Medical Billing, Insurance Write-Offs and the Collateral Source Rule

By Gary L. Wickert, Matthiesen, Wickert & Lehrer, S.C. | January 11, 2018

Recovery of Medical Expenses in Personal Injury Actions Generally

To recover damages for past medical expenses in a personal injury lawsuit, a plaintiff must present evidence and prove that the medical expenses incurred were both “reasonable” and “necessary.” For more than 100 years, this simple formula was the least complicated aspect of a plaintiff’s personal injury case. To get medical bills into evidence and recover them as an element of damage, plaintiffs simply needed to prove:

  1. The plaintiff has paid or become liable to pay the medical bills;
  2. The plaintiff necessarily incurred the medical expenses because of injuries resulting from the defendant’s negligence; and
  3. The charges were reasonable for services of that nature.

The law in every jurisdiction allowed plaintiffs to recover the “reasonable value” of the medical services incurred. Today, however, defendants have begun objecting to medical bills, claiming that such medical expenses are neither “reasonable” nor “incurred” by the plaintiff. Lawyers for defendants across the country are now frequently arguing that the bills were not actually “incurred” by the plaintiff because they were paid by a collateral source (e.g., private health insurance, state Medicaid, Medicare, workers’ compensation, governmental assistance programs, etc.). A “collateral source” is benefits received by the plaintiff from a source wholly independent of and collateral to the wrongdoer. The defendants argue that the medical bills are not “reasonable” because they were reduced or written off by the insurance provider, who accepted insurance payments; thus, defendants argue that the injured plaintiff’s reasonable medical expenses and damages should be limited to sums “actually paid” by the insurer and proof of the full medical charges that were billed (either written-off or paid by insurance) should be excluded. Proving the reasonable value of medical services has become both controversial and confusing; and every state has gone its own way in dealing with the issue.

EXAMPLE: A plaintiff is injured because of the defendant’s negligence and requires medical treatment for which he is billed $200,000. Thankfully, the plaintiff has private health insurance, and the doctor and hospital accept $65,000 from the insurance company in satisfaction of the bill. The plaintiff sues the defendant and wants to recover $200,000 as the reasonable and necessary medical expenses which he “incurred” and was billed for. The defendant files a motion asking the judge to limit the plaintiff’s recovery of medical expenses to the $65,000 that the health care providers accepted as payment. In this example, what is the reasonable value of medical services? $200,000? $65,000? Or, something in between?

Judges and legislatures struggle to arrive at equitable rules of damages and evidence that take these factors into consideration. The result is a confusing patchwork of laws depending on which state a case is filed in.

Insurance Write-Downs, Write-Offs, and Medical Billing

In years gone by, medical billing was simple. A doctor or hospital would charge a reasonable fee for medical services, and the patient would pay it. However, that is rarely what happens in today’s complex health care and insurance environment, where a complex web of negotiated rates, explanations of benefits, contractual relationships, health care coding, hundreds of different billing procedures, and the involvement of Medicare and Medicaid government billing requirements, render the process incomprehensible. Today’s health care providers almost always accept a lesser amount in satisfaction of the bill pursuant to these contractual relationships. When a person injured in an automobile crash receives medical treatment, the provider may accept $700 from the patient’s health insurance carrier for that care even though the provider’s “normal” charge would be $1,500. The amount beyond what is accepted in full satisfaction of the bill is considered a “discount”, “write-down”, or “write-off.”

Being treated by a doctor may seem like a two-party interaction, but, it’s part of a large, complex system of information and payment. While the insured/patient may only have direct interaction with the doctor, it is really a three-party relationship – the patient, the health care provider (doctor, hospital, etc.), and the payer or entity which ultimately pays the bill (health insurer, government, etc.). When a patient receives medical services from a healthcare provider, they’re typically presented with a bill at the end of their treatment. The final bill is created by a medical biller who looks at the balance the patient has, adds the cost of the procedure or service to that balance, deducts the amount covered by insurance, and factors in a patient’s co-pay or deductible. Medical coders use medical reports to accurately translate medical services into code. It has become a language unto itself. Billers then abstract information from patients’ medical records and insurance plans to create accurate medical bills. The final amount paid on a $200,000 medical bill – $65,000 in the example above – depends on an entire medical billing industry which involves the complicated overlap of medical billing, diagnosis codes, ICD codes, medical compliance, “allowed amounts”, capitation, co-insurance, EOB’s, and utilization limits. The unpaid balance of $135,000 is either written off, billed to the patient in a practice known as “balance billing”, and/or passed on to other patients in the system in the form of inflated charges. Note that “balance billing” (insurance company sends patient bill for balance of services insurance doesn’t pay for), usually occurs when a patient goes “out-of-network” for medical services, and there is no contract between the provider and the insurance company agreeing to the discounted insurance rates. Balance billing for in-network providers is generally illegal. However, it is legal when the patient uses a provider that doesn’t have a contractual relationship or seeks services not covered by insurance.

There are 1,068 for-profit hospitals in the U.S. A for-profit hospital is owned by investors, distributes profits to its investors, raises capital through investors, and must pay income and property tax. There are 2,894 non-profit hospitals in the U.S. They must invest all profit in the organization, are exempt from paying state and federal taxes on income and property, and must report “community benefits” offered by the facility. There are 983 state and local government-owned or “public” hospitals in the U.S. They are funded by federal, state, and local taxes, as well as donations and grants. Nearly 67% of U.S. hospitals are losing money, particularly when it comes to the treatment of Medicaid/Medicare patients.

The method and amount of reimbursement for hospitalization differs substantially from insurance company to insurance company. It depends on the contractual deal they have in place with the providers. It’s not just that the rate is different for each service, but that different payers will reimburse different services. Medicare, for example, bases their reimbursement rate solely on the patient’s diagnoses. A diagnosis of Ataxia-Telangiectasia will get a fixed Medicare payment regardless of how long the patient stays in the hospital, what tests are ordered, or what treatment is given. Other payers might pay by the day, or based on each individual service the patient receives. Moreover, hospitals do all their bills the same way, no matter who the payer is. So, the best way for them to get paid is to put anything that might be reimbursed by any payer on every bill. Different insurance companies will pay doctors a different amount for the same billing code. The same insurance company will also pay different doctors a different amount for the same billing code depending on the type of policy a patient has. Different insurance companies will also approve and disapprove of different services, so it’s difficult to know in advance what will be paid. The same insurance company might have several different methods of payment depending on the patient’s type of policy.

“Reasonable” Value of Medical Services

In recent years, the issue of what is considered the “reasonable value” of medical services has become complicated and distorted by the deep discounts demanded by insurance companies, laws that require hospitals to treat patients who cannot pay, and benefits like Medicaid and related state programs that pay a set amount for all treatment of a patient. The result has been an ever-widening gap between hospitals’ standard rates for uninsured patients and the discounted amounts hospitals accept from insurance companies. Moreover, the types and number of “collateral sources” available to plaintiffs have multiplied. In addition to the insurance and gratuitous payments that were the subject of early collateral source rules (see below), in today’s environment, plaintiffs in personal injury cases may have received benefits from unions, free treatment at a veterans’ facility, or at a reduced rate at a charity-affiliated provider. Collateral sources include employment benefits offered by employers, workers’ compensation programs, occupational accident plans and policies, or pensions under special retirement acts. In addition, the pricing, payment, and reimbursement system for health care providers itself has become exponentially more complex. The rise of Managed Care Organizations (MCO) in the 1980s was a partial “solution” to rising health care costs. In the process, however, patients gave up their freedom of choice among doctors and hospitals in return for slightly better cost control. Managed care has further distorted pricing for health care services, as the deep discounts demanded by the MCOs require providers to offset those discounts by charging higher prices to other patients. Some social legislation benefits eschew the traditional fee-for-service model in favor of pool payments or a set “capitation” amount for all treatment of a single patient. Hospitals are often legally required to provide treatment for patients who either are insured by companies with whom the hospital has no contractual relationship or who have no insurance at all. Federal statutes prohibiting “patient dumping” also complicate the valuation of medical expenses. What is “reasonable” has become less clear and more contentious than it was 50 years ago. As observed by courts and legislatures across the country, these developments have caused the issue of what constitutes a reasonable medical expense to become the subject of increased litigation and legislation. States have generally adopted one of three basic approaches to how much of a medical expense can be introduced into evidence and how much can be recovered:

1. “Amount Paid.” The “actual amount paid” approach limits a plaintiff’s recovery to the amount paid to the medical provider, either by insurance or otherwise. States adopting this approach generally seek to avoid allowing plaintiffs any so-called “windfall” from tortfeasors. They take the position that limiting plaintiffs’ recovery to the amount paid to the medical provider is not contrary to the Collateral Source Rule (CSR) because the rule is not implicated. They feel that limiting damages will help the liability insurance industry and help the business economy of their state. When insurance payments are used to compensate the plaintiff’s medical providers, they reason, limiting the plaintiff’s recovery to only the amount paid by the insurance company to the medical provider simply permits the plaintiff to recover no more than he has expended.

The leading case on the “actual amount paid” approach is the California case of Howell v. Hamilton Meats & Provisions, Inc., 257 P.3d 1130 (Cal. 2011). According to the view expressed in Howell, 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 negotiated rate differential is not an expense “incurred” by the plaintiff, because neither the plaintiff nor the plaintiff’s insurer will be expected to pay it. The differential is not an insurance benefit to the plaintiff; it is instead a benefit to the insurer that results from the insurer’s negotiations with medical providers. Few other courts have chosen to follow this approach. Where they have, the result is often dictated to some extent by statute.

The “actual amount paid” approach has been heavily criticized. The Howell reasoning – that the CSR is inapplicable to third-party payment of the plaintiff’s medical debts, but is still in force for third-party forgiveness of the same debt – has been called “schizophrenic” and “incoherent.” McConnell v. Wal-Mart Stores, Inc., 995 F. Supp.2d 1164 (D. Nev. 2014). It is also criticized because of the disparity that results in cases where the victim is insured as opposed to those where the victim is uninsured. The negligent tortfeasor wins the lottery when the victim he injures happens to be prudent and has bought insurance, but is punished when the victim has no insurance. As one court noted, reducing an insured plaintiff’s recovery by the negotiated rate differential “overlooks the fundamental purpose of the [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.” Acuar v. Letourneau, 531 S.E.2d 316 (Va. 2000). Pennsylvania, Idaho and California are examples of states whose courts have held that only evidence of the amount paid is relevant and admissible. New York, Florida, and Minnesota are states that apply the CSR, requiring a post-verdict reduction of the difference between the amount billed and the amount paid.

2. “Amount Billed.” (“Benefit of the Bargain”). This approach permits recovery of the full, undiscounted medical bills, including the write-off amounts, only where the plaintiff paid consideration for the insurance benefits. It gives the prudent plaintiff the “benefit of the bargain” of having purchased insurance. Under this approach, when the plaintiff is privately insured, the negotiated rate differential is considered “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. However, courts that follow this approach do not allow plaintiffs to recover the amount of their full bills if they did not pay for the benefit of discounted rates and write-offs.

The “benefit of the bargain” approach has been criticized as protecting the rich and hurting the poor, since persons who can pay for insurance are the only personal injury plaintiffs who may recover the negotiated rate differential. Stated another way, this approach promotes inherent discrimination among beneficiaries from different programs and insurance companies. Another criticism of the “benefit of the bargain” approach is that it “undermines the CSR by using the plaintiff’s relationship with a third party to measure the tortfeasor’s liability.” Leitinger v. DBart, Inc., 736 N.W.2d 1 (Wis. 2007). The CSR ensures that the liability of similarly situated defendants is not dependent on the good fortune of the way each plaintiff’s medical expenses are financed.

Appellate courts in fifteen (15) states and the District of Columbia have held that the injured plaintiff may recover the amount billed, and bar the defendant from presenting evidence of the lower amount that the health care provider accepted to satisfy the bill. Most of these courts ground their decision on the common law CSR. The “billed only” rule applies in Arizona, Colorado, Delaware, District of Columbia, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Massachusetts, Mississippi, Oregon, South Carolina, South Dakota, Virginia, and Wisconsin.

3. “Reasonable Value.” With this approach, plaintiffs may recover the “reasonable value” of their medical expenses, regardless of whether the plaintiff is privately insured. It should be noted that the courts have approached the definition of “reasonable value” in different ways, and with different results. Among states that use this approach, a minority defines “reasonable value” as the actual amount paid, while a majority holds that the “reasonable value” can be the plaintiff’s full, undiscounted medical bills. A few courts use a “hybrid” method, allowing the trier of fact to consider both the actual amount paid and the full bill in determining the “reasonable value” of medical services provided to the plaintiff. Iowa, Ohio, Indiana, and Kansas are examples of states that have decided that a jury may consider both the amount billed and the amount paid in determining the “reasonable value” of the medical services.

The few states that define “reasonable value” as the discounted amount accepted by medical providers have generally used reasoning based on comment h to § 911 of the Restatement (Second) of Torts, which focuses on the exchange value of property or services, instead of ֻ§ 920A (CSR). Bynum v. Magno, 101 P.3d 1149 (Haw. 2004). This version of the “reasonable value” approach is similar to the “actual amount paid” approach. The Howell court similarly relied on comment h to § 911 of the Restatement (Second) of Torts. Critics of the “reasonable value/actual-amount-paid” approach point out that § 911 of the Restatement (Second) of Torts was never intended to apply to cases involving physical harm. Instead, it is intended to apply in cases where a plaintiff sues to recover the value of property or services the plaintiff rendered to the defendant. In contrast, § 920A applies to “Harm to the Person.”

Some states that permit plaintiffs to recover their full, undiscounted medical bills, believe that plaintiffs are entitled to claim and recover the full amount of reasonable medical expenses charged, based on the reasonable value of medical services rendered, including amounts written off from the bills pursuant to contractual rate reductions. These courts adhere to the traditional CSR. Other states that permit plaintiffs to recover their full, undiscounted medical bills use a “hybrid” method of presenting evidence of “reasonable value” to the jury. Using this method, plaintiffs may submit their full, undiscounted medical bills to establish the “reasonable value” of the medical services received. The defendants, however, may submit evidence that the plaintiff’s medical providers accepted less than the full bills to rebut the reasonableness of the full bills, so long as insurance is not mentioned.

In determining the amount of damages to be presented as evidence in a personal injury trial, judges are often called on to decide whether to admit as evidence the higher, billed amount, the lesser amount actually paid as the cost of services rendered after the write-off, or both. They must also decide what final amount the injured plaintiff is entitled to recover as an element of damages. The result is a very awkward collision between the realities of today’s health insurance industry, modern medical billing, and a 200-year-old legal rule known as the Collateral Source Rule (CSR).

Collateral Source Rule (CSR)

The modern Collateral Source Rule (CSR) has been called one of “the oddities of American accident law.” John G. Fleming. The Collateral Source Rule and Loss Allocation in Tort Law, 54 CAL. L. REV. 1478 (1966). It states that if an injured party (plaintiff) in a civil lawsuit receives benefits from an insurance policy or some other source independent of the third-party tortfeasor (defendant), such “collateral” benefits will not be revealed to the jury or introduced into evidence, and will not be deducted from the total damages awarded to the plaintiff. Such damages paid by a collateral source are also pejoratively referred to by the tort reform advocates as “phantom damages.” The Restatement of Torts, Second, defines the CSR in § 920A(2):

§ 920A Effect of Payments Made to Injured Party

(1) A payment made by a tortfeasor or by a person acting for him to a person whom he has injured is credited against his tort liability, as are payments made by another who is, or believes he is, subject to the same tort liability.
(2) Payments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor’s liability, although they cover all or a part of the harm for which the tortfeasor is liable.

The CSR is both a rule of damages and a rule of evidence. As a rule of damages, it prohibits the tortfeasor from reducing payment of a tort judgment by the amount of money received by an injured party from other sources. As a rule of evidence, it bars the admission of evidence that the injured plaintiff received payment for any part of his damages, usually medical expenses, from other sources. Simply put, the CSR requires the party responsible for causing the injury to compensate the victim of the accident for all harm caused and not merely the net loss suffered by a victim. The rationale behind the rule is that if the plaintiff was himself responsible for the collateral benefit, as by maintaining his own insurance or by making advantageous employment arrangements, the law allows him to keep it for himself. If the benefit was a gift to the plaintiff from a third party or established for him by law, he should not be deprived of the advantage that it confers.

The underlying rationale for this plaintiff-friendly rule is that if the law must choose between allowing the plaintiff to receive more than his actual loss or allowing the defendant to pay less than the damage he inflicted, then the more equitable choice is to allow the plaintiff to receive more than his loss, rather than giving the defendant the windfall of the prudent plaintiff. If the plaintiff has obtained and paid for medical insurance, he should receive the benefit of that bargain: the plaintiff’s insurance should not indemnify the defendant. Proponents claim evidence of collateral sources is irrelevant and prejudicial. Even if the insurer has a right of subrogation against the plaintiff’s recovery, that right should not inure to the benefit of the defendant. In practice, the CSR never requires the defendant to pay twice, and rarely allows the plaintiff to retain a windfall. The collateral benefits are usually paid for by the plaintiff, subject to a right of subrogation, or both. In states which have eliminated the CSR or modified it by statute, trial lawyers argue that the existence and amount of liability insurance should also be admissible in civil trials, putting all the cards on the table for a jury. They also argue that, if the CSR can be modified, allowing evidence of collateral sources, then the discounted medical bills should be considered proven as reasonable and necessary upon testimony by the patient that the bills were incurred.

History of Collateral Source Rule (CSR). The CSR is a relatively new legal concept in the common law. Before there were significant “collateral sources” such as health insurance, workers’ compensation, auto insurance, etc., there was no need for the rule. The concept behind the rule originated from common law in England as early as 1823. It was adopted in the U.S. in 1854. The Propeller Monticello v. Mollison, 58 U.S. (17 How.) 152 (1854). The actual term “collateral source” derived from language used in a Vermont decision some years later. Harding v. Town of Townshend, 43 Vt. 536 (1871). The Vermont Supreme Court described the rule in terms similar to those used by the U.S. Supreme Court in Mollison, but the Vermont Court for the first time characterized insurance proceeds received by the plaintiff as “collateral” to any recovery from the wrongdoer. Over time, all fifty states adopted some form of the CSR and followed the rule in its traditional form.

Over time, and especially during the recent era of tort reform, the CSR has received unfavorable press. The impetus for changing the rule came from the perceived crisis in medical costs when medical malpractice litigation proliferated over the past three decades, and medical malpractice litigation was blamed by some as a significant cause. Doctors and their liability insurers were particularly outraged when asked to pay malpractice judgments that included not only very large sums for non-economic losses, but also the doctor’s own services, corrective services, and additional health care for which the patient had been fully compensated by health insurance programs of one sort or another. Banks McDowell, The Collateral Source Rule—The American Medical Association and Tort Reform, 24 Washburn L.J. 205 (Winter 1985). The emphasis in some jurisdictions began to switch from not allowing the plaintiffs’ purchase of collateral sources to become a windfall for the negligent tortfeasor, to preventing the plaintiff from recovering twice for the same element of damage (e.g., medical expenses recovered once from an insurance policy and a second time from the defendant). States began to enact collateral source statutes which significantly modified or altered the common law rule.

The common law CSR developed during a time when health insurance and publicly provided health benefits did not exist. Ever-changing circumstances in health insurance and health care billing have prompted reconsideration and modification of the CSR in many jurisdictions. This is especially true with regard to recovering reasonable and necessary damages in personal injury litigation. Tennessee recently established its long-awaited rule in Dedmon v. Steelman, 2017 WL 5505409 (Tenn. 2017). There was hope within the Tennessee Defense Lawyers’ Association that the present rule, that allowed plaintiffs to submit evidence of the full, undiscounted medical bills as proof of the “reasonable” value of medical services, would finally end. On November 11, 2017, the Supreme Court declined to alter existing law in Tennessee, holding that the CSR applies to the proof and recovery of past medical expenses in personal injury cases, despite deep write-offs and the payment of the bill by private health insurance. Consequently, plaintiffs may continue to submit evidence of the plaintiff’s full, undiscounted medical bills as proof of reasonable medical expenses. Furthermore, defendants are precluded from submitting evidence of discounted rates accepted by medical providers from the insurer to rebut the plaintiffs’ proof that the full, undiscounted charges are reasonable. They remain free, however, to submit any other competent evidence to rebut the plaintiffs’ proof on the reasonableness of the medical expenses, so long as that evidence does not contravene the CSR. Three years earlier, the Supreme Court had held that, in the context of the Hospital Lien Act (§ 29-22-101), the term “reasonable and necessary medical expenses” limits the charges to the discounted cost of medical care that is paid by a private insurer or collateral source provider. West v. Shelby County Healthcare Corp., 459 S.W.3d 33 (Tenn. 2014). At the time of the Dedmon decision, three federal district courts in Tennessee had concluded that the West rule applied in personal injury litigation as well. Smith v. Lopez-Miranda, 2016 WL 1083845 (W.D. Tenn. 2016); Hall v. USF Holland, Inc., 2016 WL 361583 (W.D. Tenn. 2016); Keltner v. U.S., 2015 WL 3688461 (W.D. Tenn. 2015).

Statutes. A few states, including Arkansas and Kentucky, have abrogated the CSR to some degree by statute. This is sometimes done as part of broader tort reform legislation, as in Texas and Missouri. Some states, including Indiana, Alabama, Ohio, and Iowa, have legislated a “hybrid” rule which allows the jury to consider evidence of both the plaintiff’s undiscounted medical bills and the discounted amounts, to assess the reasonableness of the plaintiff’s medical expenses. States such as Tennessee have abrogated the CSR through legislation, but only in health care liability and workers’ compensation cases.

Common Law / Case Decisions. Only a few states have limited plaintiffs’ medical expense damages to the discounted insurance amounts, but it is a growing trend. A few states allow defendants to use the insurance payments to reduce their liability. Both approaches violate the CSR and result in plaintiffs with insurance being treated quite differently from plaintiffs without insurance. Neither approach considers benefits other than private insurance, such as Medicaid, state Medicaid programs, charity, employer benevolence, or gifts. The means and methods of pleading, proving, and recovering medical expenses, however, remain inextricably tethered to the CSR.

The interplay between the CSR and the recovery of the full, undiscounted amount of medical expenses, can be set forth by statute, through common law and case decisions, and frequently through a combination of both. Some jurisdictions have not formulated a clear view, while others have taken inconsistent approaches depending on the facts involved or the court rendering the decision. In some states, statutes act as a rule of evidence, governing what evidence is allowed in proving the reasonableness of medical expenses. In other states, statutes act as a rule of damages, limiting recovery to discounted amounts after “write-offs.”

Despite becoming a firmly established principle of tort law in most states, many questions have arisen concerning the scope of the CSR: Does it apply to free medical services? Does it apply to services paid by Medicare or Medicaid? Can a plaintiff submit to the jury the amount initially billed for medical services, as opposed to a discounted amount that her private insurance company paid to her health care providers? What are the proper foundational requirements to introduce an unpaid medical bill? Can the defense introduce evidence of the discounted amount actually paid? Can the trial court reduce a plaintiff’s damages award to the amount actually paid by the collateral source? Some states have answered these questions, while others haven’t.

A thorough understanding of how medical expenses are proven and recovered in civil litigation is a necessity for lawyers, legislators, claims professionals, and judges alike. The law regarding what evidence can be used to prove medical expenses and the amount of medical expenses that can be recovered by a plaintiff in cases involving personal injury has been changing from state to state at light speed. A few states have even declared their CSR to be unconstitutional. View chart (begins on page 7) that provides an overview as to the law in all 50 states regarding the treatment of “reasonable” medical expenses, write-offs, and the collateral source rule.

About Gary L. Wickert, Matthiesen, Wickert & Lehrer, S.C.

Gary Wickert is an insurance trial lawyer and a partner with Matthiesen, Wickert & Lehrer, S.C., and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and is a national and international speaker and lecturer on subrogation and motivational topics. He can be reached at

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