Smith v. Farmers Ins. Exchange, No. 99SC133.

• Decision Date: 11 September 2000
• Docket Number: No. 99SC133.
• Citation: 9 P.3d 335
• Parties: Thomas SMITH, Petitioner, v. FARMERS INSURANCE EXCHANGE and Mid-Century Insurance Company, Respondents.
• Court: Colorado Supreme Court

9 P.3d 335

Thomas SMITH, Petitioner, v. FARMERS INSURANCE EXCHANGE and Mid-Century Insurance Company, Respondents.

No. 99SC133.

Supreme Court of Colorado, En Banc.

September 11, 2000.

Steven T. Nolan, Colorado Springs, Colorado, Winston & Winston, P.C., Joseph R. Winston, Colorado Springs, Colorado, Attorneys for Petitioner.

Retherford, Mullen, Johnson & Bruce, LLC, Anthony A. Johnson, Neil C. Bruce, Colorado Springs, Colorado; Attorneys for Respondents.

Justice RICE delivered the Opinion of the Court.

I. Facts and Procedural History

On March 11, 1992, Thomas Smith, the Petitioner, was involved in an automobile accident in which he was injured. At the time of the accident, Smith possessed no-fault automobile insurance issued by Farmers Insurance Exchange and Mid-Century Insurance Company, the Respondents (hereinafter Farmers). In November 1992, Smith underwent surgery on his neck due to the injuries sustained in the accident. Farmers paid for costs related to this first surgery.

According to Smith's treating physician, the surgery was unsuccessful. The physician recommended that Smith see a specialist in Arizona for a second surgery on his neck. Smith, through his attorney, informed Farmers that he needed a second surgery and sought pre-approval. According to Smith, Farmers approved the surgery at that time but later advised him immediately before the surgery that he would have to wait for independent review from another physician.¹ Smith proceeded with the surgery in August 1993, and received follow-up care.

Following the second surgery, Farmers informed Smith that it would not pay for his second surgery and related costs because his medical expense benefits were exhausted and the rehabilitation expense portion of his insurance policy did not cover his treatment. When Farmers refused to pay the medical bills associated with the second surgery, Medicare paid a portion of the bills pursuant to 42 U.S.C. § 1395y (1993), the Medicare Secondary Payer (MSP) provisions of the Social Security Act. Smith received collection notices for the remainder of the bills unpaid by Medicare.²

Smith filed suit, alleging that his medical expenses were covered under the no-fault statutory provisions of section 10-4-706, 3 C.R.S. (1993), or, alternatively, under the language of the insurance policy. Smith also alleged that Farmers acted in bad faith in denying payment. After trial, the jury found in favor of Farmers on the No-Fault Act claim, but found that Farmers had breached the insurance contract and the breach was in bad faith. The jury returned a verdict for Smith for $33,300.89 on the breach of contract claim and for $1,700 on the bad faith claim. The amount of actual damages equaled the entire cost of Smith's surgery and related costs, including the Medicare payment, the unpaid bills from medical providers,³ and any deductibles and copayments.

Farmers filed a motion for a new trial. The trial court did not rule on the motion within sixty days and it was deemed denied pursuant to C.R.C.P. 59(j).

Farmers appealed to the Colorado Court of Appeals, which reduced the damages award to $14,772, the amount of the conditional payment by Medicare, plus the amount of any co-payments and deductibles. The court of appeals ruled that the health care providers were precluded by federal law from pursuing Smith for the balance of their bills above the Medicare payment, but that they could recover the difference from the insurers. Consequently, the court of appeals stated that Smith was only entitled to the amount necessary to repay Medicare plus compensation for his co-payments and deductibles.

This court granted certiorari on the issue whether the court of appeals erred in reducing the trial court's damage award to the amount of the conditional payment by Medicare plus the amount of any co-payments and deductibles, based on the court's ruling that applicable federal statutes prevented the medical providers from seeking to recover their full charges from Smith.⁴ We hold that the court of appeals erred in limiting damages to the amount of the Medicare payment plus any deductibles and co-payments. Additionally, we hold that the charge limitation in 42 U.S.C. § 1395cc(a)(1)(A) does not apply to limit the amount a medical provider can collect from an insured who has collected from his no-fault insurance company in a situation in which Medicare has made a conditional payment under 42 U.S.C. § 1395y(b)(2)(B)(I), and the no-fault insurance company later is found responsible as the primary insurer.

II. Measure of Damages

Generally, in a breach of contract action, a plaintiff may recover the amount of damages necessary to place him in the same position he would have occupied had the breach not occurred.⁵ See Pomeranz v. McDonald's Corp., 843 P.2d 1378, 1381, (Colo. 1993)

. In this case, the measure of damages depends, then, on the amount that Smith owes to Medicare and to his medical providers; costs that should have been paid by Farmers.⁶ At issue is whether the medical providers can collect from Smith medical costs in excess of the Medicare payment.

Smith argues that his damages are equal to the amount he owes Medicare, plus the amount he was billed by medical providers in excess of the Medicare payment. He alleges that the court of appeals erroneously applied 42 U.S.C. § 1395cc(a)(1)(A) to require that the medical providers must agree not to charge any individual or any other person for items or services when such individual is entitled to have payment made by Medicare. Smith argues that this particular provision does not apply to conditional payments made under the MSP provisions.

In contrast, Farmers asserts that Smith's actual loss is limited to the amount of the Medicare conditional payment because the providers were precluded from pursuing collection of the total amount billed for their services once they accepted the Medicare payment. Farmers points to section 1395cc(a)(1)(A), titled "Agreements with providers of services," for support, which states that "any provider of services . . . shall be. . . eligible for payments under this subchapter if it [agrees] not to charge . . . any individual or any other person for items or services for which such individual is entitled to have payment made under this subchapter."

A resolution of this issue requires an analysis of the Social Security statutes at issue, the governing regulations, and their application to the facts before us.

III. Medicare Provisions

The Medicare Program served as the primary payer for all services to Medicare beneficiaries for fifteen years.⁷ See Social Security Amendments of 1965, Pub.L. No. 89-97, 79 Stat. 286 (1965); see also Oregon Ass'n of Hosps. v. Bowen, 708 F.Supp. 1135, 1139 (D.Or.1989)

; Robert L. Roth, The Medicare Secondary Payer Program: New and Continuing Issues, American Bar Ass'n. Center for Continuing Legal Educ. Nat'l Inst. (Oct. 22—23 1998). Through a prospective payment system, medical providers who agree to accept primary payment from Medicare are paid a flat fee based on an average cost and length of stay for over 400 medical diagnoses, which are grouped together in "diagnostic related groups" (DRGs). See 42 U.S.C. § 1395ww (1999); 42 C.F.R. 412. If a provider's actual costs fall below the DRG amount, it keeps the difference; however, if a provider's actual costs are greater than the DRG amount, the provider must absorb the loss itself. Medical providers participating in the prospective payment system enter into an agreement with Medicare, in which they agree to accept payments limited to the DRG amount, and they agree "not to charge . . . any individual or any other person for items or services for which such individual is entitled to have payment made under [subchapter 18]." 42 U.S.C. § 1395cc(a)(1)(A).

In order to take advantage of the Medicare Primary Payer Program, most private third party payers drafted their Coordination of Benefits provisions to ensure that Medicare was the primary payer when an insured was also eligible for Medicare. See Dechene, supra note 7, at 203-04.

Consequently, in 1980 Congress enacted the (MSP) statute in an effort to reduce the costs of the Medicare program by making Medicare the secondary payer in certain situations. See 42 U.S.C. § 1395y(b)(1) (1980). The MSP provisions prohibit Medicare from making payment when "payment has been made, or can reasonably be expected to be made" by a group health plan, workers' compensation plan, an automobile or liability insurance plan, or a no-fault insurance plan. See 42 U.S.C. § 1395y(b)(2)(A). However, under the MSP provisions and relevant to this case, Medicare will make a conditional payment as a secondary payer where prompt payment by an insurer is delayed. See 42 U.S.C. § 1395y(b)(2)(B) (1996); 42 C.F.R. § 411.53(a). Payment is "conditioned on reimbursement to the appropriate Trust Fund established when notice or other information is received that payment for such item or service has been or could be made" by an employer's insurance plan. 42 U.S.C. § 1395y(b)(2)(B)(i). In addition, the MSP statute furnishes the federal government with a direct and subrogated right to bring an action to recover conditional payments "against any entity which is required or responsible. . . to pay . . . or against any other entity (including any physician or provider) that has received payment from that entity." 42 U.S.C. § 1395y(b)(2)(B)(ii).

IV. Application

The measure of actual damages in this case depends on whether the limitation contained in 42 U.S.C. § 1395cc(a)(1)(A), that medical providers agree not to charge any individual for items or services for which such individual is entitled to have payment made by Medicare, applies when Medicare makes a payment to a provider as a secondary payer, rather than as a primary payer. We conclude that this limitation does not apply when Medicare makes a conditional payment and a no-fault insurance company subsequently is...