Paid or Incurred Ruling by the Texas Supreme Court

On July 1, 2011, the Texas Supreme Court issued a significant ruling on the issue of “paid or incurred” medical expenses and the collateral source rule.  In Haygood v. De Escabedo, --S.W.3d --, No. 09-0377 (Tex., July 1, 2011), Margarita Escabedo sued Aaron Haygood for injuries she sustained in an automobile accident.  Ms. Escabedo was billed a total of $110,069.12 by her health care providers.  However, pursuant to a Medicare agreement, the amount was adjusted to $27,739.43.  Haygood, asserting the collateral source rule, moved to exclude any amounts other than those billed, and of any adjustments and payments.  Haygood’s motion was denied by the trial court and Plaintiff’s health care providers presented evidence to the jury that the charges billed were reasonable and the services were necessary.  The full amount of the billed medical expenses, including those that were in excess of the amount actually paid by Medicare, was awarded by the jury. The trial court’s decision was reversed by the Court of Appeals, holding that section 41.0105 precluded evidence or recovery of expenses that “neither the claimant nor anyone acting on his behalf will ultimately be liable for paying.” De Escabedo v. Haygood, 283 S.W.3d 3, 7 (Tex. App.—Tyler 2009).  Haygood rejected the Court of Appeals’ suggestion of a remittitur in the amount of the health care providers’ adjustments, and the case was remanded for a new trial. Id. at 8.

The Court of Appeals’ judgment was affirmed by the Texas Supreme Court.  In their decision, Plaintiff could only recover the amount that Medicare actually paid to the health care service providers.  The collateral source rule and the theory behind it was discussed by the Court which stated that imposing liability for medical expenses that a health care provider is not entitled to charge does not prevent a windfall to a tortfeasor, but instead creates one for a claimant.  The court held that the collateral source rule does not allow recovery of damages of medical expenses that a health care provider is not entitled to charge.

It was also argued by Haygood that a claimant incurs the full charges billed by a provider regardless if the claimant is covered by the insurance and the provider is required by law or contract to reduce the charges.  The Court found that the term “incurred” is modified by “actually”, meaning expenses that have been or will be paid, and excludes the difference between such amount and charges the service provider bills, but has no right to be paid.

Importantly, the Court held that evidence of the medical charges that a provider is not entitled to be paid is irrelevant and inadmissible.  Haygood argued that his medical expenses would not be subject to adjustments or credits if he was insured.  He also argued that evidence of more expensive treatment would suggest he has more significant injuries.  In setting the non-economic damages, Haygood wanted the jury to consider evidence of non-recoverable economic damages.  The Court, however, determined that the confusion this would generate substantially outweighed any relevance, and thus decided it must be excluded. 

This decision is important because the court has clarified how the “paid or incurred” statute should be applied.  Prior to this decision, there was an ongoing debate in the law on how Texas Civil Practice and Remedies Code Section 41.0105 was implemented by some trial courts.  Plaintiffs were allowed to submit the total of the medical bills to the jury and then apply the reduction to the award of past medical bills after the verdict in many Courts.  This resulted in the total award given by a jury generally being higher in the “general damage” elements (e.g. pain and suffering). Many  juries base the so-called “general damages” on the amount of medical bills and lost wages (“hard damages”).  The Supreme Court has now made it clear that Section 41.0105 must be applied before the jury is presented any evidence of medical bills.  This ruling should result in lower jury awards overall across the state.  This is a great ruling for practitioners in trial law as well as insurers, insureds or defendants as they consider settlement offers and set reserves accordingly.