Developments in Texas 'paid and incurred' law for medical bills

This article was originally published in the September/October 2018 issue of "The Houston Lawyer" magazine.

The last two decades have seen major changes to the personal injury law landscape in Texas. In 2003, many medical malpractice cases became economically unfeasible overnight when new tort reform became effective.

Most significantly, the cap on past medical bills broadly impacted all types of personal injury cases. The new statute, Texas Civil Practice & Remedies Code Section 41.0105, mandated that “[i]n addition to any other limitation under law, recovery of medical or health care expenses incurred is limited to the amount actually paid or incurred by or on behalf of the claimant.”[1]

Haygood v. De Escabedo

When the interpretation of Section 41.0105 was taken up on appeal, the Texas Supreme Court entered its opinion in Haygood v. De Escabedo, which upended decades of everyday trial practice for personal injury attorneys.[2]

The plaintiff in Haygood had been billed $110,069.12 by his health care providers. Because he was a Medicare Part B beneficiary, the providers adjusted their bills to $27,739.43. Of that revised sum, at the time of trial, $13,257.41 had been paid, and $14,482.02 was legally owed.

The appellate issue was the trial court’s denial of the defendant’s Section 41.0105 motion to exclude evidence of any past medical expenses other than those paid and owed. Based on the evidence admitted by the trial judge, the jury found in favor of the plaintiff, awarding past medical damages in the total billed amount of $110,069.12.

The Texas Supreme Court explained that the evidence presented in Haygood was “entirely typical” of what was then standard practice:

Providers commonly bill insured patients at list rates, with reductions to reimbursement rates shown separately as adjustments or credits. Portions of bills showing only list charges are admitted in evidence, with proof of reasonableness coming from testimony by the provider, or more often, by affidavit of the provider or the provider’s records custodian as permitted by section 18.001 of the Texas Civil Practice and Remedies Code.[3]

A major argument in Haygood centered around application of the collateral source rule. This common law doctrine is intended to prevent a defendant from receiving a windfall from a benefit intended for the plaintiff.

The Supreme Court determined that “[t]he benefit of insurance to the insured is the payment of charges owed to the health care provider. An adjustment in the amount of those charges to arrive at the amount owed is a benefit to the insurer . . . not for the insured.”[4] The court then held that “only evidence of recoverable medical expenses is admissible at trial.”[5]

The Haygood opinion landed like a lead balloon in certain circles. In the six years that have passed since its release, some insurance carriers and defense attorneys have grumbled that the resilient plaintiffs’ bar has developed a work-around by increasingly utilizing letters of protection.

Letters of protection work like this: a plaintiff’s attorney sends a client for treatment with health care providers who will accept a letter of protection in lieu of billing private insurance, Medicare, or Medicaid, or demanding direct payment.

A letter of protection is essentially an agreement under which a health care provider will treat a personal injury patient in exchange for a promise by the plaintiff’s attorney to protect payment of the provider’s charges out of any recovery. In common practice, many attorneys and health care providers use a “one-third, one-third, one-third” split of any recovery that is divided among the plaintiff, plaintiff’s attorney, and pro rata to all health care providers.

At trial, plaintiffs are still able to present evidence of the undiscounted full charges of health care provided under a letter of protection. Such evidence is normally admitted with billing records affidavits from medical records custodians attesting to the reasonableness of charges and the necessity of services.[6]

Gunn v. McKoy

The Texas Supreme Court’s February 2018 opinion in Gunn v. McKoy is worthy of several articles for its far-reaching impact on the litigation of medical malpractice cases. One of its holdings, though, has broader implications on the use of Section 18.001 affidavits.[7]

The jury reached a verdict of $10,626,639 against a Houston physician and her practice group, including over $7 million for future medical expenses and over $700,000 in past medical expenses.

One of the myriad issues on appeal of this significant judgment was whether the plaintiff presented legally-sufficient evidence in support of the claim for past medical expenses.

Section 18.001 provides a form “Affidavit Concerning Cost and Necessity of Services” that can be made by “(A) the person who provided the service; or (B) the person in charge of records showing the service provided and the charge made.”

Attorneys typically use the statutory affidavit to obtain billing records from a health care provider’s custodian of records. That is exactly what the plaintiff in Gunn initially did. After the Supreme Court’s Haygood opinion was released though, the plaintiff withdrew those affidavits and substituted them with new affidavits from subrogation agents for the health insurance carriers who had paid the plaintiff’s medical bills, reflecting the amounts that had actually been paid.

Interpreting the plain statutory language of Section 18.001, the Supreme Court held that the subrogation affidavits were proper and constituted legally sufficient evidence that the plaintiff’s past medical fees were both reasonable and necessary.

In re North Cypress Medical Center Operating Co., Ltd.

The April 2018 Texas Supreme Court opinion in the case styled In re North Cypress Medical Center Operating Co., Ltd. has once again targeted past medical bills, this time honing in on pretrial discovery.[8] Interestingly, Justice Debra Lehrman, who dissented in Haygood, wrote the Court’s opinion.

Appellate outcomes sometimes epitomize the old saying, “Be careful what you ask for, because you might get it.” Many plaintiff’s attorneys must feel that way after this new opinion, which is the result of a plaintiff’s petition for writ of mandamus over a hospital lien dispute amounting to, at most, $8,278.31.

The case began as a plain vanilla car wreck matter. An ambulance took the patient from the scene of the incident to North Cypress Medical Center, where she was treated for around three hours. Because she was uninsured, the hospital billed her at the full, undiscounted “chargemaster” rate totaling $11,037.35.

Physician-owned North Cypress Medical Center timely filed a statutory hospital lien.[9] The insurance carrier for the party responsible for the car wreck offered to settle for $17,380, attributing $9,404 of that amount to past medical bills.

The plaintiff’s attorney negotiated with North Cypress Medical Center over its bill, but the hospital would not budge below $8,278.31. At 48 percent of the total proposed settlement, the hospital’s demand left roughly the same amount for the plaintiff and her attorney to split.

The plaintiff’s attorney filed a declaratory judgment action seeking to invalidate the hospital’s lien to the extent its charges were unreasonable and more than the regular rate for the services that were provided. The case was assigned to the 234th District Court, in Harris County, with the Honorable Wesley Ward presiding.

A discovery dispute quickly ensued after the plaintiff served written discovery on the hospital seeking: (1) contracts for negotiated or reduced rates for all hospital services provided to the plaintiff, including certain named health insurers; (2) its annual Medicare cost report; and (3) Medicare and Medicaid reimbursement rates for certain services.

After losing at the trial court and Houston’s Fourteenth Court of Appeals, North Cypress Medical Center continued its fight with a petition for mandamus to the Texas Supreme Court.

The hospital argued that because the plaintiff lacked private or public insurance, its reimbursement rates for private and public payors were irrelevant to her case. Citing Haygood, the hospital contended that such reductions from the full chargemaster rate belonged to the insurer, not the insured.

The plaintiff responded that the requested discovery was relevant to whether North Cypress Medical Center’s charges to the plaintiff were excessive, compared to what it customarily and reasonably received from other patients for the same services.

Given that this case deals with the enforceability of a statutory hospital lien, the Supreme Court referenced its precedent that a hospital’s right to recover the full lien amount is “‘subject only to the right to question the reasonableness of the charges comprising the lien.’”[10]

Therefore, the Court concluded, the question is not one of the plaintiff trying to take advantage of health insurance that she did not have. Rather, because a hospital lien is unenforceable if it exceeds a reasonable and regular rate, “the central issue in a case challenging such a lien is what a reasonable and regular rate would be.”[11]

According to the Supreme Court’s analysis, considering that reimbursements from private and public insurance accounts for most hospital income, “[it] defies logic to conclude that those payments have nothing to do with the reasonableness of charges to the small number of patients who pay directly.”[12] 

The Court upheld the trial court’s decision to allow the plaintiff’s discovery of what amounts the hospital was willing to accept for payments of services by insured patients because it is relevant to the reasonableness of hospital charges to uninsured patients. Yet, the opinion expressly stated that it did not conclude that “reimbursement rates standing alone are dispositive of the question of what constitutes a reasonable and regular rate for a hospital’s services.”[13]

Where do we go from here?

This year’s opinions from Texas’s high court have been a mixed bag for both sides of the bar.

Plaintiffs have a freshly-blessed option for billing affidavits. It may streamline the process, making it easier for their attorneys to capture all past medical expenses, rather than having to coordinate with multiple health care providers.

One plaintiff achieved a Pyrrhic victory against North Cypress Medical Center. Now personal injury lawyers on the plaintiffs’ side should expect a barrage of new discovery techniques from the defense bar aimed at reducing what will surely be claimed as excessive medical bills.

Even with these game-changing opinions already on the way to the publisher this year, the enduring chess match of Texas law concerning evidence of medical bills persists. For instance, many are watching to see how the Texas Supreme Court handles a pending petition for review in Glenn v. Leal.[14]

Glenn is a shoulder dystocia case where the jury found that a physician’s negligence led to the baby having a brachial plexus injury. The jury verdict included an award of $1,200,000 in future medical expenses based on testimony from the plaintiff’s life care planner. The defense moved for directed verdict and judgment notwithstanding the verdict, contending that the plaintiff had legally-insufficient evidence to support the future medical expenses claim. The trial court denied both motions.

On appeal, the defendant used familiar language, arguing that there was no evidence that the future medical expenses awarded to the plaintiff would “actually be paid or incurred.”[15] The defendant further argued that the plaintiff’s expert failed to address the impact of the Patient Protection and Affordable Care Act on the future medical expenses contained in the life care plan.[16]

Houston’s First Court of Appeals rejected the defense arguments, noting that federal law does not require individuals to purchase health insurance. Even if the plaintiff did obtain insurance coverage in the future, the court found it speculative to conclude that it would cover the items recommended in the life care plan.

Stay tuned. More change is likely coming.


Robert Painter is a medical malpractice attorney at Painter Law Firm PLLC. He is a former editor-in-chief of The Houston Lawyer and serves on the Houston Bar Association board of directors.


[1] Tex. Civ. Prac. & Rem. Code § 41.0105.

[2] Haygood v. De Escabedo, 356 S.W.3d 390 (Tex. 2012).

[3] Id. at 394.

[4] Id. at 395.

[5] Id. at 399.

[6] Tex. Civ. Prac. & Rem. Code § 18.001.

[7] Id.

[8] In re North Cypress Medical Center Operating Co., Ltd., No. 14-16-01414-CV (Tex. 2018), ___ S.W.3d ___.

[9] Tex. Prop. Code § 55.002(a).

[10] In re Cypress (citing Bashara v. Baptist Mem’l Hosp. Sys., 685 S.W.2d 307, 309 (Tex. 1985)).

[11] In re Cypress.

[12] Id. (citation omitted).

[13] See id.

[14] Glenn v. Leal, No. 01-17-0001-CV (Tex. App.—Houston [1st Dist.], pet. filed), ___ S.W.3d ___.

[15] Id. (citing Tex. Civ. Prac. & Rem. Code § 41.0105).

[16] Id.; see also 42 U.S.C. §§ 18001-18122 (West Supp. 2017) (Patient Protection and Affordable Care Act).

Robert Painter
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Robert Painter

Robert Painter is an award-winning medical malpractice attorney at Painter Law Firm Medical Malpractice Attorneys in Houston, Texas. He is a former hospital administrator who represents patients and family members in medical negligence and wrongful death lawsuits all over Texas. Contact him for a free consultation and strategy session by calling 281-580-8800 or emailing him right now.