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THE VERDICT, Summer 1999

Recently, the defense bar has employed a new tactic, which if successful, allows defendant-tortfeasors to obtain a fortuitous windfall at the expense of an injured person.[1] The tactic, a clear attempt to circumvent both the collateral source rule and law of damages, is generally viable only when the injured person has health insurance.  The purpose of this article is to bring this tactic to the attention of the bar and judiciary and to demonstrate why such claims should be rejected.

Essentially, tortfeasors argue that they should obtain the benefit of all discounts an injured person’s health insurer obtains from healthcare providers.  The insurer may be a private health insurance plan, such as an ERISA, PPO, or HMO plan or public insurance plan, such as Medicare or Medicaid.[2] Whoever the insurer is, the tortfeasor claims that the plaintiff’s recovery must be limited to the amount of medical expenses “actually paid” by the health insurer.

In many situations, health insurers require that healthcare providers write off or discount a certain portion of their bill.  Tortfeasors claim that this discount must benefit them, rather than the insured-plaintiff.  In doing so, they claim that since the plaintiff will not have to pay the discounted portion of the bill, it is unfair to hold them responsible for the whole bill – regardless of whether the whole bill is a reasonable amount for the treatment incurred.

This tactic disregards Wisconsin law.  Such a claim ignores the collateral source rule and the rationale for the rule, which has its roots in the policy of Wisconsin tort law.  In addition, such a claim overlooks the law relating to an injured person’s right to recover medical expenses.

The Collateral Source Rule

The collateral source rule holds that public or private benefits provided to an injured party, which are collateral to the defendant-tortfeasor, cannot benefit that tortfeasor.  The rule has a long-standing history in Wisconsin and applies to:

(1)         Underinsured motorist benefits, Voge v. Anderson[3];

(2)         Benefits received under automobile personal injury protection and no-fault policies for lost wages and medical expenses, Vonch v. American Standard Ins. Co.[4], and American Standard Ins. Co. of Wisconsin v. Cleveland[5];

(3)         Medical expenses paid under group health and accident insurance, Foss v. Town of Kronenwetter[6];

(4)         Salary continuation by an employer, Campbell v. Sutliff[7];

(5)         Voluntary payments made for medical treatment, McLaughlin v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co.[8];

(6)         Medicare payments for medical expenses, Merz v. Old Republic Insurance Co.[9]; and

(7)         Gratuitous medical and nursing services, Thoreson v. Milwaukee & Suburban Transport Corp.[10].

In each situation, the plaintiff received a benefit collateral to the defendant and did not “actually pay” the damages at issue.  In Campbell, the employee “actually” lost no wages, due to the continuation of salary, but it was permissible to recover the value of the time missed from work.  With medical insurance, the plaintiff never “actually pays” the expense of treatment, but is permitted to recover the value of such treatment.  As to the gratuitous medical and nursing services, plaintiffs may also recover the value of these services.

Despite this law, tortfeasors endeavor to obfuscate the collateral source rule in the managed care situation.  Defendants typically rely on the appellate court’s decision in Oliver v. Heritage Mut. Ins. Co.[11] as a basis for disallowing the discounted portions of the medical bills.

The issue in Oliver was whether the plaintiff’s voluntary bankruptcy precluded his recovery of medical and hospital expenses discharged in the bankruptcy.  Though the facts are patently dissimilar from the situation at issue here, certain language in Oliver gives defendants something to argue.  Defendants claim that Oliver addresses improper “windfalls” to plaintiffs.  They assert that because the Oliver court found the collateral source rule inapplicable, it should also be inapplicable to discounted medical bills.  The defense then tries to analogize a “write-off” to the bankruptcy discharge pointing to Oliver’s use of the word “incurred” and claiming that because portions of a provider’s bill were “written-off,” these were never “incurred.”

These arguments, however, are hollow.  A review of the cases cited above reveals that the plaintiffs generally did not “actually incur” the damages at issue – at least under the defense definition of “incur” (which appears to be “pay”).  Further, several of the plaintiffs in these cases, due to the lack of an assignment or subrogation, received a “windfall” or “double recovery.”  Thus, it is apparent that other reasons must justify the outcome in Oliver.  The reasoning is in the following statement:

We conclude that the collateral source rule is intended for instances where a “benefit” is bestowed by a “third party” and this third party benefit is what creates the windfall.  The collateral source rule is not intended for situations where the plaintiff creates the windfall by his own act.  So, although the issue is one of first impression, we have no hesitancy in deciding against applying the public policy behind our collateral source rule to this case.  Moreover, Wisconsin law mandates that medical bills be “incurred” by a plaintiff in order to be the subject of compensation.  See Wis J I–Civil 1750A.  We agree with Heritage that since Oliver was relieved of his obligation to pay the bills, there was no debt which was “incurred” at the time of trial. We further agree with Heritage that were we to hold for Oliver on this issue, we might encourage some plaintiffs to declare bankruptcy so that payment intended for medical care providers could be transferred to the plaintiff instead.  Such a windfall is unlike those in mine-run collateral source cases because the third party either gratuitously or by contract is providing the benefit.  Here, the medical care providers are not providing a windfall at all and certainly not by reason of any gratuity or contract.  It would be poor public policy to encourage bankruptcies for this purpose.  We do not insinuate that Oliver filed bankruptcy for this purpose.  We simply conclude that holding to the contrary might encourage the filing of bankruptcies in the future.[12]

Accordingly, Oliver is concerned with the public policies involved and balancing the competing interests.  The court did not want to reward a plaintiff with a windfall caused by his own conduct in discharging debts in full through bankruptcy.  The court distinguished this situation from that where a “windfall” comes to the plaintiff due to a third-party benefit.  In that situation the collateral source rule applies.  Thus, in the managed care situation, since the plaintiff’s health insurer bestows the benefit of the negotiated discount and creates the windfall, the collateral source rule must apply.

The Rationale for the Rule and Policy of Wisconsin Tort Law

In 1994, the Supreme Court of Wisconsin reaffirmed the collateral source rule, explaining:

[T]he collateral source rule requires that the tortfeasor be held responsible for his conduct by requiring the tortfeasor to compensate the injured party the full amount of damages.  We recognize that the results in this case allow the injured party a double recovery. However, a contrary conclusion would result in giving the tortfeasor a windfall: the tortfeasor would not have to pay the full amount of damages he would owe even after taking into account the amount of contributory negligence. Since Voge’s recovery from American Family stemmed from his own actions of obtaining underinsurance and paying the premium for it, the better result is to allow Voge to recover that windfall, not Illinois Farmers and Anderson. Any windfall in benefits should inure to the injured party, not to the tortfeasor.

Voge v. Anderson[13]

Back in 1927, the Supreme Court of Wisconsin stated:

It is equally clear that the defendant is not entitled to have the damages reduced because the plaintiff had purchased and paid for the right to have indemnity in case he sustained accidental injuries.  The sums paid for such insurance are in the nature of an investment, which, like other investments made by the plaintiff, ought not to inure to the benefit of the defendant.  The only parties interested in such a contract of insurance are the plaintiff and the insurer.

Campbell v. Sutliff[14] citing Gatzweiler v. Milwaukee Electric Railway & Light Co[15].

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This reasoning and long-standing policy lead the appellate court to choose Wisconsin’s collateral source rule over Minnesota law in American Standard Ins. Co. of Wisconsin v. Cleveland[16], where the court stated:

Wisconsin’s collateral source rule is intended to deter negligent conduct by placing the full cost of the wrongful conduct on the tortfeasor.

*  *  *

The primary factor favoring the choice of Wisconsin’s law relates to the advancement of this state’s governmental interests.  The policy of Wisconsin’s tort law is to provide full compensation to persons who are injured by negligent conduct and to deter such conduct by imposing the full monetary consequences on the tortfeasor.  The collateral source rule does not affect the injured person’s right to full compensation.  The rule does advance the deterrent purpose of Wisconsin tort law, however, because the tortfeasor is not gratuituously benefited by payments made to the plaintiff by collateral sources.

Based on the collateral source rule, tortfeasors should not obtain a chance windfall that results only because the injured person has health insurance.  As a matter of public policy, tortfeasors should not get windfalls and should certainly not get windfalls that stem solely from benefits that belong to the injured party.  The injured party purchased or otherwise paid for these benefits and if they had not, the tortfeasor would be required to pay the full cost of their negligent conduct.  Therefore, there is no justification not requiring tortfeasors to pay the full cost of their negligent conduct.  Allowing such tortfeasors to do so, merely because the victim has insurance, contravenes the collateral source rule and the policy of Wisconsin tort law.

The Right to Recover for the Value of Medical Treatment

The defense argument in this situation is not only repugnant to the theories behind the collateral source rule,[17] but it ignores Wisconsin law relating to an individual’s right to recover the reasonable value of the medical treatment rendered as a result of the defendant’s tortious conduct.  The argument presumes, per se, that the amount “actually paid” is the only amount that is reasonable and it ignores the fact that the insurer paid a discounted amount.

In Wisconsin, the general rule is that plaintiffs injured by tortious conduct are entitled to recover the reasonable value of the medical services required by the injury.[18]

In Thoreson[19], the Court clarified this stating:

The general rule in Wisconsin has been that a plaintiff who has been injured by the tortious conduct of another is entitled to recover the reasonable value of his medical costs reasonably required by the injury.  In most cases this is the actual expense, but in some cases it is not.  But the test is the reasonable value, not the actual charge, and therefore there need be no actual charge.

Previously, in McLaughlin[20], the Court stated:

The general rule is that a plaintiff who has been injured by the tortious conduct of the defendant is entitled to recover the reasonable value of medical and nursing services reasonably required by the injury.  This is a recovery for their value and not for the expenditures actually made or obligations incurred.

In making their argument, tortfeasors would have the litmus test of reasonable value be “the actual amount paid” and “the expenditures actually made” by the plaintiff’s insurers.  However, as can be see above, this is clearly not the law.  “Reasonable value” is the only legal standard for determining the amount of recoverable medical costs and the standard proposed by the defense simply contradicts this.

Conclusion

Wisconsin’s appellate courts have yet to specifically address this attempt by tortfeasors to perforate the collateral source rule, the policy of Wisconsin tort law and law of damages.  Further, very few courts outside of Wisconsin have examined the issue.[21] Until the issue is resolved, the courts and plaintiffs’ lawyers can be certain that the defense bar will continue to assert this new tactic.  Based on the precedent, the courts should see through this effort.  Without doing so, tortfeasors unfairly secure a windfall at the expense of an injured person.

Frank T. Pasternak of Murphy, Gillick, Wicht & Prachthauser received his B.A. in 1990 from St. Norbert College and J.D., cum laude, in 1994 from The John Marshall Law School where he was on its Law Review and National Products Liability Moot Court team.  From 1990 to 1995, he was employed at Corboy & Demetrio in Chicago and since 1995, he has been an associate at Murphy, Gillick, Wicht & Prachthauser.  Frank is a member of numerous bar associations and is active in WATL’s Membership Committee and New Lawyers Section.  His practice is limited to plaintiffs’ personal injury.

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[1].  See Beard, Michael, “The Impact of Changes in Health Care Provider Reimbursement Systems on the Recovery of Damages for Medical Expenses in Personal Injury Suits,” 21 Am. J. Trial Advoc. 452 (Spring 1998) (defense lawyer argues for limiting injured parties’ recovery to medical expenses paid by insurance).

[2].  With regard to Medicare, see Dentice, M. Angela, “The Defense Use of Payments Under the Medicare Act: Another effort to undercompensate injured people,” 20:4 The Verdict (Fall 1997).

[3] 181 Wis.2d 726, 732-33, 512 N.W.2d 749 (1994)

[4] 151 Wis.2d 138, 144-45, 442 N.W.2d 598 (Ct.App. 1989)

[5] 124 Wis.2d 258, 369 N.W.2d 168 (Ct.App. 1985)

[6] 87 Wis.2d 91, 109, 273 N.W.2d 801 (Ct.App. 1978)

[7] 193 Wis. 370, 214 N.W. 374 (1927)

[8] 31 Wis.2d 378, 395-96, 143 N.W.2d 32 (1966)

[9] 53 Wis.2d 47, 53-54, 191 N.W.2d 876 (1971)

[10] 56 Wis.2d 231, 243, 201 N.W.2d 745 (1972)

[11] 179 Wis.2d 1, 505 N.W.2d 452 (Ct.App. 1993)

[12] 179 Wis.2d at 23-24

[13] 181 Wis.2d 726, 732-33, 512 N.W.2d 749 (1994)

[14] 193 Wis. 370, 374-75, 214 N.W. 374 (1927)

[15] 136 Wis. 34, 116 N.W. 633 (1908)

[16] 124 Wis.2d 258, 264-66, 369 N.W.2d 168 (Ct.App. 1985) (citations omitted)

[17].  If there is subrogation, tortfeasors may attempt to further confuse the issues by arguing that the collateral source rule is “inapplicable” to both the amounts paid and the amount discounted.  In doing this, tortfeasors reference cases, which state that the collateral source rule does not apply where subrogation is present.  Lambert v. Wrensch, 135 Wis.2d 105, 121, 399 N.W.2d 369 (1987); and Gurney v. Heritage Mut. Ins. Co., 183 Wis.2d 270, 280, 515 N.W.2d 526 (Ct.App. 1994).  However, subrogation is derivative of the plaintiff’s right to recover from the tortfeasor.  American Standard Ins. Co. of Wisconsin v. Cleveland, 124 Wis.2d 258, 263, 369 N.W.2d 168 (Ct.App. 1985).  Where subrogation is present, it is only applicable to the amount of payments made.  See Jindra v. Diederich Flooring, 181 Wis.2d 579, 511 N.W.2d 855 (Wis. 1994); Rixmann v. Somerset Public Schools, 83 Wis.2d 571, 266 N.W.2d 326 (1978); and Heifetz v. Johnson, 61 Wis.2d 111, 211 N.W.2d 834 (1973).  Subrogation does not apply to the plaintiff’s right to recover the reasonable value of the necessary medical services and the collateral source rule must still apply to the amounts discounted.

[18] Utecht v. Steinagel, 54 Wis.2d 507, 515, 196 N.W.2d 674 (1972); Sulkowski v. Schaefer, 31 Wis.2d 600, 608, 143 N.W.2d 512 (1966).

[19] 56 Wis.2d 231, 243, 201 N.W.2d 745 (1972)

[20] 31 Wis. 2d 378, 395-96, 143 N.W.2d 32 (1966)

[21].  Defendants often cite a decision from the Kansas Court of Appeals, which has no analysis of the collateral source rule, the state’s tort law policies or its law of damages.  Rather, the decision tersely concludes that within the Medicare context “Nothing in the reasoning underlying the collateral source rule supports [the plaintiff’s] position on this issue.”  Bates v. Hogg, 921 P.2d 249 (Kan. Ct. App. 1996).  In Brown v. Van Noy, 879 S.W.2d 667, 677 (Mo. Ct. App. 1994), the court rejected the defendant’s claims as to Medicare payments and write-offs, concluding that in the absence of evidence challenging the reasonableness of the billed medical expenses, the amounts actually paid or written-off were irrelevant.  In Montgomery Ward & Co. v. Anderson, 976 S.W.2d 382, 383-85 (Ark. 1998), the Arkansas Supreme Court affirmed the denial of a defense motion in limine to prevent the plaintiff from admitting into evidence her total medical bill.  The defendant asked that the plaintiff’s evidence be limited to the actual amount for which she would be responsible to pay because the plaintiff’s attorney had negotiated a discount of 50%. The Court reaffirmed its commitment to the collateral source rule finding that any benefit obtained due to a collateral source payment should go to the injured party rather than the tortfeasor.  The Court cited as a similar situation those cases in which courts have held that an injured party may recover for medical services gratuitously rendered and that such services fall within the collateral source rule.  The court then stated that it “adopt[s] the rule that gratuitous or discounted medical services are a collateral source not to be considered in assessing the damages due a personal-injury plaintiff.”  The court found that such a rule “is consistent with our oft-stated policy of allowing the innocent plaintiff, instead of the tortfeasor defendant, to receive any windfall associated with the cause of action.”

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