Eliminating 'Phantom Damages'

Courts in many states, however, often allow plaintiffs” attorneys to introduce evidence of amounts initially billed by healthcare providers. This practice occurs even when it is undisputed that neither the patient, nor his or her insurer, paid these amounts. Jurors are led to believe that the plaintiff was responsible for paying those bills, though this is usually not true. The jurors are blindfolded from knowing that the amount accepted by the healthcare provider as full payment was substantially less. Juries then award inflated amounts that serve no compensatory purpose. “Why, that's fraud on the jury,” was the reaction of a legislator when he learned of this practice.

By way of illustration, a hospital may charge $1,500 for an MRI, but accept $500 as full payment. The plaintiff may have paid a $25 co-pay and the insurer paid the remaining $475. Yet, a court may require a defendant to pay damages based on the full $1,500 – $1,000 more than anyone ever paid – simply because that amount was printed on the initial bill. These illusory amounts serve no compensatory purpose, but drive up the costs of products and services for consumers. The amount that no one ever paid but is sought in personal injury litigation is what we (and some courts) have called “phantom damages.”

In the past year, two state legislatures and two state high courts have taken action to prohibit introduction of phantom damage evidence in court. In addition, the American Legislative Exchange Council (ALEC), whose members include state legislators throughout the United States, adopted a model Phantom Damages Elimination Act, making it likely that the momentum for addressing such wasteful litigation expenses will continue to grow.

Real Cases of Phantom Damages in the Courts

Here are a few examples of actual cases showing the impact of phantom damages. As these cases illustrate, inclusion of such illusory costs drives up awards for damages for medical care by 40% or more. They can also lead juries to arrive at inflated amounts for pain and suffering, since they often consider a multiple of the plaintiff's medical expenses when reaching an otherwise arbitrary and completely subjective amount. In addition, basing awards on the billed amounts rather than amounts paid increases the sum plaintiffs' lawyers demand to settle claims.

1. Richard Tucker slipped and fell at an event sponsored by Volunteers of America. He was billed $74,242 for medical services, which his insurer settled with a $43,236 payment (reflecting $31,006 in phantom damages). The jury, which was not allowed to learn of the amount actually paid to satisfy the bill, found Mr. Tucker 49% responsible for his own injury and the nonprofit organization 51% responsible. It reached an award based on the billed medical costs plus $60,000 for pain and suffering. The trial court subtracted the phantom damages from the award, but a divided Colorado Supreme Court reinstated the billed amount. Colorado legislators are pursuing legislation similar to the ALEC model act to overturn the court's decision. Volunteers of America Colorado Branch v. Gardenswartz, 242 P.3d 1080 (Colo. 2010).

2. George White, a patron at the Ponderosa Lounge, a popular country music venue in Portland, OR, was injured when his bar stool collapsed. The jury awarded him $37,600 in medical expenses, even though Medicare paid $13,426 to settle the bill. The trial court rejected the lounge's request to limit evidence to collectable medical expenses or to allow them to inform the jury of the amounts the medical providers wrote off. The Oregon Supreme Court affirmed the outcome. White v. Jubitz Corp., 219 P.3d 566 (Or. 2009).

3. Lydia Lopez slipped and fell when entering an Arizona Safeway supermarket. While her healthcare providers billed $59,700 for her medical treatment, they accepted $16,837 from her insurer as full payment. An Arizona trial court denied a request by Safeway to exclude evidence of the billed amounts, rather than the amounts paid. Based on evidence that included $42,863 in phantom damages, the jury awarded $400,000, which was reduced to $360,000 to reflect that Ms. Lopez was found 10% at fault. An Arizona appellate court affirmed the full $360,000 award. Lopez v. Safeway Stores, Inc., 129 P.3d 487 (Ariz. Ct. App. 2006).

4. In Florida, a state that limits recovery of phantom damages, Albert Goble was severely injured when another driver hit his motorcycle. Healthcare providers billed $574,554.31 for his treatment, but accepted $145,970.76 from his insurer in full satisfaction of the bills. Under Florida's system (which legislators are seeking to improve), the jury was not told of the amount actually paid, and awarded $574,554.31 in medical expenses. The judge then reduced the jury award by $428,583.55, representing the amount of phantom damages. The Florida Supreme Court affirmed the reduced award. As the court recognized, “[t]he alternative, forcing an insurer to pay for damages that have not been incurred, would result in a windfall to the injured party. The allowance of a windfall would undermine the legislative purpose of controlling liability insurance rates because insurers will be sure to pass the cost for these phantom damages on to Floridians.” Goble v. Frohman, 901 So. 2d 830 (Fla. 2005).

Treatment of Phantom Damages in the States

A growing number of states have limited or precluded phantom damages, but the majority rule continues to allow inflated compensation. Arizona, Colorado, Delaware, the District of Columbia, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Mississippi, Nebraska, Oregon, South Carolina, South Dakota, Virginia, Washington and Wisconsin allow recovery of phantom damages. States in which the high courts or legislatures have limited or prohibited recovery of phantom damages include Alabama, California, Connecticut, Florida, Idaho, Indiana, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania and Texas. In the remaining 14 states, the law is unresolved or inconsistently applied, allowing the distinct possibility of recovering phantom damages. This list provides a general lay of the land; it is important to recognize that each state has nuances in the application of this law.

A state's determination of whether it allows or precludes phantom damages often stems from its interpretation of the collateral source rule, which prohibits introduction of evidence that a plaintiff received compensation for his or her injury from sources other than the defendant. The collateral source rule, where applicable, allows plaintiffs to collect in litigation amounts already paid by others, such as insurers, when such payments resulted from their own efforts. Some courts view the discounted rates obtained by insurers as among the benefits to which the plaintiff is entitled due to his or her purchase of insurance. This view is flawed. The collateral source rule should not be interpreted to permit only introduction of amounts billed for two reasons. First, the plaintiff's insurance premiums reflect the rates negotiated between the insurer and healthcare providers. If the insurer had not negotiated rates lower than the list prices, the plaintiff would have needed to pay significantly higher premiums. Second, and more simply put, discounts or write-offs are not a collateral source because they represent expenses that the plaintiff never incurred.

Recent Legislative and Judicial Action on Phantom Damages

In a time in which state legislators are closely evaluating methods of promoting economic growth and jobs, and eliminating wasteful spending, phantom damages are getting a hard look. In 2011, two states – Oklahoma (H.B. 2023) and North Carolina (H.B. 542) – enacted legislation eliminating phantom damages.

They follow two other states whose legislatures have acted in recent years to curtail inflated damages. Texas was the first to do so in 2003 when it enacted a one-sentence bill: “Recovery of medical or health care expenses incurred is limited to the amount actually paid or incurred by or on behalf of the claimant.” Tex. Civ. Prac. & Rem. Code ' 41.0105. Missouri enacted a law in 2005 that took a compromise approach – it enacted a rebuttable presumption that the amount accepted by the healthcare provider as full payment for a medical bill represents the value of the medical treatment rendered and allows the judge, outside the presence of the jury, to consider other evidence of the value of the medical treatment rendered based on the medical bills incurred, the amount actually paid, and the amount of the medical bills that have not been paid but which the plaintiff is obligated to pay. Mo. Rev. Stat. ' 490.715.

The highest courts of Texas and California ' the two largest states in the union ' also took action last summer to preclude phantom damages. In July, the Texas Supreme Court resolved a dispute among mid-level appellate courts regarding the application of its one-sentence law precluding phantom damages. The court clarified that, under this law, billed amounts that do not reflect actual costs may not be presented at trial. Haygood v. De Escabedo, 2011 WL 2601363 (Tex. July 1, 2011).

The following month, the California Supreme Court, which is not viewed as favorable to defendants in civil cases, ruled 6-1 that a plaintiff may not recover undiscounted sums stated in a healthcare provider's bill but never paid “for the simple reason that the injured plaintiff did not suffer any economic loss in that amount.” Ms. Howell, who was injured in a car accident by a driver who worked for the defendant, was billed $189,978.63 for her medical care, but $130,286.90 of this amount (nearly 70%) was written off and never paid by her or her insurer. The jury returned a verdict for the full invoiced amount, which the trial court reduced by the amount of phantom damages. The California Supreme Court ruled that where a healthcare provider has accepted less than a billed amount as full payment, evidence of the full billed amount is irrelevant and inadmissible. See Howell v. Hamilton Meats & Provisions, Inc., 257 P.3d 1130 (Cal. 2011). The stakes on this issue were high in California, as they are in other states. According to the Sacramento Bee, California insurers estimated that requiring compensation based on the amount billed, rather than the amount paid based on negotiated rates and discounts, could cost them $3 billion annually.

ALEC's new model Phantom Damages Elimination Act follows the approach of these states. Under the model act, the value of reasonable and necessary health care services or treatment is based on: 1) amounts actually paid by or on behalf of the claimant; and 2) amounts actually necessary to satisfy outstanding charges still due to the healthcare provider. Billed amounts that do not reflect actual amounts paid or that remain actually owed are inadmissible at trial. As state legislatures begin their 2012 sessions, this common-sense reform, which would significantly, but fairly, reduce damages in virtually any case involving personal injuries, is likely to gain serious consideration.

Victor E. Schwartz, a member of this newsletter's Board of Editors, is a senior partner in the Washington, DC, office of Shook, Hardy & Bacon L.L.P., where he is chair of the Public Policy Group. Cary Silverman is Of Counsel with the firm, and assisted in the development of ALEC's model Phantom Damages Elimination Act.

”

In our day-to-day lives, Americans recognize that the “list” or “sticker” prices for products or services do not always reflect their actual cost. But in the topsy-turvy world of the legal system, lawyers who represent plaintiffs in product liability and other personal injury cases seek damages for medical expenses based on amounts originally billed by healthcare providers that are significantly higher than the plaintiff – or anyone paying on her behalf – actually paid. In recent years, several states have limited or eliminated these “phantom damages.”

For example, more than three-quarters of Americans have “club cards” that they routinely use at the supermarket. When the customer presents the card and the store applies applicable discounts at the checkout counter, the total bill can easily come down 20% from the “regular” prices. If an individual purchased supplies for a work-related event at the supermarket, and submitted a request to her employer for reimbursement, she would not expect to receive a check reflecting the prices on the receipt prior to the deduction of discounts. Another illustration is the sticker price of a car. Car buyers recognize that the amount on the window of the vehicle is a starting point for negotiation, and that they ultimately pay less. Most states impose a sales tax on cars. A purchaser would not expect the state to base the amount of that tax on the sticker price of the car, but would anticipate paying an amount based on the actual cost. Obviously, in each case, consumers expect the transaction to be based on the amount actually paid, not a list price. They recognize that the sticker price may simply reflect the pricing practices of that industry, not the true cost.

Similarly, as anyone who has visited a doctor can attest, it is not uncommon for the prices of medical services reflected on the original invoice to be three or four times the actual price paid. Given the widespread application of negotiated rates between managed care plans and providers, fee schedules set by Medicare or Medicaid, and other discounts and write-offs, few patients (or those who pay on their behalf) pay the full invoice. Uninsured patients rarely pay list prices, as healthcare providers have established indigent care programs that provide subsidies or discounts to low-income patients ” and write off an increasing amount of bills.

Courts in many states, however, often allow plaintiffs” attorneys to introduce evidence of amounts initially billed by healthcare providers. This practice occurs even when it is undisputed that neither the patient, nor his or her insurer, paid these amounts. Jurors are led to believe that the plaintiff was responsible for paying those bills, though this is usually not true. The jurors are blindfolded from knowing that the amount accepted by the healthcare provider as full payment was substantially less. Juries then award inflated amounts that serve no compensatory purpose. “Why, that's fraud on the jury,” was the reaction of a legislator when he learned of this practice.

By way of illustration, a hospital may charge $1,500 for an MRI, but accept $500 as full payment. The plaintiff may have paid a $25 co-pay and the insurer paid the remaining $475. Yet, a court may require a defendant to pay damages based on the full $1,500 – $1,000 more than anyone ever paid – simply because that amount was printed on the initial bill. These illusory amounts serve no compensatory purpose, but drive up the costs of products and services for consumers. The amount that no one ever paid but is sought in personal injury litigation is what we (and some courts) have called “phantom damages.”

In the past year, two state legislatures and two state high courts have taken action to prohibit introduction of phantom damage evidence in court. In addition, the American Legislative Exchange Council (ALEC), whose members include state legislators throughout the United States, adopted a model Phantom Damages Elimination Act, making it likely that the momentum for addressing such wasteful litigation expenses will continue to grow.

Real Cases of Phantom Damages in the Courts

Here are a few examples of actual cases showing the impact of phantom damages. As these cases illustrate, inclusion of such illusory costs drives up awards for damages for medical care by 40% or more. They can also lead juries to arrive at inflated amounts for pain and suffering, since they often consider a multiple of the plaintiff's medical expenses when reaching an otherwise arbitrary and completely subjective amount. In addition, basing awards on the billed amounts rather than amounts paid increases the sum plaintiffs' lawyers demand to settle claims.

1. Richard Tucker slipped and fell at an event sponsored by Volunteers of America. He was billed $74,242 for medical services, which his insurer settled with a $43,236 payment (reflecting $31,006 in phantom damages). The jury, which was not allowed to learn of the amount actually paid to satisfy the bill, found Mr. Tucker 49% responsible for his own injury and the nonprofit organization 51% responsible. It reached an award based on the billed medical costs plus $60,000 for pain and suffering. The trial court subtracted the phantom damages from the award, but a divided Colorado Supreme Court reinstated the billed amount. Colorado legislators are pursuing legislation similar to the ALEC model act to overturn the court's decision. Volunteers of America Colorado Branch v. Gardenswartz , 242 P.3d 1080 (Colo. 2010).

2. George White, a patron at the Ponderosa Lounge, a popular country music venue in Portland, OR, was injured when his bar stool collapsed. The jury awarded him $37,600 in medical expenses, even though Medicare paid $13,426 to settle the bill. The trial court rejected the lounge's request to limit evidence to collectable medical expenses or to allow them to inform the jury of the amounts the medical providers wrote off. The Oregon Supreme Court affirmed the outcome. White v. Jubitz Corp. , 219 P.3d 566 (Or. 2009).

3. Lydia Lopez slipped and fell when entering an Arizona Safeway supermarket. While her healthcare providers billed $59,700 for her medical treatment, they accepted $16,837 from her insurer as full payment. An Arizona trial court denied a request by Safeway to exclude evidence of the billed amounts, rather than the amounts paid. Based on evidence that included $42,863 in phantom damages, the jury awarded $400,000, which was reduced to $360,000 to reflect that Ms. Lopez was found 10% at fault. An Arizona appellate court affirmed the full $360,000 award. Lopez v. Safeway Stores , Inc. , 129 P.3d 487 (Ariz. Ct. App. 2006).

4. In Florida, a state that limits recovery of phantom damages, Albert Goble was severely injured when another driver hit his motorcycle. Healthcare providers billed $574,554.31 for his treatment, but accepted $145,970.76 from his insurer in full satisfaction of the bills. Under Florida's system (which legislators are seeking to improve), the jury was not told of the amount actually paid, and awarded $574,554.31 in medical expenses. The judge then reduced the jury award by $428,583.55, representing the amount of phantom damages. The Florida Supreme Court affirmed the reduced award. As the court recognized, “[t]he alternative, forcing an insurer to pay for damages that have not been incurred, would result in a windfall to the injured party. The allowance of a windfall would undermine the legislative purpose of controlling liability insurance rates because insurers will be sure to pass the cost for these phantom damages on to Floridians.” Goble v. Frohman , 901 So. 2d 830 (Fla. 2005).

Treatment of Phantom Damages in the States

A growing number of states have limited or precluded phantom damages, but the majority rule continues to allow inflated compensation. Arizona, Colorado, Delaware, the District of Columbia, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Mississippi, Nebraska, Oregon, South Carolina, South Dakota, Virginia, Washington and Wisconsin allow recovery of phantom damages. States in which the high courts or legislatures have limited or prohibited recovery of phantom damages include Alabama, California, Connecticut, Florida, Idaho, Indiana, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania and Texas. In the remaining 14 states, the law is unresolved or inconsistently applied, allowing the distinct possibility of recovering phantom damages. This list provides a general lay of the land; it is important to recognize that each state has nuances in the application of this law.

A state's determination of whether it allows or precludes phantom damages often stems from its interpretation of the collateral source rule, which prohibits introduction of evidence that a plaintiff received compensation for his or her injury from sources other than the defendant. The collateral source rule, where applicable, allows plaintiffs to collect in litigation amounts already paid by others, such as insurers, when such payments resulted from their own efforts. Some courts view the discounted rates obtained by insurers as among the benefits to which the plaintiff is entitled due to his or her purchase of insurance. This view is flawed. The collateral source rule should not be interpreted to permit only introduction of amounts billed for two reasons. First, the plaintiff's insurance premiums reflect the rates negotiated between the insurer and healthcare providers. If the insurer had not negotiated rates lower than the list prices, the plaintiff would have needed to pay significantly higher premiums. Second, and more simply put, discounts or write-offs are not a collateral source because they represent expenses that the plaintiff never incurred.

Recent Legislative and Judicial Action on Phantom Damages

In a time in which state legislators are closely evaluating methods of promoting economic growth and jobs, and eliminating wasteful spending, phantom damages are getting a hard look. In 2011, two states – Oklahoma (H.B. 2023) and North Carolina (H.B. 542) – enacted legislation eliminating phantom damages.

They follow two other states whose legislatures have acted in recent years to curtail inflated damages. Texas was the first to do so in 2003 when it enacted a one-sentence bill: “Recovery of medical or health care expenses incurred is limited to the amount actually paid or incurred by or on behalf of the claimant.” Tex. Civ. Prac. & Rem. Code ' 41.0105. Missouri enacted a law in 2005 that took a compromise approach – it enacted a rebuttable presumption that the amount accepted by the healthcare provider as full payment for a medical bill represents the value of the medical treatment rendered and allows the judge, outside the presence of the jury, to consider other evidence of the value of the medical treatment rendered based on the medical bills incurred, the amount actually paid, and the amount of the medical bills that have not been paid but which the plaintiff is obligated to pay. Mo. Rev. Stat. ' 490.715.

The highest courts of Texas and California ' the two largest states in the union ' also took action last summer to preclude phantom damages. In July, the Texas Supreme Court resolved a dispute among mid-level appellate courts regarding the application of its one-sentence law precluding phantom damages. The court clarified that, under this law, billed amounts that do not reflect actual costs may not be presented at trial. Haygood v. De Escabedo, 2011 WL 2601363 (Tex. July 1, 2011).

The following month, the California Supreme Court, which is not viewed as favorable to defendants in civil cases, ruled 6-1 that a plaintiff may not recover undiscounted sums stated in a healthcare provider's bill but never paid “for the simple reason that the injured plaintiff did not suffer any economic loss in that amount.” Ms. Howell, who was injured in a car accident by a driver who worked for the defendant, was billed $189,978.63 for her medical care, but $130,286.90 of this amount (nearly 70%) was written off and never paid by her or her insurer. The jury returned a verdict for the full invoiced amount, which the trial court reduced by the amount of phantom damages. The California Supreme Court ruled that where a healthcare provider has accepted less than a billed amount as full payment, evidence of the full billed amount is irrelevant and inadmissible. See Howell v. Hamilton Meats & Provisions, Inc. , 257 P.3d 1130 (Cal. 2011). The stakes on this issue were high in California, as they are in other states. According to the Sacramento Bee, California insurers estimated that requiring compensation based on the amount billed, rather than the amount paid based on negotiated rates and discounts, could cost them $3 billion annually.

ALEC's new model Phantom Damages Elimination Act follows the approach of these states. Under the model act, the value of reasonable and necessary health care services or treatment is based on: 1) amounts actually paid by or on behalf of the claimant; and 2) amounts actually necessary to satisfy outstanding charges still due to the healthcare provider. Billed amounts that do not reflect actual amounts paid or that remain actually owed are inadmissible at trial. As state legislatures begin their 2012 sessions, this common-sense reform, which would significantly, but fairly, reduce damages in virtually any case involving personal injuries, is likely to gain serious consideration.

Victor E. Schwartz, a member of this newsletter's Board of Editors, is a senior partner in the Washington, DC, office of Shook, Hardy & Bacon L.L.P., where he is chair of the Public Policy Group. Cary Silverman is Of Counsel with the firm, and assisted in the development of ALEC's model Phantom Damages Elimination Act.

”