It is frankly difficult to get excited about the legal principle known as "the collateral source rule." This technical doctrine usually operates in favor of personal injury victims who have medical insurance coverage. In two recent cases, however, state high courts made clear that the protections it affords are not available to Medicaid recipients.

The collateral source rule originated in an 1854 United States Supreme Court case involving a collision between a steamship and a schooner. The schooner’s owner had insured his vessel, and so when he sued the steamship’s owner he had already recovered the value of the ship and cargo. The steamship’s owner argued that he should be permitted to deduct the insurance recovery from his damages, since the schooner’s owner had not been financially injured.

The Supreme Court ruled that the agreement between the insurance company and the schooner owner should not benefit the defendant in a civil action. The steamship’s owner was required to pay the full cost of the damages suffered.

In each of the two recent cases, an injured party has sued to recover damages caused by an accident. While the lawsuits were pending in each case, the plaintiffs received medical care from the Medicaid program. Because Medicaid operates by forcing medical providers to agree to accept a smaller amount for their services, the result was that the medical expenses incurred by each plaintiff were dramatically reduced—and then paid by Medicaid in each case.

At trial, the two sets of defendants sought to limit the plaintiffs’ damages to the medical costs actually paid by Medicaid. Each plaintiff argued that the reductions in medical bills were from a "collateral source"—Medicaid—and the defendants should be required to pay the original costs of the medical care. Two Supreme Courts—in Louisiana (Bozeman v. State of Louisiana) and Alaska (Lucier v. Oliva)—disagreed and reduced the plaintiffs’ damages to the amount paid by Medicaid. Coincidentally, both cases were decided on July 2, 2004.

The effect of the rulings (which follow the trend in a number of other states) is significant. First, Medicaid will ordinarily impose a lien on personal injury settlements to the extent of its actual payments—meaning that the plaintiffs could theoretically receive nothing after payment of attorney’s fees, costs and liens.

A second effect is more subtle. Personal injury settlements are often negotiated as a multiple of actual medical expenses. That rule-of-thumb calculation will result in significantly lower settlements for plaintiffs who happened to be poor, or who were reduced to poverty because of the medical expenses associated with their injuries.

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