Wills v. Foster: A Split Decision in the Battle Between Compensatory Damages and the Collateral Source Rule

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1 Illinois Association of Defense Trial Counsel Springfield, Illinois IDC Quarterly Volume 18, Number 4 ( ) Feature Article By: David B. Mueller and Gay Nell G. German Cassidy & Mueller Wills v. Foster: A Split Decision in the Battle Between Compensatory Damages and the Collateral Source Rule Introduction With its recent decision in Wills v. Foster, 229 Ill. 2d 393, 892 N.E.2d 1018 (2008), the Illinois Supreme Court has laid to rest the question of whether compensatory damages include reparations for medical expenses that were neither paid by the injured plaintiff nor assessed as liabilities against him or her. Following Wills, the starting point in considering the amount that a plaintiff may recover for medical expenses is the reasonable value of the services that were received. Whether those services were rendered gratuitously or the provider was paid substantially less than the plaintiff claims makes no difference. As the following discussion points out, the requirement of compensation commensurate with loss has surrendered to the collateral source rule. Similarly, the prohibitions against windfalls and double recoveries have been subordinated to punishing the wrongdoer. In this latter context, the decision in Wills reflects a clear preference for allowing a plaintiff to recover the value of medical services that were never billed by the provider if the alternative would allow the defendant to benefit from the gratuity. Wills is the logical terminus of the legal path that the supreme court commenced in Arthur v. Catour, 216 Ill. 2d 72, 833 N.E.2d 847 (2005). Both decisions consider the question of the extent to which medical expenses are recoverable where there is a disparity between the amount that was billed and the sum that was accepted as payment in full by the providers. Arthur involved payment by a private insurer. In Wills, Medicare and Medicaid paid the medical expenses. In both instances, there were deep discounts between the amount that was billed and the amount that was paid. In both cases, the supreme court held that the plaintiff was entitled to recover the reasonable value of the services, even though that value might be different from the amount that was billed or the amount that was accepted in satisfaction of the bill. Although it is possible to understand the holding in Wills without appreciating the legal history and the reasoning that led to the decision, simplification of that type is like the scent of a meal without the flavor. The following analysis of the issue s evolution is intended to put the problem and its current solution in proper perspective. Compensation Equal to Loss vs. The Collateral Source Rule The objective of compensatory damages is to substitute money for a plaintiff s loss that results from the negligence or other fault of another. In that regard, the following approved pattern jury instruction is given without exception in every bodily injury case: Page 1 of 7

2 If you decide for the plaintiff on the question of liability, you must then fix the amount of money which will reasonably and fairly compensate him for any of the following elements of damages proved by the evidence to have resulted.... Illinois Pattern Jury Instructions: Civil (2006) (emphasis added). Thus, the objective of fair compensation is an honest recompense for the injury that was sustained. As stated by the court in Peterson v. Lou Bachrodt Chevrolet Co., 76 Ill. 2d 353, 363, 392 N.E.2d 1 (1979): The purpose of compensatory tort damages is to compensate (Restatement (Second) of Torts sec. 903, Comment a (1979)); it is not the purpose of such damages to punish defendants or bestow a windfall upon plaintiffs. The view that a windfall, if any is to be enjoyed, should go to the plaintiff (Grayson v. Williams (10 th Cir. 1957), 256 F.2d 61, 65) borders too closely on approval of unwarranted punitive damages, and it is a view not espoused by our cases. Section 903 of the Restatement (Second) of Torts ( the Restatement ) provides that compensatory damages are the equivalent of compensation, indemnity or restitution for harm sustained by the plaintiff. This is in contradistinction to Section 901(c), which describes as one objective of damages the punishment of wrongdoers and thereby deterrence of wrongful conduct. By definition, that is the function of punitive or exemplary damages. Illinois Pattern Jury Instructions: Civil (2006). Medical expenses have always been an element of an injured plaintiff s damages. In that respect, the historic rule is that a party who is injured through the negligence of another may recover the reasonable expense of necessary medical care, treatment, and services incurred because of those injuries. Wicks v. Cuneo- Henneberry Co., 319 Ill. 344, 349, 150 N.E. 276 (1925); North Chi. St. Ry. Co. v. Cotton, 140 Ill. 486, 498, 29 N.E. 899, (1892). The rule had two substantive prongs. First, the plaintiff had to be liable for the expenses. Second, the expenses had to be reasonable and necessary for the treatment of the injuries suffered as a result of the defendant s negligence. Thus, in Peterson, the plaintiff was not entitled to recover the value of medical services that were rendered gratuitously by the Shriners Hospital for Crippled Children. Working against the element of loss as the sine qua non for compensatory damages is the collateral source rule. It is not uncommon for an injured plaintiff to have all or a portion of his medical expenses paid by an insurance policy or plan that he purchased or received as an employment benefit. In those instances, the collateral source rule provides that the damages that are recoverable from the defendant are not decreased by the insurance proceeds. The rationale behind the rule is straightforward. The injured party, either directly or indirectly, paid the premiums for that coverage. Wilson v. Hoffman Group, Inc., 131 Ill. 2d 308, , 546 N.E.2d 524 (1989). Therefore, he should not be deprived of the benefit of his bargain. As a corollary, the rule is also underpinned by the reasoning that the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of contracts or other relations that may exist between the injured party and third persons. Id. at 320. Before Wills, the collateral source rule in Illinois required: (1) an obligation on the part of the plaintiff to pay for the services and (2) the contribution, actual or constructive, by the plaintiff to the insurer, employer or other third party who paid the bills. As those elements were lacking in Peterson, the collateral source rule did not apply and the plaintiff was unable to recover for the charitable services that were received. Although there is considerable logic and public policy behind the Peterson limitations upon the collateral source rule, those limitations are contrary to the breadth and the scope of the collateral source rule that is found in the following language of Section 920A(2) of the Restatement: (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. Page 2 of 7

3 Comment c to Section 920A includes within the categories of payments made to or benefits conferred on the injured party from other sources the following: (3) Gratuities. This applies to cash gratuities and to the rendering of services. Thus, the fact that the doctor did not charge for his services or the plaintiff was treated in a veteran s hospital does not prevent his recovery for the reasonable value of the services. (4) Social Legislation Benefits. Social security benefits, welfare payments, pensions under special retirement acts, are all subject to the collateral-source rule. Consistently, Comment f of Section 924 of the Restatement includes as recoverable damages the value of medical services although they have created no liability or expense to the injured person, as when a physician donates his services. The Restatement s view also has found a common-law home in a majority of jurisdictions, as discussed by then-chief Justice McMorrow in her Arthur dissent. See Arthur, 216 Ill. 2d at (McMorrow, C.J., dissenting). On the issue of reasonableness, Illinois historically indulged the so-called paid bill rule of evidence. As stated by the court in Arthur: The premise is that a consumer will not willingly pay an unreasonable amount or unusual charge for a service.... Id. at 82. Consequently, a bill was prima facie reasonable if it was paid. Under that rule, sufficient foundation for admission of the bill was laid by testimony of the plaintiff that it had been paid, regardless of the payor. Practically, there was little dispute regarding the reasonableness of medical bills because it was commonly accepted that the amount billed was the amount paid. That perception has been replaced by the current reality that there is generally a wide disparity between the charges that are made and the payments that are received and accepted in satisfaction of those charges. That gap is the subject of the decisions in Arthur and Wills. Accounting for the Difference This article is the second by its lead author on the subject of discounted medical expenses. The first was entitled Arthur v. Catour In the World of Compensatory Damage: A Consideration of Arthur v. Catour in the Context of Its Ancestors and Its Progeny, published in Volume 17, Number 3 of the IDC Quaterly. In that article, we pointed out that the difference between the amounts that are billed by health care providers and the sums that are accepted in payment is largely the product of cost shifting as a consequence of the continuing constriction of payments by Medicare. A brief précis of that discussion is beneficial, because it explains why there are different prices for the same services by the same provider. It also permits an understanding of how the cost of health care varies from patient to patient and answers the question of why the value of a procedure fluctuates inversely to a patient s ability to pay. The healthcare crisis, which accounts for disparate bills for identical services, began in 1983 when Medicare switched to the diagnosis related group (DRG) method of reimbursement. Before the adoption of DRGs, the government paid on a fee-for-service basis. For example, an appendectomy might have a hospital component of $1,000. When DRGs were instituted, the government would pay only the arbitrary value that it assigned to that procedure. At first, and for the purposes of the example, the DRG for an appendectomy might be $1,000. The second year, the DRG was reduced to $900 and thereafter it continued to drop to the point where Medicare might pay the hospital only $500. Medicare is responsible for approximately 50% of all healthcare dollars, and therefore it has the leverage to force providers to accept its reimbursement rate. Not surprisingly, Medicare s imposition of DRGs started a cost-shifting phenomenon. Rick Mayes & Jason S. Lee, Medicare Payment Policy and the Controversy Over Hospital Cost Shifting, 3 Applied Health Econ. Pol y 153 (2004); Robert F. Coulam & Gary L. Daumer, Medicare s Prospective Payment System: A Critical Appraisal, Healthcare Financing Rev., Annual Supp. 1991, at 45; David Dranove, Pricing by Non- Profit Institutions, The Case of Hospital Costs-Shifting, 7 J. Health Econ. 47 (1980). Hospitals that otherwise Page 3 of 7

4 would have charged $1,000 but were forced to accept $500 had to make up the difference by charging other patients more than $1,000. The phenomenon is akin to squeezing a balloon on one end. The end that is squeezed contracts but the air is forced to the other end, which expands. The more that Medicare reduced its rate of reimbursement, the more healthcare providers charged their other patients. To counter that progression, insurers and employers moved in two directions. First, they increased the insured s or the employee s share of the cost through deductibles and co-pays. Second, they exerted leverage by entering into preferred provider agreements (PPOs), by which they controlled employee access to healthcare providers in exchange for reduced charges. These employer discounts then squeezed the healthcare balloon even more. Correspondingly, the opposite end expanded even more. Joyce Frieden, Healthcare Costs: The Shift Goes On, Bus. & Health, Mar. 1992, at 49-50, wherein the author observes: Businesses are another source of cost shifting. Here s how it s done: A large business in a particular community often can negotiate deep discounts with local healthcare providers. The providers then make up those discounts by charging more to smaller employers with less bargaining power. The less that Medicare and contracted payors pay for healthcare the more the bills rise to the nondiscounted patient. Using the example of the $1,000 appendectomy, Medicare would reimburse $400 only, the employer/ppo would pay $600, and the non-leveraged patient would pay $2,000. In that setting, it is difficult, if not impossible, to say what the fair and reasonable charge for an appendectomy actually is. If the provider is willing to accept $400 or $600, it is difficult to see how or why any patient should be obligated to pay $2,000. In the same respect, there is absolutely no reason why a defendant or his insurance carrier should be obligated to pay the non-discounted amount as compensatory damages where the physician or hospital accepted payment in a lesser amount from Medicare, Medicaid, the plaintiff s employer, or a healthcare insurer. From the preceding analysis, it is easy to see how and why there is no logical equation between the value of medical services that are provided and the amount that is billed for those services. Where the payor has leverage, there is a deep discount. Conversely, the private-pay patient receives the full brunt of the cost-shifted discounts that go to Medicare, Medicaid, leveraged insurers, and employers. Understandably, when the patient is a plaintiff, he or she wants the best of both worlds. The plaintiff seeks the maximum discount off the bill that he or she receives. At the same time, the plaintiff wants to recover the difference between what is billed and what is paid, despite the fact that the provider was not paid that difference. The Rubber Meets the Road As discussed in the introduction, in Arthur and Wills, the Illinois Supreme Court has resolved the philosophic and public policy dispute between compensatory damages as restitution for actual loss and application of the collateral source rule. In Arthur, the injured plaintiff received medical bills totaling $19, Blue Cross, the group insurance carrier for the plaintiff s husband s employer, satisfied those bills in full for $13, The dispute involved whether the plaintiff s provable damages were the amount of the bills or the amount paid to satisfy them. The court sidestepped the issue by relying upon the well-recognized rule that a plaintiff is entitled to recover the reasonable expenses of necessary medical care. What is reasonable is a matter of proof. The fact that the bills have been paid does not ipso facto mean that the charges are reasonable where the providers have settled for less than the amounts that were charged. The door, therefore, was open to the question of what is the reasonable value of medical services in a multi-tiered system where one amount is billed but the amount that is accepted in payment completely depends upon the payor. As recognized by Arthur, the problem is one of proof, which goes to the value, that is, the reasonableness, of the services that were rendered. In that respect, the questions are (1) what is reasonable value and (2) how is it proved. Wills carries the same analysis to the setting of discounted amounts that are paid by Medicaid and Medicare. There the amount billed was $80, and the amount paid by the respective governmental Page 4 of 7

5 agencies totaled $19, The plaintiff claimed that the collateral source rule applied and that she was entitled to the non-discounted amount that was billed. Procedurally, the trial court denied the defendant s motion in limine and allowed the jury to consider $80, as the amount of the medical expenses. In post-judgment proceedings, the defendant s motion to reduce the jury s award from $80, to $19, was allowed, subject to the following order: In the event plaintiff s medical providers seek to recover from plaintiff the difference between the amount shown on the ledgers and the amount paid by the Illinois Department of Public Aid or Medicare, plaintiff may within one year from the date of this order petition the court for a revision of this order. On the qualification level, the trial court held that benefits paid through Medicaid or Medicare do not fall within the collateral source rule. On that issue, it reasoned: [B]ecause the benefits conferred upon plaintiff did not result from a bargained-for exchange with a third party who provided the benefits, the collateral source rule does not apply. On appeal, the Fourth District Appellate Court held that benefits that are paid through Medicaid or Medicare do not fall within the collateral source rule. Having made that distinction, the court then adopted the rationale of Peterson. Thereby, the appellate court held that, where the plaintiff is not obligated for the expense, he or she is not entitled to recover its value, as there is no injury to be compensated. At that point in the opinion, it would appear that a plaintiff whose medical bills were paid by a governmental agency without recourse against him or her would not be entitled to seek recovery in any amount. Consistent with that conclusion is the following reasoning, which equates the gratuitous provision of healthcare services in Peterson with Medicaid and Medicare payments: With our supreme court s decision in Peterson, it appears Illinois has aligned itself with the former set of cases and intends to exclude Medicaid and Medicare payments as collateral source within the meaning of the rule. Akin to the plaintiff in Peterson, those individuals, like plaintiff here, covered by Medicaid or Medicare do not make expenditures and have not bargained for their coverage. A covered plaintiff s liability is nonexistent as well because by accepting payments from DHFS, Medicare, or Medicaid, health-care providers have agreed such payments constitute full satisfaction of their fees. See 305 ILCS 5/11-13 (West 2004); 89 Ill. Adm. Code (i), as amended by 24 Ill. Reg (eff. December 1, 2000). Wills v. Foster, 372 Ill. App. 3d 670, 675, 867 N.E.2d 1223 (4th Dist. 2007). After Wills had been accepted by the supreme court, but before it was argued, the Third District Appellate Court decided Nickon v. City of Princeton, 376 Ill. App. 3d 1095, 877 N.E.2d 776 (3d Dist. 2007). There, the plaintiff s medical bills totaled $119, and were satisfied in full by a Medicare payment of $34, Over objection of the defendant, the plaintiff was allowed to put the bills in evidence under the paid bill rule, without proof of their reasonableness. Nor was the defendant permitted to impeach the bills either at trial or following the verdict that awarded the full amount. The appellate court affirmed without comprehending that the collateral source rule does not apply to the differential and without recognizing the admonition of the supreme court that further proof is required where the amount that is paid differs from that which is billed. Choosing to disagree with the Fourth District decision in Wills, the Third District simply held: The supreme court s answer to the evidentiary question in Arthur preempts the endless discussion of distinguishing details concerning who pays medical charges on behalf of an injured party. This practical answer to the collateral source question is easily applied without reference to the source of the payment. Pursuant to Arthur, simply give the jury the initial bill and move on with the evidence. Page 5 of 7

6 After a verdict is rendered, the trial court may consider a motion to reduce the award, as was done in this case. Nickon, 376 Ill. App. 3d Clearly, the appellate court decisions in Wills and Nickon are the point and counter-point of the argument. The former restricts recovery to the amounts that were paid. The latter looks to the amounts that were billed. As is evident from the supreme court s opinion in Wills, neither court heard the klaxon of Arthur. Recognizing that its decision in Arthur could be misconstrued, particularly in the setting of payments by governmental agencies, the supreme court set out to discuss the issue of discounted bills from all points of view. Ultimately, it adopted a standard that extends the reasoning in Arthur to all discounted or free medical services. In doing so, it established a rule that both benefits and vexes billed amount advocates and paid bill proponents. At bedrock, the court viewed the case from the perspective of the collateral source rule. Given that foundation, the question was not one of compensation for nonexistent losses, but rather whether the collateral source rule extends to government benefits and by implication to gratuitous services. In reaching its decision, the court considered the alternative approaches that have been recognized in other jurisdictions. These run from the actual amount paid rule to the benefit of the bargain approach to the reasonable value doctrine. For various reasons, the court discounted and discarded the actual amount paid and benefit of the bargain concepts. (The nature of those rules, and the court s reasoning in rejecting them, while interesting, would unduly expand the scope of this article.) The reasonable value approach has both minority and majority alternatives. A minority of courts holds that the reasonable value of medical services is the actual amount paid. See, e.g., Hanif v. Housing Authority, 200 Cal. App. 3d 635, , 246 Cal. Rptr. 192, (1988); Cooperative Leasing, Inc. v. Johnson, 872 So. 2d 956, (Fla. Dist. Ct. App. 2004); Moorhead v. Crozer Chester Med. Ctr., 564 Pa. 156, , 765 A.2d 786, (2001). The majority view is that a plaintiff may seek to recover the amount that originally was billed by the medical provider. Baptist Healthcare Sys., Inc. v. Miller, 177 S.W.3d 676 (Ky. 2005); Brown v. Van Noy, 879 S.W.2d 667 (Mo. Ct. App. 1994); Robinson v. Bates, 112 Ohio St. 3d 17, 857 N.E.2d 1195 (2006); Haselden v. Davis, 353 S.C. 481, 579 S.E.2d 293 (2003); Papke v. Harbert, 738 N.W.2d 510 (S.D. 2007); Koffman v. Leichtfuss, 246 Wis. 2d 31, 630 N.W.2d 201 (2001). The Wills court rejected the minority view and adopted the majority view. In doing so, the court adhered to its earlier decision in Arthur that the plaintiff may place the entire billed amount into evidence, provided that the plaintiff establishes the proper foundational requirements to show the bill s reasonableness. 216 Ill. 2d at The court also squarely based its decision upon the language of Section 920A and Comment f of Section 924 of the Restatement. Those sections extend the collateral source rule to any and all gratuities and social legislation benefits. Medicare and Medicaid fall within the category of social legislation benefits. The preceding analysis also caused the court to overrule its previous decision in Peterson. Thus, the holding in Wills extends the substantive aspects of the collateral source rule to their broadest extent in denying defendants credits for any benefits that satisfy a plaintiff s medical expenses, even to the point where no expenses were incurred. The court also applied the evidentiary component of the collateral source rule to those benefits. In a separate section of the opinion, it gave a negative answer to the following question: Are the Paid Bills Admissible by the Defense? Wills, 892 N.E.2d at Again following the majority rule and its reasoning in Arthur, the court held that the collateral source rule operates to prevent the jury from learning anything about collateral income and that the evidentiary component prevents defendants from introducing evidence that a plaintiff s losses have been compensated for, even in part, by insurance. Id. at 1033 (emphasis added). Where Wills v. Foster Leaves Us Page 6 of 7

7 The decision in Wills does little to allay the concerns expressed by then-chief Justice McMorrow in her dissent in Arthur. There, she pointed out that the requirement imposed upon a plaintiff to prove the reasonableness of medical bills that are not paid in full, and the defendant s opportunity to rebut that evidence, create a multitude of practical problems that will complicate and prolong civil trials. Those concerns are real and the opinion in Wills simply carries them over to cases involving governmental payors. The reasonable value rule started by Arthur and finished by Wills provides victories for plaintiffs and defendants while creating problems for both. Contrary to any misapprehensions that followed Arthur (such as in Nickon), a plaintiff cannot introduce medical bills that have not been paid in full based upon the traditional foundation that they are paid bills. To the contrary, and as specifically stated by the court in Wills: The reasonableness requirement discussed in Arthur is part of the foundational requirement that a plaintiff must satisfy for admission of an unpaid bill into evidence. Arthur, 216 Ill.2d at 82; see also Arthur, 216 Ill.2d at 96 (McMorrow, C.J., dissenting), quoting 11 Ill. Jur. Personal Injury & Torts 5:26, at 315 (2002) ( [i]f no evidence as to a bill s reasonableness is introduced, the bill is not admissible into evidence. ). 892 N.E.2d at Neither Arthur nor Wills explains how the proponent of a medical bill can prove that it is reasonable, other than generally through witness testimony. The same uncertainties attend a defendant s ability to rebut that testimony without showing that the bills were paid in discounted amounts. The decision leaves these conundrums open for future resolution. Conclusion Arthur v. Catour and Wills v. Foster must be considered together. The supreme court went to great lengths to establish a consistency of result and reasoning that leads to a single outcome. The bottom line is that medical bills that have not been paid in full, as well as the value of care that is given for free, are to be treated the same as bills that are unpaid. The plaintiff has the burden of proving the reasonable value of the services that were received. The defendant then has the ability to rebut that evidence either by cross-examination or by direct testimony, but without the benefit of showing the amounts that actually were paid. About the Authors David B. Mueller is a partner in the Peoria firm of Cassidy & Mueller. His practice is concentrated in the area of products liability, construction injury litigation, and insurance coverage. He received his undergraduate degree from the University of Oklahoma and graduated from the University of Michigan Law School in He is a past co-chair of the Supreme Court Committee to revise the rules of discovery, and presently serves as an advisory member of the Discovery Rules Committee of the Illinois Judicial Conference. He was member of the Illinois Supreme Court Committee on jury instructions in civil cases and participated in drafting the products liability portions of the 1995 Tort Reform Act. He is the author of a number of articles regarding procedural and substantive aspects of civil litigation and lectures frequently on those subjects. Gay Nell G. German is an associate with Cassidy & Mueller. Her practice focuses on civil defense in federal and state court and workers compensation. She graduated from the University of Illinois (B.A.) in 1991 and the University of Colorado (J.D.) in Page 7 of 7