Court Opinion

ID: 9683680
Source: CourtListenerOpinion
Date Created: 2023-08-24 13:35:05.958057+00
Date Added: 2024-06-11T18:17:49.614822
License: Public Domain

COOPER, Justice,
dissenting in part.
Because of her age, Appellee Golda Miller is a Medicare beneficiary. In the trial of her medical malpractice lawsuit against Appellant, Baptist Healthcare Systems, Inc., d/b/a Central Baptist Hospital (“Central Baptist”), Miller introduced as evidence and recovered in the judgment medical expenses “charged” by Dr. Charles R. Combs in the total sum of $81,840.00 and by Neurodiagnostics, P.S.C., in the total sum of $1,700.00. However, because of their status as “participating providers” of Medicare services, Dr. Combs and Neuro-diagnostics accepted from Centers for Medicare and Medicaid Services (“CMS”) as payment-in-full for their services the sums of $3,356.38 and $791.07, respectively. The majority opinion characterizes the difference between the amounts charged and the amounts paid as “collateral source benefits,” thus allowing Miller to prove and collect the amount “charged” and precluding Central Baptist from proving and limiting the judgment to the amount accepted as payment-in-full. That characterization ignores the realities of modern *685health care, i.e., “managed care,” and the relationship between medical providers and medical payers, especially when the payer is, as here, the government.
I. MEDICARE.
Prior to the Great Depression, physicians negotiated their own fees, usually accepting a sum based more on the patient’s ability to pay than any other factor. Michael K Beard, 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 Ad-voc. 453, 461 (Spring 1998). As the country sank deeper into depression, the American Hospital Association (AHA) sponsored the establishment of “Blue Cross,” a tax-exempt, pre-payment plan for hospital care, which was designed to provide hospitals with a stable source of revenues from lower and middle-income patients. Sylvia A. Law & Barry En-sminger, Negotiating Physician’s Fees: Individual Patients or Society? (A Case Study in Federalism), 61 N.Y.U. L.Rev. 1, 9 (1986). By 1942, similar plans, dubbed “Blue Shield,” were created to fund physician’s services. Id. at 9-10. Payment was made directly to the physician when the service was rendered. Id. The success of Blue Cross and Blue Shield encouraged private insurers to begin writing health insurance. Beard, supra, at 462-63. The payment to the provider was a percentage of the “usual, customary, and reasonable” (UCR) fee charged for a particular service. Providers participating in Blue Cross/Blue Shield accepted the UCR rate as full payment. Id. at 463.
In 1965, Congress enacted the Medicare Act,1 now codified at 42 U.S.C. § 1395, to provide health care for the aged, and the Medicaid Act,2 now codified at 42 U.S.C. § 1396, to provide health care for the indigent. By 1995, more than 40% of all health care expenditures were paid through these programs, as opposed to 32% by private insurance and 21% by individual patients. Beard, supra, at 464 (citing Sources of Financing for Health Care Services, Health Care Financing Review 1995 Statistical Supplement 14). As of 2001, 58% of expenditures for hospital care were paid by public payers (30% by Medicare, 17% by Medicaid, 11% by others), 34% by private insurance, and 3% by individual patients. CMS, Health Care Industry Market Update, Acute Care Hospitals 8 (July 14, 2003).
From 1965 until implementation of the Medical Fee Schedule in January 1992, Medicare reimbursed physicians for their “reasonable fees,” defined as the lowest of (1) the physician’s billed charge for the service, (2) the physician’s customary charge, or (3) the prevailing charge for that service in the community. Beard, supra, at 464-65 n. 68 (citing Physician Payment Review Commission, 1997 Annual Report 484). Under this system, the providers controlled their own fees by increasing their charges annually to assure higher reimbursements the next year. Id. at 468.
To control the spiraling costs of government-paid health care, Medicare implemented a “prospective payment system,” by which CMS, formerly known as the Health Care Financing Administration, establishes payment schedules based on diagnostic-related groups (“DRGs”) for hospitals and a resource-based relative value scale (“RBRVS”) for physicians. These *686pre-set payment schedules are based on the cost of the services rather than the billed, customary, or prevailing charges. Id. The DRGs and the RBRVS inform participating providers in advance what they will be paid for treatment rendered for particular types of illnesses or injuries and for particular types of medical treatments provided to Medicare patients. Susan Adler Channick, The Ongoing Debate Over Medicare: Understanding the Philosophical and Policy Divides, 36 J. Health L. 59, 69-70 (Winter 2003). “[Medicare] suppliers either take the price offered or they leave it. Given the historical importance of Medicare revenue to most providers, it has been rare for them to elect to ‘leave it.’ ” Id. at 69. Since the DRG and RBRVS rates are not negotiable, it is technically incorrect to refer to the difference between those rates and amounts “charged” as “discounts” or “write-offs.” In fact, the provider’s “charge” for services rendered is irrelevant when, as here, Medicare makes payment as the primary payer as opposed to a “conditional payment” as a secondary payer under 42 U.S.C. § 1395y(b)(2)(B). “Charges” are only relevant under the secondary payer statutes where, e.g., a policy of medical or liability insurance is the primary payer and costs are limited to those that are reasonable and customary. See 42 U.S.C. § 1395f. In summary:
The Medicare program is structured upon a prospective payment system under which health care providers that agree to accept primary payment from Medicare are reimbursed on a flat fee basis determined by average cost and length of stay for various diagnostic related groups (DRGs). If a provider’s actual cost falls below the DRG amount, it keeps the difference; if the provider’s actual cost exceeds the DRG amount, the provider absorbs or writes off the loss. Under the secondary payer statutes, the costs are limited to costs that are reasonable and customary.
Rose v. Via Christi Health Sys., Inc./St. Francis Campus, 113 P.3d 241, 246 (Kan.2005).
Furthermore, in order to qualify as participating providers (and, thus, be entitled to direct payment from CMS, as well as other benefits), Dr. Combs and Neurodiag-nostics agreed “not to charge, except as provided in paragraph (2) [deductibles and coinsurance3], any individual or any other person for items or services for which such individual is entitled to have payment made under this subchapter .... ” 42 U.S.C. § 1395cc(a)(l)(A)(i). Thus, the acceptance by Dr. Combs and Neurodiagnos-tics of the payments authorized by the applicable DRG and/or RBRVS extinguished any additional potential liability of either Miller or Central Baptist to those providers. Holle v. Moline Pub. Hosp., 598 F.Supp. 1017, 1021 (C.D.III.1984). Under the reasoning of Our Lady of Mercy Hospital v. McIntosh, 461 S.W.2d 377, 379 (Ky.1970), Central Baptist has a collateral-source-based liability to Miller for the sums CMS actually paid to Dr. Combs and Neurodiagnostics for Miller’s treatment; and Miller is required to pay those sums over to CMS. 42 U.S.C. § 1395y(b)(2)(B)(ii); Rybicki v. Hartley, 792 F.2d 260, 262 (1st Cir.1986). “[T]he Medicare scheme is not one where the beneficiary contracts for double recovery. Most notably, Medicare has a right of sub-rogation allowing it to seek recovery of amounts paid to a beneficiary.” Rose, 113 P.3d at 247. Central Baptist does not contest its liability for the sums actually paid. However, neither Miller nor Central *687Baptist has any further potential liability to Dr. Combs or Neurodiagnostics, both of whom have been paid in full. Evanston Hosp. v. Hauck, 1 F.3d 540, 544 (7th Cir.1993); Rybicki, 792 F.2d at 262.
II. COLLATERAL SOURCE RULE.
The collateral source rule originated in English common law and debuted in this country in The Propeller Monticello v. Mollison, 58 U.S. (17 How.) 152, 15 L.Ed. 68 (1854). “Monticello,” a steamship, and “Northwestern,” a schooner, collided on Lake Huron, causing “Northwestern” to sink with its cargo of salt. Mollison, the owner of “Northwestern,” was insured, and his insurer compensated him in full for his loss. When Mollison sued the steamship, its owner raised as a defense that Mollison had already been fully compensated. The United States Supreme Court held that the insurance contract was “in the nature of a wager between third parties, with which the trespasser has no concern. The insurer does not stand in the relation of a joint trespasser, so that the satisfaction accepted from him shall be a release of others.” Id. at 155. The term “collateral source” derives from language used in Harding v. Town of Townshend, 43 Vt. 536 (1870) (“The policy of insurance is collateral to the remedy against the defendant, and was procured solely by the plaintiff and at his expense, and to the procurement of which the defendant was in no way contributory.”).
The collateral source rule first entered Kentucky’s jurisprudence in 1901 (not pri- or to the adoption of our present Constitution, as suggested in O’Bryan v. Hedgespeth, 892 S.W.2d 571, 578 (Ky.1995)—a suggestion no doubt intended as a signal that any legislative attempt to abolish the rule would be challenged as unconstitutional under the so-called “jural rights” doctrine). In Louisville & N.R. Co. v. Carothers, 65 S.W. 833 (Ky.1901), an opinion designated as “Not to be officially reported,” our predecessor court stated without citation to authority that:
The answer also attempted to plead as a defense that plaintiff had an accident policy entitling him to $30 a week from each of two companies, and that the plaintiff, by reason of his said contracts with said insurance companies, had presented a claim for insurance against the damages sustained by him, and that he was attempting to collect the same, all of which was stricken out, and properly so.
Id. at 834 (emphasis added). Later, the Court also held, again without citation to authority, that “[t]he question of plaintiffs employment or his accident policies could not be proven for the purpose of defeating or diminishing his right of recovery.” Id.
In Taylor v. Jennison, 335 S.W.2d 902 (Ky.1960), our predecessor court specifically adopted “the rule”:
The general rule recognized in other jurisdictions is that damages recoverable for a wrong are not diminished by the fact that the injured party has been wholly or partly indemnified for his loss by insurance (to whose procurement the wrongdoer did not contribute).... It is a collateral contractual arrangement which has no bearing upon the extent of liability of the wrongdoer.
Id. at 903 (emphasis added). On the same day, May 20,1960, the Court also rendered Conley v. Foster, 335 S.W.2d 904 (Ky.1960), in which the plaintiff had been reimbursed for his medical expenses by the United Mine Workers’ Welfare Fund, to which reimbursement he was entitled because of his UMW membership. The Court noted that the plaintiff had paid a monthly contribution out of his wages to obtain entitlement to the Welfare Fund’s benefits and held that “in the absence of an assignment or express contractual sub-*688rogation the injured person may recover medical and hospital expenses incurred on his behalf, at least where the expenses are paid pursuant to an agreement based upon the payment of premiums or contributions by or on behalf of the injured person.” Id. at 907 (emphasis added).
In Our Lady of Mercy Hospital v. McIntosh, the Court held that there could be no offset for those portions of the plaintiffs hospital and medical bills that were actually paid by Medicare, perceiving that the plaintiff had paid a premium for those benefits. 461 S.W.2d 377, at 379.
[McIntosh assumed the patient had paid something for the Medicare coverage. Id. at 379. In fact, hospital care, “Medicare Part A,” which was the medical expense at issue in McIntosh, is available to social security and railroad retirement recipients without payment of premiums. 42 C.F.R. § 406.6(a); 70C Am.Jur.2d Social Security and Medicare, § 2046. While premiums are charged for “Medicare Part B,” which includes physician’s bills, Part B is also funded partially by federal income and excise taxes imposed on every employed individual (through FICA withholding) and every employer in the United States, including, presumably, Central Baptist. 26 U.S.C. § 1401(b), 3101(b), 3111(b) Thus, it is arguable that there should be no collateral-source liability at all with respect to Medicare payments. Burke Enterprises, Inc. v. Mitchell, 700 S.W.2d 789, 796 (Ky.1985) (“There is a sharp distinction between collateral source benefits and payments by another person also charged with liability for the injury which is the subject matter of the lawsuit.”); Restatement (Second) of the Law of Torts § 920A(1). If Miller can assert entitlement to the collateral source rule on the basis of having paid premiums for Medicare Part B coverage, Central Baptist can assert a defense to collateral source liability for having contributed to providing those benefits by payment of excise taxes because of its status as an employer. See Hardaway Mgmt. Co. v. Southerland, 977 S.W.2d 910, 918 (Ky.1998) (“The logic behind [the collateral source] rule is that there is no reason why a wrongdoer should receive the benefit of insurance obtained by the injured party for his own protection.... Of course, that logic does not apply here, where the wrongdoer, Hardaway, also obtained the insurance which paid the workers’ compensation benefits to Southerland.”).]
In Daugherty v. Daugherty, 609 S.W.2d 127, 128 (Ky.1980), we held that medical bills incurred by the plaintiff for treatment at a military hospital were both provable and collectable, even though not payable by her because of her father’s status as a military servicemember.
The case at bar is similar to those involving Medicare and welfare funds. Although movant’s father was not required to pay premiums in order to qualify for medical treatment at a military hospital, the coverage was nonetheless a direct benefit of his military service.
Id. at 128. In other words, the plaintiffs father “paid” for the treatment by serving in the military. See also Rayfield v. Lawrence, 253 F.2d 209, 213-14 (4th Cir.1958). The same reasoning applies when an employee’s medical bills or lost wages are paid by the employer’s insurance carrier as a fringe benefit of the employment. Burke Enterprises, 700 S.W.2d at 796; Hellmueller Baking Co. v. Risen, 295 Ky. 273, 174 S.W.2d 134, 136 (1943).
All of these cases rightly hold that the tortfeasor is not entitled to the benefit of the injured party’s bargain when the injured party has purchased, either in cash *689or in services, payment of medical bills actually incurred and either paid or owing. That is the nature of the “collateral source rule,” as defined by these cases. It is an exception to the “strong public policy in this Commonwealth against double recovery.” Hardaway, 977 S.W.2d at 918. Otherwise, “[t]he object of compensatory damages is to make the injured party whole to the extent that it is possible to measure his injury in terms of money. The object is not to place the plaintiff in a better position than he would have been had the wrong not been done.” Ky. Cent. Ins. Co. v. Schneider, 15 S.W.3d 373, 374 (Ky.2000) (internal citations omitted). “The purpose of compensatory tort damages is to compensate; it is not the purpose of such damages to punish defendants or bestow a windfall upon plaintiffs.” Peterson v. Lou Bachrodt Chevrolet Co., 76 Ill.2d 353, 29 Ill.Dec. 444, 392 N.E.2d 1, 5 (1979). Nevertheless, the majority opinion in the case sub judice allows Miller to prove and collect medical expenses that were never incurred by her, were never owed by Medicare or any other entity, and payment for which was never expected by the medical providers. The majority purports to justify this result by substituting “reasonable value” for “expenses incurred” as the measure of damages. Ante, at 682. However, when a sum certain has been paid for services, the “reasonable value” cannot exceed the amount paid.
When the plaintiff seeks to recover for expenditures made or liability incurred to third persons for services rendered, normally the amount recovered is the reasonable value of the services rather than the amount paid or charged. If, however, the injured person paid less than the exchange rate, he can recover no more than the amount paid, except when the low rate was intended as a gift to him.
Restatement (Second) of Torts § 911 cmt. h (1979). See also Hanif v. Housing Auth., 200 Cal.App.3d 635, 246 Cal.Rptr. 192, 195-96 (1988) (“ ‘Reasonable value’ is a term of limitation, not of aggrandizement. ... [A] plaintiff is entitled to recover up to, and no more than, the actual amount expended or incurred for past medical services so long as that amount is reasonable.”); Goble v. Frohman, 901 So.2d 830, 835 (Fla.2005) (“[Recovery for medical expenses [is limited] to the amount of medical expenses that he actually was obligated to pay.”).
The better-reasoned opinions of jurisdictions that have addressed this issue hold that the collateral source rule does not apply to this kind of phantom expense that was never incurred.
If Plaintiff could recover these fees without a showing of personal liability, she would reap a windfall recovery at the expense of the taxpayers, who made her Medicaid benefits possible. The collateral source rule does not apply because Plaintiff did not incur the Medicaid discount.
McAmis v. Wallace, 980 F.Supp. 181, 185 (W.D.Va.1997). (Like Medicare providers, Medicaid providers are required to accept the Medicaid payment as payment in full. 42 C.F.R. § 447.15. Thus, cases addressing the issue in the context of Medicaid “charges” versus actual payments are equally relevant to this issue.) See also Hanif, 246 Cal.Rptr. at 197 (limiting plaintiffs collateral-source recovery of medical expenses to $19,317, amount actually paid by Medi-Cal, not “reasonable value” of $31,618); Coop. Leasing, Inc. v. Johnson, 872 So.2d 956, 958 (Fla.Ct.App.2004) (limiting collateral-source recovery to $13,461 paid by Medicare, not $56,950.70 billed by medical providers: “[T]he reasonable value of medical services is limited to the amount accepted as payment in full for *690medical services.”); Dyet v. McKinley, 139 Idaho 526, 81 P.3d 1236, 1239 (2003) (“[T]he [Medicare] 'write-off ... is not an item of damages for which plaintiff may recover because plaintiff has incurred no liability therefore.”); Rose, 113 P.3d at 248 (amount of Medicare write-off must be credited against award for medical expenses, particularly where the Medicare provider was also the malpractice defendant); Bates v. Hogg, 22 Kan.App.2d 702, 921 P.2d 249, 253 (1996) (“[T]he collateral source rule is not applicable under these circumstances. [A] medical provider, by agreement and contract, may not charge Medicaid patients for the difference between their [sic] customary charge and the amount paid by Medicaid. Therefore, the amount allowed by Medicaid becomes the amount due and is the ‘customary charge’ under the circumstances we have before us.”); Kastick v. U Haul Co. of W. Mich., 292 A.D.2d 797, 740 N.Y.S.2d 167, 169 (2002) (“[Medicare] write-off ... is not an item of damages for which the plaintiff may recover because plaintiff has incurred no liability therefor.”); Moorhead v. Crozer Chester Med. Ctr., 564 Pa. 156, 765 A.2d 786, 789-90 (2001) (limiting plaintiffs recovery to Medicare payment of $12,167.40, not “reasonable value” of $108,668.31: “[W]here, as here, the exact amount of expenses has been established by contract and those expenses have been satisfied, there is no longer any issue as to the amount of expenses for which the plaintiff will be liable. In the latter case, the injured party should be limited to recovering the amount paid for the medical services .... [W]e find that the collateral source rule is inapplicable to the additional amount of $96,500.91.”).
I note in passing that although the majority cites and quotes Schwartz v. Hasty, 2003-CA-000796-MR, an opinion of the Court of Appeals addressing the collateral source rule in the context of underinsured motorist automobile insurance (and which is currently designated “not final and shall not be cited as authority in any courts of the Commonwealth of Kentucky”), ante, at 683, it ignores Thomas v. Greenview Hospital, Inc., 127 S.W.3d 663 (Ky.App.2004), which addressed the collateral source rule in the context of, coincidentally, Medicare write-offs. “[T]he trial court acted properly in allowing Thomas to introduce the full amount of the medical expenses billed and then reducing the judgment to the amount payable to the providers following the trial.” Id. at 675. In allowing the evidence, the Court of Appeals relied on Beckner v. Palmore, 719 S.W.2d 288 (Ky.App.1986), which mandated the same procedure with respect to medical bills previously paid in the form of basic reparation benefits (BRBs). Of course, the BRBs represented actual medical expenses incurred and paid, not phantom expenses such as Medicare write-offs. With respect to Medicare and Medicaid payments, I would limit both the evidence and the judgment to the amount actually incurred and paid.
As Professor Beard so aptly concluded:
A functional legal system should provide certain, fair, and rational rules to govern the affairs of its citizens. Moreover, given the concerns over the waste and inefficiency of our legal system, expecting legal rules to conform to the current economic realities seems reasonable. Oftentimes, the courts are not able to fully accommodate all these interests in deciding legal issues. However, a rule limiting the measure of recovery to paid charges (where the provider is prohibited from balance billing the patient) meets all of these criteria. Such a rule provides certainty without violating the principles protected by the collateral source rule. Even with a limit of recovery to the net loss there is no lessening of the deterrent force of tort *691law, the defendant does not gain the benefit of the plaintiffs bargain, and the plaintiff receives full compensation for the amount of the expense he was obligated to pay. Certainly, the collateral source rule should not extend so far as to permit recovery for sums neither the plaintiff nor any collateral source will ever be obligated to pay.
Moreover, the paid charge rule comports with the economic realities of our time because it adopts the same assessment of value determined by the marketplace. The participants in the health care industry all recognize the impact of market competition on the pricing of health care. This realization on the provider’s side is epitomized by the following comment in a well-respected medical economics publication: “If your stated fee for a procedure is $5,000, but no insurer is paying more than $2,500, what will you charge an out-of-network patient or someone with a medical savings account? ... If you’re willing to take $2,500, then that’s your fee.”
Beard, 21 Am. J. Trial Advoc. at 489-90 (quoting Mark Crane, Getting Peanuts, Med. Econ., September 22, 1997, at 145, 146).
Accordingly, I dissent and would reverse this case for a new trial at which only the actual medical expenses paid would be introduced into evidence and awarded in the judgment.

. Health Insurance for the Aged Act, Pub.L. No. 89-97, 79 Stat. 290 (1965).

. Grants to States for Medical Assistance Programs Act, Pub.L. No. 89-97, 79 Stat. 343 (1965).

. Any deductibles or copayments actually paid by Miller would not be payments from a "collateral source,” so are not relevant to the issues on appeal.