Issue # 3:7, July 2015

The Unintended Effect of Medicare on the Law of Torts

Stayton v. Delaware Health Corporation, — A.3d — 2015 WL 3654325 (Del. 2015)

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).

HIPAA and the Physician-Patient Privilege: Can Doctors Defending Against Medical Malpractice Suit Carry Out Ex Parte Interviews with the Plaintiff’s Treating Physicians?

Caldwell v. Chauvin, — S.W.3d —, 2015 WL 3653447, (Ky. 2015)

Whether a litigant’s right to conduct informal ex parte interviews with fact witnesses extends to the plaintiffs’ treating physicians, given the confidentiality provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), is a question of considerable practical importance. This question has recently received a positive answer from the Kentucky Supreme Court in Caldwell v. Chauvin, — S.W.3d —-, 2015 WL 3653447, (Ky. 2015), after “percolating through state courts, federal district courts, and academic circles for a decade.” Id. at *5.

HIPAA regulations, issued by the Secretary of Health and Human Services, prohibit disclosure of any information that –

(1)   Is created or received by a health care provider, health plan, public health authority, employer, life insurer, school or university, or health care clearinghouse; and

(2)   Relates to the past, present, or future physical or mental health or condition of an individual; the provision of health care to an individual; or the past, present, or future payment for the provision of health care to an individual.

45 C.F.R. § 160.103.

This prohibition is subject to the litigation exception that permits disclosure of protected information “in the course of any judicial or administrative proceeding.” 45 C.F.R. § 164.512(e)(1).

The plaintiff argued that this exception does not permit an informal ex parte discovery because such discovery does not take place “in the course of any judicial or administrative proceeding.” This argument was supported by the Missouri Supreme Court’s decision in State ex rel. Proctor v. Messina, 320 S.W.3d 145, 156-57 (Mo. 2010) (en banc), which explained that the litigation exception only applies to proceedings that take place “under the supervisory authority of the court either through discovery or through other formal court procedures” and ruled that HIPAA proscribes informal ex parte communications. This ruling did not help the plaintiff, however, because the court also decided that Missouri courts are not authorized to issue formal orders directed to nonparties.

The defendants, for their part, relied on the New York Court of Appeal decision in Arons v. Jutkowitz, 880 N.E.2d 831, 842 (N.Y. 2007), followed by the Michigan Supreme Court in Holman v. Rasak, 785 N.W.2d 98, 105–08 (Mich. 2010). According to that decision, informal interviews fall under the litigation exception provision that permits discovery not only “in response to a subpoena [and a formal] discovery request” but also by “other lawful process.” 45 C.F.R. § 164.512(e)(1)(i)-(ii). Hence, informal ex parte interviews with the plaintiff’s doctors can proceed when the defendant gives the plaintiff the requisite privacy-protecting assurances pursuant to the litigation exception. These assurances include reasonable efforts to secure a qualified protective court order that will prevent further use of the plaintiff’s medical information. Because the plaintiff waived the physician-patient privilege when he sued the defendants for medical malpractice, he can claim no confidentiality rights beyond these statutory assurances.

The Kentucky Supreme Court decided that the New York and Michigan precedents interpret “other lawful process” too broadly. The Court ruled that this expression refers to a recognized legal process and that “ex parte interviews do not fall within this strict definition.” The Court, however, also ruled that a trial court can issue an order allowing defendants to carry out an informal interview with the plaintiff’s doctors, given that “litigants have historically been permitted to conduct ex parte interviews with fact witnesses.” Id. at *1. This interpretation of the litigation exception, the Court explained, is “consistent with our reliance on trial courts as gatekeepers of discovery—even informal discovery, when appropriate.” Id. at *9. Hence, contrary to the plaintiff’s argument, “HIPAA does not prohibit ex parte interviews, but its strictures do regulate disclosure of protected health information during their course. … HIPAA’s procedural prerequisites to disclosure of protected health information may only be satisfied by order of a court or administrative tribunal.”

This interpretation of the HIPAA regulations effectively creates a qualified physician-patient privilege. Any disclosure of a patient’s medical information in connection with litigation can only take place pursuant to a court order. Courts should issue such orders only when the value of protected information, measured in terms of its contribution to factfinding, exceeds the harm to the patient’s privacy, and they also should protect the information against unnecessary disclosure. 45 C.F.R. § 164.512(e)(1)(i)-(ii).

The Court also explained that Kentucky law does not prohibit informal interviews with party-opponent witnesses and does not recognize a physician-patient privilege. This law consequently does not conflict with HIPAA, which obviated the need to consider HIPAA’s preemption provision. Furthermore, the Court ruled that the American Medical Association’s Code of Medical Ethics does not carry the force of law, and so the plaintiff cannot benefit from its strict confidentiality requirements.

This very well reasoned and well balanced decision was written by Kentucky’s Chief Justice, John D. Minton.

Understanding the Same-Specialty Requirement

Dubois v. Brantley, — S.E.2d — 2015 WL 4181840 (Ga. 2015)

In this case, the Supreme Court of Georgia imposed a limit on the “same specialty” requirement for experts testifying about whether the defendant complied with the applicable standard of medical care. The court below held that “a surgeon was not qualified as a matter of law … to give expert testimony about negligence in connection with a laparoscopic procedure to repair an umbilical hernia because he had not performed more than one laparoscopic procedure to repair an umbilical hernia in the last five years, notwithstanding that the surgeon had performed many other abdominal laparoscopic procedures during that time.” The Supreme Court decided that an expert witness’s and the defendant’s clinical experiences need not be completely identical, so long as they practice medicine in the same specialty and the expert shows “an appropriate level of knowledge” about the procedure in question. The expert’s experience with similar procedures would normally allow her to satisfy the “same specialty” requirement.