• An explanation of the collateral source rule Tuesday, December 22, 2009

    The real cost of insurance premiums

    This op-ed article appeared in the Daily Journal on Dec. 4, 2009. It is reprinted with permission of the Daily Journal.(c) 2009 The Daily Journal Corporation. All rights reserved.

    By Scott Sumner
    The 4th District California Court of Appeal did not change the law when it issued its decision last week in Howell v. Hamilton Meats & Provisions. Rather, it restated the collateral source rule, which dates back to the19th century in California.

    The collateral source rule is simple. It’s also fundamentally fair. The collateral source rule protects an injured person’s investment in insurance, ensuring it does not financially benefit the very individuals who caused them harm.

    As the California Supreme Court said in a 1970 case, “The collateral source rule…embodies the venerable concept that a person who has invested years of insurance premiums to assure his medical care should receive the benefits of his thrift. The tortfeasor should not garner the benefits of his victim’s providence.”

    If a drunken driver kills your spouse, should that driver get a break because you invested in life insurance? If you are injured and cannot work, should the person who stripped your ability to work pay less because you invested in disability insurance? If you are injured and must get medical care, should the person who sent you to the emergency room gain a financial advantage simply because you invested in health insurance?

    For more than a decade, major liability insurance companies doing business in California has misled some trial courts and convinced judges to grant just such a windfall at the expense of injured people like Rebecca Howell, who bought health insurance or made sure they had a job with health benefits.

    The unanimous three-justice decision last week in Howell v. Hamilton Meats was a conservative ruling that respects precedent and reiterates California’s adherence to the collateral source rule.

    Ms. Howell is 48, a former school teacher and part-time surf contest judge. A life-long athlete, she was a three-time All-American in field hockey, and a professional surfer. She earned a full scholarship to Stanford, where she received a Masters degree in Education.

    Ms. Howell regularly paid health insurance premiums, anticipating the day when she might need medical care. That day came in 2007 when a Hamilton Meats truck driver made an illegal u-turn and plowed into her, causing a severe back injury that left her unable to work.

    Two spinal surgeries later, Ms. Howell’s medical bills totaled $189,978, and she owed every penny of that to her medical providers. Like every patient, whether insured or not, Ms. Howell was legally responsible for the full cost of her care. That is the law in California.

    Unlike some patients, however, Ms. Howell had health insurance. Her coverage provided that her carrier, PacificCare, would indemnify her for those $189,978 in medical charges. And PacificCare did.

    The two hospitals providing medical care to Ms. Howell had negotiated contracts with PacificCare, under which PacificCare would direct patients and provide other benefits to them, in exchange they would accept reduced cash payments and extend contractual credits to PacificCare against debts PacificCare members incur for services. In Ms. Howell’s case, the hospitals received $59,691 in cash and extended $130,287 in contractual credits, and the health insurance Ms. Howell had purchased thereby extinguished her medical debt.

    The average annual health insurance premium for a family is almost $15,000 a year. People work and pay premiums their entire lives. Health insurers count on the fact that most people will pay far more in premiums during their lives than they will use in coverage. We are fine with that because if something does go wrong and we need medical services, we’ll be covered.

    Doctors and hospitals enter into contracts with health insurers not just for the cash payments from health insurers, but to gain access to that plan’s membership as patients, to reduce overhead costs, and to save on advertising. Few people ever stop to ask what doctors and hospitals pay to health plans to get those contracts. The answer is that the contractual credits are what the doctors and hospitals pay to the Anthem Blue Crosses, HealthNets and Kaisers of this world to get their business.

    When Hamilton Meats’ insurance attorney convinced a San Diego County superior court judge to cut the medical damages portion of the award to $59,691 from $189,978, Hamilton Meats gave Ms. Howell no consideration for the years of premiums she had invested, and gave nothing for the value of the contract between the hospitals and PacificCare.

    Hamilton Meats capitalized on Ms. Howell’s foresight, and on the investment of every single member of PacificCare. Hamilton Meats’ liability insurance company looked like it was getting off easy, receiving a benefit for which it paid nothing, and thereby increasing its profits. Talk about a windfall.

    In most instances, medical bills incurred are dwarfed by the amount of premiums the victim invests either directly or constructively through laboring for benefits.

    Now that a California Court of Appeal has told the liability insurance industry to stop reaching into the pockets of Ms. Howell and other injured people who have purchased health insurance, the industry’s defenders are threatening everyone with rate increases.

    Amazing. The insurance industry’s spin machine truly is something to behold. It’s as if the burglars are complaining that the police are interfering with their crimes.

    I’ve worked for over 20 years and always maintained benefits. Health insurers have collected several hundreds of thousands of premium dollars from me over the years, while providing benefits worth maybe $75,000 to my family. I don’t begrudge the health plans for that, though, because if I, my wife, or one of my children had the misfortune to need hundreds of thousands of dollars of medical services, we would be able to get the care we need, and I wouldn’t have to worry about where that money would come from. It would come from the pooled premiums dollars of my co-workers and the hundreds of thousands of people I will never know, but who also purchased health insurance through my health plan.

    Of course, like Ms. Howell and everyone else with insurance, I hope that my investment in health care coverage will always be a net loss for me. But if it is not, and Hamilton Meats, or some company is responsible for the harm, I would not want them or their liability insurer to get a break.

    No individual, especially one who is badly hurt and is brought to a hospital by ambulance, has the power to negotiate over the cost of medical care.

    The liability insurers’ arguments suggest that the pricing of health care is false, but that’s a charge they never back up with any facts. Rather than challenge the pricing system, liability insurers choose instead to ignore California law, and seek to punish injured people for the high cost of medical care. In the process, they take advantage of a bargain secured by the patients’ payments of premiums. It’s about time they were made to stop.

    Scott H.Z. Sumner is a partner in the consumer law firm, Hinton, Alfert & Sumner, in Walnut Creek and San Francisco. He drafted an amicus brief Consumer Attorneys of California in support of plaintiff in Howell v. Hamilton Meats, Olsen v. Reid, and co-authored amicus briefs in several other cases touching on the collateral source rule.

    (c) 2009 Daily Journal Corporation. All rights reserved.