Medicare Reimbursement and Collateral Source Rule in Delaware

Commentary, Medicare Set-Aside Blog, MSP Litigation on June 22, 2015
Posted by Jennifer Jordan, JD, MSCC

On June 12, 2015, the Supreme Court of Delaware rendered a decision in Stayton v. Delaware Health Corporation, et al. opining that the collateral source rule would not apply in the recovery sought by the plaintiff. The case involves a 76 year old wheelchair bound resident of the Harbor Healthcare and Rehabilitation Center. Plaintiff is paralyzed in one arm and one leg and while unsupervised, attempted to light a cigarette and caught her clothing on fire and suffered burns over 23% of her body, requiring treatment from over 30 physicians and other health care providers during a nearly 6 month stay at the Crozer Burn Center. Plaintiff’s medical bills totaled $3,683,797.11, of which Medicare paid $262,550.17 in full satisfaction of all healthcare provider charges related to her accident. In asserting damages, plaintiff demands recovery of the full $3,683,797.11, claiming that the collateral source rule prohibits the actual Medicare payment from being considered in determining her damages. The Superior Court ruled in favor of the defendants’ motion and limited plaintiff’s medical expense claim to the amounts actually paid by Medicare and on appeal, the Supreme Court agreed.

As a general proposition, the collateral source rule prevents a tortfeasor from benefiting from the injured party having insurance with an independent source. If it were applied in this case, plaintiff could introduce evidence that her medical care cost nearly $3.7M rather than the mere $263K actually paid. However as other states have held, the court declined to apply the rule to “amounts required by federal law to be written off by healthcare providers.” The important distinction made here was between benefits received as a consequence of a contract with a private insurer from benefits received by operation of federal law. Had it been private health insurance that she acquired for her own behalf, the outcome would have been different. But because Medicare, a federal entitlement, was involved, the rule did not apply.

Other states such as New York and Arizona have arrived at similar conclusions but mainly due to reasons involving Medicare’s statutory recovery right. This decision is interesting because it is mainly due to consideration of the windfall should the analysis be limited to the actual Medicare. While I think the outcome is correct, the rational leaves me wondering if the Delaware courts truly understand how Medicare works. If a provider agrees to accept Medicare patients, it agrees to payment at the Medicare fee schedule in full satisfaction of payment for its services. It is not much different from a provider agreeing to accept the negotiated rate from Blue Cross or Aetna. There is no “write-off” per se. If the provider wants access to Medicare patients or and federal funding perks that might come with accepting Medicare, then the tradeoff is excessive profits. The provider has the option, at its own election, to place a lien against any insurance settlement and run the risk of the billing window for Medicare closing and forever attaching its hopes for payment to the liability of the tortfeasor. As it stands, the provider elected guaranteed payment at the lower rate rather than absorb the risk of nonpayment, which would have been a write-off.

If we were to believe that there was truly a write-off in cases such as this, then what would stop medical providers from establishing prices even more outrageous than those demonstrated in this case and writing off so much that they would ultimately show a loss? Providers accepting Medicare could make it so the IRS owed them money to stay in business. If they are willing and able to accept $263K from Medicare, then that must be much closer to what that care cost than the “actual bill” and that demonstrates the primary problem with healthcare. How is it that an x-ray for a patient with no insurance costs $400 but with insurance it is $45? Why are patients with insurance recommended “regular” follow-up but those without seem to be advised to follow-up “as needed”. In the millions of pages of medical reports that have rolled through MEDVAL, the one thing that is evident is that medicine is big business and we need to stop presuming that if a doctor prescribed it, that it must be necessary or that if a hospital billed it, then that must have been what it cost. If nothing else, this court at least got the fact that the $3.4 million dollar differential here did not exist and that no one should get to benefit from the act of hospitals just being greedy.

No. 601, 2014
2015 Del. LEXIS 288
May 6, 2015, Submitted
June 12, 2015, Decided