Date: 06-25-2010

Case Style: Ana Silva Yanez v. SOMA Environmental Engineering, Inc., et al.

Case Number: A123893

Judge: Margulies

Court: California Court of Appeal, First Appellate District on appeal from the Superior Court for Alameda County

Plaintiff's Attorney: Paul Kemp and Dan Schaar, Law Office of Paul B. Kemp, San Jose, California

Hinton, Alfert & Sumner, Scott H.Z. Sumner and Jeremy Lateiner for Consumer Attorneys of California as Amicus Curiae for Plaintiff and Appellant.

Defendant's Attorney: H. Thomas Watson and David Ettinger, Horvitz & Levy, Encino, California; and Steve Toschi and Sumair Sandhu, Toschi, Sidran, Collins & Doyle, Oakland, California

Description: Plaintiff Ana Yanez sued defendants SOMA Environmental Engineering, Inc., Mansour Sepehr, and Brian Tims (collectively SOMA) for injuries she suffered in an automobile accident. A jury found that SOMA‘s negligence caused Yanez‘s injuries, and returned a special verdict awarding her $150,000 in damages, including $44,519.01 in damages for past medical expenses. After judgment was entered, SOMA moved to reduce the award for medical expenses to $18,368.24, which was the amount actually accepted by Yanez‘s medical providers as payment in full under their contracts with Aetna and Healthnet, her private health insurers. The trial court granted the motion and entered an amended judgment reducing Yanez‘s damage award.

Yanez appeals from the amended judgment, contending the trial court erred in reducing the jury‘s award, and in denying Yanez her post-offer costs and interest under Code of Civil Procedure section 998. We reverse the amended judgment and remand the case back to the trial court to (1) enter a new judgment restoring the original amount of damages awarded by the jury, and (2) redetermine Yanez‘s entitlement to an award of costs and prejudgment interest.

I. BACKGROUND

Yanez sued SOMA for injuries suffered in an October 2005 automobile accident. The individual defendants were the driver of the pickup truck that collided with Yanez‘s automobile and the owner of SOMA Environmental Engineering, Inc. Over SOMA‘s objections, the trial court granted Yanez‘s motion to allow into evidence the amounts billed by her health care providers for her medical treatment, without regard to the amount of the billed expenses that were actually paid (by Yanez or her health insurers) or were still considered owing by the provider. SOMA contended unpaid amounts were irrelevant to its liability but conceded the trial court had no choice but to grant the motion in light of Greer v. Buzgheia (2006) 141 Cal.App.4th 1150 (Greer).1

Over Yanez‘s objection, the court ruled it would conduct a posttrial hearing to determine if her medical expense damages should be reduced to the amount of the expenses actually paid to her providers by Yanez or her insurance carriers, and accepted by the providers as payment in full for their services.

The trial was limited to the issues of causation and damages. During the trial, Yanez submitted documentary evidence of her past medical bills to the jury and her surgeon testified that the surgery bill for approximately $17,000 was reasonable. Regarding past medical expenses, the jury was instructed to award damages in an amount that would compensate Yanez for ―the reasonable cost of reasonably necessary medical care that she has received.‖ The jury returned a special verdict of $150,000, which included an award of $44,519.01 in damages for past medical expenses for services from 10 different health care providers.

The court entered judgment on the verdict for $150,000.

SOMA moved to reduce Yanez‘s medical expenses to $18,368.24, the amount actually accepted by her medical providers as payment in full for the services she received. The motion included evidence of medical billings and actual payments, and stated further evidence would be presented through affidavits or live testimony at the posttrial hearing the court had agreed to hold. At the hearing, SOMA‘s witnesses, representing several of Yanez‘s providers, furnished business records of billings and payments, and testified that each of the providers had written off a substantial amount of what had been billed, pursuant to their contracts with Yanez‘s health insurers, Aetna and Healthnet, and that she did not owe the amounts written off. None of the provider-insurer contracts in question were introduced in evidence. Although the witnesses testified that set amounts or percentages were discounted, they did not testify about how the providers and insurers negotiated or arrived at the amount of the discounts. Yanez‘s counsel objected to admission of the business records on the grounds their admission violated the collateral source rule and the records were irrelevant. Yanez‘s objection was overruled and the court reduced her medical expense damages by a total of $21,355.66, for five different health care providers. The court entered an amended judgment reducing Yanez‘s damages award accordingly. The judgment also awarded her all of her recoverable court costs.

Before trial, Yanez had made an offer to settle for $150,000 under Code of Civil Procedure section 998 (hereafter section 998 offer). SOMA did not accept the offer. In her posttrial memorandum of costs, Yanez claimed entitlement to prejudgment interest of $17,133.67 and to $6,992.50 in expert witness fees because, including ordinary trial costs, she recovered more than her settlement offer. (Code Civ. Proc., § 998, subd. (d); Civ. Code, § 3291.) SOMA moved to tax the prejudgment interest and expert witness fees on the ground that if the medical expense award were reduced, the judgment would be less than Yanez‘s section 998 offer.2 After granting SOMA‘s motion to reduce Yanez‘s medical expense damages, the trial court held that she did not obtain a judgment exceeding her settlement offer. The court accordingly struck the prejudgment interest cost claim in its entirety and struck $5,992.50 of the expert witness fees claimed by Yanez.

Yanez timely appealed from the amended judgment.

II. DISCUSSION

Yanez contends the trial court erred in (1) reducing the jury‘s award of past medical specials to the amounts actually paid by her and her insurers to her medical providers, and (2) finding it had no discretion to award Yanez her post-offer costs and interest under Code of Civil Procedure section 998 due to the reduced amount of her medical specials.

A. Medical Expense Damages Award

Yanez argues the trial court violated the collateral source rule by limiting her recoverable damages to the amounts she and her insurers actually paid for her accident-related medical care. According to Yanez, the portions of the medical bills written off by the providers, totaling $21,355.66, were in fact collateral source benefits that under California‘s collateral source rule could not be deducted from her recoverable damages. We begin by reviewing the applicable authorities defining the collateral source rule.

1. The Collateral Source Rule

The collateral source rule provides that the compensatory damages recoverable from a tortfeasor in a personal injury case should not be reduced merely because the tort victim also receives compensatory benefits from independent or collateral sources, such as insurance. The rule has been described as follows: ― ‗[T]he courts generally have held that benefits received by the plaintiff from a source wholly independent of and collateral to the wrongdoer will not diminish the damages otherwise recoverable from the wrongdoer. . . . [T]he wrongdoer cannot take advantage of the contracts or other relation that may exist between the injured person and third persons. Thus, while a plaintiff‘s recovery under the ordinary negligence rule is limited to damages which will make him whole, the collateral source rule allows a plaintiff further recovery under certain circumstances even though he has suffered no loss.‘ [¶] 22 Am.Jur.2d Damages § 566 (1988) (citations omitted).‖ (Marsh v. Green (Ala. 2000) 782 So.2d 223, 230.)

California has adopted the collateral source rule. (Lund v. San Joaquin Valley Railroad (2003) 31 Cal.4th 1, 9.) The rationale for it was explained in Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1 (Helfend). The plaintiff in Helfend was injured when a transit district bus driver sideswiped his car. (Id. at pp. 4–5.) The plaintiff sued the bus driver and his public employer. (Id. at p. 5.) At trial, the defendants asked to show that about 80 percent of the plaintiff‘s hospital bill had been paid by the plaintiff‘s Blue Cross insurance carrier and that some other medical expenses had been paid by other insurance. (Ibid.) The trial court denied the request, and the jury awarded the plaintiff $16,400. (Ibid.) The defendant appealed, claiming the collateral source rule did not apply to tort actions involving public entities. (Id. at p. 14.)

Helfend explained the rationale for the collateral source rule as follows: ―Courts consider insurance a form of investment, the benefits of which become payable without respect to any other possible source of funds. If we were to permit a tortfeasor to mitigate damages with payments from plaintiff‘s insurance, plaintiff would be in a position inferior to that of having bought no insurance, because his payment of premiums would have earned no benefit. Defendant should not be able to avoid payment of full compensation for the injury inflicted merely because the victim has had the foresight to provide himself with insurance.‖ (Helfend, supra, 2 Cal.3d at p. 10.) The Helfend court rejected arguments that the rule provides plaintiffs with a double recovery, pointing out plaintiffs rarely receive full compensation for injuries due to the significant portion of the recovery that goes to compensate the plaintiff‘s attorney under standard contingent fee agreements. (Id. at p. 12.) According to Helfend, the collateral source rule ―partially serves to compensate for the attorney‘s share and does not actually render a ‗double recovery‘ for the plaintiff.‖ (Ibid.) The court further noted the tort victim obtains no double recovery to the extent insurers can recover their outlays from the tort victim via contractual subrogation rights. (Id. at pp. 10–11.)

Nonetheless, the courts apply the collateral source rule even when it unquestionably does confer a windfall benefit on the tort plaintiff. The rule reflects a policy preference favoring the tort victim over the wrongdoer since not applying the rule allows the wrongdoer to profit from the victim‘s investment in purchasing insurance or from the generosity of those who come to the victim‘s aid. (See Smock v. State of California (2006) 138 Cal.App.4th 883, 888.)

California also applies a closely related evidentiary principle that, absent special circumstances, the jury should not hear evidence concerning collateral source benefits received by the plaintiff: ―The potentially prejudicial impact of evidence that a personal injury plaintiff received collateral insurance payments varies little from case to case. Even with cautionary instructions, there is substantial danger that the jurors will take the evidence into account in assessing the damages to be awarded to an injured plaintiff. Thus, introduction of the evidence . . . creates the danger of circumventing the salutary policies underlying the collateral source rule. Admission . . . should be permitted only upon a persuasive showing that the evidence sought to be introduced is of substantial probative value.‖ (Hrnjak v. Graymar, Inc (1971) 4 Cal.3d 725, 732–733, fn. omitted (Hrnjak).)

The Legislature has limited the application of the collateral source rule in certain contexts. Judgments against public entities may be reduced under Government Code section 985, based on services or benefits the plaintiff has received from certain publicly funded sources and private insurance. Civil Code section 3333.1 partially exempts malpractice actions against health care providers from the collateral source rule.

2. California Case Law Concerning Discounted Costs

There is no dispute in this case that the collateral source rule applied to and entitled Yanez to recover the actual amounts paid by her and her insurers to her health care providers for injuries caused by SOMA‘s negligence. There was also no dispute that the fact Yanez had insurance coverage for part of the medical costs she incurred as a result of the accident was inadmissible under Hrnjak. The primary question raised by this appeal is whether the collateral source rule entitled Yanez to recover the full amount billed by her providers for her medical care, $44,519.01, or only the discounted amount actually paid out of pocket by her and her insurers, and accepted by her medical providers as payment in full, $18,368.24.

In Hanif v. Housing Authority (1988) 200 Cal.App.3d 635 (Hanif), a Third Appellate District panel held that a plaintiff struck by an automobile, who had no private medical insurance, could not recover amounts for medical services in excess of those paid on his behalf by Medi-Cal. (Id. at p. 640.) The plaintiff had sought to introduce evidence that the reasonable value of the medical services he received exceeded the amounts Medi-Cal had actually paid to his providers. (Id. at p. 639.) Based on the collateral source rule, Hanif held initially that Medi-Cal‘s payments did not preclude the plaintiff from recovering as special damages the amount Medi-Cal paid for those services. (Id. at pp. 639–640.) The court stated it was ―not unreasonable or unfair in light of Medi-Cal‘s subrogation and judgment lien rights‖ for the plaintiff to be deemed to have personally paid or incurred liability for those amounts for purposes of assessing special damages. (Id. at p. 640.) But, based on its separate analysis of the proper measure of medical expense damages, Hanif went further. The court held that the plaintiff was not entitled to recover any more than the actual amount paid for past medical care and services or for which a liability was incurred. (Ibid.) As will be discussed in further detail post, the court reasoned that any compensation in excess of the amount actually paid or incurred, plus any discounts furnished as gifts to the plaintiff, would place the plaintiff in a better position than he would have been in had the tort not been committed. (Id. at pp. 640–644.)

Decided by another panel of this court, Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4th 298 (Nishihama), involved a plaintiff with an employer-sponsored Blue Cross medical plan under which her provider agreed to accept reduced rates as payment in full for its services. (Id. at p. 306.) The defendant conceded its liability to pay the plaintiff the amounts actually paid by Blue Cross to the provider, but objected to the jury‘s award of medical damages based on the provider‘s higher, normal rates. (Id. at p. 307.) The plaintiff insisted she was entitled to a recovery based on the provider‘s normal charges because the provider had filed a lien against her judgment seeking to recover the difference between the Blue Cross payments it received and its normal rates, pursuant to the Hospital Lien Act (HLA) (Civ. Code, § 3045.1 et seq.). (Nishihama, at p. 307.) Nishihama reasoned that the damages awarded should have been limited to the reduced charges Blue Cross actually paid rather than the provider‘s normal charges because the provider‘s lien rights under the HLA derived from, and could be no greater than, the plaintiff‘s rights against the tortfeasor. (Nishihama, at pp. 307–309.) As to the latter, Nishihama simply followed Hanif in holding that the plaintiff could recover no more from the tortfeasor than the amount actually paid or incurred for medical services, whether by the plaintiff herself or by an independent source such as insurance. (Nishihama, at p. 306.) Nishihama did not address whether Hanif should apply outside of the Medi-Cal context, but assumed without discussion that discounted provider reimbursement rates negotiated by private insurance companies were indistinguishable from reduced rates established by publicly funded medical insurance programs like Medi-Cal for purposes of establishing economic damages under the collateral source rule.3

In Greer, the appellate court implicitly accepted Nishihama‘s premise that ―it is error for the plaintiff [in a tort action] to recover medical expenses in excess of the amount paid or incurred.‖ (Greer, supra, 141 Cal.App.4th at p. 1157, italics omitted.) The court nonetheless upheld a judgment awarding the plaintiff tort victim the full amount of the medical expenses billed by his providers because the defendant had failed to preserve his claim for a ―Hanif/Nishihama reduction‖ by not requesting a sufficiently specific special verdict form. (Greer, at pp. 1154, 1157–1159.)

In Olsen v. Reid (2008) 164 Cal.App.4th 200 (Olsen), the plaintiff and amicus curiae asked the appellate court to reconsider the holdings in Hanif and Nishihama that when a plaintiff has medical insurance, tort damages must be limited to the amount actually paid or incurred. (Olsen, at p. 203.) The court declined to reach that question, however, because it was not clear from the evidence that the plaintiff‘s medical providers had in fact discounted or written off part of their medical expense charges. (Id. at pp. 202–203.) Two of the justices, in separate concurring opinions, did reach the issue. Justice Moore argued that, as applied to situations involving private insurance, the Hanif/Nishihama line of cases abrogated the collateral source rule. (Olsen, at p. 213 (conc. opn. of Moore, J.).) She reasoned that under Hanif/Nishihama, an uninsured tort victim would receive a greater recovery from the tortfeasor than a victim with private insurance, a result she viewed as drastically undermining a key policy rationale behind the collateral source rule. (Olsen, at p. 215.) Justice Moore contended a change of this sort to the collateral source rule could only be adopted by legislative action or by endorsement from the California Supreme Court. (Id. at pp. 213–214.) Justice Moore also observed confusion had arisen about the procedures to be followed in reducing a damage award under the Hanif/Nishihama line of cases—over the type of hearing to be held, the burden of proving the amounts actually paid, and the standard of review on appeal—which she attributed to trying to apply ―judge-made rules of this kind.‖ (Olsen, at p. 213, fn. 3.)

Justice Fybel, in his concurring opinion, endorsed the Hanif/Nishihama analysis, which he characterized as ―limiting recovery . . . to the amount of actual damages incurred . . . .‖ (Olsen, supra, 164 Cal.App.4th at p. 216 (conc. opn. of Fybel, J.).) He found the principles underlying these cases to be firmly grounded in several California statutes—Civil Code sections 3281,4 3282,5 3333,6 1431.2, subdivision (b)(1)7—as well as the Restatement Second of Torts (Restatement), section 911, comment h.8 Justice Fybel contended that Hanif and Nishihama followed the collateral source rule ―because the plaintiffs in those cases recovered all medical costs actually incurred, even though the costs were paid by others.‖ (Olsen, at p. 215.)

SOMA also calls our attention to a recent criminal case—People v. Millard (2009) 175 Cal.App.4th 7. The defendant in Millard was convicted of driving under the influence causing bodily injury to another person, and was ordered to pay restitution for the victim‘s medical expenses. (Id. at p. 13.) The People appealed the trial court‘s restitution order, arguing in part that the trial court erred by valuing the victim‘s medical expenses based on the amount paid by his insurance company rather than the amount billed by his medical providers. (Ibid.) The appellate court upheld the trial court‘s methodology, following People v. Bergin (2008) 167 Cal.App.4th 1166, a previous restitution case that had relied on Hanif. Applying an abuse of discretion standard of review to the trial court‘s restitution order, the Millard court found that limiting restitution to the amount actually paid by the insurer had a rational basis and was not based on a demonstrable error of law. (Id. at pp. 26, 28–29.) The court observed that a restitution order was not intended to provide the crime victim with a windfall, but only to reimburse the victim for the actual economic loss incurred, even if the amount of the loss is paid by a collateral source such as Medi-Cal or private insurance. (Id. at p. 28.) Because Millard‘s consideration of the issue was limited to whether there was a rational basis for the trial court‘s restitution order, we do not find it persuasive in the present context.

The issue of whether amounts written off by a health care provider pursuant to its contract with a private insurer may be recovered as damages under the collateral source rule is now before the California Supreme Court.9

3. Out-of-state Cases

The great majority of decisions from other jurisdictions have concluded that the collateral source rule entitles tort victims to recover the full amount of reasonable medical expenses charged, including amounts written off from their bills pursuant to contractual rate reductions or under Medicaid or Medicare. (See case law reviews in Robinson v. Bates (Ohio 2006) 857 N.E.2d 1195, 1199; Lopez v. Safeway Stores, Inc. (Ariz.Ct.App. 2006) 129 P.2d 487, 495 (Lopez); Scott v. Garfield (Mass. 2009) 912 N.E.2d 1000, 1011–1012; Stanley v. Walker (Ind. 2009) 906 N.E.2d 852, 864; Wills v. Foster (Ill. 2009) 892 N.E.2d 1018, 1025–1029 (Wills).)10 11 A few of the states following the majority rule allow such recoveries when the plaintiff is covered by private insurance or Medicare, for which premiums are required to be paid, and limit recovery to the actual amount paid to providers when the plaintiff is covered by Medicaid for which no premium is required. (See Bozeman, supra, 879 So.2d at pp. 703–705; Rose, supra, 78 P.3d at p. 803; Wills, supra, 892 N.E.2d at pp. 1030–1031.)

The Virginia Supreme Court‘s reasoning in Acuar, is representative of the majority view: ―[Defendant] contends that the collateral source rule is not applicable . . . because [plaintiff] is not, and never will be, legally obligated to pay those portions of his medical bills that were written off, nor were those amounts paid on his behalf. According to [defendant], the amounts written off . . . are not benefits derived from a collateral source, and to allow [plaintiff] to recover such amounts . . . would create a double recovery or windfall in his favor. [¶] . . . [Plaintiff] maintains that, if [defendant‘s] position were adopted, she would derive a benefit from [plaintiff‘s] health insurance without having paid any consideration for [it], thereby creating a windfall for [defendant]. . . . [¶] . . . [¶] . . . [Defendant‘s] argument overlooks the fundamental purpose of the [collateral source] rule . . . to prevent a tortfeasor from deriving any benefit from compensation or indemnity that an injured party has received from a collateral source. . . . [T]he focal point of the collateral source rule is not whether an injured party has ‗incurred‘ certain medical expenses. Rather, it is whether a tort victim has received benefits from a collateral source that cannot be used to reduce the amount of damages owed by a tortfeasor. [¶] [Plaintiff] is entitled to seek full compensation from [defendant].

[Citation.] . . . [Defendant] cannot deduct from that full compensation any part of the benefits [plaintiff] received from his contractual arrangement with his health insurance carrier, whether those benefits took the form of medical expense payments or amounts written off because of agreements between his health insurance carrier and his health care providers. Those amounts written off are as much of a benefit for which [plaintiff] paid consideration as are the actual cash payments made by his health insurance carrier to the health care providers. [They] constitute ‗compensation or indemnity received by a tort victim from a source collateral to the tortfeasor . . . .‘ ‖ (Acuar, supra, 531 S.E.2d at pp. 321–323.)

Moorhead exemplifies the minority view that amounts written off by the health care provider pursuant to contract or law may not be awarded as damages under the collateral source rule: ―Awarding [plaintiff] the additional amount of $96,500.91 would provide her with a windfall and would violate fundamental tenets of just compensation. It is a basic principle of tort law that ‗damages are to be compensatory to the full extent of the injury sustained, but the award should be limited to compensation and compensation alone.‘ [Citation.] [Plaintiff] never has, and never will, incur the $96,500.91 sum from [defendant] as an expense. We discern no principled basis upon which to justify awarding that additional amount. [¶] . . . [¶] Additionally, we find that the collateral source rule is inapplicable to the additional amount of $96,500.91. The rule ‗provides that payments from a collateral source shall not diminish the damages otherwise recoverable from the wrongdoer. [Citation omitted]. The principle behind the collateral source rule is that it is better for the wronged plaintiff to receive a potential windfall [than] for a tortfeasor to be relieved of responsibility for the wrong.‘ [Citation.] [Plaintiff] relies upon comment b to the Restatement (Second) of Torts § 920A, which provides in pertinent part: ‗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.‘ . . . [¶] Clearly, [plaintiff] is entitled to recover $12,167.40, the amount which was paid on her behalf by Medicare and Blue Cross, the collateral sources. [Citation.] . . . [T]he issue is whether [plaintiff] is entitled to collect the additional amount of $96,500.91 as an expense. [Plaintiff] did not pay $96,500.91, nor did Medicare or Blue Cross pay that amount on her behalf. The collateral source rule does not apply to the illusory ‗charge‘ of $96,500.91 since that amount was not paid by any collateral source. [Citations.]‖ (Moorhead, supra, 765 A.2d at pp. 790–791.) Moorhead relied in part on Hanif. (Moorhead, at p. 790.)

Finally, a few states take no position as to whether the written off or full amount of the plaintiff‘s medical bills is a better measure of the reasonable value of the services rendered, but allow evidence of both to be presented to the jury. (See Stanley v. Walker, supra, 906 N.E.2d at p. 858; Robinson v. Bates, supra, 857 N.E.2d at pp. 1199–1200.) But courts taking the majority view have criticized this approach on the grounds it undermines the evidentiary component of the collateral source rule by letting jurors know (or inviting them to speculate) that the plaintiff‘s bills have been paid by a collateral source. (See Leitinger v. DBart, Inc. (Wis. 2007) 736 N.W.2d 1, 13–14.)

4. Analysis

In our view, the trial court erred in reducing Yanez‘s damages to the amounts actually paid by her insurers. Although the court reasonably relied on case law extending Hanif to the private insurance context, we find Hanif used overly broad language and the extension of its holding to private insurance by Nishihama and other cases is inconsistent with the collateral source rule. Consistent with the view taken by the appellate courts in a great majority of the jurisdictions that have considered the issue, we conclude the amounts written off by Yanez‘s health care providers constitute collateral benefits of her insurance. Whether the full amounts billed by Yanez‘s health care providers reflected the reasonable value of their services is a separate issue that was for the jury, not the court, to decide. Accordingly, we will reverse the judgment and remand the case to the trial court to enter a judgment consistent with the jury‘s award of damages and to reconsider its award of costs accordingly.

As an initial matter, we agree with Justice Moore‘s concurrence in Olsen that the Hanif/Nishihama line of cases are difficult to square with the collateral source rule, at least as applied to private insurance cases. (Olsen, supra, 164 Cal.App.4th at p. 213 (conc. opn. of Moore, J.).) The problem stems from Hanif‘s analysis of the measure of tort damages for medical expenses. Hanif correctly states the traditional rule that a tort victim is entitled to recover ―the reasonable value of medical care and services reasonably required and attributable to the tort.‖ (Hanif, supra, 200 Cal.App.3d at p. 640, italics added.) Focusing on a series of older cases applying this rule, Hanif observes that in each case the issue was whether the medical expenses actually paid or incurred were unreasonably high. (Id. at pp. 641–643.) Hanif generalizes from these cases as follows: ―Implicit in the above cases is the notion that a plaintiff is entitled to recover up to, and no more than, the actual amount expended or incurred for past medical services so long as that amount is reasonable.‖ (Id. at p. 643.) From this, Hanif concludes the term ―reasonable value of medical care‖ must be construed as a ―term of limitation‖ barring tort victims from receiving in damages any sum greater than the amount actually paid for their medical care or for which they or an independent source incurred liability for payment. (Id. at p. 641.) In deference to the collateral source rule, Hanif contemplated only one exception to this rule—if there was ―evidence . . . the low rate charged was intended as a gift to the plaintiff.‖ (Id. at p. 643.)

While Hanif impliedly recognized that a gift of services would have to be valued without regard to the amount incurred or paid, it failed to recognize other circumstances in which a below-value rate might be charged. In particular, Hanif did not address or appear to contemplate situations in which patients covered by private health insurance are charged reduced rates by the provider for their care as an insurance benefit negotiated between the insurer and the health care provider. We need not decide in this case whether Hanif was wrongly decided on its own facts. Those facts are materially different from ours: the plaintiff tort victim in Hanif had not purchased his Medi-Cal coverage by paying premiums and the rates Medi-Cal paid were not established or marketed as a benefit for him, but were set as a matter of legislative policy to balance the interests of providers with the availability of public funds. But, to the extent Hanif‘s holding has been assumed to extend beyond the Medi-Cal context, we do not find its analysis reliable. Because this court‘s decision in Nishihama relied on Hanif to reduce a plaintiff‘s jury award to the reduced rates paid by her private insurance, we must now reject that aspect of Nishihama‘s reasoning. In addition to its analysis of the case law concerning the ―reasonable value‖ measure of damages, Hanif (and Justice Fybel‘s concurrence in Olsen) also relied on various statutory provisions as well as language from comment h to section 911 of the Restatement in support of the proposition that a tort plaintiff can recover no more than the amounts paid or incurred for medical care. (Hanif, supra, 200 Cal.App.3d at pp. 640–641; Olsen, supra, 164 Cal.App.4th at p. 215 (conc. opn. of Fybel, J.).) The cited statutory sections tell us that (1) damages in a tort action are meant to compensate the victim in money for the detriment caused by the defendant‘s tort (Civ. Code, §§ 3281, 3333), but not to put the victim in a better position than he or she would have been in had the wrong not been done; and (2) economic damages are ―objectively verifiable monetary losses,‖ including compensation for ―medical expenses,‖ as opposed to non-economic damages, which are for subjective, nonmonetary losses (Civ. Code, §1431.2, subd. (b)). Based on these sources, Hanif concludes that, unless a gift is involved, an award of damages for past medical expenses in excess of their ―actual[] cost‖ would, of necessity, constitute overcompensation. (Id. at p. 641.) Although this may be a correct inference for an uninsured individual paying directly for his or her own medical care, it is not true of the health care financing model that has evolved in this country, in which the cash paid or liability incurred to medical service providers is often not the entire consideration the providers receive in exchange for their services. As further discussed post, providers receive noncash, pecuniary consideration from their transactions with the patient‘s private insurers, which allows and induces them to accept a reduced rate for their services. Making the amount paid or incurred for medical care an absolute ceiling on a plaintiff‘s recovery for past medical care ignores this reality.12

Comment h to section 911 of the Restatement is also inapposite. It states in essence that when an injured person pays less than the market rate for services rendered to him by third parties, he can recover no more than the amount paid unless the low rate was intended as a gift. Section 911 deals with tort damages generally. Out-of-state cases addressing the same issue before us have questioned comment h‘s applicability to valuing medical services financed by health insurance. (See Moorhead, supra, 765 A.2d at p. 795 (dis. opn. of Nigro, J.); Wills, supra, 892 N.E.2d at p. 1028; Bynum v. Magno, supra, 101 P.3d at p. 1159; White v. Jubitz Corp, supra, 219 P.3d at pp. 581–582.) The Restatement comment addressing the collateral source rule seems more on point than comment h: ―[Collateral-source benefits] do not have the effect of reducing the recovery against the defendant. The injured party‘s net loss may have been reduced correspondingly, 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 . . . , the law allows him to keep it for himself. If the benefit was . . . established for him by law, he should not be deprived of the advantage that it confers. The law does not differentiate between the nature of the benefits, so long as they did not come from the defendant or a person acting for him.‖ (Rest.2d Torts, § 920A, com. b, p. 514, italics added.) Further, comment f to section 924 of the Restatement instructs: ―The value of medical services made necessary by the tort can ordinarily be recovered although they have created no liability or expense to the injured person, as when a physician donates his services.‖ (Rest.2d Torts, § 924, com. f, p. 527.) To the extent that the rate discounts Yanez‘s health care providers accepted for her care were benefits of Yanez‘s health insurance, the Restatement, if anything, supports her position that she and not SOMA was entitled to reap their reward.

SOMA‘s witnesses at the Hanif hearing all testified that the amounts the providers wrote off of Yanez‘s bills were established pursuant to contracts between the providers and Yanez‘s health care insurers, Aetna and Healthnet. It is readily apparent that these write-offs are an integral part of the consideration Yanez received for her (or her employer‘s) premium payments. That consideration accrued to her in two principal forms. First, the write-offs reduced Yanez‘s out-of-pocket costs for any deductible or copayment or coinsurance percentage she was required to pay, or for any medical services subject to the write-off that were not otherwise fully covered under her policies.13 Thus, if the central purpose of investing in health insurance is to be protected from having to pay large medical bills, discounted provider charges deliver part of that protection.

Second, and equally important, the discounts reflect noncash, pecuniary savings in the cost of delivering health care services that are financed by Yanez‘s premium dollars. This was explained in Stanley v. Walker: ―[T]hese contractual discounts confer significant benefits upon medical service providers in addition to just the cash received in discounted payments. In exchange for medical services, providers receive not only the insurer‘s payments, but also the pecuniary value of numerous additional benefits, among which are prompt payment, assured collectability, avoidance of collection costs, increased administrative efficiency, and significant marketing advantages. [¶] It is widely recognized that, by agreeing to reduced rates, providers gain significant administrative and marketing advantages, ‗including a large volume of business, rapid payment, ease of collection, and occasionally advance deposits.‘ Lawrence F. Wolper, Health Care Administration: Planning, Implementing, and Managing Organized Delivery Systems 553 (4th ed.2004) . . . .‖ (Stanley v. Walker, supra, 906 N.E.2d at p. 863 (dis. opn. of Dickson, J.).) In other words, the measure of the collateral benefit Yanez purchased for her premiums includes not only the cash Aetna and Healthnet paid for her medical care but the financial, administrative, and marketing savings the providers obtained that induced and permitted them to accept a discounted rate of payment for their services to her.

Because of these marketplace realities, Hanif’s holding that, as a matter of law, the reasonable value of medical services can never be greater than the cash paid or liability incurred for them cannot sensibly be extended to the private insurance context. Rate discounts negotiated between health insurers and providers must be deemed collateral benefits which, under the collateral source rule, should accrue to the insured plaintiff, not the defendant. Therefore, the trial court erred by reducing Yanez‘s economic damages for past medical expenses based on Hanif. To the extent the reasonable value of the provider‘s services was greater than the discounted amounts paid or incurred for those services, Yanez was entitled to the entire amount as damages under the collateral source rule. Since the jury found that $44,519.01 in damages for past medical expenses was reasonable, she was entitled to that amount, without reduction.

By so holding, however, we do not mean to suggest that discounted rates negotiated between health insurers and providers are always or even usually below the reasonable value of the services they cover, nor that the undiscounted amounts billed by providers are necessarily closer to reasonable value than the discounted amounts the providers negotiate with private health insurers. The pricing of medical services is a subject of tremendous complexity, and disputes over fair pricing in the health field abound. (See, e.g., Reinhardt, The Pricing of U.S. Hospital Services: Chaos Behind a Veil of Secrecy (2006) vol. 25, No. 1 Health Affairs 57 [suggesting, among other things, that both full and discounted charges established by hospitals for private payors tend to be significantly above true costs, in part to offset losses on Medicaid and uninsured patients]; Hospital Fair Pricing Act, Health & Saf. Code, § 127400 et seq. [requiring hospitals to establish fair pricing policies for uninsured low and moderate income patients].) But in this case, the jury heard evidence concerning the full amounts billed by Yanez‘s providers and determined those amounts were reasonable. We are bound by that determination.

It is also true the jury did not hear evidence of the sharply discounted amounts Aetna and Healthnet actually paid to the providers. Jurors might not have found $44,519.01 to be a reasonable damage award for past medical expenses if they had been informed that Yanez‘s health care providers had accepted $18,368.24 as full payment for their services. It could be argued that, in fairness, the jury as fact finder should have heard evidence of both the billed and discounted amounts since both are relevant to determining the reasonable value of the services involved. But that issue is beyond the scope of this appeal. First, no such request was made in the trial court. Instead, SOMA simply requested evidence of any unpaid amounts be excluded, while also readily conceding this position was legally untenable. SOMA clearly looked to a postverdict Hanif hearing as its remedy. More importantly, evidence Yanez‘s providers had agreed to accept reduced amounts for their services would have run afoul of the collateral source rule since jurors would have had to be given some explanation for how the discounts came about. However unfair it may have been to prevent the jury from hearing that evidence, this court is not empowered to provide redress. The collateral source rule is based on Supreme Court authority. If modifications to that rule are called for as a matter of fairness and good policy, only our Legislature or Supreme Court may make them.

We believe the alternative that has developed in the trial and appellate courts of this state—holding postverdict Hanif hearings in which the trial court hears evidence of the discounted amounts paid by private insurers and reduces the jury‘s verdict—lacks a sound foundation as a matter of law or policy.

B. Code of Civil Procedure Section 998 Cost Award

The trial court believed it had no discretion to award Yanez her post-offer costs under Code of Civil Procedure section 998, or prejudgment interest under Civil Code section 3291, because her reduced damage award fell below her section 998 offer.

Because Yanez‘s original damages award must now be restored, we will remand the case to the trial court to also exercise its discretion under Code of Civil Procedure section 998 and to award prejudgment interest under Civil Code section 3291.

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See: http://www.courtinfo.ca.gov/opinions/documents/A123893.PDF

Outcome: The judgment is reversed and the case is remanded to the trial court to (1) enter a new judgment reinstating the damages established by the jury‘s verdict, (2) award prejudgment interest in accordance with Civil Code section 3291, and (3) exercise its discretion under Code of Civil Procedure section 998 whether to award plaintiff post-offer costs.

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