The Unintended Effect of Medicare on the Law of Torts

By Alex Stein

If you are familiar with about a thousand medical malpractice decisions and can’t think of an accident that might surprise you, read Stayton v. Delaware Health Corporation, — A.3d —- 2015 WL 3654325 (Del. 2015). Another reason for reading this new decision of the Delaware Supreme Court is that it has delivered an important precedent: the Court decided that the collateral source rule does not cover medical costs written off by Medicare.

The plaintiff, Ms. Stayton, was a 76 year-old, wheelchair bound, resident of a healthcare and rehabilitation center (HCRC). She was paralyzed in one of her arms and one of her legs and had also suffered from a stroke. This condition did not prevent her from trying to light a cigarette while unsupervised. Ms. Stayton did so unsuccessfully, caught her clothing on fire and was burned over twenty three percent of her body.

Over thirty physicians and other healthcare providers treated Ms. Stayton’s burnings during her nearly six month stay at a special hospital, the Crozer Burn Center in Chester, Pennsylvania. This treatment was successful and, understandably, costly as well: its sticker price was $3,683,797.11. Luckily for Ms. Stayton, she was entitled to Medicare – a federal health insurance for people who reached the age of 65 and are eligible for Social Security retirement benefits. Pursuant to Medicare rules, Ms. Stayton’s medical bill was written off by 93%: Burn Center billed Medicare for only $262,550.17. This extraordinary discount reflected Medicare’s bargaining power as a key supplier of patients.

Ms. Stayton sued HCRC in connection with the burning accident. Granted that HCRC was negligent and could not shift any portion of the blame to Ms. Stayton, how much should it pay Ms. Stayton for her economic damage?

According to Ms. Stayton, HCRC should pay her $3,683,797.11. She argued that HCRC should not benefit from the Medicare write-off negotiated by the federal government. HCRC was a wrongdoer, she explained, and wrongdoers do not deserve this windfall. Instead, the court should fork the windfall over to her because she was a victim.

This argument relied on the collateral source rule, as presented in Comment B to the Restatement (Second) of Torts § 920A:

“The injured party’s net loss may have been reduced [by a collateral source benefit], and to the extent that the defendant is required to pay the total amount there may be a double compensation for a part of the plaintiff’s injury. But it is the position of the law that a benefit that is directed to the injured party should not be shifted so as to become a windfall for the tortfeasor. If the plaintiff was himself responsible for the 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.”

This argument was facially compelling. The parties also have stipulated that their controversy did not implicate Delaware statute, 18 Del. C. §6862, that requires factfinders to “consider evidence of [a]ny and all facts available as to any public collateral source of compensation or benefits payable to the person seeking such damages.” Stayton v. Delaware Health Corp., 2014 WL 4782997 at *3 (Del. Super. 2014). Ms. Stayton was thus well positioned to win $3,683,797.11.

The Court nonetheless granted HCRC’s request for judgment as a matter of law that Ms. Stayton’s medical expense damages amounted to $262,550.17. The Court ruled—properly, in my opinion—that the $3,421,246.94 that Burn Center wrote off was paid by no one: “Any benefit that Stayton’s healthcare providers conferred in writing off over ninety percent of their collective charges was conferred on federal taxpayers, as a consequence of Medicare’s purchasing power. Thus, the collateral source rule does not apply to the amounts written off by Stayton’s healthcare providers.”

This ruling properly implemented the compensatory objective of our torts system. If Ms. Stayton were to pay Burn Center $262,550.17 using her own money, Medicare would have to reimburse her for that payment. Because Ms. Stayton had a prior entitlement to that reimbursement, HCRC could not use it as a factor that mitigates her damage. For that reason, HCRC must pay Ms. Stayton $262,550.17. HCRC could not be obligated to pay Ms. Stayton $3,683,797.11 because neither she nor Medicare paid Burn Center this amount.

With deterrence, however, things do not look good at all. Our torts system needs to deter wrongdoers, and the Court’s ruling evidently fails to accomplish that goal. Medicare write-offs erode deterrence. The Court’s decision not to fix this erosion after acknowledging that “poor and disabled persons covered by government programs will receive the lowest recovery in litigation” is therefore disappointing.

This decision turns Medicare patients into “cheap victims” of medical malpractice. To avoid this ill effect, the Court should have added punitive damages to HCRC’s $262,550.17 liability. Economists recommend this measure as the most expedient way of fixing under-deterrence (see A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysis, 111 Harv. L. Rev. 870, 887–96 (1998)) and the Court should have followed that recommendation. For a recent decision forcing a nursing home to pay punitive damages, see Manor Care, Inc. v. Douglas, 763 S.E.2d 73 (W. Va. 2014), and its discussion here.

From a normative standpoint, punitive damages compensating for Medicare write-offs must be decoupled: plaintiffs should recover from the defendant only a fraction of those damages, with the remainder going to the federal government that runs Medicare. For a classic economic analysis of decoupling, see A. Mitchell Polinsky & Yeon-Koo Che, Decoupling Liability: Optimal Incentives for Care and Litigation, 22 Rand J. Econ. 562 (1991).

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