Reviews and Cases of Note

Journal of Legal Economics, Mar 2008 by Ireland, Thomas R

Special Editors: Lane Hudgins, Thomas Ireland, and Gerald Martin

This will be the first in a series of features on "Reviews and Cases of Note" in the Journal of Legal Economics that will focus on reviews of legal decisions, case studies and articles of interest to forensic economics that may have appeared in media that forensic economists do not typically read. The papers will not present original research in the sense usually required for double-blind editorial review. It must be written well enough to satisfy members of the editorial board of the journal, but reviews of this kind should not be claimed as "peer reviewed publications." Lane Hudgins, Tom Ireland and Jerry Martin will serve as editors for this section, but other editorial board members may also be asked to comment on submissions. One of the objectives of this section is to assist writers in getting their reviews into publishable condition. Reviews should be short, but we will try to work with persons submitting reviews to get their reviews into publishable form to a degree that would not be appropriate with double blind editorial review. If you want to submit reviews for future issues, send drafts or suggestions to Tom Ireland at ireland@umsl.edu. Regular submission fees will not be charged. When legal cases are described, as in this first review, it should be understood that the author or authors are not legal experts and the descriptions provided should not be assumed to be authoritative or "good law" without consultation with a qualified legal expert.

The Concept of Reasonable Value in Recovery of Medical Expenses in Personal Injury Torts*

In a recent Arizona case, I was asked by George Crough, an attorney for the State of Arizona, to look into an issue I had not previously confronted, but which I subsequently discovered has been the source of litigation throughout the United States. The issue George Crough wanted me to consider and address was the determination of the reasonable value of past medical expenses of an injured plaintiff. This was a damages element I had always taken for granted. In all of my previous cases, I was told by my retaining attorney what amount of past medical expenses the plaintiff had incurred. Typically, I did not (and still do not) mention this issue in most of my reports of economic damages caused by an injury to a plaintiff. I had always thought that past damages were whatever they were and that an economist, as an economist, added no value by adding up those expenses. In this case, however, the issue was more complicated. I discovered that the issue was so complicated that case law in how to deal with it varies significantly from state to state and that some states have passed legislation dictating how that issue should be handled. I have thus far found and described 20 legal decisions that provide the substance readers may wish to consider if confronted with that issue.

The issue can best be illustrated with an example based on assumed facts. Assume that an automobile accident has caused a personal injury that resulted in a plaintiff spending several months in a hospital. The plaintiff's bills for treatment by medical doctors, tests, surgical interventions and hospitalization totaled $500,000. The plaintiff however had good medical insurance and those bills were paid for by the plaintiff's insurance. Assume that the obligations of the plaintiff have been completely covered so that the insurance company has no right to claim any portion of the plaintiff's award if the plaintiff wins a tort recovery that includes his medical expenses. (This means that there is no right of subrogation. See the definitions that follow this introduction to relevant legal decisions.) The plaintiff has had no outof- pocket expense and will have no future out-of-pocket expense for past medical treatments, regardless of the size of the award the plaintiff wins in tort litigation. However, the actual amount paid for the plaintiff's medical bills by the plaintiff's third party insurer was $100,000. The 5 to 1 ratio between amount billed and the amount paid in this example is not unusual. The amount paid by third party payers is typically only a small fraction of the amount originally billed by medical care provides. Third party payers have contracts with medical care providers that define how much third party payers, including Medicare and Medicaid programs, will pay based on original amounts billed and only a small fraction of persons receiving medical services actually pay original amounts billed for those services.

In the Arizona case in which I was retained, there was no question that collateral source offsets could not be taken. That is not true in all states and in all types of legal actions. California's MICRA legislation for medical malpractice cases allows offsets for collateral source payments to be taken from alleged damages amounts. New York allows offsets for a wide variety of collateral offsets in all types of tort litigation. Other states also have exceptions to the general rule that offsets for collateral sources cannot be taken, particularly in medical malpractice cases. The issue I confronted was not about whether offsets for collateral source payments could be taken. Offsets for collateral source payments were not permitted in Arizona. The plaintiff was going to receive an award equal to the "reasonable value" of his past medical expenses if the plaintiff proved liability. The plaintiff would get to keep whatever was awarded for past medical expenses even though the plaintiff had no out-of-pocket costs relating to those expenses. That fact was not being challenged in the case I was involved with. What was being challenged was whether the amount to be recovered as a "windfall gain" by the plaintiff was the amount originally billed by medical care providers, the amount actually paid by the plaintiff's third party payers, or some figure in between those two amounts. (I have put quotations around the term "windfall gain" because it is doubtful that the plaintiff has been "made whole" in the sense that he would have consented in advance to the injury for the amount awarded in the tort action. In that sense, even though the amount awarded for past medical expenses did not replace any out-ofpocket less, it also probably did not make the injured plaintiff better off than if the injury had not occurred.)