Protecting Investments in Medical Insurance

By Scott H.Z. Sumner

The decision of the 1st District Court of Appeal in Yanez v. SOMA Environmental Engineering Inc. 2010 DJDAR 9720 (June 24) once again protects and preserves the integrity of the collateral source rule, and in doing so, respects, honors and protects the financial investments of the citizens and residents of the state of California in health insurance and their contributions to Medicare. The decision is especially important in this day and age when all working people are contributing to Medicare, and as the cost of medical insurance continues to rise sharply.

Scott Sumner

Liability insurers and large, self-insured corporations have long sought to take from their tort victims the benefits of their investment in life, health and disability insurance. What these liability insurers and large corporate defendants seek is to profit at the cost of medical providers, health plans, and all the people of California who are covered by private health insurance or Medicare. They are asking trial courts, appellate courts, and the Supreme Court to enable them to steal benefits intended for and negotiated on behalf of the members of a health plan, without having to pay the premiums the plan members invest, without having to bear the cost of running a health insurance enterprise, and without compensating the hospitals and doctors who have agreed to give discount rates to health plans in exchange for contracts with health plans to guarantee a flow of patients, prompt payment, avoidance of collection costs, etc.

The opinion examines the “marketplace realities” and “the health care financing model that has evolved in this country:” “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.” It has long been a policy of this state, as well as the overwhelming majority of the states in this nation, that “a benefit directed to the injured party should not be shifted so as to become a windfall for the tortfeasor.” Rest.2d Torts, Section 920A, com. b.

Liability insurers and large corporate defendants attempt to ignore this policy, even though it is well-codified in the California Insurance, Health & Safety, and Business & Professions Codes. They want to deny the intent of the Legislature, of the people of California, and the workings of the free market in negotiating and securing the benefits of contractually negotiated rates in order to steal those benefits to line their own pockets.

If liability insurers claim that this outcome will require an increase in insurance premiums for Californians, where were the supposed savings in premiums we should have seen since the Nishihama v. City and County of San Francisco, 2002 DJDAR 4927 decision? Liability insurer’s profits have soared year after year as have liability insurance premiums, and it is ridiculous to think that anything more than a token portion of these ill-gotten profits have ever benefited California’s premium payers or anyone other than the owners of these liability insurance behemoths.

This court plainly set forth that the practice, which has developed in some of the trial courts of this state to hold post-verdict hearings, “lacks a sound foundation as a matter of law or policy.” The Hanif v. Housing Authority (1988) 200 Cal.App.3d 635 decision, on which defendants seek to rely, involved federal Medicaid and state Medi-Cal laws. As the Yanez court explains, Medi-Cal is not a market-based system, such as private insurance or Medicare. Instead, Medi-Cal “balances the interests of providers with the availability of public funds.” Federal Medicaid law requires that a Medi-Cal beneficiary assign their right to past medical damages as to services provided through Medi-Cal to the state of California. California statute limits the state’s right of recovery on that assigned claim to the Medi-Cal rate of payment. As the California Supreme Court observed in v. Scripps Health, (2003) 30 Cal.4th 798, restricting tort damages to the amounts paid by Medi-Cal rewards tortfeasors with a windfall at the expense of the medical providers. The Olszewski court asked the Legislature to intervene to address that inequity. The Legislature twice sent a bill to the Governor to do so, and also to increase the funds that would flow into the Medi-Cal program, thereby benefiting all the citizens of California. But on each occasion, at the behest of the liability insurance lobby, Gov. Arnold Schwarzenegger vetoed the bills.

Justice Kathleen M. Banke’s concurrence suggests that it is time we trust jurors to follow limiting instructions and let them hear the discounted amounts as well as the medical providers’ charges, to hear “all the relevant evidence.” To do so would of course require a sea change in the collateral source rule, and would take California out of the majority rule in the United States, where, as Justice Sandra L. Margulies’ opinion points out “the great majority of decisions from other jurisdictions have concluded that the collateral source rule” encompasses “amounts written off” from medical bills “pursuant to contractual rate reductions.”

To permit juries to hear the negotiated rates would also require that the jury hear an explanation of the contractual arrangements between plaintiff and their health plan, including the years that have been worked and the premiums that have paid, and between the health plan and the medical providers, including an examination of all the considerations and benefits that go into those contracts. That would turn every run-of-the-mill rear-end auto collision case into a graduate-level medical financing and insurance exposition, and would easily more than double the time served by jurors and the use of court days and resources needed for tort cases.

On the other hand, if it is time we trust jurors to follow limiting instructions and let them hear about plaintiff’s health insurance, life insurance, and disability insurance, then we should also let juries hear about defendant’s liability insurance, or tell them when a corporate defendant is self-insured, and what that means. While we’re at it, shouldn’t we also tell jurors – many of whom are going without pay to serve – that defense counsel have been paid by the hour for every minute of work done on the case; that the defense experts work for these same insurance carriers and corporations in lawsuit after lawsuit; and that the plaintiff’s attorney, who has paid out of their own pockets for the plaintiff’s experts, will not be paid unless and until the jury compensates plaintiff for all the harm the defendant’s carelessness inflicted on them.

These considerations, and the public policy and civil justice implications that flow from them are part and parcel of the collateral source rule in California and this nation, and the balance of justice it helps strike in our civil justice system.

Yanez, like Howell before it, is the right result, a just result, and the time-tested result that most broadly respects and serves the economic interests of all the citizens, employers and medical providers in this state.

Scott H.Z. Sumner is a partner in the consumer law firm, Hinton, Alfert & Sumner in Walnut Creek and San Francisco.

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Nicole Catsouras, 18, was killed in a high-speed crash on October 31, 2006, after losing control of her father’s sports car. CHP officers investigating the accident took approximately 50 pictures of  Catsouras’ corpse. Two officers, Thomas O’Donnell and Aaron Reich,  e-mailed some of the “graphic and horrific” pictures to members of the public not involved in the official investigation. Family members of Catsouras brought actions for invasion of privacy and for the intentional infliction of emotional distress.

Orange County Superior Court Judge Steven L. Perk dismissed the case, stating the CHP and its officers owed no duty to the surviving family members for an invasion of privacy. The trial court held the right to privacy regarding the distribution of the photographs applied only to the woman who was photographed, and that right expired when she died. The Catsouras family took the case to the 4th District Court of Appeal.

In the appeals court opinion, Justice Eileen C. Moore focused on the officers’ duty to the surviving family members to respect their privacy. The court held that as a result of the officers’ negligence, the death images were placed on the internet in a “vulgar display,” and said it was foreseeable that those postings would cause emotional distress to the family members.

“We rely upon the CHP to protect and to serve the public,” Moore wrote. “It is antithetical to that expectation for the CHP to inflict harm upon us by making the ravaged remains of our loved ones the subjects of Internet sensationalism.”

In reversing the Superior Court’s ruling, the Court of Appeal held that the Catsouras family’s actions for invasion of privacy and negligence, for the intentional infliction of emotional distress, and for negligence should be allowed to go forward. The court also held that the Catsouras family should be allowed to argue in court that in this case Highway Patrol officers should not be granted immunity from prosecution as they normally would be for actions taken in furtherance of an official investigation. In this case the officers’ distribution of e-mails was unrelated to the investigation and not part of their official work.

Catsouras v Department of the California Highway Patrol Court of Appeal Fourth District  Div 3  (G040330)

–Steve Ingram

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In 2004 Ms. Whitney R. Leeman served notice on eight California meat companies and retailers, claiming that they were violating the law by selling ground beef and liver products that contained dioxin and PCBs at retail locations, without the types of warnings required under Prop 65.  Both dioxin and PCBs are known carcinogens.

But federal law also comes into play here.  The Federal Meat Inspection Act requires federal inspectors to rigorously inspect meat products.  Passing inspection depends in large part on whether the meat has been adulterated by having poisonous or otherwise harmful ingredients added to it.  And the act forbids any state to have laws that conflict with the federal law by requiring additional or different information in meat products’ labels.

Leeman did not actually file a citizen’s lawsuit; she attempted to work with the meat companies to resolve the matter, but after 60 days the companies filed a complaint in the San Diego Superior Court asking it to rule that Prop 65 warning labels on the meats are expressly controlled by, or preempted by, the Federal Meat Inspection Act.

Leeman argued that Prop 65 requires warnings be applied to the meat products at “the point where they are sold” (retail stores) and said such warnings are different from the meat inspection labels that the federal law describes.  Therefore she argued Prop 65 warnings would not be controlled by the federal law in this case.

In the San Diego Superior Court, Judge Thomas P. Nugent ruled in favor of the meat companies, stating that the federal law does indeed preempt state law in this case.

Leeman appealed to the Court of Appeal Fourth District Division One.  There Justice Joan Irion ruled for the meat companies and affirmed the trial court.  The court determined that the point of sale warnings attached to the meat products at retail locations are the type of “labels” covered under the federal law.  Thus the Prop 65 warnings would be additional label information attached to the meat product and would be prohibited under the federal law.

Bottom line for California consumers:  the information about potential carcinogens in meat that is normally required under Prop 65 was ruled to conflict with the federal law and is prohibited.

American Meat Institute v Leeman Court of Appeal Fourth District Div 1 (D053325)

–Steve Ingram

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In addition to witnessing the bad dispensing practices, California Department of Health Care Services investigators noted that that Golden Drugs Pharmacy’s monthly Medi-Cal payments increased from a monthly average of $82,240 in 2003 to $280,109 in 2005.

The pharmacy own reports show it had dispensed 282 prescriptions or 35 per hour on one day in November, 364 prescriptions or 43 per hour on another day, and 406 prescriptions or 50 per hour on third day.

At the time, the pharmacy had only one pharmacist on hand.

The California Court of Appeal affirmed a ruling by Superior Court Judge Gail D. Ohanesian of Sacramento rejecting the pharmacy’s appeal of the order terminating its contract.

“Clearly, there is a rational connection between a threat to public welfare and an unauthorized, unsupervised person distributing drugs into containers for delivery to customers’ homes,” the court said in a decision written by Justice Rick Sims.

Golden Drugs CO., INC. v. David Maxwell-Jolly, Director California Department of Health Care Services Court of Appeal 3^rd District (C058178)

–Steve Ingram

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In the front window of her Orange County office, MacMillion listed her name, her specialty and a certificate advertising herself, USC Clinical Associate Professor.

MacMillan examined Kinses and proposed a treatment plan that included pulling 28 teeth and installing dentures. Kinses agreed without seeking a second opinion. She found the dentures to be painful and returned for several times over the next eight months.

According to the California Court of Appeal, MacMillan became hostile, telling Kinses that she “should be grateful you don’t have cancer” and that she “should be grateful you didn’t lose a limb.” When Kinses complained that the dentures caused her chin to protrude, MacMillan suggested that she get Botox treatment.

Finally, Kinses demanded a refund. MacMillan responded by waving consent forms at Kinses stating that she could not sue, and left a message on Kinses’ answering machine saying:

“Don’t come back to this office unless you have the money for a new set of dentures.”

Kinses sued MacMillan for fraud and for the negligent infliction of emotional distress. She testified that she chose MacMillan because she was impressed with her affiliation with USC. MacMillan responded that she had been a part-time, unpaid clinical associate professor from 1998-2000.

“I’m proud of being a professor, so it’s just letting the patients know,” MacMillan testified.

After she was sued, MacMillan asked USC whether it was proper to claim the affiliation. USC responded that she could not list any affiliation.

Superior Court Judge James P. Gray of Orange County dismissed the suit before a jury trial.

Kinses appealed. Justice William W. Bedsworth of the Court of Appeal reversed Gray, finding there was sufficient evidence for a jury to find fraud based on MacMillan’s claim of the USC affiliation. The court said:

“MacMillan was not a USC clinical professor when she took Ms. Kinses as a patient and she had not taught at USC since 2000.”

The court called MacMillan’s comments “been ill-considered, unwise, and perhaps unprofessional.” But the law did not provide for a remedy to such “insults and indignities.”

Kinses v. Mitra Bolbolan MacMillan, Court of Appeal 4^th District Div 3 (G041375)

–Steve Ingram

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A California Court of Appeal ruled that Barbosa could press his suit, overturning a decision by Superior Court Judge Charles Margines of Orange County who had thrown out thecase.

 Barbosa had been a carburetor assembler and a team leader of eight other workers. When other employees told Barbosa they had not been paid for overtime work, Barbosa became convinced he also had not been paid for two hours of overtime.

IMPCO’s supervisor said he trusted Barbosa and approved the overtime pay. But the payroll administrator reviewed security tapes and time clocks, and determined that Babosa was not due the extra money. Barbosa was fired, despite his protests that he had become confused and an offer to repay the money.

Margines granted the employers’s motion to dismiss the case, concluding there “was no public policy requiring an employer to continue to employ an employee who made an unjustified claim for monies.”

In a decision authored by Justice David G. Sills, the Court of Appeal concluded there was a fundamental public policy that protected Mr. Barbosa’s interest in this claim.

The justices noted that the company had made mistakes in the past over timekeeping, and said there was evidence that Barbosa had a good faith belief that he was owed the overtime.

The court said:

“The courts have been sensitive to the need to protect the individual employee from discriminatory exclusion from the opportunity of employment whether it be by the all-powerful union or employer. The employer is not so absolute a sovereign of the job that there are not limits to his prerogative.”

Barbosa v. IMPCO Technologies, INC., (G041070) Court of Appeal 4^th District Div 3

–Steve Ingram

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The California Supreme Court today made it easier for victims of on-the-job harassment to prove their cases, but restricted the amount of punitive damages the victim in Monday’s case can collect from employers.

Monday’s case involves Charlene J. Roby, a West Sacramento resident who worked 25 years for drug maker and health care distributor McKesson Corp.

She was fired in 2000, two years after developing a psychiatric condition diagnosed as panic disorder. She would suffer difficulty breathing, uncontrollable shaking, and profuse sweating, and would scratch her arms until they bled. The prescribed medication caused her to develop an unpleasant body odor.

According to the high court’s review of the facts, Roby’s boss, Karen Schoener, “made negative comments in front of other workers about Roby’s body odor, although Schoener knew from Roby that medication was causing the odor.”

“Schoener also called Roby ‘disgusting’ because of the sores on her arms and her excessive sweating. Schoener openly ostracized Roby in the office, refusing to respond to Roby’s greetings and turning away when Roby tried to ask questions, and Schoener made a facial expression of disapproval when Roby took rest breaks because of her panic attacks. … She overlooked Roby when handing out specialty food items, holiday gifts, and travel trinkets, although Schoener regularly gave these small gifts to the other employees on her staff.”

Roby was financially and emotionally devastated by her termination, and lost her savings and health care insurance. In 2001, the Social Security Administration declared her totally disabled.

In a trial court before Superior Court Judge Timothy Fall of Yolo County, the jury concluded that Roby was wrongfully discharged, discriminated against, and harassed in violation of California’s Fair Employment and Housing Act.

The jury also awarded Roby $15 million in punitive damages–although the high court slashed the amount to 1.9 million, the amount of the compensatory damages.

McKesson appealed, challenging the judgment that McKesson was guilty of workplace harassment, and asked the Court of Appeal to eliminate or at least reduce the punitive damages.

Writing for the majority, Justice Joyce L. Kennard overturned the Court of Appeal ruling, holding that there was indeed sufficient evidence to support a claim of workplace harassment. The high court said “hostility was pervasive and effectively changed the conditions of Ms. Roby’s employment.”

“Discrimination is by its nature an abusive action not a non-abusive action. Here the supervisor’s treatment of Ms. Roby involved constant hostility based upon her medical condition and violated California employment law.”

A majority also reduced the punitive damages, rejecting a view that in this case, the wealth of a defendant should have been heavily weighted when determining the level of damages.

In the California case, the majority concluded that in this fact-specific case, $1.905 million was the limit that was permitted under the current controlling United States law.

The majority said:

“It is certainly relevant for a reviewing court to consider the wealth of a defendant when applying federal constitutional limits to an award of punitive damages, thereby ensuring that the award has the appropriate deterrent effect, but the punitive damages award must not punish the defendant simply for being wealthy.”

Justice Kathryn Mickle Werdeger, joined by Justice Carlos Moreno, dissented, supporting a higher award of punitive damages of about $3.8 million, and concluding that McKesson itself act reprehensibly toward Roby. The dissenters also concluded that McKesson’s wealth was important:

“In 2000, the year it fired Roby, McKesson ranked number 38 on Fortune Magazine’s list of the 500 largest American corporations, reportedly having a market value of more than $5 billion, more than $30 billion in revenues, and almost $85 million in profits. … While McKesson’s wealth alone cannot justify a high award, a somewhat larger award may be warranted in order to effectively deter such a large and profitable corporation from repeating its (at the least) conscious disregard of employees’ rights.”

UPDATE: Consumer attorney Sharon Arkin, who helped brief the case on behalf of Consumer Attorneys of California, said:

The Supreme Court’s analysis of the harassment issue will make it easier for employees establish that cause of action when they have been abused and mistreated in the workplace.  Unfortunately, in limiting the punitive damages to a one to one ratio, the majority’s opinion ignored the many actions by the employer in not only establishing the policy, but in refusing to stop its abusive use – even to the point that the employer confirmed the wrongful termination after investigation. 

Perhaps most disturbing is the Supreme Court’s refusal to consider the wealth as a defendant as important a factor in assessing the appropriate amount of punitive damages as the other three State Farm guideposts.  The purpose of punitive damages is to deter wrongful conduct.  A $2 fine for you and me isn’t going to do that.  And a $3 million fine for McKesson won’t either.  As William Blackstone said, “What is ruin to one man’s fortune, may be a matter of indifference to another’s.”  Unless and until the Supreme Court factors in wealth as a meaningful element in the assessment of a punitive damages award, corporate malefactors will not have any incentive to change their ways.

Roby v. McKesson Corporation, California Supreme Court (S149752) from Court of Appeal 3^rd District (C048799)

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