The Vital Role of the Collateral Source Rule in United States Healthcare Financing

Abstract

The collateral source rule plays a vital role in both the healthcare financing and legal systems in the United States. While for many years the rule has been under fire from various tort reform advocates, and has taken some severe hits over that time, it remains as important today as it was when first developed over one-hundred and fifty years ago. Long understood as a rule of evidentiary consequence, modern legal scholars seem to have lost track of both the origins and of the real value of the rule and, as such, application has been constricted unnecessarily. While the costs of both the American tort and healthcare structures are undeniably high, abrogating the collateral source rule is neither the best nor the most plausible way to lower those costs.Made necessary by the unique multi-payer cost sharing nature of healthcare financing in the United States, the collateral source rule serves a number of vital roles in supporting the way in which medical providers spread the costs of caring for the uninsured and underinsured. As such, the rule remains vital to balancing medical costs and to ensuring a viable healthcare provider market. Furthermore, in individual cases, the equities of most situations depend on application of the collateral source rule to properly balance competing interests.Warnings about the evils of double recovery from the defendant’s bar are overdramatic and grossly misrepresent the actual facts as viewed from the broader vantage point of sound public policy. In Part I of this paper I review the origin and application of the collateral source rule in California including a brief discussion of the impact of the Howell case. In Part II I discuss the nature of the fragmented healthcare financing system in the United States today. In Part III I argue for a continued application of the collateral source rule, including to the negotiated rate differential, in personal injury cases in California.