Medico-Legal Funding: The Winners and Losers
Rob Bonnaffons and Katie Wollfarth authored the below article which was published in Transportation Lawyers Association in the October 2020 issue.
The Meteoric Rise of Litigation Funding
In 2019 litigation funding was a rising asset class expected to double in growth in five years. Harvard University announced that same year that it was investing a portion of its endowment into a $500,000,000.00 fund managed by IMF Bentham Ltd., a publicly traded company engaged in financing plaintiffs’ litigation in the United States.1 That was 2019. In the wake of COVID-19 and the bleak economic outlook for 2020, we expect that litigation and the appetite for litigation funding will increase.
Medico-Legal Funding 101
Medico-legal Funding Companies (MLFCs) market themselves as helping the plaintiff, David battle the insurance Goliath, who can out-resource David in protracted litigation. But, in the realm of personal injury litigation, once the MLFC is involved, the opposite often occurs. In the context of personal injury claims against trucking companies, MLFCs typically insert themselves via payment of the plaintiff’s medical expenses. The MLFC often becomes involved despite the plaintiff having Medicare or private health insurance. This is done strategically by plaintiff’s counsel to artificially inflate the plaintiff’s recovery. The typical arrangement is simple: The MLFC secures a Master Agreement (“Agreement”) with designated liberal health care providers. Sometimes this written Agreement is in existence before the subject litigation arises. The Agreement acknowledges that the MLFC will, from time to time, purchase the accounts receivable of a personal injury patient from the healthcare provider at a discounted rate (often between 33% and 50% of the billed amount). In exchange for payment by the MLFC, the health care provider agrees to assign its rights to collect the full “billed” amount to the MLFC. When a claim arises and plaintiff begins accruing medical treatment/bills, the plaintiff’s attorney contacts the MLFC to institute financing. The plaintiff’s attorney provides specific details regarding the viability of plaintiff’s claim and alleged injuries to the MLFC, which then decides whether or not to invest in the matter. If the MLFC decides to participate, more often than not, the plaintiff’s attorney and the MLFC also enter into a contract whereby the plaintiff’s attorney guarantees reimbursement of the full “billed” amounts of his/her client’s medical treatment. The MLFC then refers the plaintiff to health care providers with whom the MLFC has a favorable relationship. These health care providers then execute a specific assignment of their “billed” charges to the MLFC. Likewise, the plaintiff also signs a letter of guarantee in favor of his/her treating healthcare provider confirming that the provider will receive payment of all “billed” care provided to the plaintiff for accident related injuries.
Because the health care provider is guaranteed (by the MLFC), payment of a certain percentage of whatever he bills for treatment, the health care provider games the civil justice system by exorbitantly increasing his normal charge for a medical procedure. For example, a two-level cervical fusion will typically be reimbursed by a healthcare insurer/Medicare at 22% – 45%, based upon what the CPT codes deem as the usual and customary cost of the procedure. In the litigation funding context, the plaintiff’s treating physician will double or triple the customary amount charged for the same procedure, thereby allowing the plaintiff’s physician to be paid exponentially more than he would in a non-litigation scenario.
As a result of this arrangement, reasonable settlements become harder and harder to obtain. The below illustration is a rudimentary example of the distortion on settlement values encountered when MLFCs become involved:
Settlement Breakdown for $400,000 settlement Settlement Breakdown for $625,000 settlement
Without MLFC With MLFC
Total Settlement $400,000 Total Settlement $625,000
Legal Fee (33%) $132,000 Legal Fee (33%) $206,250
Past Medicals $ 75,000 Past Medicals $200,000
Court Costs and Expenses $ 5,000 Court Costs and Expense $ 5,000
Plaintiff Net Recovery $188,000 Plaintiff Net Recovery $213,750
Here, the involvement of an MLFC increases the overall settlement number by $225,000. The legal fee increases by $74,250. The past medical bills increase by $125,000 with $81,250 (65%) going to the MLFC and the plaintiff’s medical provider keeping the remaining $43,750. Yet, the net increase for the plaintiff is only $25,750. And the involvement of the MLFC increases the defendant’s cost of settling the case by 36%.
The tripartite referral system between the doctors, lawyers, and MLFCs continues to grow in popularity because the doctors, lawyers, and MLFCs reap significant profits. Unfortunately, the plaintiff is typically ignorant of these machinations. As long as MLFCs fund personal injury cases, and the pre-arranged doctors continue to favorably opine on causation, there is no reason to believe that fairness and justice will influence the operation. With MLFCs, plaintiffs’ attorneys are able to offload the financial risk of funding what could be years of overpriced medical treatment. The result of this entire arrangement is that in plaintiff-favorable jurisdictions (judicial hell holes), a low speed rear end accident quickly spirals into a brain injury/orthopedic/ neurosurgical case with the plaintiff incurring six to seven figure medical expenses.
Challenges to the Enforceability of MLFC Agreements
Defendants seemingly have at least a few arrows in their quiver to defend against these arrangements. The Collateral Source Rule can be used to challenge the enforcement of MLFC Agreements. Additional challenges can be based upon champerty, maintenance, and bias.
The origin of the Collateral Source Rule dates back more than 150 years to the United States Supreme Court’s decision in The Propeller Monticello v. Mollison, 58 U.S. 152 (1854), wherein the court stated: “The contract with the insurer is in the nature of a wager between third parties, with which the trespasser has no concern. The insurer does not stand in the relation of a joint tort trespasser, so that satisfaction from him shall be a release of others.” As it has evolved, the Collateral Source Rule is best examined in terms of the recovery of insurance medical benefits in tort cases. Medical benefits that are paid on behalf of the injured plaintiff who is insured by a healthcare insurer and/or Medicare, are considered collateral sources. While there are in application nuances depending upon the state, generally across jurisdictions the Collateral Source Rule is one of evidence and damages.    Evidence of payments made by a collateral source results in the plaintiff recovering the full amount billed by a healthcare provider from the tortfeasor, as opposed to the lower amount paid by the healthcare insurer and/or Medicare. The rationales underscoring the Collateral Source Rule are: a) the tortfeasor should not be allowed to benefit from a plaintiff’s foresight and prudence in securing insurance benefits; and, b) the tortfeasor should pay to an injured victim all of his/her damages resulting from his (tortfeasor’s) actions. Admittedly, the application of the Collateral Source Rule can allow a plaintiff who has received health insurance benefits for medical care to double recover from the tortfeasor – making the victim more than “whole.” But in those instances, the plaintiff has paid a premium for the benefits.
MLFCs are typically confronted with the Collateral Source Rule as the result of a Motion in Limine (MIL) filed by a defendant-motor carrier in preparation for trial. The defendant seeks to limit plaintiff’s recovery to amounts paid for medical treatment instead of the exorbitant amounts billed. The MIL typically presents a two-fold argument: (1) that the plaintiff paid no consideration to obtain the benefit of the medical discounts and (2) depending upon the Agreement with the MLFC, the plaintiff is not personally obligated to repay even the discounted amount paid. As per argument #(1), MLFCs are not healthcare insurers who receive premiums in exchange for coverage. The plaintiff never pays any consideration/fee/charge. Further, the plaintiff’s attorney typically arranges for the MLFC to fund the case versus the plaintiff himself procuring the Agreement. This lack of consideration being paid to the MLFC is the focus (in some jurisdictions) when examining whether only evidence of paid medical expenses versus the inflated billed expenses should be submitted to the jury. In the litigation arena, a close examination of the Agreement entered into between the MLFC and the plaintiff is critical. As for Argument # (2), often the Agreement contains a vague and tortured use of linguistics, with the net result being that the plaintiff has no obligation to repay anything to the MLFC, although the Agreement purportedly asserts a lien (against the plaintiff) to recover the full billed amount from any settlement or judgment. The lack of any legal obligation on the plaintiff’s part to pay the amounts written off by the health care provider has served as a trigger for some courts to conclude that this illusory debt is not recoverable.  In fact, some courts have taken the stance that MLFCs are not a collateral source.
Depending upon the jurisdiction, the common law doctrines of champerty and maintenance may preclude a MLFC from recovering the full “billed” amount. These ancient concepts can weaponize a defendant in challenging the legitimacy of the billed amount of plaintiff’s medical expenses. Maintenance is the intermeddling in another’s suit, by assisting a party with money or by prosecuting or defending it. Champerty is a form of maintenance whereby a non-party undertakes to further another’s interest in a suit in exchange for a pecuniary interest in the litigated matter if a favorable result is reached. This pecuniary interest is the essence of the MLFC Agreement. For the Agreement to be profitable, a stunning level of litigation control is exerted by the MLFC. Defense attorneys need to scrupulously review and analyze fine print in the Agreement. Some courts have determined that the Agreement with the MLFC is not champerty merely by virtue of the assignment. However, if an Agreement with a MLFC requires that the plaintiff and/or his counsel seek the lender’s approval of future advances, as well as to “consult” with the MLFC should the plaintiff wish to retain other counsel, then some courts have determined that this “power of the purse” constitutes significant control over the underlying litigation and is champertous. If this argument is successful, a defendant can potentially invalidate the entire Agreement.
To defend against plaintiff’s pursuit of recovery of his “billed” medical costs, defendants should use the Agreement to expose the bias endemic in the tripartite relationship. At its most basic level, the relationships between the MLFC, the plaintiff’s attorney and the co-opted doctors create the risk, and indeed the likelihood of bias. The exploration of bias is crucial when considering the gross over-treatment that many plaintiffs receive in low-speed, minimal impact collisions with motor-carriers. Time and time again, plaintiffs undergo unnecessary and often invasive treatment at the recommendation of greedy doctors and attorneys, and MLFCs. Proof of this bias can bode well for the trucking defendant, depending upon the jurisdiction. For this reason alone, it is imperative that defendants obtain the Agreement at the outset of the case.
State legislatures and Congress can assist. Recently, in 2018, Wisconsin enacted legislation requiring the disclosure of funding agreements in all civil actions. The provision likewise mandates that before issuing discovery requests, a litigant must provide to other parties “any agreement under which any person…has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment or otherwise”. On the federal level, U.S. Senator Chuck Grassley, introduced draft legislation on May 10, 2018, entitled, “The Litigation Funding Transparency Act of 2018” – but the bill died. Currently, there is no Federal Rule of Civil Procedure requiring automatic disclosure of third party funding agreements.
MLFCs have significant resources to assist a plaintiff’s attorney in hiding the ball. But in some jurisdictions, the evidentiary curtain shielding MLFCs is slowly opening, enabling judges and juries to hear the true motivations underpinning the over-treatment of personal injury plaintiffs. Juries are savvy and will figure out that the plaintiff is the real loser in the entire arrangement. Via concerted efforts by defendants and attorneys, recent jurisprudence is placing a critical light on these Agreements. It will take the trucking industry’s firm resolve and financial support to expose, case by case, the true nature of these Agreements as well as the deleterious effects on an individual plaintiff and the industry.
 This dubious agreement means that at the conclusion of the case, the MLFC and the heath care provider each receive 100% reimbursement of the “billed” amount for treatment rendered to plaintiff.
 In Colorado, “Generally, under the collateral source rule, ‘compensation or indemnity received by an injured party from a collateral source, wholly independent of the wrongdoer and to which the wrongdoer has not contributed, will not diminish the damages otherwise recoverable [by the injured party] from the wrongdoer.’” Forfar v. Wal-Mart Stores, Inc., 2018 COA 125, ¶ 7, 436 P.3d 580, 583, cert. denied, No. 18SC694, 2019 WL 1236858 (Colo. Mar. 18, 2019).
 In Illinois, the rule has both evidentiary and substantive components. Wills v. Foster, 229 Ill. 2d 393, 400, 892 N.E.2d 1018, 1022 (2008).
 In Tennessee, the Supreme Court held, “that the collateral source rule applies in this personal injury case, in which the collateral benefit at issue is private insurance. Consequently, the plaintiffs may submit evidence of the injured party’s full, undiscounted medical bills as proof of reasonable medical expenses.” Dedmon v. Steelman, 535 S.W.3d 431, 433 (Tenn. 2017)
 In Alaska, “the difference between the amounts billed and the amounts paid is a benefit to the injured party that is subject to the collateral source rule; as such, evidence of the amounts paid is excluded from the jury’s consideration but is subject to post-trial proceedings.” Weston v. AKHappytime, LLC, 445 P.3d 1015, 1019 (Alaska 2019).
 See Simmons v. Cornerstone Investment, LLC, 2018-0735 2019 WL 2041377 at *3 – *5 (La. 5/8/19)(noting “we reject the notion that Plaintiff ‘paid consideration’ in the form of being subjected to the Workers’ Compensation scheme in the first place”)
 Id. (noting in the context of Medicaid benefits and Workers’ Compensation insurance: “The bottom line is that the plaintiffs in each of these situations did not actually incur, and need not repay the “written off” amounts at issue. Such amount are illusory in that they are never statutorily susceptible of being paid by the plaintiffs.”); See also Williams v. IQS Ins. Risk Retention, CV 18-2472, 2019 WL 937848, at *3 (E.D. La. Feb. 26, 2019)(holding that the collateral source rule did not apply to the difference between the charged amount of plaintiffs’ medical expenses and the amounts paid by a third-party litigation funding company)
 See also Dyet v. McKinley, 139 Idaho 526, 81 P.3d 1236 (2003) (Idaho) (noting “‘[a]lthough the write-off technically is not a payment from a collateral source within the meaning of [the collateral source statute], it is not an item of damages for which plaintiff may recover because plaintiff has incurred no liability therefore.’.” 139 Idaho at 529), but see Eldridge v. West, 166 Idaho 303, 458 P.3d 172, 183 (2020)(holding that “The jury should be provided with the providers’ bills that are subject to the write-offs, absent any write-offs … If a verdict is rendered that includes those amounts, ‘[s]uch award shall be reduced by the court.’).
 Houston v. Publix Supermarkets, Inc., No. 1:13-cv-206-TWT, 2015 WL 4581541, at *1 (N.D. Ga. July 29, 2015), aff’d sub nom. ML Healthcare Servs., LLC v. Publix Super Markets, Inc., 881 F.3d 1293 (11th Cir. 2018); Miller v. J-M Mfg. Co., No. CV-05-1499-ST, 2008 WL 356932, at *1 (D. Or. Feb. 7, 2008))
 See Rancman v. Interim Settlement Funding Corp., 2003-Ohio-2721, ¶ 10, 99 Ohio St. 3d 121, 123, 789 N.E.2d 217, 219; Odell v. Legal Bucks, LLC, 192 N.C. App. 298, 307, 665 S.E.2d 767, 773 (2008)
 Odell v. Legal Bucks, LLC, 192 N.C. App. 298, 309, 665 S.E.2d 767, 775 (2008) (But note that in weighing whether Legal Bucks had control in the litigation, the court looked to Legal Bucks’ lack of interference and influence over the underlying litigation and settlement proceedings as well as Legal Bucks’ lack of influence over the plaintiff’s decisions on matters such as obtaining replacement counsel.
 In re DesignLine Corp., 565 B.R. 341, 349 (Bankr. W.D.N.C. 2017)(noting that the key inquiry into whether the alleged champertor’s involvement is for purpose of stirring up strife and continuing litigation, so as to constitute “champerty” under North Carolina law, is whether that party exercised control over the cause of action.); Boling v. Prospect Funding Holdings, LLC, 771 F. App’x 562 (6th Cir. 2019)(litigation-funding agreements violated champerty statute; agreements provided that lender would receive compensation from borrower’s award in personal-injury action in exchange for providing funding to assist him in pursuing litigation, lender and lender’s predecessor were not parties on record in underlying personal-injury litigation, agreements injected lender’s interests into personal-injury case and directly provided that lender would assume the risk of resolution of personal-injury case, and agreements effectively gave lender substantial control over the litigation by limiting borrower’s right to change attorneys without lender’s consent.)
 See e.g. Woulard v. Greenwood Motor Lines, Inc., No. 1:17CV231-HSO-JCG, 2019 WL 3311752, at *3 (S.D. Miss. Feb. 4, 2019)(noting: “To the extent Defendants seek to introduce evidence of the arrangement between HMR Funding and Plaintiff’s treating physicians in order attack the credibility and motivation of her experts during cross-examination, and not in an attempt to reduce or mitigate damages, the collateral source rule would not be violated”)