On Wednesday, March 7, the Wisconsin Supreme Court issued an opinion adding to the line of cases involving the collateral source rule.

Specifically, the court held that the collateral source rule applies to cases involving underinsured motorist claims. Therefore, the court held that the plaintiff is entitled to the full amount of past medical expenses, even those amounts that were written off by the medical providers as a result of a contractual agreement between the medical provider and health insurer.

These expenses are often referred to as “phantom damages,” because no one ever paid the medical expenses, yet the plaintiff receives the full sticker price.

Typically, the plaintiff’s insurer has negotiated rates with the the health care provider. The health care provider submits a bill for the full price, but due to these contractual rates, the health insurer pays less than the full price. Yet, as the court held in this case and numerous other decisions, the defendant has to pay the full sticker price even though this was not the amount actually paid.

Facts

The plaintiff (Linda Orlowski) was injured in an automobile accident caused by an underinsured driver. Orlowski recovered damages up to the limits of the underinsured driver’s insurance. Orlowski also had health insurance coverage which paid a portion of her medical expenses. In addition, Orlowski had an automobile insurance policy with State Farm, including underinsured motorist (UIM) coverage.

Orlowski submitted a claim to State Farm to recover under her UIM coverage. An arbitration panel awarded Orlowski $11,498.55 for the medical service provided to her as a result of the accident. This amount ($11,498.55) was the amount that was actually paid to the health care provider, rather than the full amount billed by the medical provider ($72,985.94).

The arbitration panel did not include in its award to the amount of Orlowski’s medical expenses that had been written off by her medical provider because of discounts through her health insurance coverage with United Healthcare. The amount that was written off by the medical provider was $61,487.39. No one paid this amount, yet the plaintiff was seeking the full value of the medical expenses.

Orlowski appealed the arbitration panel’s decision to the Milwaukee County Circuit Court, which modified the award. The judge awarded the plaintiff the full amount billed by the medical provider ($72,985.94), instead of the amount actually paid ($11,498.55). As a result, the plaintiff was awarded $61,487.39 in damages that was written off and never paid to the medical provider.

Wisconsin Supreme Court Decision

The case was appealed to the court of appeals, which certified the case to the Wisconsin Supreme Court. In a 7-0 decision authored by Justice Patrick Crooks, the court upheld the trial court’s decision and awarded Orlowski the full amount billed by the medical provider rather than the amount actually paid; therefore, handing the plaintiff a windfall of $61,487.39 in damages that neither she nor anyone else paid to the medical provider.

The court cited its previous decisions, all of which have held that the plaintiff is entitled to the full amount of medical expenses, even those amounts that were written off by the medical provider.

According to the court:

“We reaffirm what our prior precedent has clearly established: an injured party is entitled to recover the reasonable value of medical services, which, under the operation of the collateral source rule, includes written-off medical expenses.”

The case is Orlowski v. State Farm Auto. Ins. Co., 2012 WI 21.

The Wisconsin Supreme Court heard oral arguments in an important case, Orlowski v. State Farm Mut. Ins. Co., 2009AP2848, which will determine whether the collateral source rule applies to underinsured motorist (UIM) policies.

The Wisconsin Supreme Court has explained that the “collateral source rule states that benefits an injured person receives from sources that have nothing to do with the tortfeasor may not be used to reduce the tortfeasor’s liability to the injured person.” Leitinger v. Dbart, Inc., 2007 WI 84, 736 N.W.2d 1 (2007). For example, in Leitinger, the Court held that the plaintiff was allowed to receive the full amount ($154,818.51) of his past medical expenses, even though the actual amount paid by the plaintiff’s health insurer was $111,394.73.

The plaintiff in Orlowski was injured in an automobile accident arising out of the negligence of an underinsured motorist. The plaintiff recovered the policy limit from the underinsured motorist’s liability carrier and then brought a claim under her UIM policy against State Farm Mutual Automobile Insurance Company.

The claim was submitted to arbitration under the terms of the UIM policy. The arbitration panel determined that the reasonable value of the medical services was $72,985.94. The arbitration panel also determined that the plaintiff’s health insurer only paid $11,498.55 in past medical expenses. The parties stipulated that the difference between the total amount billed ($72,985.94) by the medical providers and the amount actually paid ($11,498.55) by the plaintiff and her health insurer totaled $61,487.39. The $61,487.39 was due to insurance company write-offs or reductions, and therefore the plaintiff did not pay the full amount actually billed by the health care providers.

The arbitration panel ruled that the collateral source rule did not apply and therefore the plaintiff was not entitled to $61,487 that was not paid by the plaintiff or her health insurer due to write-offs or reductions.

The plaintiff then filed a petition with the circuit court seeking an order from the court allowing her to recover the $61,487.39 in written-off medical expenses. The circuit court reversed the arbitration panel’s decision and ruled that the plaintiff was legally entitled to collect the full reasonable value of medical expenses from the tortfeasor.

However, as noted by the Court of Appeals, that court in Heritage Mut. Ins. Co. v. Graser, 2002 WI App. 125, 254 Wis.2d 851, 647 N.W.2d 385 held that the collateral source rule does not apply in UIM cases and thus the written-off medical expenses are not recoverable under UIM coverage.

In certifying the case to the Wisconsin Supreme Court, the Court of Appeals concluded that it was unable reconcile its holding in Graser with State Farm’s insurance contract and with the collateral source rule.

The Court will issue a decision by the end of its term in July 2012.

This post was authored by Andrew Cook.