6303 allows the defense to introduce evidence after a verdict for the plaintiff (but before judgment is entered on the verdict) to establish that the expense of medical care, rehabilitation, loss of earnings, loss of earnings capacity, or other economic loss was paid by a “collateral source.” Thereafter, if the court finds that the plaintiff's loss has been paid or is payable by a collateral source, the plaintiff’s judgment must be reduced accordingly. This reduction makes sense based on the generally accepted purpose behind the statutory enactment: “to prevent personal injury plaintiffs from being compensated twice for the same injury.”

Relevant to the remaining discussion, the statutory definition of “collateral source,” includes, in pertinent part, “benefits received or receivable from an insurance policy.” As is provided by the statute, within 10 days after a verdict in favor of the plaintiff, plaintiff’s counsel must provide notice to any entity entitled to a lien on the amount awarded, including any healthcare insurer or insurers that have paid, or are otherwise contractually obligated to pay, the plaintiff's medical expenses. A lienholder then has 20 days after receipt of the notice to exercise their right of subrogation. However, the statute excludes from the definition of “collateral source” any benefits paid or payable by a legal entity entitled by contract to a lien against plaintiff’s recovery if the contractual lien has been exercised.

In other words, the statutory exception to the collateral-source rule permits the plaintiff to recover the amount of his or her expenses paid by a contractually entitled lienholder. However, as anyone who has reviewed their latest health insurance statement is aware, a health insurer almost never pays the actual amount billed by the hospital or health facility. Pursuant to negotiated contractual agreements between health insurers and healthcare providers, the billed amount is reduced or “discounted.” The health insurer only actually pays the discounted amount, and is only able to exercise a lien for the amount it actually paid. Simply put, a plaintiff’s actual medical expenses are not congruent with the amounts originally billed.

Nevertheless, because evidence of payments made by an insurer is generally inadmissible during the trial phase, plaintiffs are often awarded past medical expenses based on the full amount billed by the healthcare provider. This creates a scenario where the insurer pays the discounted amount, but the plaintiff thereafter receives an economic damages award for the full amount of the original bill. From the perspective of many defense attorneys, this essentially created a windfall scenario for plaintiffs who received the full amount billed as prior economic damages, but never paid an amount greater than the discounted rate negotiated for by the insurer.

Consider the following example: a plaintiff is billed $100.00 for a medical procedure that becomes the subject of a medical malpractice suit. The jury returns a verdict in favor of the plaintiff, and awards $100.00 in past medical expenses to cover the amount billed for the procedure. Pursuant to a contract negotiated on behalf of its insureds, the health insurer actually paid only $75.00 for the procedure. The health insurer exercises a lien and is reimbursed by the plaintiff for the $75.00 it originally paid to the healthcare provider on plaintiff’s behalf. This leaves the plaintiff with a windfall of $25.00. Essentially, the plaintiff is permitted to receive “economic” damages that do not reflect the amount ever actually paid for any prior medical expenses (or expenses of any kind). This dichotomy—between what was actually occurring pursuant to the statue and the statute’s stated purpose—became the subject of Greer.

Greer v Advantage Health.

In Greer, the issue was whether the above-described discount that insurers receive on a healthcare provider’s bill is an exception to the collateral source rule pursuant to MCL 600.6303. Defendants asserted that the discounts were, in fact, a collateral source because they were a benefit “received or receivable” from an insurance policy. As such, Plaintiff’s verdict award should have been reduced by the amount of the discount, i.e., the benefit received by Plaintiff.

However, in a published opinion issued May 13, 2014, the Court of Appeals disagreed. Specifically, based on its interpretation and application of MCL 600.6303, the Court held that—in addition to actual insurance payments for which a lien can be asserted—insurance discounts fell under the statutory exclusion. In other words, they could not be reduced from plaintiff’s judgment post-verdict. To the credit of the defense, the Court agreed that the insurance “discounts,” which reduced the total amount of medical expenses the plaintiffs would otherwise have to pay, were plainly “benefits received or receivable from an insurance policy” and were, therefore, a collateral source as defined by the first portion of MCL 600.6303(4). The Court also agreed that this reading of MCL 600.6303 was consistent with (1) “common sense and economic reality,” and (2) the dictionary definitions of “benefit” as being “something that is advantageous or good; an advantage” or “a payment made to help someone or given by a benefit society, insurance company, or public agency.” However, the Court ultimately concluded that the discounted amounts were also subject to the exclusion pursuant to the latter portion of MCL 600.6303(4). Based on the plain language of the rule, the Court found that application of the exclusion was not limited to the amount of a potential contractual lien, rather it applied to all benefits that were paid or payable by a legal entity contractually entitled to a lien, i.e., the discounted amounts were likewise covered by the exclusion.

Defendants filed a timely application for leave to appeal on June 17, 2014, and the Michigan Supreme Court granted leave to appeal on December 10, 2014. However, after oral arguments were scheduled and heard on the application, the Michigan Supreme Court vacated its previous order granting leave and ultimately declined to hear the case in an Order dated July 8, 2016, leaving in place the decision of the Michigan Court of Appeals.

In a concurrence to the July 2016 Order, Justice Zahra (joined by Justices Young and Markman) stated that “[t]he Court of Appeals’ opinion will ultimately authorize some amount of recovery for medical expenses never incurred by injured plaintiffs” and that, considering the above-discussed legislative intent, it seemed “counterintuitive that the Legislature would enact the statute with a loophole that permits a plaintiff to recover for medical expenses never owed or paid.” In conclusion, Justice Zahra opined that “[t]o the extent that the Legislature did not intend to allow a windfall recovery of the retail price for medical services that were provided at a discount, the statute needs to be amended.”

Subsequent legislative action

Based on the Court’s concurrence and commentary from the defense bar, the Michigan Senate introduced SB 1104 on September 21, 2016. The associated Legislative Analysis of what has now become Public Act 556 of 2016, codified at MCL 600.1482, provides pointed insight into the discussion and thought process of the Legislature as it enacted the post-Greer “fix.” For example, as noted in the Senate Fiscal Analysis, the policy concerns presented to the Legislature in support of the bill included those articulated in Greer, notably the following:

Michigan courts have made it clear that the purpose of the statutory collateral source rule is to prevent plaintiffs from receiving a double recovery for a single loss. This purpose is defeated when a plaintiff receives both the amount actually paid by his or her insurer (which the insurer has a lien on) and the amount of a discount that the insurer did not pay (which the plaintiff keeps).[]

Among the arguments presented in opposition to the bill, the following points were asserted:

• By enacting a “fix” to the decision in Greer, the Legislature is effectively denying plaintiffs paid-for benefits because insurance “discounts” are negotiated on behalf of prudent purchasers of health insurance, and any efforts expended into those negotiations are paid for by an injured plaintiff’s health insurance premiums;

• By preventing plaintiffs from recovering the amount of a negotiated discount, SB 1104 could make it unaffordable to bring medical malpractice actions; and

• The actual billed costs (as opposed to the discounted rates paid by insurers) best reflect the “reasonable value” of medical services.

However, in rebuttal to these plaintiff-friendly arguments, the following points are noteworthy:

• The purpose of the statutory collateral-source rule (preventing a double recovery for a single loss) is severely undermined when a plaintiff receives both the amount actually paid by the insurer and the amount of the discount (which no one will ever pay);

• As indicated by the above-mentioned purpose of the statutory collateral-source rule, it is not meant to address any issues regarding the affordability of bringing a medical-malpractice suit, and even assuming arguendo that this is a legitimate concern, improving affordability by providing plaintiffs a double recovery under the guise of “economic” damages is incredulous at best; and

• It is rare for a patient to pay the actual billed amount, and there are often significant modifications between the amount billed and the amount a healthcare provider might eventually accept as payment, which creates a legitimate question with regard to whether the amount billed actually represents the “reasonable value” of medical services.

As evidenced by its action, the Legislature ultimately concluded that it was necessary to amend the law and close what appeared to be the inadvertent loophole exposed in Greer. Accordingly, pursuant to the recently enacted MCL 600.1482, damages for medical expenses (including rehabilitation costs) in medical malpractice actions filed on or after April 10, 2017 are limited to the actual damages for medical care.

Specifically, the statute provides that, “notwithstanding any other law to the contrary . . . both of the following apply” in any medical malpractice action:

• Recoverable damages for past medical expenses or rehabilitation service expenses shall not exceed the actual damages for medical care that arise out of the alleged malpractice; and

• Courts shall not permit plaintiffs to introduce evidence of past medical expenses or rehabilitation service expenses at trial, “except as evidence of the actual damages for medical care.”

Pursuant to the statute, the phrase "actual damages for medical care" is defined as follows:

(i) The dollar amount actually paid for past medical expenses or rehabilitation service expenses by or on behalf of the individual whose medical care is at issue, including payments made by insurers, but excluding any contractual discounts, price reductions, or write-offs by any person; [and]

(ii) Any remaining dollar amount that the plaintiff is liable to pay for the medical care.

At least in the realm of medical malpractice, “Defendants and their insurers will no longer be required to pay plaintiffs for costs they never incurred.” As these payments are ultimately passed on to patients and policyholders in the form of lower costs, reduced premiums, and improved patient care, this enactment of MCL 600.1482 not only repairs an inadvertent loophole in the statutory collateral-source rule, it also protects the best interest of healthcare and health insurance consumers.

Remaining post-Greer issues

While MCL 600.1482 is music to the ears of medical-malpractice defense practitioners, it is worth noting the readily apparent narrow scope of the statute: MCL 600.1482 applies only to medical malpractice actions. In contrast, the statutory collateral-source rule is applicable to all “personal injury” actions. Likewise, the Court’s decision in Greer was not expressly limited to medical-malpractice cases. As such, defense practitioners should be aware of the arguments for and against limiting the collateral-source rule with regard to “discount” payments as litigation regarding this issue could arise in other contexts.

Furthermore, although at first blush it may arguably appear to be one of the more straightforward statutes (especially when compared to original collateral-source statute and complex common law), courtroom battles regarding interpretation are nevertheless bound to arise. By way of example, the statute does not provide a definition of “rehabilitation services.” It is easy to imagine courts across the state coming to their own unique conclusions regarding the scope of this phrase.

The statutory enactment could also increase the frequency of dual-theory filings, specifically, plaintiffs bringing medically related claims under theories of both medical malpractice and ordinary negligence. These battles are nothing new in the field of medical malpractice and have arguably seen a resurgence of late. Because of the limited scope of MCL 600.1482, if a case can be framed in terms of “ordinary negligence,” plaintiffs could potentially rely on Greer to assert that they are entitled to the amount billed for medical expenses, i.e., the potential damage award could be greater.

Finally, medical-malpractice defense counsel should take note of the location of the statute: it was not codified anywhere near the statutory collateral source rule, nor does the phrase “collateral source” appear anywhere in the statutory language. Although these observations do not affect the legal import of the enactment, the location and verbiage—in conjunction with the fact that there will not likely be many referencing sources on Westlaw or Lexis for some time—could make the new section difficult to locate in a pinch.

Categories: Volume 8-1

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