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What physicians should know about "Letters of Protection"

by Brian Dittmar and David White

You are a health care professional in Texas who has entered into a routine managed care contract with a health insurance company. You have agreed to discount your charges for medical services in exchange for being “in network.”

You are treating a patient for injuries allegedly caused by the medical negligence of another physician. The patient is represented by an attorney who is pursuing a claim for damages against the other physician.

The patient’s attorney contacts you with an interesting proposition. Would you like to be paid more for your services than what you would receive from the patient’s health insurance carrier? In fact, the attorney has no problem if you want to bill an amount significantly higher than insurance contract rates. All you have to do is agree to not send the bill to the patient’s health insurance. The attorney will even give you a “Letter of Protection” that promises you will be paid the full amount of your bill when the patient’s liability claim is resolved. 

The laws in Texas governing health care liability actions state that claimants are only allowed to recover damages for medical bills that are actually “paid or incurred.” Accordingly, a claimant “without” health insurance has more costly medical “bills” to claim than a claimant who is insured. If your bill is not submitted to the patient’s health insurance, the attorney will produce your bill and the letter of protection as proof of “incurred” medical expenses that should be awarded as compensation. 

Then, when the liability claim is resolved, you are surprised when the attorney offers to pay you an amount less than what you billed. The attorney might tell you that case expenses were higher than anticipated, the settlement was not as much as anticipated, etc. You decide that even though your patient and attorney have collected compensation based on the amount of your original bill, a compromise in the amount you will accept is better than going through the time and effort of collection attempts. In the health care liability insurance industry, the term for the difference between what is awarded and what is ultimately paid to you is “phantom damages.”

A general principle of Texas law requires claimants to mitigate their damages. However, it is not clear whether a claimant’s decision to not use otherwise available health insurance in these circumstances represents a failure to mitigate damages.

This past legislative session, two bills were filed that attempted to add the following clarifying language to the statute. “The trier of fact shall consider a claimant ’s failure to seek reimbursement for medical or health care expenses that are obligated to be paid on the claimant ’s behalf a failure to mitigate the claimant’s damages.” Unfortunately, neither bill advanced out of legislative committee. 

Those physicians who agree to accept a Letter of Protection in lieu of submitting charges to otherwise collectible health insurance are put in an interesting position. Yes, they might someday be paid more for their services than they would otherwise collect under their contract. However, they would also be participating in a scheme intended to subvert the “paid and incurred” provisions of Texas law. Please consider that by helping to facilitate awards of “phantom damages,” physicians may be working against the long-term interests of all health care professionals and their patients.