1/1/2014

Affordable Care Act

Can It Be Used To Mitigate Damages?

By Jack Hipp , Caryn Lilling

The Affordable Care Act (ACA) adopted by Congress in March 2010 and deemed constitutional by the United States Supreme Court, provides that all persons in the United States be provided health insurance regardless of their health or financial situation. Under the ACA, a medical insurer can no longer deny coverage on the basis of a pre-existing condition. Furthermore, the ACA requires individuals to purchase health insurance or pay a penalty. The purpose of this “individual mandate” is to reduce the overall number of uninsureds. Thus, whereas in the past, an injured plaintiff would most likely be denied health insurance, now that person can get coverage and has an incentive to get coverage to avoid the penalty.

Mandates and Requirements

The ACA’s so-called “individual mandate” takes effect January 1, 2014, and requires every applicable individual to obtain minimum essential coverage or pay a penalty. The minimum essential coverage required must include ambulatory patient services, emergency room services, hospitalization, maternity and newborn care, mental health and substance abuse, prescription drugs, rehabilitative services and devices, lab services, preventive and wellness services, chronic disease management, and pediatric services. Furthermore, for these minimum coverage plans, the ACA limits the annual amount of out of pocket medical expenses that can be incurred. In 2014, the out-of-pocket limit for individuals is $6,350 and $12,700 for families.

The guaranteed issue requirement bars insurance companies from denying coverage to individuals with pre-existing conditions. It works in conjunction with the community rating requirement, which prohibits insurance companies from charging higher rates to individuals based on their medical history. Insurers also are prohibited from placing lifetime and annual spending limits on the minimum essential benefits. Moreover, health insurance carriers must provide coverage to dependent children until the age of 26.


Collateral Source Rule
The common law collateral source rule prohibits a defendant from reducing damages the plaintiff receives in a tort case by third-party payments received by the plaintiff. Although states differ as to what payments qualify as a collateral source, generally speaking, collateral source payments are payments made by a third-party to the plaintiff or a medical provider on the plaintiff’s behalf as a result of the injuries sustained by the plaintiff. Under the common law rule, collateral source payments, such as private health insurance, employee benefits and gratuities cannot be used to mitigate damages.


The main justifications given for the common law collateral source rule have been that it:

  • Promotes deterrence
  • Enforces the fundamental principle of tort law that a tortfeasor pay for the consequences of their actions
  • Prevents a defendant from receiving a windfall of lesser or no damages based on benefits paid by a third-party
  • Encourages individuals to purchase insurance
  • Avoids prejudice to the plaintiff because juries can look unfavorably on a plaintiff suing for costs already paid by a collateral source

The collateral source rule, however, developed at a time when insurance was rare. As insurance became more common, states began to question the practicality of the collateral source rule as an evidentiary principle. Furthermore, with the rise of the insurance crisis in the 1980s, many states began to modify or abolish the collateral source rule as a means of tort reform. These modifications were seen as a means of preventing double recoveries and reducing the costs of insurance. Today, only 13 states and the District of Columbia still adhere to the common law collateral source rule. The remaining 37 states have modified the common law rule to varying degrees.


Collateral Source and ACA
The enactment of the ACA arguably undermines some of the main arguments made in support of the common law collateral source rule. First, the ACA undermines the rationale that the common law collateral source rule was designed to hide from the jury whether the plaintiff has insurance. Now, given the individual mandate, most jurors will assume that the plaintiff has insurance. Thus, the ACA essentially eliminates the evidentiary purpose of the common law rule. And second, the common law collateral source rule was intended to serve as a deterrent and to prevent a windfall to the defendant. As such, defendants were required to pay the full amount billed by the medical provider for the plaintiff’s care. Now, however, most people will have insurance and their insurance company will be billed at a reduced rate.

Despite the elimination of some of the traditional rationales for the common law collateral source rule, barriers to obtaining offsets for future damages still remain. One particular problematic area is a health insurer’s right to subrogation. Many insurance contracts now afford the health insurance company the right to seek reimbursement directly from the plaintiff for costs expended to treat injuries caused by third-party tortfeasors. In addition, some states and statutes give health insurers the right to seek reimbursement from the plaintiff or defendant. Where that right exists, a strong argument can be made that juries should be permitted to award the full cost of the amounts actually paid by insurance because ultimately the plaintiff would be out-of-pocket those amounts.


While that argument has continuing validity under the ACA, it should still be recognized that the plaintiff’s claimed damages should not reflect the full amount that would be billed to an individual. The amounts claimed in the plaintiff’s life care plan should be reflective of only the amounts that would likely be charged to the insurance carrier for such care. Several states already follow this approach, and the ACA provides an opportunity to expand that principle to other states as well.     


Another continuing area of concern is the level of proof necessary needed to obtain a collateral source offset. In some states, such as New York, the courts have been reluctant in the past to grant an offset for private health insurance because the defendant failed to prove with reasonable certainty that the plaintiff’s insurance benefits will continue for the duration of the jury award. That is because the plaintiff’s health insurance was received through the plaintiff’s employment and if the plaintiff loses or changes jobs, he or she could lose that insurance. If plaintiff lost that insurance, then he or she might not be able to get insurance because of a pre-existing condition. The ACA has now undercut some of that rationale.


Reducing Future Medical Expenses
Given that a number of states still adhere to common law collateral source rule and have been reluctant in the past to grant offsets, defendants should expand their arguments beyond just the collateral source rule. One such argument derives from the plaintiff’s duty to mitigate damages. Generally, a plaintiff has a duty to mitigate damages and render their injury “as light as possible.” Under the current tort system, awards for future medical expenses are based on projections made by a life care planner and an economist. Some courts, however, have recognized that this endeavor is inherently speculative and cannot reliably be predicted. Until the implementation of the ACA, there has not been a more reliable alternative.  


Now under the ACA, individuals are required to purchase health insurance or pay a penalty. If they fulfill that obligation and purchase insurance, it is highly likely that it will cover many, if not all, of the claimed expenses in a plaintiff’s life care plan. Arguably, therefore, an individual should not be permitted to inflate damages by requesting the speculative award of a jury where by law they are required to buy insurance and the defendant’s cost to purchase insurance that would cover the care claimed would be less. Furthermore, even where there is a right to subrogation, limiting damages to those amounts actually paid by insurance would still lower the amount currently claimed as damages in many cases.

Defendants, therefore, can attempt to argue that the plaintiff can reduce the amount of damages by purchasing an insurance policy. The defendant then would only be responsible to reimburse the plaintiff for the premiums to maintain the policy, annual increases in those premiums and any other out-of-pocket expenses such as co-pays, deductibles or other expenses not covered by insurance. Under this argument, the defendant would most likely still have to prove which items in the proposed life care plan would be covered by insurance, how much those premiums would be, the projected increases and whether that type of policy will likely be available throughout the duration of the plaintiff’s medical needs.


Notably, and even before trial, the availability of private health insurance may be more effectively raised in settlement discussions. For example, in catastrophic injury cases a defendant can now offer in settlement discussions (after a cost-benefit analysis) to purchase the plaintiff the best plan available; pay for the premiums with projected future increases; pay for all uncovered expenses attributable to the defendant and include future lump sums that can be invested or available in the event premium increases exceed the amount that has been projected.


Alternatively, an argument can be made that the purpose of compensatory damages is to make the plaintiff whole for the losses actually suffered. In the area of medical expenses, a plaintiff suffers an economic loss by taking on liability for the costs of the treatment that he would not otherwise have incurred. Any reasonable and necessary charges, therefore, that the plaintiff has paid or will owe as a result of the accident are recoverable.


It is well known that there is a tremendous disparity between what medical providers often bill their patients and what is actually paid to those providers. With the ACA, even less people will pay or ever be responsible for billed rates. In fact, virtually everyone will either pay the rates agreed between the medical provider and the insurer (negotiated rates) or rates charged under Medicare, Medicaid or other government programs.  


To that end, a number of states have already taken the view that the plaintiff’s recovery for medical expenses should be reflective of the amount actually paid or incurred on behalf of the plaintiff. Some of those states include California, Iowa, Minnesota, Nebraska, New York, Ohio, and Texas. Other states, such as Hawaii, Illinois, Mississippi, South Carolina, South Dakota, Virginia and Wisconsin, have rejected the use of negotiated rates and continue to use billed rates as the proper measure of damages. Those cases, however, arose prior to the ACA, which now undercuts much of the rationale for the usage of billed rates as the proper measure of damages.


Defendants, therefore, can try to expand upon the successful arguments made in California and elsewhere. They can argue that the court should find that:

  • The collateral source rule does not apply because the difference between billed and negotiated rates does not reflect an amount paid on the plaintiff’s behalf.
  • When awarding compensatory damages, the plaintiff should only be able to recover for amounts paid or that could be owed.
  • Even if the collateral source rule applies, the amount of the offset should include the amounts actually paid by a third party on the plaintiff’s behalf.

A Sea Change
The ACA has undercut the main rationales that have supported many of the traditional barriers to lowering future damages for medical care. Going forward, therefore, defendants can argue that plaintiffs’ damages for future medical care should be limited to health insurance premiums and any additional out of pocket expenses that would not be covered by health insurance. Alternatively, at the very least, medical expenses should not exceed the negotiated amounts paid or to be paid by health insurers. Both of these arguments have the potential to result in significant savings in catastrophic injury cases.


At the early stages of the ACA’s implementation, however, counsel should tread carefully and selectively in determining which cases, when and how to make these arguments. Initially, courts may be reluctant to consider such arguments because the full ACA has not yet been implemented and until the ACA has been fully implemented, it is unclear how it will affect premiums and the types of coverage plans available. Careful consideration, therefore, must be given to raising these issues in the right forum, at the right time and in the right manner. That will maximize the chances of success and enable each new success to bolster future cases.



Jack Hipp is a Vice President of Claims Technical at Fireman’s Fund Insurance Company.

Caryn Lilling is a Principal of Mauro Lilling Naparty LLP.

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