Collateral Source Rule in Delaware – Part II

Commentary, Medicare Advantage, Medicare Set-Aside Blog, MSP Litigation on August 3, 2015
Posted by Jennifer Jordan, JD, MSCC

In follow up to the Delaware Supreme Court ruling in Stayton v. Delaware Health Corp. [see blog dated June 22, 2015], declaring Medicare payments not subject to the collateral source rule, the Superior Court on July 28, 2015 extended the application to Medicare Advantage Plans as well. In Honey v. Bayhealth Medical Center, plaintiff attempted to apply the collateral source rule to Medicare Advantage payments because they are made by private health insurance companies and not the federal government. The court however determined that because Medicare Advantage is in fact a part of the Medicare Act, the Stayton ruling should apply here as well.

As noted in footnote 11 of the opinion, I am on record as a critic of the “widespread judicial misunderstanding of the operation of the Medicare system” so of course I have issues with this ruling. However it is not with the Superior Court given that it was merely applying the Supreme Court ruling. If in fact Medicare payments should not be subject to the collateral source rule, then the Superior Court’s ruling is correct. Therefore my issue lies with the Stayton decision. Whether Medicare or not, the healthcare provider billed rate should never govern damages when said providers know that contractually they will never receive that amount in payment.

Medicare is a federal entitlement program to which its beneficiaries become entitled through years of payroll contributions by both the beneficiaries and their employers. While those individuals who contribute through sufficient quarters are automatically entitled at age 65 or through a qualifying disability, they do not necessarily need to enroll. But if they do enroll, there are associated premiums and co-insurance payments, so it is not as if Medicare is not without costs to its beneficiaries. So why is it that Medicare beneficiaries should be treated differently than plaintiffs with private insurance?  If the collateral source applies at all, then it should apply equally to all “insurance” situations. A provider contractually accepting Medicare is no different than one agreeing to accept Humana or Aetna – they are well aware of how much they may bill for services when they agree to participate.

So my problem is the collateral source rule itself. While it is a reasonable concept that a tortfeasor should not benefit from the inured party carrying insurance at their own expense rather than being uninsured, the problem is that damages are based upon the billed rates. The concept predates managed care organizations that came into existence in the 1980s which created networks and negotiated pricing with medical providers based upon a percentage of billing. If you want access to those patients, you agree to accept contract pricing. Providers keep their “retail” prices inflated so that they still receive what they want/need from the MCO after the discount and MCOs look like they’re providing a great service to their clients by obtaining big discounts. The only people injured in this process were the uninsured who were ultimately billed the retail rates then relentless pursued into collections and bankruptcy. So if the billed amount wasn’t artificially inflated, excluding the amounts actually paid by the insurer wouldn’t result in such a ridiculous outcome. But I digress.

The Stayton court declined to apply the collateral source rule to “amounts required by federal law to be written off by healthcare providers” and herein lies my issues with the ruling. Healthcare providers that agree to accept Medicare do so understanding that they are limited in payment to the Medicare fee schedule. Medical providers may “write down” bad debts or charitable care, not the balance billing between what they bill and what they agree to contractually accept in payment for services. If that were the case, then all medical services should retail for at least 1000 times the cost to actually provide the service. Why not? Never pay taxes again. So the error is in believing that there is a write-off to consider and why that should differentiate Medicare payments from any other form of insurance. Courts simply should not determine damages based upon fictitious amounts billed by medical providers with full knowledge that they will never receive payment in that amount.

So long as the courts continue to apply questionable deference to the Medicare program, inequitable outcomes such as this will continue in our courts. In this case, damages are assessed at a lesser rate than those with private insurance, making their claims less valuable. In workers’ compensation settlements, Medicare beneficiaries receive higher medical compensation due to the existence of MSAs, making their settlements theoretically more valuable. Until the judiciary understands the distinctions made here, outcomes like this will likely continue. At least this one is a win for defense.

Delaware corporation, and ERIC M. HITCHCOCK, D.O., Defendants.
C.A. No: K13C-05-018 RBY
2015 Del. Super. LEXIS 378
July 17, 2015, Submitted
July 28, 2015, Decided