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Jury verdicts across the country continue to rise, with payout amounts increasing 51.7 percent annually from 2010 to 2018 while overall inflation grew only 1.7 percent.

As trial lawyers flock to file lawsuits in the wake of the pandemic, the U.S. is poised to hold onto its reputation as the most litigious country in the world, and our $373.1 billion tort system is likely to grow even more expensive. A recent study showed that in 2018, small businesses shouldered 53 percent, or $182 billion, of the U.S. tort system’s commercial liability costs. This immense burden is too much for many to shoulder and is forcing doors to close or owners to relocate to less litigious states.

While small and large businesses may face lawsuits that bankrupt them, everyday Americans pay the price of lawsuit abuse through a “tort tax” costing more than $760 per person every year in Judicial Hellholes across the country.


A variety of civil justice abuses contribute to the growing litigation costs, none more so than judges permitting “phantom damages” to be introduced in their courtrooms. “Phantom Damages” exist any time lawsuit recoveries are calculated using the dollar amount a patient was billed for a medical service instead of the amount the patient, their insurer, Medicare, Medicaid, or workers’ compensation actually paid for treatment. For example, a hospital may bill $20,000 for an emergency room visit, while the amount the hospital actually receives after adjustments may be $8,000. The $12,000 difference is not owed or ever paid in the real world.

The use of inflated billed amounts only increases the overall cost of the judicial system, spreading the financial burden on the backs of every American through higher costs on goods and services. These amounts become a driving factor for settlements or jury awards in personal injury cases when juries are asked to assign a verdict of three to four times the amount of the inflated medical bills.

But, juries are only told the “phantom” large dollar amount billed. They are not informed of the actual amount paid by a patient or his or her insurer. They’re not made aware of the financial interest of medical finance companies or their impact on health care costs. Consequently, we see higher and higher phantom damage awards and settlement amounts based on exaggerated numbers intended to produce a larger payout for trial lawyers.

Juries’ lack of access to critical evidence is allowable in more than 36 states, contributing to the dramatic rise in settlements and verdicts with phantom damage awards.

Twenty-five states plus DC allow full recovery of phantom damages under most or all conditions, with little opportunity for defendants to question juries about whether medical bills reflect a reasonable market value.

Eleven states allow juries to consider evidence of phantom billed numbers, but courts reduce awards post-trial to actual amounts paid. While a slight improvement from those allowing full recovery of phantom damages, this approach demonstrates a lack of trust for juries by withholding the reality of the medical care costs at issue.


It is the collateral source rule in most jurisdictions that creates “phantom damages.” This is an archaic, century old evidentiary rule where the courts discussed the “prophylactic effect” on the wrongdoer. The courts feared the wrongdoer would not be deterred from similar acts in the future if the wrongdoer benefitted from reduced damages by of collateral sources.

The collateral source rule provides that in computing damages, a jury is not permitted to consider compensation the plaintiff received for the injury from sources other than the defendant, even if the payments partially or completely mitigated the plaintiff’s actual monetary loss. Evidence of payments coming from third parties are barred from the jury’s ears, allowing an injured party to receive an award to cover lost wages or medical expenses even when already reimbursed for those losses from a third party. More than a dozen states have a collateral source rule that applies in all civil cases and 18 states have a rule with limited exceptions. The remaining states have addressed the issue through a variety of reforms, including a requirement that damage awards be decreased by the amount paid by third-parties, or at the very least, the states allow such evidence to be considered by the jury.

The collateral source rule encourages litigation because it creates incentives to sue, even if a person has already received or is receiving substantial compensation. Such litigation, and the attendant transactional costs, such as attorneys’ and expert witness fees and court expenses, may increase insurance premiums and needlessly use judicial resources.

Over time, this concept is outdated where the wrongdoer is not ultimately paying these inflated damages, rather, insurance consumers are paying them with increased rates. This contributes to the rising “tort tax” paid by Americans, especially in Judicial Hellholes across the country.


“Phantom Damages” are not new; however, a troubling new trend in our civil justice system threatens to further bloat the system, as “phantom damages” grow larger due to an increased use of medical finance companies and “letters of protection.”


Instead of using health insurance coverage, trial lawyers are now encouraging clients to enter into agreements with third-party medical financing companies to pay for medical care related to injuries. Lawyers go so far as encouraging their patients to not use their health insurance, but rather use the medical finance companies. The patient still finds themselves liable for the full amount billed even if they do not recover in the lawsuit. Patients do not benefit from insurers’ price negotiations and are responsible for inflated medical costs.

With the advent of medical finance companies, the amount of the phantom damages in an individual case have increased significantly. They represent the second generation of phantom damages. The persons now receiving the benefits not only include the plaintiffs’ attorneys and their clients, but also pre-selected medical providers and these medical finance companies. In some cases, lawyers will even recommend clients to doctors the lawyer has a relationship with, and those doctors often charge a much higher amount than a typical doctor might charge.

The financial interest of a business that is not a party in a lawsuit should not play an outsized role in a case.  It unduly increases litigation costs and hinders the parties’ abilities to efficiently resolve matters.


Another troubling trend contributing to the rise in “phantom damages” is the abuse of “letters of protection” to medical providers in personal injury cases. In this instance, a doctor treats a patient on a letter of protection provided by the injured party’s attorney that states the bill will be paid out of the settlement or verdict pro- ceeds. It is similar to medical financing because the injured party is still liable for the full amount billed even if they do not recover in the lawsuit and patients do not benefit from insurers price negotiations.

A prime example in Florida shows the immense financial impact letters of protection have on litigation costs. A Florida plaintiff slipped and fell in a grocery store, injuring both knees, requiring identical surgeries on each knee. For the first knee surgery, the plaintiff used health insurance, was billed $19,000 by the doctor and the total cost was $3,400. However, the second knee surgery was performed under a letter of protection, resulting in $59,000 billed by and owed to the surgery center.

As discussed in the Florida Watch List section, Florida is ground-zero for this type of abuse. According to a Publix lawyer testifying before the Florida Senate Judiciary Committee, at any given time, there are approximately 450 personal injury claims pending against Publix, with a vast majority filed in Florida. The single largest factor in the cost of these claims is whether it involves a letter of protection. More than 60 percent of 450 claims at any given time involve letters of protection and of those claims, 61 percent of the plaintiffs have health coverage and choose not to use it. The cost of settling in Florida is 65 percent higher than the other states in which Publix operates and its largely due to letters of protection, which inflate damage awards and provide windfalls to plaintiffs and their attorneys.


The impact of “phantom damages,” medical financing companies, and letters of protection on the cost of civil litigation is undeniable. When determining damage awards, juries should be permitted to consider all evidence needed to fully analyze each case. They should be made aware of referral relationships between attorneys and doctors as well as both usual and customary billed costs to compare with those requested in cases where medical finance services or letters of protection are involved. As the system currently operates, the only winners are the plaintiffs’ lawyers at the expense of everyday Americans and employers.

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