How Does Insurance Affect the Reasonableness of Medical Bills?

Accident victims who have health insurance typically submit their medical bills to their insurers for payment. Depending on the nature of their insurance plan, the victims will usually pay a co-pay or a deductible. The insurance company may or may not pay the rest of the bill, depending on the terms of the insurance policy and on the insurer’s view of whether the expenses are reasonable.

When an accident victim sues a negligent party for causing the victim’s injuries, the victim will typically seek recovery of the victim’s medical expenses in addition to other damages. The amount the victim will recover may be affected by whether the victim was insured and, if so, the amount of medical expenses paid by the insurance company.

While states follow different rules, they generally limit the plaintiff’s recovery to medical expenses that are reasonable and necessary. In some states, expenses are presumed to be reasonable to the extent that they were paid. An insurance company’s payment of medical expenses may therefore be evidence of reasonableness on the theory that rational people will not pay an unreasonable bill. 

The insurance company may have a subrogation interest in the plaintiff’s recovery to the extent of the bill payment. If the plaintiff only recovers medical expenses that were covered by insurance, the plaintiff might not receive any medical expense recovery unless the plaintiff proves that medical expenses not paid by insurance were reasonable and necessary. The unpaid portion of the bill is not presumed reasonable, leaving it to the accident victim to introduce expert testimony (usually provided by a medical billing expert) to obtain a full recovery.

Medical care providers often make an agreement with a health insurer to accept the insurance company’s payment of an insured’s medical bill as full payment, even if the payment was for less than the billed amount. When the accident victim is under no obligation to pay the balance of a bill that has been settled by an insurance company, most states allow the injury victim to recover the full amount of the bill from the negligent party.

The prevailing understanding of the “collateral source rule” is that “damages may not be diminished or mitigated on account of payments received by plaintiff from a source other than the defendant.” Thus, if an accident victim incurred a $10,000 medical bill and the victim’s health insurer accepted $7,000 as full payment pursuant to a preexisting agreement with the insurer, the fact that $7,000 of the $10,000 was paid does not necessarily extinguish liability for payment of the full $10,000. 

After all, the accident victim paid for health insurance. She should not be penalized by limiting her recovery when an uninsured accident victim would be able to recover the full $10,000. 

California has taken a different approach. In 2011, the California Supreme Court decided that the state’s collateral source rule allows the injury victim to recover medical expenses for which the victim is actually liable, even if insurance paid those expenses. However, if the health insurer has a preexisting agreement with the medical provider that extinguishes the victim’s responsibility for paying the balance of a bill, California’s version of the collateral source rule does not allow the victim to recover the unpaid portion of the bill. 

Since the victim is not liable for payment of the part of the bill that the insurer does not pay, the California Supreme Court decided that those expenses “do not represent an economic loss for the plaintiff.” That’s true, but the premiums the insured paid for the insurance that covered the bill do represent an economic loss. 

Plaintiffs’ lawyers question the fairness of allowing an uninsured victim to recover the full bill while a victim who had the foresight or means to purchase insurance can only recover the amount paid by the insurer. Insurance defense lawyers question the fairness of making a defendant (or the defendant’s insurer) reimburse a plaintiff for medical bills that the plaintiff will never be required to pay. 

Most courts have not been persuaded by the California interpretation of the collateral source rule. Speaking to Nevada law, a federal district court recognized that the California decision is “squarely at odds with the collateral source rule, which utterly disregards the amount of money a tort victim is actually made to pay to remedy his injuries, in favor of awarding the reasonable cost of ameliorating the injuries.” Most courts have agreed that California gives a windfall to defendants who happen to injure an insured party.

On the other hand, some state legislatures have agreed with the insurance industry that it is unfair to give a windfall to plaintiffs by allowing them to be reimbursed for medical bills they will not need to pay. Some state laws allow the jury to award full medical expenses as damages and then require the judge to deduct amounts that were paid by insurance unless the insurer is subrogated. Some state laws apply the collateral source rule in most tort actions but not in medical malpractice cases.

States that require judges to reduce damages after a verdict is returned to reflect collateral payments will generally allow the jury to consider the full bill. Those courts recognize that the amount of a bill is relevant evidence of the injury a plaintiff received. Since juries tend to base pain and suffering damages on a multiplier of medical expenses, proving the reasonableness of medical expenses can be important even if the judge might later reduce the verdict by deducting payments made by collateral sources.

Medical billing experts analyze medical bills and provide expert opinions about their reasonableness. That analysis considers whether the biller followed appropriate standards. Unbundling charges for separate procedures that should have been billed as a single procedure is the kind of error that inflates medical bills. Using the wrong CPT code to describe the procedures performed, or billing for procedures that were never performed, are additional examples.

After determining whether the billing is accurate, medical billing experts determine whether the billing reflects usual, customary, and reasonable charges within the community where the services were provided. Billing experts rely on comprehensive databases of actual charges for the same services to determine whether medical bills are reasonable. Testimony about reasonableness for either the plaintiff or the defendant can have a significant impact on jury verdicts.