San Diego County Super. Ct. No. GIN053925 Ct.App. 4/1 D053620
The opinion of the court was delivered by: Werdegar, J.
When a tortiously injured person receives medical care for his or her injuries, the provider of that care often accepts as full payment, pursuant to a pre-existing contract with the injured person's health insurer, an amount less than that stated in the provider's bill. In that circumstance, may the injured person recover from the tortfeasor, as economic damages for past medical expenses, the undiscounted sum stated in the provider's bill but never paid by or on behalf of the injured person? We hold no such recovery is allowed, for the simple reason that the injured plaintiff did not suffer any economic loss in that amount. (See Civ. Code, §§ 3281 [damages are awarded to compensate for detriment suffered], 3282 [detriment is a loss or harm to person or property].)
The collateral source rule, which precludes deduction of compensation the plaintiff has received from sources independent of the tortfeasor from damages the plaintiff "would otherwise collect from the tortfeasor" (Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 6 (Helfend)), ensures that plaintiff here may recover in damages the amounts her insurer paid for her medical care. The rule, however, has no bearing on amounts that were included in a provider's bill but for which the plaintiff never incurred liability because the provider, by prior agreement, accepted a lesser amount as full payment. Such sums are not damages the plaintiff would otherwise have collected from the defendant. They are neither paid to the providers on the plaintiff's behalf nor paid to the plaintiff in indemnity of his or her expenses. Because they do not represent an economic loss for the plaintiff, they are not recoverable in the first instance. The collateral source rule precludes certain deductions against otherwise recoverable damages, but does not expand the scope of economic damages to include expenses the plaintiff never incurred.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff Rebecca Howell was seriously injured in an automobile accident negligently caused by a driver for defendant Hamilton Meats & Provisions, Inc. (Hamilton). At trial, Hamilton conceded liability and the necessity of the medical treatment plaintiff had received, contesting only the amounts of plaintiff's economic and non-economic damages.
Hamilton moved in limine to exclude evidence of medical bills that neither plaintiff nor her health insurer, PacifiCare, had paid. Hamilton asserted that PacifiCare payment records indicated significant amounts of the bills from plaintiff's health care providers (the physicians who treated her and Scripps Memorial Hospital Encinitas, where she was treated) had been adjusted downward before payment pursuant to agreements between those providers and PacifiCare and that, under plaintiff's preferred provider organization (PPO) policy with PacificCare, plaintiff could not be billed for the balance of the original bills (beyond the amounts of agreed patient copayments). Relying primarily on Hanif v. Housing Authority (1988) 200 Cal.App.3d 635 (Hanif),*fn1 Hamilton argued that because only the amounts paid by plaintiff and her insurer could be recovered, the larger amounts billed by the providers were irrelevant and should be excluded. The trial court denied the motion, ruling that plaintiff could present her full medical bills to the jury and any reduction to reflect payment of reduced amounts would be handled through "a posttrial Hanif motion."
Plaintiff's surgeon and her husband each testified that the total amount billed for her medical care up to the time of trial was $189,978.63, and the jury returned a verdict awarding that same amount as damages for plaintiff's past medical expenses.
Hamilton then made a "post-trial motion to reduce past medical specials pursuant to [Hanif]," seeking a reduction of $130,286.90, the amount assertedly "written off" by plaintiff's medical care providers, Scripps Memorial Hospital Encinitas (Scripps) and CORE Orthopaedic Medical Center (CORE). In support of the motion, Hamilton submitted billing and payment records from the providers and two declarations, the first by Scripps's collections supervisor, the second by an employee of CORE's billing contractor. The Scripps declaration stated that of the $122,841 billed for plaintiff's surgeries, PacifiCare paid $24,380, plaintiff paid $3,566, and the remaining $94,894 was " 'written off' or waived by [Scripps] pursuant to the agreement between [Scripps] and the patient's private healthcare insurer, in this case Pacificare PPO." The CORE declaration stated that of the surgeon's bill for $52,915, PacifiCare paid $9,665, and $35,392 was waived or written off pursuant to CORE's agreement with PacifiCare.*fn2 Both declarants stated the providers had not filed liens for, and would not pursue collection of, the written-off amounts.
In opposition, plaintiff argued reduction of the medical damages would violate the collateral source rule. She supported her opposition with copies of the patient agreements she had signed with Scripps, in which she agreed to pay Scripps's "usual and customary charges" for the medical care she was to receive, and with CORE, in which she agreed to pay any part of the physician's fee her insurance did not pay.
The trial court granted Hamilton's motion, reducing the past medical damages award "to reflect the amount the medical providers accepted as payment in full." Accordingly, the court reduced the judgment by $130,286.90.
The Court of Appeal reversed the reduction order, holding it violated the collateral source rule. Because it viewed the reduction of the award as substantively improper, the Court of Appeal did not resolve plaintiff's additional contentions that the procedures used in the trial court were statutorily unauthorized and the evidence Hamilton presented was insufficient.
We granted Hamilton's petition for review.
Compensatory damages are moneys paid to compensate a person who "suffers detriment from the unlawful act or omission of another" (Civ. Code, § 3281), and the measure of damages generally recoverable in tort is "the amount which will compensate for all the detriment proximately caused" by the tort (id., § 3333). Civil Code section 3282, in turn, defines "detriment" as "a loss or harm suffered in person or property." A person who undergoes necessary medical treatment for tortiously caused injuries suffers an economic loss by taking on liability for the costs of treatment. Hence, any reasonable charges for treatment the injured person has paid or, having incurred, still owes the medical provider are recoverable as economic damages. (See Melone v. Sierra Railway Co. (1907) 151 Cal. 113, 115 [plaintiff is entitled to "[s]uch reasonable sum . . . as has been necessarily expended or incurred in treating the injury"].)
When, as here, the costs of medical treatment are paid in whole or in part by a third party unconnected to the defendant, the collateral source rule is implicated. The collateral source rule states that "if an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor." (Helfend, supra, 2 Cal.3d at p. 6.) Put another way, "Payments made to or benefits conferred on the injured party from other sources [i.e., those unconnected to the defendant] are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable." (Rest.2d Torts, § 920A, subd. (2).) The rule thus dictates that an injured plaintiff may recover from the tortfeasor money an insurer has paid to medical providers on his or her behalf.
Helfend, like the present case, involved a health insurer's payments to medical providers on the plaintiff's behalf. In these circumstances, we explained, the collateral source rule ensures plaintiffs will receive the benefits of their decision to carry insurance and thereby encourages them to do so. (Helfend, supra, 2 Cal.3d at pp. 9-10.) Since insurance policies frequently allow the insurer to reclaim the benefits paid out of a tort recovery by refund or subrogation, the rule, without providing the plaintiff a double recovery, ensures the tortfeasor cannot "avoid payment of full compensation for the injury inflicted . . . ." (Id. at p. 10.)
In Helfend, we addressed a challenge to the continued acceptance of the collateral source rule. After considering the rule's operation and consequences, we rejected that challenge, concluding that "in the context of the entire American approach to the law of torts and damages, . . . the rule presently performs a number of legitimate and even indispensable functions." (Helfend, supra, 2 Cal.3d at p. 13.) Helfend did not, however, call on this court to consider how the collateral source rule would apply to damages for past medical expenses when the amount billed for medical services substantially exceeds the amount accepted in full payment. While Helfend unequivocally reaffirmed California's acceptance of the rule, it did not explain how the rule would operate in the circumstances of the present case.
The collateral source rule has an evidentiary as well as a substantive aspect. Because a collateral payment may not be used to reduce recoverable damages, evidence of such a payment is inadmissible for that purpose. Even if relevant on another issue (for example, to support a defense claim of malingering), under Evidence Code section 352 the probative value of a collateral payment must be "carefully weigh[ed] . . . against the inevitable prejudicial impact such evidence is likely to have on the jury's deliberations." (Hrnjak v. Graymar, Inc. (1971) 4 Cal.3d 725, 732.) Admission of evidence of collateral payments may be reversible error even if accompanied by a limiting instruction directing the jurors not to deduct the payments from their award of economic damages. (Id. at pp. 729, 734.)
The Legislature has abrogated or altered the collateral source rule for two classes of actions. First, in a professional negligence action against a health care provider, the defendant may introduce evidence of collateral payments and benefits provided to the plaintiff for his or her injury; the plaintiff, in turn, may introduce evidence of premiums paid or contributions made to secure the benefits. (Civ. Code, § 3333.1, subd. (a).) Second, a public entity defendant may move, after trial, to reduce a personal injury award against it by the amount of certain collateral source payments. (Gov. Code, § 985, subd. (b).) The trial court has discretion to reduce the judgment, though its discretion is guided and limited in several respects, including that the total deduction may not exceed one-half of the plaintiff's net recovery. (Id., subd. (g).) Neither statute applies here.
The California history of the substantive question at issue--whether recovery of medical damages is limited to the amounts providers actually are paid or extends to the amounts of their undiscounted bills--begins with Hanif, supra, 200 Cal.App.3d 635.
The injured plaintiff in Hanif was a Medi-Cal recipient,*fn3 and the amounts Medi-Cal paid for his medical care were, according to his evidence, substantially lower than the "reasonable value" of the treatment (apparently the same as the hospital bill, as the opinion notes the hospital had " 'written off' " the difference). (Hanif, supra, 200 Cal.App.3d at p. 639.) Although there was no evidence the plaintiff was liable for the difference, the court in a bench trial awarded the plaintiff the larger, "reasonable value" amount. (Ibid.) The appellate court held the trial court had overcompensated the plaintiff for his past medical expenses; recovery should have been limited to the amount Medi-Cal had actually paid on his behalf. (Id. at pp. 639, 643-644.) The court ordered the judgment modified to reflect the proper reduction. (Id. at p. 646.)
Hanif's rationale was straightforward. While California courts have referred to the "reasonable value" of medical care in delineating the measure of recoverable damages for medical expenses, in this context " '[r]easonable value' is a term of limitation, not of aggrandizement." (Hanif, supra, 200 Cal.App.3d at p. 641.) The "detriment" the plaintiff suffered (Civ. Code, § 3281), his pecuniary "loss" (id., § 3282), was only what Medi-Cal had paid on his behalf; to award more was to place him in a better financial position than before the tort was committed. (Hanif, at pp. 640-641.) A tort plaintiff's recovery for medical expenses, the Hanif court opined, is limited to the amount "paid or incurred for past medical care and services, whether by the plaintiff or by an independent source . . . ." (Id. at p. 641.)
We cited Hanif's holding with approval in Olszewski v. Scripps Health, supra, 30 Cal.4th 798, in which we held California's provider lien statute (Welf. & Inst. Code, § 14124.791) was preempted by federal law and invalid as applied to a Medi-Cal beneficiary's tort recovery. In so doing, we observed that because a provider's lien for its full fees was not permissible, pursuant to Hanif the Medi-Cal beneficiary may recover as damages from the tortfeasor only the amount payable to the provider under Medi-Cal. (Id. at pp. 826-827.)
In Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4th 298 (Nishihama), the Court of Appeal applied Hanif's rationale to payments made by a private health insurer. The jury awarded the injured plaintiff $17,168 for her hospital expenses, an amount based on the hospital's "normal rates." (Id. at p. 306.) The record, however, showed the plaintiff participated in a health plan administered by Blue Cross, which had an agreement with the hospital pursuant to which the hospital had accepted $3,600 in full payment for its services to the plaintiff. (Id. at pp. 306-307.) Relying on Hanif's holding that only the amount actually paid or incurred is recoverable as compensation for medical expenses, and rejecting the plaintiff's argument that the hospital might take a larger sum (its normal rate) out of her recovery under a lien it had filed,*fn4 the Nishihama court ordered the judgment reduced to reflect only the amount the hospital had received from Blue Cross. (Nishihama, at pp. 306-309.)
This court subsequently reached the same conclusion in Parnell v. Adventist Health System/West (2005) 35 Cal.4th 595, 598, holding the hospital could not assert a lien against a patient's tort recovery for its full bill when it had agreed to accept an insurer's lesser reimbursement as full payment. At the same time, however, we reserved judgment on whether Hanif, supra, 200 Cal.App.3d 635, and Olszewski v. Scripps Health, supra, 30 Cal.4th 798, "apply outside the Medicaid context and limit a patient's tort recovery for medical expenses to the amount actually paid . . . ." (Parnell, at pp. 611-612, fn. 16.)
Hanif and Nishihama were distinguished in Katiuzhinsky v. Perry (2007) 152 Cal.App.4th 1288. There, although the injured plaintiffs' medical providers had sold some of their bills at a discount to a medical finance company, the plaintiffs remained liable to the finance company for the original amounts of the bills. (Id. at pp. 1290-1291.) The appellate court concluded the trial court, in limiting recovery to the discounted amounts, "did not correctly apply Hanif and Nishihama. The intervention of a third party in purchasing a medical lien does not prevent a plaintiff from recovering the amounts billed by the medical provider for care and treatment, as long as the plaintiff legitimately incurs those expenses and remains liable for their payment." (Id. at p. 1291, italics added.)
None of the above decisions discussed the question, central to the arguments in this case, of whether restricting recovery to amounts actually paid by a plaintiff or on his or her behalf contravenes the collateral source rule. These arguments, although extensive, can be reduced to a few central disputed issues: (1) Was Hanif correct that a tort plaintiff can recover only what has been paid or incurred for medical care, even if that is less than the reasonable value of the services rendered? (2) Even if Hanif, which involved Medi-Cal payments, reached the right result on its facts, does its logic extend to plaintiffs covered by private insurance? (3) Does limiting the plaintiff's recovery to the amounts paid and owed on his or her behalf confer a windfall on the tortfeasor, defeating the policy goals of the collateral source rule? (4) Is the difference between the providers' full billings and the amounts they have agreed to accept from a patient's insurer as full payment--what the appellate court below called the "negotiated rate differential"--a benefit the patient receives from his or her health insurance policy subject to the collateral source rule? We address these questions below.
A. Hanif and the Measure of Damages for Past Medical Expenses
We agree with the Hanif court that a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less. (Hanif, supra, 200 Cal.App.3d at p. 641.) California decisions have focused on "reasonable value" in the context of limiting recovery to reasonable expenditures, not expanding recovery beyond the plaintiff's actual loss or liability. To be recoverable, a medical expense must be both incurred and reasonable. (See Melone v. Sierra Railway Co., supra, 151 Cal. at p. 115 [proper measure of damages for medical expenses is "[s]uch reasonable sum . . . as has been necessarily expended or incurred in treating the injury" (italics added)]; Townsend v. Keith (1917) 34 Cal.App. 564, 566 [trial court's failure to instruct the jury "to limit its finding to the reasonable value of the expenses incurred" did not prejudice defendant, as the expenses incurred were, on their face, not unreasonable (italics added)].)
The rule that a plaintiff's expenses, to be recoverable, must be both incurred and reasonable accords, as well, with our damages statutes. "Damages must, in all cases, be reasonable . . . ." (Civ. Code, § 3359.) But if the plaintiff negotiates a discount and thereby receives services for less than might reasonably be charged, the plaintiff has not suffered a pecuniary loss or other detriment in the greater amount and therefore cannot recover damages for that amount. (Id., §§ 3281, 3282.) The same rule applies when a collateral source, such as the plaintiff's health insurer, has obtained a discount for its payments on the plaintiff's behalf.
The Restatement rule is to the same effect. While the measure of recovery for the costs of services a third party renders is ordinarily the reasonable value of those services, "[i]f . . . 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." (Rest.2d Torts, § 911, com. h, pp. 476-477, italics added.)
Plaintiff argues section 911 of the Restatement is irrelevant, as it deals only with the wrongful taking of services and damage to property. Not so. Section 911 articulates a rule, applicable to recovery of tort damages generally, that the value of property or services is ordinarily its "exchange value," that is, its market value or the amount for which it could usually be exchanged. Comment h to section 911, on the "[v]alue of services rendered," applies, inter alia, to services the plaintiff must purchase from third parties as a result of the tort, noting that if the plaintiff obtains these for less than the exchange value, only the amount paid may be recovered. The expenses of medical care, although not specifically mentioned, are logically included in the rule articulated. Thus the general rule under the Restatement, as well as California law, is that a personal injury plaintiff may recover the lesser of (a) the amount paid or incurred for medical services, and (b) the reasonable value of the services.
Contrary to the view of the dissent (dis. opn., post, at pp. 10-11), section 924 of the Restatement, which provides that a tort plaintiff may recover "reasonable medical and other expenses," expresses no different principle. (Rest.2d Torts, § 924.) To be recoverable as "expenses," monies must generally have been expended, or at least incurred; that they must also be reasonable does not alter this general rule.*fn5
B. Hanif and Private Health Insurance
Plaintiff contends Hanif's limitation on recovery, even if correct as to Medi-Cal recipients, does not logically apply to plaintiffs, like her, with private medical insurance. The appellate court below agreed, reasoning that "Howell, who was privately insured, incurred personal liability for her medical providers' usual and customary charges," whereas the plaintiff in Hanif "incurred no personal liability for the medical charges billed to Medi-Cal." Observing that Hanif stated the measure of recovery for medical expenses was the amounts actually "paid or incurred" (Hanif, supra, 200 Cal.App.3d at p. 641), plaintiff argues she incurred liability for the full amount of Scripps's and CORE's bills when she signed patient agreements with those providers and accepted their services.
We find the distinction unpersuasive. Evidence presented at the posttrial hearing showed Scripps and CORE accepted the discounted amounts as full payment pursuant to pre-existing agreements with PacifiCare, plaintiff's managed care plan. Since those agreements were in place when plaintiff sought medical care from the providers and signed the patient agreements, her prospective liability was limited to the amounts PacifiCare had agreed to pay the providers for the services they were to render. Plaintiff cannot meaningfully be said ever to have incurred the full charges. (See Parnell v. Adventist Health System/West, supra, 35 Cal.4th at p. 609 [where hospital had agreed with plaintiff's health plan to accept discounted amounts as payment in full, plaintiff owed hospital nothing beyond those discounted payments]; cf. People v. Bergin (2008) 167 Cal.App.4th 1166, 1170 [for purposes of Pen. Code § 1202.4, subd. (f)(3), requiring restitution in the amount of the "economic loss incurred," crime victim incurred loss only in the amount medical provider accepted as payment from private insurer].) In this respect, plaintiff here was in the same position as the Hanif plaintiff, who also bore no personal liability for the providers' charges. This is not a case like Katiuzhinsky v. Perry, supra, 152 Cal.App.4th at page 1296, where the plaintiffs "remain[ed] fully liable for the amount of the medical provider's charges for care and treatment."
Hanif noted one exception to its rule, viz., for medical services that are gratuitously provided or discounted, an exception included in the Restatement section on which the court relied (Rest.2d Torts, § 911, com. h, pp. 476-477). (See Hanif, supra, 200 Cal.App.3d at p. 643 [no evidence the low rate charged Medi-Cal "was intended as a gift to the plaintiff"].) The question arises whether this exception, if accepted, limits Hanif's logic in a manner important to the present issue. That is, if a plaintiff, as the Restatement provides, may recover the reasonable value of donated medical services--services for which neither the plaintiff nor the plaintiff's insurer paid--should a plaintiff also be permitted to recover other amounts that were not paid but were reasonably billed by the provider, including the negotiated rate differential? If the amount of a gratuitous discount would be considered a collateral source payment, should the amount of a negotiated discount be treated in the same way?
The Restatement reflects the widely held view that the collateral source rule applies to gratuitous payments and services. (Rest.2d Torts, § 920A, com. c, subd. (3), p. 515 ["Thus the fact that the doctor did not charge for his services or the plaintiff was treated in a veterans hospital does not prevent his recovery for the reasonable value of the services."]; see also Rest.2d Torts, § 924, com. f, pp. 526-527.) California law is less clear on the point. In Helfend, we suggested in dictum that the collateral source rule applies to unpaid services only when those are rendered "with the expectation of repayment out of any tort recovery." (Helfend, supra, 2 Cal.3d at p. 7, fn. 5.) But in Arambula v. Wells (1999) 72 Cal.App.4th 1006, the Court of Appeal declined to follow this dictum, finding it inconsistent with other California cases, the law of sister states, and the policy of encouraging charitable action: "We doubt such gifts would continue if, notwithstanding a donor's desire to aid the injured, the person who caused the injury ultimately stood to gain a windfall. Donors should not have to consult with a lawyer to make sure their largesse is not hijacked by the tortfeasor." (Id. at p. 1013.) Thus, although in Arambula the injured plaintiff's employer had continued to pay his salary, the appellate court held the jury should have been permitted to award damages for lost earnings. (Id. at pp. 1008-1009, 1016.) This court has neither approved nor disapproved Arambula's holding, nor does this case require that we do so.
Assuming California follows the Restatement's view that a plaintiff may recover the value of donated services under the collateral source rule, this exception to Hanif's limitation on recovery does not, we believe, militate against applying Hanif's rule--that only amounts paid or incurred are recoverable--to medical expenses paid by the plaintiff's insurer. Medical providers that agree to accept discounted payments by managed care organizations or other health insurers as full payment for a patient's care do so not as a gift to the patient or insurer, but for commercial reasons and as a result of negotiations. As plaintiff herself explains, hospitals and medical groups obtain commercial benefits from their agreements with health insurance organizations; the agreements guarantee the providers prompt payment of the agreed rates and often have financial incentives for plan members to choose the providers' services. (See Stanley v. Walker (Ind. 2009) 906 N.E.2d 852, 863-864 (dis. opn. of Dickson, J.) [detailing administrative and marketing advantages medical providers derive from managed care agreements, particularly those with preferred provider plans].) That plaintiffs are not permitted to recover undiscounted amounts from those who have injured them creates no danger these negotiations and agreements will disappear; the medical provider has no financial reason to care whether the tortfeasor is charged with or the plaintiff recovers the negotiated rate differential. Having agreed to accept the negotiated amount as full payment, a provider may not recover any difference between that and the billed amount through a lien on the tort recovery. (Parnell v. Adventist Health System/West, supra, 35 Cal.4th at p. 598.)
In jurisdictions where donated services are considered to fall within the collateral source rule, the plaintiff is presumably entitled to recover the reasonable value of the services even though he or she did not incur liability in that amount. The dissent argues that to limit the recovery of a plaintiff with medical insurance, such as Howell, to the amounts paid or incurred is anomalous, given that he or she could have recovered a hypothetically larger reasonable value had the services been gratuitously provided. (Dis. opn., post, at p. 6.) We see no anomaly, even assuming we would recognize the gratuitous-services exception to the rule limiting recovery to the plaintiff's economic loss. The rationale for that exception--an incentive to charitable aid (Arambula v. Wells, supra, 72 Cal.App.4th at p. 1013)--has, as just explained, no application to commercially negotiated price agreements like those between medical providers and health insurers. Nor, as discussed below, does the tort-law policy of avoiding a windfall to the tortfeasor suggest the necessity of treating the negotiated rate differential as if it were a gratuitous payment by the medical provider.*fn6 (See pt. C, post.)
The dissent's repeated description of the negotiated rate differential as a write-off from the provider's bill illustrates the confusion between negotiated prices and gratuitous provision of medical services. (See dis. opn., post, at pp. 2, 5, 7, 12.) Where a plaintiff has incurred liability for the billed cost of services and the provider later "writes off" part of the bill because, for example, the plaintiff is unable to pay the full charge, one might argue that the amount of the write-off constitutes a gratuitous benefit the plaintiff is entitled to recover under the collateral source rule. But in cases like that at bench, the medical provider has agreed, before treating the plaintiff, to accept a certain amount in exchange for its services. That amount constitutes the provider's price, which the plaintiff and health insurer are obligated to pay without any write-off. There is no need to determine a reasonable value of the services, as there is in the case of services gratuitously provided. "[W]here, as here, the exact amount of expenses has been established by contract and those expenses have been satisfied, ...