Evidence of Medical Costs: How the Indiana Supreme Court’s Error in Stanley v. Walker Led to Patchett v. Lee

by: Colin E. Flora

     It is hard to imagine that it has been so long, but four years ago we discussed the function and impact of a seminal decision by the Indiana Supreme Court from 2009 called Stanley v. Walker. On its surface, the Stanley decision might seem innocuous. Indeed, nominally, the decision is nothing more than interpretation of Indiana Rule of Evidence 413 and the Collateral Source Statute. Stanley held that a defendant in a personal injury case in which the plaintiff seeks compensation for his/her medical expenses may submit evidence of the amount actually paid for the medical services provided. Again, this sounds fairly innocuous. The problem is that it is much more complicated than it appears on the surface.

     We return to Stanley to discuss a new decision from October that builds on the shaky basis that is Stanley. The case, Patchett v. Lee, was correctly decided if Stanley was correctly decided. The underlying logic reasonably extends from Stanley to Patchett. The problem, however, is that Stanley was plainly incorrectly decided. Patchett merely held that Stanley applies with equal force to allow evidence of the amount actually paid regardless of whether the payee is a private insurer or a government payer.

     Mind you, neither Stanley nor Patchett held that the amount actually paid is the reasonable value of medical expenses. Rule 413 explicitly prevents such a conclusion: “Statements of charges for medical, hospital or other health care expenses for diagnosis or treatment occasioned by an injury are admissible into evidence. Such statements are prima facie evidence that the charges are reasonable.” Justice Boehm made that point clear in his concurrence in Stanley: “First, and obviously, we hold today only that the discounted price actually paid for medical services is admissible evidence as to the reasonable value of those services. We do not hold that it is conclusive.” Thus, Rule 413 allows admission of the amount actually billed and Stanley/Patchett permits evidence of what was actually paid.

     So why was Stanley wrong? For that we must turn to Indiana’s Collateral Source Statute. At common law, the Indiana collateral source rule–not to be confused with the Collateral Source Statute–“prohibited defendants from introducing evidence of compensation received by plaintiffs from collateral sources, i.e., sources other than the defendant, to reduce damage awards.” In 1986, Indiana enacted the Collateral Source Statute, which states:

In a personal injury or wrongful death action, the court shall allow the admission into evidence of:

(1) proof of collateral source payments other than:

(A) payments of life insurance or other death benefits;

(B) insurance benefits that the plaintiff or members of the plaintiff's family have paid for directly; or

(C) payments made by:

(i) the state or the United States; or

(ii) any agency, instrumentality, or subdivision of the state or the United States;

that have been made before trial to a plaintiff as compensation for the loss or injury for which the action is brought;

(2) proof of the amount of money that the plaintiff is required to repay, including worker's compensation benefits, as a result of the collateral benefits received; and

(3) proof of the cost to the plaintiff or to members of the plaintiff's family of collateral benefits received by the plaintiff or the plaintiff's family.

     In 1996, the Indiana Supreme Court decided the case Shirley v. Russell. In a statement that would later be described as “unfortunate language,” the Court determined that “the new statute abrogated both the substance and the procedure of the common law collateral source rule.” The decision in Shirley was unanimous and fairly uncontroversial. The court determined that the Collateral Source Statute prohibited admission into evidence of a monthly survivor benefit for the widow of the deceased, as it was an insurance benefit paid for directly by the family.

     Notably, there was no need to determine whether the statute had wholly abrogated the rule in order to reach the conclusion in Shirley. Merely applying the statute without even considering the rule would have been sufficient. When viewed in this light, it is apparent that the statement in Shirley declaring the common law rule abrogated is obiter dictum. Obiter dictum, in its native Latin, means “‘something said in passing,’ and [the Indiana] Supreme Court has stated that in appellate opinions, ‘statements not necessary in determination of the issue presented are obiter dictum . . . are not binding and do not become the law.’” Consequently, the declaration that the rule had been abrogated was not truly binding when Stanley worked its way to the Indiana Supreme Court.

     This now takes us to what is wrong with Stanley. For that, no better source may be offered than the dissent of Justice Dickson, which was joined by Justice Rucker. Notably, Justice Dickson had concurred with the Shirley opinion. But, as Associate Justice Robert Jackson of the Supreme Court of the United States famously wrote, “I see no reason why I should be consciously wrong today because I was unconsciously wrong yesterday.”

     Justice Dickson’s dissent began by focusing on the text of the Collateral Source Statute. He found,

The new rule established today, in my opinion, contravenes the express provisions of the collateral source statute, which should control this case. . . .

* * * * *

Creating an exclusion from the common law collateral source rule, the statute expressly allows evidence of certain collateral source payments, but explicitly declines to extend this admissibility to payments in the form of “insurance benefits for which the plaintiff or members of the plaintiff's family have paid for directly.”

. . . The refused evidence consisted of an assortment of hospital and medical bills and statements of account revealing the amount of contractual write-offs resulting from the plaintiff's insurance coverage (Anthem Blue Cross Blue Shield) and the amounts actually paid in full satisfaction of the medical bills by Anthem. The plaintiff testified that he had paid the Anthem insurance premiums.

The collateral source statute expressly declines to authorize the admission of evidence of payments in the form of “insurance benefits for which the plaintiff or members of the plaintiff’s family have paid for directly.” The trial court’s exclusion of the defendant’s evidence in this case was thus consistent with the statutory requirements. The rule pronounced by today’s opinion, which invites admission of “discounted amount[s] actually paid,” seems diametrically opposed to the statute’s clear and unequivocal language. Statutory modification or nullification is best left to the General Assembly.

     Not content to merely chastise the majority opinion for failing to apply the plain language of the Collateral Source Statute, Justice Dickson went on to seek to correct the wrong of Shirley:

I also dissent to express my disagreement with the majority’s statement that the collateral source statute abrogated the common law collateral source rule. The statute contains no words expressly abrogating the common law collateral source rule. Rather, the statute’s precise language appears to create a limited exception to the common law rule, which is otherwise left intact. From the statute’s “the court shall allow” and “other than” language, I understand the statute merely to modify the common law rule to allow the admission of some collateral source payments but to deny this admission to life insurance, other death benefits, insurance benefits paid for by the plaintiff and the plaintiff’s family, and government payments, thus leaving the common law rule in place as to these. The statute establishes a carefully crafted exception to the rule that narrowly allows only collateral source payments “other than” payments of benefits conferred from a plaintiff's own insurance or from government payments.

This interpretation of the collateral source statute seems conclusively governed by our well-established jurisprudence for determining the impact of a statute on existing common law:

When the legislature enacts a statute in derogation of the common law, this Court presumes that the legislature is aware of the common law, and does not intend to make any change therein beyond what it declares either in express terms or by unmistakable implication. In cases of doubt, a statute is construed as not changing the common law.

In line with this bedrock principle, this Court consistently construes statutes in derogation of the common law strictly and applies them narrowly in a variety of contexts.

     Notably, the issue of whether the common law collateral source rule was abrogated, ultimately does not matter to Stanley or really any other cases otherwise governed by the Collateral Source Statute. It does, however, strongly impact other areas of law. The statute only applies to personal injury and wrongful death cases, but makes no mention of breach of contract or other tort cases, such as property damage cases. Mind you, the purpose of the collateral source statute is multifaceted. First, the collateral source–for example medical insurance–often retains a lien over any proceeds obtained by the wronged party and may subsequently seek repayment for the payments. Second, there is no good sense in leaving a plaintiff’s insurance company holding the bill when it was the defendant’s fault in the first place. Third, a defendant who committed an actionable wrong should not be left to benefit by the injured party’s foresight in paying for collateral source protection ahead of time. To do so would mean that the liability of the defendant would not be dictated by his/her actions but by the wholly unrelated choices of the plaintiff ahead of time. Thus, a defendant who injured a person without health insurance would be in a substantially worse position than a defendant who injured an insured person. Moreover, the rule recognizes that the plaintiff who acted with foresight and paid for protection for years could receive the benefit of that foresight.

     The same basic logic applies regardless of whether the action is for personal injury or wrongful death. Nevertheless, the Court offhandedly cast aside centuries of common law wisdom for broad application of a tort reform measure and, in doing so, has thoughtlessly dragged other areas of law along side. If the collateral source rule has truly been abrogated, then it no longer applies in a property damage case. Thus, a defendant who gets blackout drunk, hops in his car, and slams through the side of a home while its residents are on vacation can go to the jury and argue that the family doesn’t need further compensation, because the home was fully insured. Regardless of whether you think that should be a permissible argument, the important part is that nothing in the Collateral Source Statue even remotely suggests that the centuries of support for the wisdom of the common law rule should be thrown away.

     Justice Dickson went on to address the serious policy concerns created by the Stanley decision:

I also oppose the new rule because it is incomplete, misleading, and unfair, and will add layers of complexity, time, and expense to personal injury litigation, impairing the efficient administration of justice.

The majority acknowledges that the proper measure of medical expense damages for a personal injury plaintiff is the reasonable value of such expenses but concludes that the complexity currently surrounding the state of health care pricing systems favors giving defendants new tools, namely the evidence of discounted payments for such services, to challenge the plaintiff's evidence of presumptively reasonable medical expenses under Indiana Evidence Rule 413.

The new rule fails to take into account, however, that these contractual discounts confer significant benefits upon medical service providers in addition to just the cash received in discounted payments. In exchange for medical services, providers receive not only the insurer's payments, but also the pecuniary value of numerous additional benefits, among which are prompt payment, assured collectability, avoidance of collection costs, increased administrative efficiency, and significant marketing advantages.

It is widely recognized that, by agreeing to reduced rates, providers gain significant administrative and marketing advantages, “including a large volume of business, rapid payment, ease of collection, and occasionally advance deposits.”

Even the Amicus Defense Trial Counsel of Indiana, which supports the defendant in this case, acknowledges that:

Discounted fee arrangements between healthcare providers and insurers are for their mutual benefit. Providers “discount” from their “customary rate” for managed care patients for a reason -- to be included on a list of preferred network providers from which the managed care plan members are permitted to obtain healthcare without prior approval from the insurance company. Thus, providers bargain for a large panel of patients who are, to some extent, directed to them by the insurance company in exchange for discounting or writing-off their “customary” rates. The insurance company essentially obtains a bulk discount on medical services for the plan members. The insurers pass their savings onto the plan members in the form of lower premiums, which helps them attract more customers, representing even more potential business for providers.

As recognized by the Virginia Supreme Court, “amounts written off are as much of a benefit for which [the plaintiff] paid consideration as are the actual cash payments made by his health insurance carrier to the health care providers.”

. . . Professor Dobbs explains, “In line with the basic measure of damages--the reasonable value of the medical services rendered--most courts passing on the issue in recent years have made rulings that permit the plaintiff to prove all of the reasonable medical charges,   even though some of those charges were waived by the provider.” This dominant view comports with the fundamental purpose of the common law collateral source rule: “to prevent a tortfeasor from deriving any benefit from compensation or indemnity that an injured party has received from a collateral source.” “[T]he focal point of the collateral source rule is not whether an injured party has 'incurred' certain medical expenses. Rather, it is whether a tort victim has received benefits from a collateral source that cannot be used to reduce the amount of damage owed by a tortfeasor.”

Thus, if we authorize consideration of the amount of discounted payments as evidence of the reasonable value of a plaintiff’s medical services, juries will receive a distorted, misleading, and incomplete picture unless they are also able to consider the pecuniary value of all the benefits conferred upon health care providers in their symbiotic exchange with medical insurers. While today’s new rule does not foreclose the admission of such essential evidence, its gathering and presentation will significantly burden both injured plaintiffs and efficient judicial administration. A new level of discovery will be needed to determine and quantify the value to providers. Plaintiffs will be required to expend considerable resources to marshal and present such evidence, thereby prolonging trials. New appellate issues will result. Not the least of these will be the challenge of devising a methodology to implement the majority's caveat that discounted amounts may be introduced only if done “without referencing insurance.” Regardless of the technique used, it seems virtually impossible to deceive the common-sense inference of juries that insurance is the source of any discounted amounts paid to satisfy medical care accounts.

In further support, Justice Dickson also noted, “The bulk of courts appear to agree that reduced payments under arrangements between a plaintiff’s insurer and the medical service providers are not admissible as evidence of reasonableness of the medical services because they constitute a collateral source.”

     Based on experience, I can tell you Justice Dickson’s prognostications were absolutely correct. The Stanley v. Walker ruling has complicated discovery and increased litigation costs and trial time. Notably, Justice Rucker, who had joined Justice Dickson’s dissent, remains a member of the court, although Justice Dickson recently retired and was replaced by the author of the majority opinion in Patchett. Nevertheless, Justice Rucker, joined by Justice David, concurred in the Patchett decision with a crucial caveat:

Largely for reasons the majority explains I agree “the rationale of Stanley v. Walker applies equally to reimbursements by government payers.” I write separately however because I continue to believe Stanley was wrongly decided. More to the point, Indiana’s collateral source statute could not be any clearer. It precludes admission into evidence of, among other things, “payments made by: i) the state or the United States; or ii) any agency, instrumentality, or subdivision of the state or the United States . . . .” Payments made by HIP—a federal/state government program—unquestionably fall within this prohibition. A contrary reading endorsed by Stanley and reaffirmed today simply cannot be reconciled with the collateral source statute.

Unfortunately, it appears timing is everything. Had Patchett reached the Indiana Supreme Court prior to Justice Dickson’s recent retirement, there may have been a 3–2 majority willing to right the wrongs of Stanley. Instead, Patchett has done nothing more than spread the problem.

     This takes us to easily the most crucial portion of our discussion: why does it matter? On first blush, I’m sure the entire Stanley v. Walker issue appears to be nothing more than greed of plaintiffs. Doubtless, that is the superficial view of many from the defense bar on the matter. The problem is that medical costs and non-consequential damages are inextricably linked. As Justice Dickson’s dissent recognized,

Although only four thousand or so dollars is actually at stake in this appeal, the majority’s decision impacts more than just the calculation of medical expense damages that an injured plaintiff is entitled to receive from a defendant whose wrongful acts caused the injury. The amount of reasonable medical expenses incurred by a plaintiff is an important factor that influences juries in their assessment of additional general damages. As a plaintiff's medical expenses increase or decrease, a corresponding effect on the award of general damages is often observed.[1] It is thus not surprising that the amici curiae Defense Trial Counsel of Indiana and Indiana Trial Lawyers Association are strongly asserting opposing views.

[1] This practical reality finds additional confirmation from the defendant’s assertion that “it’s likely the jury’s verdict of $70,000 was influenced by the level of medical expenses it erroneously believed Walker had incurred.”

     As we have discussed before, Stanley v. Walker has drastically changed the landscape of Indiana personal injury practice. As I previously wrote,

  When it comes to damages for the pain and the trauma sustained by an injured person it is impossible to apply some mathematical formula to decide that value. There are rules of thumb and concepts of multipliers that many attorneys on both sides utilize to try and assess these damages. According to Mark Guralnick in his book Formulas for Calculating Damages:

At one time, plaintiffs’ lawyers and defense insurance carriers recognized a “three times specials” rule, in which the multiplier was informally set at 3. Today, it is probably more common to find insurance carriers offering plaintiffs’ attorneys anywhere from 1.1 to 2 times special damages on small cases, and perhaps as high as 4 or 5 times specials on larger claims for pain and suffering.

What this means is that not only have insurance adjusters become more stingy in their negotiation posture, but now they utilize a different factor in their calculations. The Stanley v. Walker medical expenses – i.e. the discounted rates – can be a mere fraction of the billed rates. Where insurance adjusters had historically used the billed rates to calculate payment for pain and suffering, they now have decided that because the billed rates are less, so too must a person’s pain and suffering be decreased.

This change is insane. It is not just ludicrous, but it is actually insane. The logic behind it can only be supported with Orwellian feats of doublethink. It is farcical enough to tie the evaluation of a person’s pain and suffering to how much his or her medical procedures cost. But to have used that as a factor prior to Stanley v. Walker and then after the case to have not adjusted multipliers to reflect the decreased cost is mindboggling.

     Lest you think that the role of multipliers is merely confined to pre-trial settlement, I can easily dispel such a notion. The very post I just excerpted was recently cited by defendants requesting a judge to supplant his judgment in place of a substantial jury verdict. The defendants argued, “In support of this request, Defendants counted the Court should use the general calculation of the amount of special damages multiplied by three to five (3-5) to calculate the general damages award.” The defendants cited to my post quoting Guralnick. Granted, the court denied the motion, but it goes to show you that this absurd notion of multipliers is not dropped at the courthouse doors. By shifting the anchor for the multiplier, Stanley has redefined the landscape. This problem magnifies depending on the power of the source of the payment. For example, Medicare and Medicaid are backed by the coercive force of the government and pay substantially less than private insurers for the exact same services.

     The matter becomes even more complicated when you realize how much it skews the playing field in favor of uninsured persons. Uninsured persons do not receive the benefit of negotiated reductions obtained by a strong insurance company. Instead, the uninsured are left to the mercy of the healthcare provider to seek a discount from the charge master rates.

     Of further concern, as we previously discussed, the Indiana Supreme Court decision in Allen v. Clarian Health Partners, Inc. saw plaintiffs challenging the use of chargemaster rates–i.e. the standard billing rates for hospitals–where contracts for medical services were silent as to specific prices. The argument in Allen was that the chargemaster rates were not a reasonable rate. That was the argument because contract law requires that a contract silent as to price be interpreted to mean a reasonable price. The court dodged the issue in Allen by concluding that the contract incorporated the chargemaster rates and therefore did not need to consider whether the rates were reasonable. The fundamental argument challenging the chargemaster rates was that Stanley meant that the chargemaster rates were not reasonable. The issue remains an open question. It sets up a potentially absurd scenario in which the injured person may be contractually obligated to pay the chargemaster rate but only permitted to recover a lesser “reasonable” amount from the tortious defendant.

     The important part here is to look past the very simple notion that the amount awarded to the plaintiff for medical expenses should be the amount someone actually paid for medical expenses. You get no argument from me that in an ideal world that’s how it would work. The fundamental problem is that it has a ripple effect that goes far beyond compensatory damages. Granted, the few cases from across the nation to actually address the propriety of correlating medical expenses with non-consequential damages have readily exposed the duplicity of insurance companies attempting to rationalize multipliers. (See collection of cases and excerpts in the sources below). Nevertheless, as Justice Dickson astutely noted, even the DTCI amicus brief flatly recognized that there is a correlation in the minds of jurors between medical expenses and non-consequential awards.

     Join us again next time for further discussion of developments in the law.

 

Sources

Our inquiry, therefore, must focus on the evidentiary question as to whether the dollar amount of the medical services provided is probative of the degree and extent of Mr. Martin’s pain and suffering.

It is immediately apparent that there is no logical or experiential correlation between the monetary value of medical services required to treat a given injury and the quantum of pain and suffering endured as a result of that injury. First, the mere dollar amount assigned to medical services masks the difference in severity between various types of injuries. A very painful injury may be untreatable, or, on the other hand, may require simpler and less costly treatment than a less painful one. The same disparity in treatment may exist between different but equally painful injuries. Second, given identical injuries, the method or extent of treatment sought by the patient or prescribed by the physician may vary from patient to patient and from physician to physician. Third, even where injury and treatment are identical, the reasonable value of that treatment may vary considerably depending upon the medical facility and community in which care is provided and the rates of physicians and other health care personnel involved. Finally, even given identical injuries, treatment and cost, the fact remains that pain is subjective and varies from individual to individual.

Thus the fact that a particular amount of money was expended to treat an injury bears no logical correlation to the degree of pain and suffering which accompanied the injury to the plaintiff in question, forces the conclusion that such evidence possesses no probative value in a determination as to the appropriate monetary compensation to be awarded. Evidence of the cost of medical services is therefore irrelevant and, consequently must be held to be inadmissible for that purpose.

As has been indicated, pain and suffering have no known dimensions, mathematical or financial. There is no exact correspondence between money and physical or mental injury or suffering, and the various factors involved are not capable of proof in dollars and cents. For this reason, the only standard for evaluation is such amount as reasonable persons estimate to be fair compensation. Denco Bus Co. v. Keller, 202 Okl. 263, 212 P.2d 469, 475 (Sup. Ct 1949); Roedder v. Rowley, supra. In discussing the matter of a proposed mathematical formula for determining the allowance for future pain and suffering and inconvenience, the Eighth Circuit Court of Appeals said in Chicago & N.W. Ry. Co. v. Candler, 283 F. 881, 884, 28 A.L.R. 1174 (1922):

"No such process is possible in estimating the amount to be allowed for pain and suffering, or for pain and inconvenience. In the matter of pain, suffering, or inconvenience, no books are kept, no inventories made, no balances struck.

Neither the plaintiff in the case nor any one else in the world has ever established a standard of value for these ills. The only proof ever received to guide the jury in determining the amount of the allowance they should make is, broadly stated, the nature and extent of the injury, its effect and results. They are instructed to allow a reasonable sum as compensation, and in determining what is reasonable under the evidence to be guided by their observation, experience and sense of fairness and right. At the best the allowance is an estimated sum determined by the intelligence and conscience of the jury, and we are convinced that a jury would be much more likely to return a just verdict, considering the estimated life as one single period, than if it should attempt to reach a verdict by dividing the life into yearly periods, setting down yearly estimates, and then reducing the estimates to their present value. The arbitrariness and artificiality of such a method is so apparent that to require a jury to apply it would, we think, be an absurdity.”

* * * * *

“The nature of pain and suffering is such that no legal yardstick can be fashioned to measure accurately reasonable compensation for it. No one can measure another's pain and suffering; only the person suffering knows how much he is suffering, and even he could not accurately say what would be reasonable pecuniary compensation for it. Earning power and dollars are interchangeable; suffering and dollars are not. Two persons apparently suffering the same pain from the same kind of injury might in fact be suffering respectively pains differing much in acuteness, depending on the nervous sensibility of the sufferer. Two persons suffering exactly the same pain would doubtless differ as to what reasonable compensation for that pain would be. This being true, it follows that jurors would probably differ widely as to what is reasonable compensation for another’s pain and suffering, no matter how specific the court's instructions might be.” Herb v. Hallowell, 304 Pa. 128, 154 A. 582, 584, 85 A.L.R. 1004 (Sup. Ct. 1931).

Difference of opinion is said to underlie the sale of inferior land and the marriage of ugly women. Who are we to say from the scholarly serenity of the appellate bench that a jury erred in awarding $18,250.00 to Mrs. Simpson? She suffered some nerve damage in the left ear which causes pain in the ear and headaches and which physicians testified is permanent. The translation of misery into money is a task for which judges are no better fitted than laymen, and we will not disturb a jury's verdict in the absence of a showing that it reflects passion, prejudice, improper motive or manifest misconstruction of the law or the evidence.

Appellant contends that the verdict is excessive because it is more than twenty times the amount of medical expense incurred. This argument does not survive reflection. We are grateful for whatever rules of thumb facilitate the settlement of personal injury cases before they reach the courts, but they have no legal significance. Pain and suffering do not vary with the cost of treatment. Suppose an injury resulting simply in the loss of an eye beyond medical help, entailing a nominal expense. Should we apply some pair of magical multipliers to determine the permissible boundaries of the jury's judgment? Would the same multipliers govern the loss of two eyes? This court will not substitute judges' computations for juries' common sense. We adhere to the law stated in Clark v. Russo, 133 So.2d 764 (Fla.App.1961), aff'd 147 So.2d 1 (Fla.1962) and Price v. Jordan, 115 So.2d 444 (Fla.App.1959).

*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.