ACA May Change Landscape Under
the Collateral Source Rule

Settlements may be reduced if the ACA changes how damages are calculated.

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (ACA). The act significantly affects the principles that underpin the common law collateral source rule. Under this rule, any evidence of a plaintiff's alternative or additional sources of payment for expenses or losses for which damages are sought in a civil action, such as insurance coverage, is excluded as irrelevant.

This may have made sense in a world where health insurance was not guaranteed and readily available to all individuals. But with the passage of the ACA, the landscape has shifted. The individual mandate contained in Section 1501 of the act requires that most Americans maintain “qualified health insurance.” It goes further to require insurers to make it available, regardless of pre-existing conditions. Thus, we may now begin seeing it argued that a plaintiff will purchase health insurance coverage under the act, thereby avoiding the higher costs of ongoing medical care as projected in traditional life care plans, etc.

This issue has not yet been resolved by the courts, but because a plaintiff has a duty to mitigate his or her damages, the courts may begin to render rulings that significantly impact a plaintiff’s ability to recover the cost of future medical care.

The initial effect of these changes has been felt on the West Coast as the California Supreme Court recently issued a noteworthy decision in Howell v. Hamilton Meats & Provisions, Inc. Instead of allowing the plaintiff a full recovery of billed medical expenses, it modified the collateral source rule to provide recovery of only what was paid by the insurer, along with out-of-pocket costs.

As California is generally viewed as plaintiff-friendly territory, this should serve as a wake-up call that changes are likely in the other 49 states. In fact, many of those states are already grappling with how to deal with this issue. Recoveries may vary widely from state to state, depending on how damages are calculated. As a corollary, the evidence allowed for trial purposes may also vary, pending that state’s treatment of the collateral source rule. Click here to download a current state-by-state summary on the status of the collateral source rule.

And What About Those Settlements?

As most cases don’t go all the way to verdict, a more pertinent question may be how the ACA will impact cases that settle. Some settlements are, in part, predicated on paying back medical liens at a reduced amount. Potential changes in those scenarios may not produce significant effects. However, looking at Howell, countable damages may decrease as states modify collateral source rules, applying downward force on settlement values. It is also possible that the rules that are applicable today may change during the lifetime of a case. For venues where it takes longer to get to trial, this may affect settlement negotiations.

Amidst the debate, one fact stands out that is worth examining more closely. With passage of the ACA, new alternate payer sources have been created to address the question of future medical expenses in compromised settlements. While the Medicare Secondary Payer Act prohibits shifting this burden to Medicare, it may be possible to create settlement plans that include the purchase of ACA-compliant health insurance policies to help make a plaintiff whole. The cost of an annuity funding this purchase may be a much smaller line item than the entirety of a plaintiff’s future medical costs, but it might also be an acceptable “bridge to settlement” for the interested parties.

We’ll Toss You a
Life Preserver

With ACA waves just starting to hit shore, the effect has yet to be fully gauged. There are signs that previous assumptions could be swept away or washed further inland. To help you navigate the ever-changing waters of settlement planning, please contact your Ringler Associates representative.