BROWN v. California Department of Health Services, Claimant and Appellant.

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Court of Appeal, Third District, California.

Stacy Jo BROWN, a minor, by and through her Guardian ad Litem, Joanne Larsen and Joanne Larsen, individually, Plaintiffs, v. Gary K. STEWART, M. D. and Harmon Michelson, M. D., Defendants and Respondents, California Department of Health Services, Claimant and Appellant.

Civ. 19742.

Decided: July 17, 1981

Hardy, Erich & Brown and Robert Zimmerman, Sacramento, for defendant and respondent Gary K. Stewart. Wilke, Fleury, Hoffelt & Gray, and Bradley N. Webb, Sacramento, for defendant and respondent Harmon Michelson, M. D. George Deukmejian, Atty. Gen., Thomas E. Warriner, Asst. Atty. Gen., and Robert F. Tyler, Deputy Atty. Gen., for claimant and appellant.

The primary issue before us is the applicability of Civil Code section 3333.1 to Medi-Cal liens. The California Department of Health Services (Department) appeals from an order granting a motion to strike its lien in the underlying medical malpractice action filed by plaintiffs.

Subsequent to the filing of the complaint for professional negligence against the two doctor-defendants, Department, pursuant to statutory authority granted by Welfare and Institutions Code section 14124.70 et seq., filed in the action its notice of lien for $739 for ameliorative treatment provided to plaintiffs at public expense subsequent to the alleged substandard medical treatment.

Defendant Dr. Michelson filed a “Motion to Strike Notice of Lien or in the Alternative ․ Motion for Summary Judgment.” He was joined in this motion by his codefendant Dr. Stewart. The motion was grounded upon a claim that the lien was invalid, in that Medi-Cal's right to claim reimbursement from the settlement of or judgment in a medical malpractice action had been abrogated by enactment of Civil Code section 3333.1. A secondary issue of procedural impropriety in noticing the lien was also asserted.

The trial court, without specification of grounds or reasons or even comments, at least in the record before us, granted the motion to strike. Inferentially, we must conclude the trial court found that section 3333.1 did indeed abrogate Medi-Cal lien rights in medical malpractice actions and further that the motion to strike was timely and the appropriate procedural device to remove the lien. Both findings are erroneous, requiring reversal, though consideration of the latter issue is not essential to the ruling herein.

The statute in question was enacted in 1975 as part of the “Medical Injury Compensation Reform Act” (Stats.1975 Second Ex. Sess. ch. 1, p. 3949), the Legislature's response to what was perceived as a crisis in the medical profession because of dramatic increases in the premium cost of malpractice insurance.1 Section 3333.1 as finally amended provides:

“(a) In the event the defendant so elects, in an action for personal injury against a health care provider based upon professional negligence, he may introduce evidence of any amount payable as a benefit to the plaintiff as a result of the personal injury pursuant to the United States Social Security Act, any state or federal income disability or worker's compensation act, any health, sickness or income-disability insurance that provides health benefits or income-disability coverage, and any contract or agreement of any group, organization, partnership, or corporation to provide, pay for, or reimburse the cost of medical, hospital, dental, or other health care services. Where the defendant elects to introduce such evidence, the plaintiff may introduce evidence of any amount which the plaintiff has paid or contributed to secure his right to any insurance benefits concerning which the defendant has introduced evidence.

“(b) No source of collateral benefits introduced pursuant to subdivision (a) shall recover any amount against the plaintiff nor shall it be subrogated to the rights of the plaintiff against a defendant.” (Emphasis added.)

If perceived as a grand sweep, these provisions effectively annul, in medical malpractice actions, the collateral source rule firmly established in California law. As explained in Hrnjak v. Graymar, Inc. (1971) 4 Cal.3d 725, 729, 94 Cal.Rptr. 623, 484 P.2d 599, “․ the admissibility of evidence of plaintiff's receipt of collateral insurance benefits is not governed by specific statutory exclusion. Nevertheless, a pervasive public policy has been judicially expressed and California remains a firm proponent of the ‘collateral source rule.’ (Fn. omitted.) This doctrine provides that if an injured party received some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor.”

In noting the court's adherence to the collateral source rule had been reaffirmed in Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 84 Cal.Rptr. 173, 465 P.2d 61, and Acosta v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 19, 84 Cal.Rptr. 184, 465 P.2d 72, the court repeated the rationale for such rule as expressed in Helfend, supra: “The collateral source rule as applied here embodies the venerable concept that a person who has invested years of insurance premiums to assure his medical care should receive the benefits of his thrift. (Fn. omitted.) The tortfeasor should not garner the benefits of his victim's, improvidence. (P) The collateral source rule expresses a policy judgment in favor of encouraging citizens to purchase and maintain insurance for personal injuries and other eventualities․” (2 Cal.3d at pp. 9-10, 84 Cal.Rptr. 173, 465 P.2d 61.)

Significantly, the emphasis by the court is on collateral benefits received by an injured person from a source to which such person has contributed by way of premiums or otherwise.

Department concedes the effect of section 3333.1 in covered cases is to abrogate the rule that evidence of collateral benefits may not be introduced and the usual result is any such benefits are not included in any damage verdict. However, Department reasons that only those benefits specified in subsection (a) are affected; that Medi-Cal payments are not includable within any of the enumerated categories; and are not a collateral source contemplated by the Legislature as within the ambit of operation of section 3333.1. This conclusion is predicated on the assertion that Medi-Cal benefits are 1) not payable as a benefit to the plaintiff-beneficiary; 2) are not payable pursuant to a “contract;” 3) are not paid by an “organization;” 4) are not paid pursuant to the Social Security Act; 5) that Department is not a subrogee within the meaning of section 3333.1, and 6) section 3333.1 must be construed to harmonize with other relevant statutes. We consider these contentions, though not necessarily in order of briefing.

Our determination of whether Medi-Cal liens are encompassed within section 3333.1 must necessarily start with the legislative history and intent. The Governor's Proclamation which delineated those matters to be acted upon by the Legislature at the 1975 Second Extraordinary Session included in addition to discipline and certification matters, several actions aimed at reducing the size of medical malpractice judgments, which inferentially would result in a reduction of insurance premiums for medical service providers. These were voluntary binding arbitration, limits on the amount of contingency fees charged by attorneys, limitation in the compensation recoverable for pain and suffering and “Elimination of double payments (‘collateral sources').” (Stats.1975, Second Ex. Sess., p. 3947.) The clear intent was to prevent a double recovery by plaintiffs of medical expenses and disability income payments received from other sources. This preclusion of double recovery was to be accomplished not by prohibiting recovery of such sums by plaintiff, but by allowing the fact finder to receive and consider such evidence with the hopefully predictable result that such fact finder would exclude these payments in computing damages,2 and by prohibiting the source of collateral benefits from reimbursement either from the plaintiff or as a subrogee of the plaintiff from the third-party tortfeasor.

The collateral benefits for which repayment is prohibited are divided into two general classes. The first is “any amount payable as a benefit to the plaintiff . . . pursuant to the United States Social Security Act, any state or federal income disability or worker's compensation act, any health, sickness or income-disability insurance, accident insurance that provides health benefits or income disability coverage.” The second is any sums paid pursuant to “any contract or agreement of any group, organization, partnership, or corporation to provide, pay for, or reimburse the cost” of health care services.

Medi-Cal Payments as an Amount Payable as a Benefit to Plaintiff Pursuant to the United States Social Security Act

In 1965, the Congress of the United States enacted as Title XIX of the Social Security Act (42 U.S.C. s 1396 et seq.) the “Medicaid” law, which authorized federal financial support to states who adopted conforming medical assistance programs. Significantly, Medicaid programs are not now and never have been fully federally funded. The present plan is in a matching funds basis as provided in 42 U.S.C. section 1396a, which states as pertinent herein: “(a) A State plan for medical assistance must

“(2) provide for financial participation by the State equal to not less than 40 per centum of the non-Federal share of the expenditures under the plan and, effective July 1, 1969, provide for financial participation by the State equal to all of such non-Federal share or provide for distribution of funds from Federal or State sources, for carrying out the State plan, on an equalization or other basis which will assure that the lack of funds from local sources will not result in lowering the amount, duration, scope, or quality of care and services available under the plan.”

42 U.S.C. section 1396 authorizes annual appropriations by Congress to enable each State to furnish medical and rehabilitation assistance to the needy and specifically states that “sums made available under this section shall be used for making payments to States which have submitted, and had approved by the Secretary of Health, Education, and Welfare, State plans for medical assistance.” In response to this federal legislation, the California Legislature enacted the Medi-Cal Program (Welf. & Inst.Code, s 14000 et seq.) to be administered by the state with partial funding from the federal government, and to provide basic and extended health care services for recipients of public assistance and medically indigent persons.

We conclude payments to recipients under the Medi-Cal program are not “any amount payable as a benefit to the plaintiff ․ pursuant to the United States Social Security Act.” First, the funds are appropriated for the specific purpose of partially funding State medical assistance plans, and are paid directly to the State of California, to be administered as part of its Medi-Cal plan. To qualify for such financial assistance, the State must comply with certain requirements of the federal law. Second, Medi-Cal payments by the State are made directly to the medical service providers upon proof of rendition of health care services to an eligible Medi-Cal beneficiary. In a technical sense, a benefit is conferred upon the Medi-Cal recipient by the receipt of medical services but the thrust of the statutory language of section 3333.1 is directed to sums payable to the plaintiff.3

Defendants urge that the direct payment to health care providers under Medi-Cal is of no significance as private health care plans such as Blue Cross, Blue Shield, and the Foundation Health Plan of Sacramento also pay directly according to an agreed upon schedule. This facile argument ignores that such private plans are specifically identified in the second contract providers clause of subdivision (a) of section 3333.1.

Defendants in a supplemental brief, argue that the earlier legislation proposed by Assemblyman Barry Keene in Assembly Bill No. 1 provided that any compensation awarded pursuant to the proposed law could, in the election of the health care provider, be reduced by the amount of any benefits to which the patient (plaintiff) had become entitled by reason of the loss, including any benefits payable under the Social Security Act, except those payable under Titles XVIII (Medi-Care) and XIX (Medicaid-Medi-Cal in California); that the exceptions were deleted in the subsequent amended legislation, section 3333.1, and this evidences a legislative intent to encompass Medi-Cal payments within section 3333.1. However, when the Legislature took the language of Assembly Bill No. 1 (proposed Health & Saf. Code, s 21154.5) and transferred it to section 3333.1, a significant change was made in the prefatory language. The original draft provided for reduction in damages “by any benefits to which the patient is entitled by reason of the loss.” (Emphasis added.) In section 3333.1, the Social Security benefits referred to are only those payable as a benefit to the medical malpractice plaintiff. If the Legislature had intended to include all forms of Social Security benefits to which the patient was entitled, irrespective of the person or persons to whom those benefits were payable, it would have retained the language in the original form. It did not. It substituted language stating directly that only those social benefits payable (directly) to the plaintiff were within the ambit of the Act. Social Security programs, except for those contained in Titles XVIII and XIX, pay benefits directly to the recipient. The change in the prefatory language of the statute rendered superfluous the specific exemption of Titles XVIII and XIX.

Medi-Cal Payments As An Amount Paid Pursuant to a Contract By an Organization

Defendants urge the State of California is an organization which pays for health care services pursuant to a statutory scale of payment which constitutes an offer which in turn becomes a contract upon acceptance by the rendering of medical services by a provider.

The basic fallacy in this assertion is that medical services are paid under the Medi-Cal program on the basis of the statutory eligibility of the recipient-beneficiary, not by contract, as in private insurance contracts such as Blue Cross and Blue Shield.

Our courts have expressly rejected the concept of a contractual relationship as to the health care providers. (California Assn. of Nursing Homes etc., Inc., v. Williams (1970) 4 Cal.App.3d 800, 817-818, 84 Cal.Rptr. 590, 85 Cal.Rptr. 735.) Nor do we perceive that Medi-Cal recipients have any rights based on contract to receive public assistance medical services.

Construction of Section 3333.1 With Other Relevant Statutory Enactments

Courts should construe a statute with reference to the whole system of law of which it is a part so that all may be harmonized and have effect. Welfare and Institutions Code section 14124.70 et seq. specifically authorizes the Director of the Department to recover against third-party tortfeasors Medi-Cal payments either by lien or a direct action. To accept defendants' interpretation of section 3333.1 would create a direct conflict with the statutory recoupment sections.

The Social Security Act itself requires participating states in the Medicaid program to seek reimbursement for Medicaid payments from third-party tortfeasors. 42 U.S.C. section 1396a(25) provides: “(25) provide (A) that the State or local agency administering such plan will take all reasonable measures to ascertain the legal liability of third parties to pay for care and service (available under the plan) arising out of injury, disease, or disability, (B) that where the State or local agency knows that a third party has such a legal liability such agency will treat such legal liability as a resource of the individual on whose behalf the care and services are made available for purposes of paragraph (17)(B), and (C) that in any case where such a legal liability is found to exist after medical assistance has been made available on behalf of the individual, the State or local agency will seek reimbursement for such assistance to the extent of such legal liability; ․” (Emphasis added.)

We cannot presume the Legislature intended to enact a provision in violation of federal supremacy principles, and in Welfare and Institutions Code section 11003, specific provision is made whereby any state requirement relating to public assistance which does not conform to federal requirements is voided.

Moreover, we do not perceive it was the intent of the Legislature to bail out doctors and other health providers by the use of public funds. At the time of the enactment of the legislation in question, the Governor had made it clear he would not be willing to use general funds to pay for malpractice premium increases. (Keene, Medical Malpractice Crisis, p. 30.) But under the trial court's ruling, this precise result is accomplished. Acceptance of this interpretation means the state is required to forego its statutory right and federal obligation to collect monies to reimburse and thereby partially fund the Medi-Cal program in favor of reducing tort liability damage awards against health care providers and derivatively malpractice insurance premiums. Such a plan, in the absence of a direct public benefit, could be viewed as an impermissible gift of public funds (Cal.Const., art. XVI, s 6); at best, there is only an indirect benefit accruing to the public.

Finally, we note the Medi-Cal reimbursement statutes were revised and reenacted in 1976 subsequent to the enactment of section 3333.1 in 1975 (Stats. 1976, ch. 621 p. 1476). Though one purpose of the amendment was to clarify certain provisions governing attorneys fees, costs and notice, former section 14117 was reenacted as section 14124.74, which grants first lien rights to payments under the Medi-Cal program in any third-party suit, whether the action or claim is prosecuted solely by the Medi-Cal beneficiary or jointly by the beneficiary and the Director of the Department. The Legislature is presumed, in enacting or amending a statute, to be aware of former enactments. We cannot assume the Legislature in 1976 was not mindful of section 3333.1 enacted the previous year. (Rosenberg v. Bump (1919) 43 Cal.App. 376, 185 P. 218, 58 Cal.Jur.3d, Statutes, s 92, pp. 446-449.) The reasonable assumption is if the Legislature had intended to preclude reimbursement of Medi-Cal payments by inclusion within section 3333.1, it would have explicitly so provided in either section 3333.1 or in section 14124.70 et seq.

Notice of Lien Procedure

Defendants asserted in the trial court and renew those assertions before us that Department's practice of filing and serving a notice of lien in the third-party action is procedurally improper in that the reimbursement statutes allow for the perfection of a lien “In the event of judgment or award ․” upon the application of the Director (Welf. & Inst.Code, s 14124.74), which connotes a motion or its equivalent, which the court, in its discretion, may or may not grant. An analogy is made to the perfection of creditors' liens as set forth in Code of Civil Procedure section 688.1. Such analogy is inappropriate. Statutorily, reimbursement of Medi-Cal payments in third-party suits or claims permit no judicial discretion. The only discretion to waive all or part of the lien rests with the Director.4 (Welf. & Inst.Code, s 14124.74, subd. (b); see Wright v. Department of Benefit Payments (1979) 90 Cal.App.3d 446-449, 153 Cal.Rptr. 474.) The Medi-Cal claim for reimbursement is created by operation of law. No judgment, award or settlement in any action, or claim by a beneficiary may be satisfied without giving notice to the Director and allowing a reasonable opportunity to satisfy the lien. (Welf. & Inst.Code, s 14124.76.) We perceive that no formal procedure for perfecting the claim for reimbursement is necessary. The “Notice of Lien” procedure employed by the Director accomplished its intended purpose of putting all parties on notice that the Director is asserting a lien in the underlying proceedings.

The remaining peripheral issues raised by both parties need not be addressed.

The order granting defendants' motion to strike the notice of lien is reversed.

Much as I like the result reached by my two favorite colleagues, I dissent. They are wrong$ It is for the Legislature to legislate and for us to interpret and apply. Our Legislature placed Medi-Cal benefits beyond the scope of subrogation in medical malpractice cases for whatever reasons it may have had; if the choice has proven unwise, or if it was an oversight, the Legislature meets every year for no better reason than to correct it. Let it do so.

In the meantime, how can we misinterpret phrases like “pursuant to the United States Social Security Act” or “any amount payable as a benefit to the plaintiff?” California's Medi-Cal program was enacted in direct response, hence “pursuant to,” the Medicaid law, as my colleagues point out. “Any amount payable as a benefit to the plaintiff” is not the same as “any amount payable to the plaintiff as a benefit;” yet my colleagues prefer the latter words and their meaning (as do I), so they substitute them. That funds are paid directly to a provider rather than to the plaintiff himself does not make them any less “payable as a benefit to the plaintiff.” Were this so, then certain workers' compensation benefits, health and sickness benefits, and accident insurance benefits also are excluded. Are they?


1.  The Governor, in his proclamation convening the Legislature in a Second Extraordinary Session, declared: “The cost of medical malpractice insurance has risen to levels which many physicians and surgeons find intolerable. The inability of doctors to obtain such insurance at reasonable rates is endangering the health of the people of this State, and threatens the closing of many hospitals. The longer term consequences of such closings could seriously limit the health care provided to hundreds of thousands of our citizens․”

2.  An example of this hope fulfilled is Hrnjak v. Graymar, Inc., supra, 4 Cal.3d 725, 94 Cal.Rptr. 623, 484 P.2d 599. Presumably, under the statute at issue, a kind and generous jury could include any collateral benefits in its award, and even in a medical malpractice action, the plaintiff could recover what has been characterized by some as a windfall.

3.  Our dissenting colleague, in his role as a strict constructionist of statutory law, overlooks that federal funding of Medi-Cal is only partial, that even if we construed the federal appropriations for state medical assistance programs as payable pursuant to the United States Social Security Act, this comprises only roughly half of the funds expended which constitute Medi-Cal lien. The state contribution, even by the tortured reasoning of the dissent, is not payable “through the Social Security Act,” it is paid from appropriations made by the State Legislature from the general fund.

4.  There is a statutory limit on such claims in Welfare and Institutions Code section 14124.78, of one-half the beneficiary's recovery after deducting attorneys fees, litigation costs, and medical expenses relating to the injury paid by the beneficiary.

CARR, Associate Justice.

PUGLIA, P. J., concurs.