Eliminating 'Phantom Damages'

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