The Collateral Source Rule in Texas: An In-Depth Overview

The collateral source rule explained

The collateral source rule holds that a plaintiff in a personal injury or wrongful death case may not have the amount of his medical bills be discounted by the amount paid in comp benefits or other benefits. The rule has deep roots in the law, and is designed to prevent wrongdoers from benefitting from the plaintiff’s good fortune. Stated simplistically, the rule provides that the defendant in a personal injury suit cannot avoid liability simply because the plaintiff has taken steps to insure himself against hardships that the defendant’s breach of duty might create.
The rule is considered an important and essential rule of public policy. Bomar v. Ralston Purina Co., 657 S.W.2d 615, 617 (Tex. Civ. App.-Dallas 1983, writ ref’d n.r.e.) ("the collateral source rule is bottomed on public policy considerations of great importance"). The collateral source rule has been a long-standing principle in both personal injury and wrongful death actions since the turn of the century. Precedents establishing the rule date to 1901 and 1912 (St . Louis Southwestern Ry. Co. v. McGab, 69 Tex. 440, 6 S.W. 323, 324 (Tex. 1887); Texas & Pac. Ry. Co. v. Rakestraw, 77 Tex. 382, 13 S.W. 259, 263 (Tex. 1889)). The collateral source rule has been referred to as "well-settled." Roberts v. Williamson, 643 S.W.2d 121, 124 (Tex. 1982); Joske v. Interstate Bond Co., 279 S.W. 4, 6 (Tex. 1925).
In 1995, the Texas Legislature enacted statutes that abrogated the collateral source rule with regard to (1) past medical expenses, (2) past lost wages or earning capacity and (3) past loss of earning capacity, if the benefits received are greater than the benefits lost. Tex. Civ. Prac. & Rem. Code §§ 41.0105-.0107. The 1995 statutory changes did not apply to negligence that occurred before September 1, 1995. Id. § 41.0105(b). The 1995 statutory additions to the Civil Practice and Remedies Code have since been held unconstitutional, leaving the collateral source rule to its long-standing application. See entitled "Collateral Source Rule After 1995 Legislative Changes Ruled Unconstitutional".

History of collateral source rule

During the early years of our nation when trials were held by juries drawn from all classes of society, enormous discretion resided in the jury with respect to the damages awarded. Even though no testimony was provided as to the monetary value of particular items of damages, it was possible for the jury to consider the claim and the evidence of damages, and then reduce the damage amount to what they determined the damages to be. For example, in cases where the injured party was presented with medical bills from various physicians, the jury was free to believe that all of the medical bills were unreasonably high and reduce the total amount of damages claimed based on the medical bills. This practice frequently resulted in the deduction of a higher amount than the actual amount included in the bills. The result was that many deserving injured parties received less than what was necessary to compensate them for their actual injuries and damages.
An early case in which the First Legislature expressed concern with this practice was Martinez v. Longoria, 6 White & W. 496 (Tex. 1881) (opinion on rehearing). In Martinez, the issue was whether the injured party could testify regarding his medical bills since he was not qualified to testify as an expert and the statements on the bill as to the price paid were hearsay. The Supreme Court held that the party could testify to the bills and the reasonable value of the services. Id. at 498. Twenty years later, a different Supreme Court, in Texas & Pacific Railway Company v. Smith, 23 S.W. 941 (Tex. 1894) (overruling Martinez), addressed this issue and concluded that "the jury is the body clothed with the authority to determine the amount of compensation which in its judgment the injured party is entitled to, and in the absence of fraud or such gross mistake as amounts to fraud, it will be conclusively presumed that damages assessed by the jury are, within legal limits, correct." Id. at 942. The Court then held that a discharged clerk who brought suit against his former employer to recover the cost of hospital fees incurred for a back injury caused by an accident while he was working for the railroad had to introduce other evidence to show that the bill was fair and reasonable because the bills were not introduced in his previous trial due to the belief that the discretion of the jury would be applied and his damages would be fairly and justly compensated. Id. at 943.
It was not until 1909 that the legislature enacted a statute that allowed a party declaring a hospital lien to intervene in the suit and present evidence of the costs and terms of the plaintiff’s hospitalization. Acts of Apr. 1, 1909, 31st Leg., 2d C.S., ch. 28, § 1, 1909 Tex. Gen. Laws 70, 70, amended by Acts of Mar. 26, 1935, 44th Leg., ch. 112, § 1, 1935 Tex. Gen. Laws 272, 272-73 (current version at Tex. Civ. Prac. & Rem. Code Ann. § 55.002 (Vernon 2008)). The current collateral source statute was enacted by the 43rd Legislature in 1933. Acts of Mar. 18, 1933, 43rd Leg., R.S., ch. 70, § 1, 1933 Tex. Gen. Laws 115, 115-16 (current version at Tex. Civ. Prac. & Rem. Code Ann. § 41.0105 (Vernon 2008)). The principle that a tort-feasor should not be allowed to profit from a plaintiff’s foresight and self-discipline in obtaining insurance has become a fundamental rule of law in most jurisdictions. As noted by the Austin Court of Appeals in a 1981 case: The so-called "collateral source rule" is ancient, having been in wide use for centuries in the common law of every state. See 2 Bl. Comm. pp. 376-377. In the late 19th Century, application of the rule came under attack since the evidence usually indicated the jury would consider the injury and the extent of the damages and discount the claim as it saw fit. At that point, courts generally moved to the position that speculation and conjecture should not be the basis for the amount of damages awarded, and accordingly applied the "collateral source rule," contending the "collateral source rule" does not require a showing of reasonableness or necessity for medical care.

How the collateral source rule works in Texas

The collateral source rule is applied in a variety of cases across the State of Texas. An important case applying the rule post— medical billing statements is Sandoval v. Allen, 2002 WL 1588477 (Tex. App. – San Antonio 2002). In Sandoval, the court found the party to not be responsible for Mr. Allen’s $4,000.00 bills from Christus Santa Rosa Hospital even though the treating physician was part of the same hospital system as the hospital management company and even though Mrs. Allen agreed to satisfy the bill. This is the correct application of the rules set out above. A physician not employed by the hospital or a hospital management company cannot be liable for the balance after health insurance pays its portion of the bills. The Collateral Source Rule even applies if the physician is a non-participant in the suit as found in Lufkin Regional Medical Center v. Murphree, 1992 WL 272667 (Tex. App – Tyler-November 24, 1992)(wherein the Court substituted language in the final judgment to show an offsetting amount reflecting the amount paid to the physician).
The Collateral Source rule even applies in a product liability context. In Volkswagen of America v. Ramirez, 159 S.W.3d 1 (Tex. 2003), the jury was instructed as follows: "Do not enter any sum that you find for [plaintiffs] twice. Any amount of money you are instructed to enter for any party may be entered only once, regardless of whether you believe that party is entitled to more than one sum." (Emphasis added). In holding the trial court did not err in denying the defendant’s motion for new trial, the Texas Supreme Court echoed the legal precept that it is the jury’s job to decide all controversies of fact, including the issue of offsets, as almost all jurisdictions agree. 159 S.W.3d at 16. The court further noted that the jury could not have been misled because the verdict form explicitly states that the award for past damages applies only once instead of multiple times. Id.
If the defendant seeks a reduction of the verdict based on a collateral source, evidence of the amount of the collateral source, and only that amount, must be introduced. If it is not desired to admit a full bill, the amount paid by any collateral source, including an insurance company, permits the jury to make a single reduction from the total of past medical expenses as assessed by the jury. However, the "full measure" rule does not allow evidence of future bills paid by a collateral source when future bills are at issue. See Texas Health Enterprises, Ltd. v. Petty, 816 S.W.2d 762 (Tex. App.—Tyler 1991, writ denied). In Petty, the plaintiffs challenged the admission of the amount already paid by Medicare for some of the medical bills instead of the "full measure" being testified to by the plaintiff’s expert because the plaintiff objected to the "full measure". Petty involved a minor wife who suffered a severe head injury in a gang fight at a high school football game. Petty involved the interpretation of subsection 41.0105 of the Civil Practice and Remedies Code (effective September 1, 1987), as well as the medical payment provisions in the Medicare and Medicaid statutes. Id. at 780. Under Petty, in a Medicare case, the full measure of the medical expenses should be submitted, which would include charges billed, payments received from all collateral sources, and the difference. Id. at 782. In other words, if the Plaintiff, Alleged and Suspected, is the recipient of Medicare for past bills, the charges alleged and suspected ("full measure") by the medical providers should be admitted. Of course, defense counsel would seek to counter this argument.

Exceptions to the collateral source rule in Texas

There are some circumstances in Texas law where a jury is allowed to hear and consider these types of benefits, which are not actually medical bills. Some of these are:

• Excess health insurance coverages. If the plaintiff has health insurance with large deductibles with a disability rider that pays cash monthly disability benefits, then the defendant is entitled to present evidence of (a) actual cash receipt of the amounts paid by the disability coverage (b) pending applications for cash disability benefits and (c) the market value of the right to seek disability benefits generally. The key issue really is whether the plaintiff has received anything in compensation for the disability or if he is simply looking for a windfall.
• Abandoned medical bills. A family member’s insurance carrier can intervene to collect the amount of medical bills paid, subject to subrogation rights. The family member must authorize the intervention, and grant to the family member the right to testify to the extent that he "has knowledge of the fact, the amount and the date thereof. Tex. R. App. P. 36.1(b).
• Medicaid and Medicare payments. This one is a biggie. These two government programs have worked so hard to keep these benefits a hidden and open secret that most lawyers have no idea they are co-insured when they receive treatment in circumstances where the provider accepts assignment of the insurance policy. Until July 10, 2003, the defendants could never mention the fact that the plaintiff received treatment that they paid for. They were precluded entirely because Medicaid/Subrogan had a right to intervene and decline to disclose whether or not they would seek to recover the pro-rata amount of their payments. This prevented the defendants from ever putting on any evidence of how the bills were paid and what was left owing.

Now, however, the defendants can disclose the fact of the payments and the amount of the payments before trial, and the plaintiff must timely allow discovery of this fact. If they don’t, they cannot object to the introduction of the evidence in trial. The only limit is that they cannot inquire into the collateral records themselves; they can only elicit the information about the amount from the plaintiff and the plaintiff’s witnesses.
The public policy behind allowing this exception is that it reduces the risks to the taxpayer by allowing the recovery of expenses wrongfully incurred by the taxpayer to some extent. Because the taxpayer is the real party in interest when the money is paid, the taxpayer has the right to both intervene and demand the plaintiff bring them into the suit for indemnification purposes. While they cannot actually satisfy the bill, they cannot keep the money if it is paid.

How the collateral source rule affects personal injury claims

In Texas, the collateral source rule affects personal injury claims, must be carefully considered. injured victims may pursue compensation from multiple sources. This can include compensation through insurance while also holding the negligent person accountable through a personal injury claim. So, even if a medical provider is offering a discount or the insurance company has agreed to settle for less than a full amount owed, it does not mean that amount should be the amount paid by wrongdoers. There are limits on how much of your medical expenses can be recovered in a personal injury claim in Texas . The Texas Civil Practice and Remedies Code § 41.0105 states that an injured person may recover only those medical expenses that "were paid or incurred." The point at which those medical expenses are paid or incurred is relevant to any personal injury claim. In a case where medical expenses are simply discharged or reductions in amounts owed due to a discount, this may not flow through to injured victims. Subsections (c) and (d) discuss the "reasonable payment cap" and its limitations. The personal injury lawyers at our Houston, TX, firm can discuss how this could affect your case.

Collateral source rule debate

In addition to the case law, there is also a wealth of literature that weighs in both for and against application of the collateral source rule in Texas.
The majority of legal literature takes a stance against the existence of the collateral source rule in Texas. In personal injury cases, the collateral source rule has led to a number of unintentional consequences. To make an analogy to a tort reform effort that occurred in Ohio, these consist of the creation of a "bubble" with respect to negligent liability. Meaning that, when a defendant has conflicting interests, such as the insurance company or the provider of medical care, these entities will have the incentive to negotiate with the injured party in bad faith because (1) they know that the injured party is not necessarily entitled to recover in full, but instead, only entitled to recover as to the amount of their uncompensated damages, and; (2) the stronger the conflict, the more likely the injured party is to back down from litigation. Put differently, the insurance company or medical provider can take advantage of the injured party’s weaknesses for its own gain.
In a 1995 article entitled "The Collateral Source Rule: Anachronism or Emanation?" Charlotte D. Taylor further explains: "However, notwithstanding the scholarship of Tilford[15] and Attorney General Ma[es], Texas courts cited by the author have retained ‘the unqualified application’ of [Turner v. Methodist Memorial Hosp.,] Scripps-Howard Cable Co. v. West, 865 S.W.2d 619, 623 (Tex.App.—Houston [1st Dist.] 1993, writ dism’d). In fact, the Turner court specifically rejected the approach suggested by [Fort Worth State Bank v. Nickerson, 830 S.W.2d 475 (Tex.1992)] because the Nickerson court discussed only ‘unreimbursed care due to indigency.’ Turner, 877 S.W.2d at 991-92."
More recently, Richard J. Gilbert and Susan Elton-Lloyd Davis have a slightly more modern take on the matter in their 2002 article "Time to Put the Collateral Source Rule Out to Pasture." In that article, the writers state "[i]t is widely recognized that the collateral source rule is more completely unsupported than it ever was, and only remains on the books to provide a torpedo for the Titanic of trial lawyers whose present practice demands still another plunder." (Gilbert, Richard J.; Davis, Susan Elton-Lloyd.)
Especially in light of current financial pressures on the part of both the citizens of Texas and the Legislature, the justification for the collateral source rule appears to be much weaker than it once was prior to the passage of the Texas Medical Liability and Intergarven Healthcare Liability Acts (TMLA).
It is not just legal experts however with a vendetta against the collateral source rule.
In the context of the medical malpractice argument, there has been a growing tension between those who are directly affected by the rule and those who are not. Dr. Samuel Tindel, a neurosurgeon, felt strongly about the issue. "The rules of civil procedure and evidence should apply to all defendants. It is blatantly unfair that one group of defendants is treated differently from another, and the difference should be removed." He went on to state, "[t]he Bible says that if someone [is] having a party and they break something we pay them back instead of having to lower our expectations from the party next time. The same principle should apply to a lawsuit where a negligent defendant injures us." (Dr. Samuel Tindel, Notice and Comment concerning House Bill 4.)
This problem has really created a "them versus us" scenario, which has the potential to hurt those who are trying to make good decisions and find a resolution to their problems by potentially hurting their own interests.
Much more recently, in 2005, the Texas Senate Committee on State Affairs released an interim report on the problem of high and increasing medical liability premiums. Their report highlights several arguments for and against the existence of the collateral source rule. For example, Chairman Robert Duncan argued that "[t]he existence of a collateral [source rule] may perpetuate fraudulent billing and other abuses that force physicians to offset their increases by overcharging patients with private insurance," while Senator Frank Madla argued that a "repeal of the collateral source rule may unnecessarily punish those who are both innocent and poor." (Texas Senate Committee on State Affairs interim report for the 79th legislature.) Thus, the fight over the collateral source rule is an ongoing stalemate, with arguments on both sides.

Collateral source rule in recent years and going forward

In the Texas Legislature’s last session in 2017, seven bills addressing the collateral source rule gained attention: H.B. 1774 (Bailes), H.B. 2049 (Anderson), H.B. 2504 (Huberty), H.B. 2745 (Patterson), H.B. 2762 (Darby), H.B. 3063 (Flynn), and S.B. 1747 (Hall). These bills sought to limit the applicability of the rule, particularly in the context of claims for personal injury and wrongful death, but none of them passed. The 2019 Texas Legislative session began on January 8, 2019, so any new or modified bills will be considered then—I’ll be keeping an eye out, and I’ll update the article accordingly if any new laws are passed this session that affect the collateral source rule.
The general trend of recent years has been to enact statutes limiting the collateral source rule specifically in the medical malpractice arena. The most significant piece of legislation in this area was S.B. 1484 (Duncan) in 2003, which, in combination with the passage of law outlawing Medicaid balance billing (Chapter 146) , resulted in hospitals being precluded from recovering the difference between the discounted sums (Medicaid, Medicare, or a self-paid sum below the full charge) and the full charge not covered by the patient to whom they provided medical care. At least one lower court, however, refused to extend this limitation of the collateral source rule beyond the Medicaid context, distinguishing the legislature’s stated objectives in passing the Medicaid law from the broader policy reasons justifying the collateral source rule. See Harris Methodist Fort Worth v. Ollie, 2010 WL 3253921 (Tex. App.—Fort Worth 2010). A split of authority such as this may be ripe for review by the Texas Supreme Court.
At present, though, in light of court decisions holding that states have no constitutional obligation to reduce healthcare spending or maintain lower healthcare costs, it seems unlikely that the collateral source rule will be adversely affected by legislative action. Case law development will play a more central role in the development of the rule in Texas in the immediate future.