The Doctor’s Advocate | Fourth Quarter 2018
Government Relations Report

Inflated Medical Damages and Lien-Based Care

Elizabeth Y. Healy, Assistant Vice President, Government and Community Relations

Medical care from an out-of-network provider (one that does not accept the patient’s medical insurance) usually costs the patient more than care by an in-network physician or facility (one that has contracted with the patient’s insurer to provide care at a reduced cost). Some patients are being steered to out-of-network care by attorneys intending to inflate damages in planned lawsuits. A recent appellate court case in California, Pebley v. Santa Clara Organics, LLC, provides legal support for this strategy.

Patients might choose care from an out-of-network provider for a number of reasons—for example, a medical emergency occurring when the closest hospital or urgent care center is not part of the patient’s network. A patient might also prefer a particular provider or facility because of expertise or reputation regardless of insurance coverage.

A more disturbing reason for consulting out-of-network providers has emerged, driven by plaintiffs’ attorneys seeking to maximize damages—and contingency fees—in personal injury cases. An injured person may be referred by a lawyer to a medical provider who has agreed to provide care based on the expectation that money to pay for the care will be available after the lawsuit is tried or settled. This arrangement goes by a variety of names; in California, for example, it is often referred to as “lien-based medical treatment.” In Florida, the provider is described as treating the patient under a “letter of protection.”

It’s possible that such an arrangement could be in the best interest of the patient. If the patient/plaintiff is uninsured or underinsured or genuinely needs care that a health insurer is unwilling to cover, it might be reasonable for the patient’s attorney to arrange for needed care with a provider who is willing to wait for payment or even risk forfeiting payment if the case is resolved in favor of the defendant. The same arguments typically support the need for contingency arrangements between plaintiffs and personal injury lawyers.

The relationship between an attorney and a provider is, however, cause for concern when a larger damages award or settlement puts both in a position for larger financial gain. In this scenario, there is a powerful incentive to overtreat and overcharge the patient to inflate medical damages. In many jurisdictions, noneconomic damages are influenced by the amount of actual economic damages, so these would be inflated as well.

Howell Court Took a Stand Against “Phantom Damages”

Inflating medical damages is nothing new in litigation. Historically, a plaintiff’s insurance or lack of it was not an issue in determining damages. The “collateral source rule” prevented defendants from arguing that a plaintiff’s costs were already paid by insurance or government benefit. This rule came from a common law concept that defendants should not benefit because plaintiffs had the foresight to be insured and that allowing evidence of insurance to reduce damages would encourage people not to carry insurance. Most states have abandoned or modified this rule and now allow the defense to introduce evidence that insurance has paid or will pay the plaintiff’s costs.

In 2011, the California Supreme Court went further, issuing a ruling that discouraged the practice of introducing inflated medical bills (often called “phantom damages”). In Howell v. Hamilton Meats, 52 Cal.4th 541 (2011), a plaintiff injured in an auto accident sought medical damages based on the amount billed by her treating physicians and hospital, minus the amount paid by her insurer. The Howell court ruled that her providers had been paid by the insurer and by the patient’s co-payments, meaning that the medical costs charged in excess of those amounts were not actually owed by the patient or insurer and could not be recovered in court, “for the simple reason that the injured plaintiff did not suffer any economic loss in that amount.”

Subsequent cases have extended Howell’s holding. In Corenbaum v. Lampkin, 215 Cal.App.4th 1308 (2013), a California appeals court held that for an insured plaintiff, evidence of the full amount billed for past medical services is irrelevant and inadmissible to prove past or future medical expenses or noneconomic damages. The court in Ochoa v. Dorado, 228 Cal.App.4th 120 (2014), held that even where there is no prenegotiated discounted rate, “the full amount billed, but unpaid, for past medical services is not relevant to the reasonable value of services provided.”

Bermudez v. Ciolek, 237 Cal.App.4th 1311 (2015), addressed the uninsured. The court in Bermudez noted that “the ramifications of Howell...in a case brought by an uninsured plaintiff (who has not paid his bill) are less clear.” The Bermudez court held that when a plaintiff is not insured, medical bills are relevant and admissible to prove both the amount incurred and the reasonable value of medical services provided.

The Pebley Case

In Pebley v. Santa Clara Organics, LLC, 22 Cal.App.5th 1266 (2018), a man injured in an auto accident was insured, but he chose physicians and facilities outside his network. According to the defense, the patient was referred to the treating physician by the attorney handling his lawsuit. The Pebley court wrote, “Such a plaintiff shall be considered uninsured, as opposed to insured, for the purpose of determining economic damages.” This means that medical costs in cases in which the plaintiff goes out of network will be determined through introduction of medical bills and by expert testimony about the reasonableness of the asserted costs. It is worth noting the defense’s expert testified that the plaintiff’s surgery was billed at more than double the customary rate. More troubling is the opinion’s reference to an article by one of the patient’s attorneys. The court writes that “the authors propose, however, that insured plaintiffs use the lien form of medical treatment, which ‘effectively allows the plaintiff and his or her attorney to sidestep the insurance company and the impact of Howell, Corenbaum and Obamacare.’ They maintain that treating on a lien basis increases the ‘settlement value’ of personal injury cases.”

The California Supreme Court has declined to review the Pebley decision, leaving the door open for more lien-based medical care and more inflated damage claims based on costs far in excess of what plaintiffs using their health insurance would have been liable for. Defendants still have the right to contest the reasonableness of medical costs, but the notion of plaintiffs’ attorneys scheming to generate exorbitant damages is cause for grave concern. The Pebley opinion, while not binding on other state courts, is still likely to have an impact beyond California. A recent Tennessee case rejecting the defense’s calculation of medical damages cited a Pennsylvania appellate case as the basis for its holding.

The Doctors Company has been at the forefront in lobbying to protect the rule in Howell from legislative attacks and to limit or prevent claims for phantom damages in other states. We will continue to be a leader in protecting and defending the practice of good medicine and in advocating for healthcare providers.

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