By Robert D. Martin
The Tennessee Supreme Court issued its long-awaited decision in Dedmon v. Steelman, a case that could have had a potentially sweeping impact on personal injury actions statewide. The primary issue to be decided was whether the monetary value of “reasonable medical expenses” recoverable by a plaintiff are the dollar-amount billed by a health care provider, or the discounted amount ultimately accepted by that provider as payment in full. The Tennessee Supreme Court, upholding the status quo, held that the undiscounted, billed amounts were reasonable, and that the discounted amounts accepted by the providers were inadmissible altogether.
To understand the implications of the Dedmon decision, it is important to understand the backdrop under which it was decided. First, in personal injury actions in Tennessee, injured plaintiffs typically may recover their past medical expenses as part of their damages, so long as those medical expenses are both “necessary and reasonable.” Traditionally, the focus has been on the “reasonable value” of necessary services rendered to the plaintiff.
Tennessee, along with most other states, follows the “collateral source rule”, which prohibits the admission of evidence that a third-party (the “collateral source”) paid an injured party’s medical expenses. Most often, the collateral source rule is invoked to prohibit the admission of evidence relating to a plaintiff’s insurance. The justification for the rule has been that the existence of insurance, or any other third-party payment, should not benefit the “tortfeasor” or defendant. To allow this evidence would essentially deprive the plaintiff of the advantage of having insurance. The collateral source rule helps ensure that “[t]he tortfeasor is held responsible for the harm he caused, regardless of the ‘net loss’ of the injured party,” according to the Court. Additionally, the rule seeks to prevent juries from discounting the harm done to the plaintiff, simply because he had insurance. Under Tennessee law, the “reasonable medical expenses” incurred by plaintiffs in most personal injury actions has been essentially limited to the full, undiscounted amounts billed.
Hospitals, by statute, are entitled to a lien on their patients’ tort recoveries in the amount of “all reasonable and necessary charges” if their treatment arose from the negligence of another. In other words, if a hospital is not paid for its treatment of an injured plaintiff, it will have a lien on any recovery by that plaintiff by way of judgment or settlement, to recover the fees it is owed. In 2015, the Tennessee Supreme Court issued a monumental decision in West v. Shelby County Healthcare Corporation, holding that the “reasonable and necessary charges” are the discounted amounts paid by the patient’s private insurance. The practical effect of the decision was that hospitals are now prohibited from accepting a reduced payment from a patient’s insurance company, and then seeking recovery of any “written off” amount from the plaintiff’s judgement or settlement. “The [hospital’s] lien can exist only as long as the patient owes a debt to the hospital.”
Following the West decision, defense lawyers argued that the Court’s definition of “reasonable and necessary charges” in hospital lien cases should also apply in personal injury actions. After all, over the last several decades, health care in the United States has become increasingly complex, with billing structures becoming even more convoluted. Health insurance companies negotiate with hospitals to determine the value of various services, and the government sets such rates without negotiation for Medicare and Medicaid payments. With the overwhelming majority of Americans carrying at least some health insurance, “virtually no public or private insurer actually pays full charges.” As most insurers, scholars, and laypeople understand, the full, unadjusted rates of most health care charges are dramatically inflated well beyond the market rate for those services. Why should an injured plaintiff be entitled to a windfall recovery based on inflated hospital rates that have little or no actual relation to the market value of the services received by the plaintiff?
In 2011, the California Supreme Court implemented a West-type limitation to medical-expense damages in personal injury actions in that state, declaring “although the collateral source rule precludes certain deductions against otherwise recoverable damages, it does not expand the scope of economic damages to include expenses the plaintiff never incurred.” The Federal Courts in the Western and Middle Districts of Tennessee, and several state circuit courts, including courts in Davidson and Hamilton County, applied the West decision to personal injury actions, capping the amount of a plaintiff’s medical expenses at the amount paid by their insurance provider. This was precisely the issue that led the Dedmon case to the Supreme Court.
Dedmon arose from a motor vehicle accident, in which the plaintiff incurred total medical expenses of $52,482, and her health insurer paid $18,255.42, or roughly only one third of the total charges billed. Prior to trial, the defendants filed a pre-trial motion, seeking to exclude evidence of “unreasonable medical charges.” The defendants relied on West, arguing that evidence of the plaintiff’s full, undiscounted medical charges must be excluded because the amounts of those bills were, as a matter of law, unreasonable. The defendants insisted that granting the motion would not violate the collateral source rule, because no evidence of insurance payment would be submitted to the jury; rather, the jury would simply be given a number of the plaintiff’s medical bills, which would be the discounted amount actually paid.
The trial court granted the defendants’ motion and excluded all evidence of the plaintiff’s full, undiscounted medical bills. The plaintiff appealed, and the Court of Appeals reversed the trial court’s decision. According to the Court of Appeals, the West decision was limited to cases arising under the Hospital Lien Act, and was not expanded to all personal injury actions. The defendants appealed to the Supreme Court, who agreed to hear the case and consider two issues: whether the West court intended to apply the definition of “reasonable medical charges” to personal injury actions, and if not, whether that definition should be adopted in personal injury actions anyway.
In a unanimous decision by Justice Holly Kirby, the Tennessee Supreme Court first held that “West was not intended to apply in personal injury cases.” The Court distinguished West from other personal injury, medical malpractice, or workers’ compensation cases, explaining:
West was intended only to construe the phrase “reasonable charges” in the context of determining the maximum amount of a hospital’s HLA lien. Certainly there is some overlap in that the word “reasonable” is used in connection with the valuation of medical expenses in many types of cases, such as those based on work-related injuries, medical malpractice injuries, and generic personal injuries . . . However, those types of claims involve different public policies than the policies underlying the HLA, and they are governed by different statutory schemes and common law rules. . . . West interpreted the HLA in a manner consistent with the Legislature’s intent and purpose for that statute. . . . Application of the West holding to personal injury cases would transform what would be a factual finding on damages into a legal holding by the court.
The Court also declined to extend the West definition of “reasonable medical charges” to personal injury actions, primarily relying on the collateral source rule. “The rule has served important public policies, namely, that a tortfeasor’s responsibility is to compensate for all the harm he causes, not limited to the net loss that the injured party receives, and that a benefit directed to the injured party should not become a windfall for the tortfeasor.”
The “amount actually paid” standard creates a “disparity that results in cases where the victim is insured as opposed to those where the victim is uninsured” according to the Court. In other words, the defendant’s liability is reduced where “the victim is prudent and buys insurance, but is increased when the victim has no insurance,” overlooking the fundamental purpose of the collateral source rule, which is “to prevent a tortfeasor from deriving any benefit from compensation or indemnity that an injured party has received from a collateral source.”
The Court acknowledged that in some instances, the “full-bill” approach could lead to overcompensation for the plaintiff, but it determined this possibility did not matter: “The law contains no rigid rule against overcompensation.” The Court also reasoned that “the negotiated rate differential is ‘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.’”
In addition to simply upholding the collateral source rule, the Tennessee Supreme Court went a step further, holding that “reasonable medical expenses” are not definitionally analogous to “fair market value.” Not only did it reject the comparison, it said such an analogy was “simplistic at best and misleading at worst.” This criticism (and accusation) of the defendant’s position is somewhat surprising, considering that the Court held literally the exact opposite two years ago.
The Court of Appeals, seeking to find a middle ground, had held that while plaintiffs could offer their full, undiscounted medical bills as proof of their damages, defendants could also offer discounted amounts accepted as payments by the providers. Under this approach, a jury would decide whether the full amounts or the discounted amounts were the reasonable measure of damages.
The Supreme Court rejected this middle-ground approach, holding that such an approach would “most surely allow a jury to infer the existence of a plaintiff’s insurance. . . and ultimately lead to the demise of the collateral source rule itself.”
The Dedmon decision, while not entirely unexpected, is still disappointing. Under the current system now explicitly endorsed by the Tennessee Supreme Court, plaintiffs may recover the full amount billed by a hospital for services rendered, despite the widely recognized fact that these amounts are often two or three times greater than the actual value of those bills, and defendants are left without any real possibility to rebut the reasonableness of those bills. Theoretically, defendants could enlist the services of an expert witness to testify as to what the reasonable value of the services rendered would be, but any discussion of that value would almost certainly require a discussion of insurance adjustments, which would be prohibited by the Court’s decision.
And on top of medical expenses and other “economic damages,” plaintiffs can also recover “non-economic damages,” such as “pain and suffering.” Since these damages are difficult or impossible to actually measure, plaintiffs typically use a multiple of the economic damages to value their noneconomic damages. The Tennessee Supreme Court acknowledged this early in Dedmon, but it failed to consider it in its analysis.
The Dedmon decision not only enables the possibility of a windfall for plaintiffs in the calculation of their economic damages, but it allows them to multiply that windfall through their non-economic damages. Thankfully, Tennessee has caps on non-economic damages.
In short, the unanimous Dedmon decision maintained the status quo in such a way that it seems unlikely the Tennessee Supreme court will reconsider in the near future, absent legislative action. The silver lining of the decision is that it imposes no new burdens on defendants in personal injury actions. However, in a time with skyrocketing health care costs, Dedmon could lead to higher verdicts bearing less resemblance to the injury actually sustained by plaintiffs.
 The collateral source rule does not apply in medical malpractice or workers compensation actions.