Are Medical Lien Prices Evidence of Reasonable Value of Medical Services?

California’s Second and Third District Courts of Appeal are diametrically opposed regarding the role of medical lien purchases in determining the reasonable value of medical services where the an uninsured plaintiff has not paid for medical services. The California Supreme Court in Howell v. Hamilton Meats & Provisions, Inc., 52 Cal.4th 541, 555-6 (Cal., 2011) (reh’g and modification denied Nov. 2, 2011) on remand, 2011 WL 6399842 (Cal.App. 4 Dist., Dec. 21, 2011) (unpublished/noncitable) (affirming the trial court’s order reducing the woman’s award to the amount her medical providers had accepted as payment in full from the woman and her insurer), limited a plaintiff’s damages for past medical expenses to the lesser of (1) the amount paid or incurred for past medical services or (2) the reasonable value of the services.

To understand Howell, one must understand chargemasters, negotiated rate differentials, and medical finance companies. According to California’s Office of Statewide Health Planning and Development (OSHPD), a chargemaster (also known as a hospital charge description master or CDM) is a document (1) containing the prices of all services, goods, and procedures for which a separate charge exists and (2) used to generate a patient’s bill. Think of the chargemaster as a car’s sticker price, the price displayed on a car’s window or “Monroney” sticker, also known as the manufacturer’s suggested retail price (MSRP), a fiction that almost no one really pays.

A negotiated rate differential is the difference between the health care providers’ chargemaster price and the amount the healthcare provider agrees to accept from a patient’s insurer as full payment for a service, good, or procedure. How do we get out of paying sticker price for a car? We use our savvy negotiating skills. Unlike buying a car, we get out of paying the chargemaster price by buying health insurance. Our insurance company negotiates with each healthcare provider to get its insureds the best discount percentage. So, the negotiated rate differential is the percentage discount off the health care provider’s list price negotiated by each insurer. Like car buyers, one insurer may have more negotiating savvy than another, so different insurers may get different negotiated rate differentials.

A medical finance company purchases medical bills, and the liens securing them, from health care providers. Before an uninsured patient without means to pay is able to secure medical treatment, the patient executes a medical lien agreement with her healthcare providers, obligating the patient to pay the full amount of the fees billed. The health care providers subsequently sell their outstanding medical bills and liens to a medical finance company.

These three items result in three pieces of potential evidence of a plaintiff’s damages for past medical expenses: (1) the healthcare provider’s chargemaster rate for the plaintiff’s care, (2) the amount the health insurer paid for the plaintiff’s care after reducing the chargemaster price by the negotiated rate differential, and (3) the amount the medical finance company paid the health care provider for the plaintiff’s outstanding medical bill and lien.

In litigation involving insured plaintiffs, there are two relevant questions.

  1. Is the healthcare provider’s chargemaster admissible as evidence of a plaintiff’s damages for past medical expenses?
  2. Is the health insurer’s negotiated rate differential admissible as evidence of a plaintiff’s damages for past medical expenses?

The California Supreme Court in Howell v. Hamilton Meats & Provisions, Inc., 52 Cal.4th 541, 555-6 (Cal., 2011) (reh’g and modification denied November 2, 2011), held that an injured plaintiff whose medical expenses are paid through private insurance may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received or still owing at the time of trial.

The court explained that “the negotiated rate differential—the discount medical providers offer the insurer—is not a benefit provided to the plaintiff in compensation for his or her injuries and therefore does not come within the” collateral source rule. This means the only relevant evidence of an insured plaintiff’s damages for past medical expenses is the price the insurer paid after the negotiated rate differential.

What happens to the uninsured? The hospital bills the uninsured the chargemaster amount. When the uninsured cannot pay that amount, the healthcare provider has the person execute a medical lien for the billed amount. It’s like when you can’t pay cash for your car. The car dealer charges you the amount you negotiated for the car. You take out a loan for that amount. That’s where the analogy between health care billing and car buying ends and your weekend viewing of the cult classic Repo Man begins. At best, one could argue that the price the medical finance company paid the health care provider for the medical bills and the liens securing them is analogous to the cost of repossessing the car.

Now, imagine explaining medical liens and medical finance companies to a jury. If you just hit your forehead with your palm, California’s Third District Court of Appeal agrees with you.

The defendant in Moore v. Mercer, 2016 WL 6135335 (Cal.App. 3 Dist., October 21, 2016) (not designated for publication), and amici curiae the Association of Southern California Defense Counsel and the Association of Defense Counsel of Northern California and Nevada argued that this case compelled an expansion of Howell and the pronouncement of a new rule that the total amount a medical finance company pays for a plaintiff’s account receivable and medical lien caps the plaintiff’s damages and must be admitted as evidence of reasonable value.

The Third District California Court of Appeal declined. The court held that (1) a plaintiff’s damages for past medical expenses are not capped at the amount a medical finance company pays the plaintiff’s health care providers for accounts receivable and medical liens and (2) trial courts have discretion to exclude evidence of the amount a medical finance company pays, if the trial court decides that the evidence was minimally probative of the plaintiff’s damages for past medical expenses, if at all, and would necessitate an undue consumption of time to try collateral issues. The vast assortment of collateral issues the court was concerned about litigating included, but was not limited to, the collectability of the debt, the health care providers’ financial management reasons for selling their bills and liens at a particular price, whether the doctor was strapped for cash, or whether the medical finance company believed the litigators were exceptional.

Conversely, the Second District in Ochoa v. Dorado, 228 Cal.App.4th 120 (Cal.App. 2 Dist., 2014) (review denied October 22, 2014), held that the full amount billed, but unpaid, for past medical services is not relevant to the reasonable value of the services provided. The court explained that evidence of unpaid medical bills cannot support an award of damages for past medical expenses. The Second District eliminated the chargemaster price from consideration, leaving only the price the medical finance company paid the health care provider for the medical bills and the liens securing them.

In litigation involving uninsured plaintiffs, there are two relevant questions.

  1. Is the healthcare provider’s chargemaster admissible as evidence of a plaintiff’s damages for past medical expenses?
  2. Is the amount the medical finance company paid the health care provider for the plaintiff’s outstanding medical bill and lien admissible as evidence of a plaintiff’s damages for past medical expenses?

In California, the answers two those two questions are different depending on the appellate district.

By Sarah Kelman, JD, and the experts and editors at Medical Law Perspectives.

For more details about Moore v. Mercer, 2016 WL 6135335 (Cal.App. 3 Dist., October 21, 2016) (not designated for publication), see the Scalpel Weekly News, October 31, 2016, “Damages Not Amount Medical Finance Co. Pays to Acquire Lien; Recovery for Amount Billed.”

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