The Legal Phantom Damages and the Misapplication of the Collateral Source Rule in Georgia
| Citation | Vol. 28 No. 6 Pg. 0016 |
| Publication year | 2023 |
| Pages | 0016 |
The two core principles of Georgia tort damages law are
(1) compensatory damages should be awarded in an amount that makes the plaintiff whole, no more and no less, and (2) a defendant can be liable only for those damages it caused. Phantom damages violate both of these core principles.
BY JACOB E. DALY
The statements, views and opinions expressed within this article are those of the author and do not necessarily reflect those of the State Bar of Georgia, its officers, Board of Governors, Sections, Committees, Editorial Board or staff
The costs of America's tort system have exploded in recent years.[1] Nationally, those costs effectively imposed a per-household tort tax of $3,621 in 2020.[2] Georgia has the seventh highest annual per-household tort tax in the country at $4,157.3 This is one reason why Georgia ranked 41st in the most recent Lawsuit Climate Survey conducted by the U.S. Chamber of Commerce Institute for Legal Reform.[4] A significant contributor to the high costs of Georgia's tort system is phantom damages, which artificially inflate the amount of recoverable medical expenses in tort lawsuits.
Phantom damages are the difference between a hospital's list prices for the services and procedures it offers, often referred to as chargemaster rates, and the amount it accepts as full payment for those services and procedures. A typical hospital bill itemizes the list price for every service or procedure performed, followed by the amount accepted in full satisfaction of the bill based on the lower prices negotiated by the patient's insurance company or the lower prices allowed by Medicare or Medicaid. The difference between these two amounts is often said to be written off. However, this descriptor is inaccurate.
Phantom damages are not a legitimate item of recovery in a tort case because they do not reflect the true costs of the plaintiff's treatment. The amount by which the prices were discounted was never billed to the plaintiff, and the plaintiff was never responsible for paying that amount. Instead, the plaintiff was billed and responsible for paying only the reduced amount. Nevertheless, Georgia decisional law allows the plaintiff to recover past medical expenses based on the chargemaster rates. This results in the plaintiff receiving a windfall that violates fundamental principles of Georgia damages law.
Georgia's appellate courts have allowed this inequity through their misapplication of the collateral source rule. If they do not overrule their precedent, the General Assembly should enact legislation to prohibit the recovery of phantom damages, as Florida's legislature did earlier this year.[5]
Hospital Pricing of Medical Services and Procedures
Before addressing the problem and how to fix it, it is important to understand how hospitals price their medical services and procedures. The District of Columbia Court of Appeals has explained this incredibly complicated issue as follows:
Three different groups pay hospitals for care: patients, insurers, and the federal and state governments (for Medicare and Medicaid). The first group, self-pay patients, pay directly for their care because they have no insurance, receive elective or out-of-network care, or believe that paying directly is cheaper than relying on insurance. Self-pay patients account for fewer than 10% of all patients. Hospitals generally charge these patients rates specified in what is called "chargemasters," which list all items and services provided by each hospital with their gross charges. Many hospitals offer discounts to self-pay patients based on standardized cash discounts or individual financial need (or both). As a result, chargemaster rates are virtually never what hospitals ultimately receive as payment. Although these gross charges bear little relationship to market rates and are usually highly inflated, they exist for historical and legal reasons. Specifically, Medicare requires hospitals' charges for Medicare and non-Medicare patients to be the same for a specific service, and hospitals comply with that requirement by listing chargemaster rates as if they were applicable to everyone, even though hospitals receive different payments depending on the payer's identity.
Over 90% of patients rely on third-party payers, i.e., insurers, Medicaid and Medicare. Medicaid and Medicare pay hospitals based on rates set by the states and the Centers for Medicare & Medicaid Services. Those rates are public. Insurance companies have contractual agreements with hospitals to pay negotiated rates for their services. Although insurers and hospitals often treat chargemaster rates as the starting point for negotiations, negotiated rates are a product of a wide range of methodologies ... .
With so many different methodologies for setting rates, determining what negotiated rate applies to a particular patient for a particular item or service is exceedingly complex. Adding to the complexity, negotiated rates are not necessarily what insured patients would pay, as their out-of-pocket costs depend on their health insurance plan, which has its own rules on copays, deductibles and coverage limits.[6]
The problem with chargemaster rates is that they do not represent the reasonable value of each listed service or proce-dure.[7] In fact, they have been characterized as "uniquely irrational" because they bear little, if any, relation to the hospital's actual costs of providing the services and procedures or to the quality of the services and procedures, they vary wildly from hospital to hospital (even in the same geographic area), and they vary within a single hospital for the same service or procedure depending on who the payer is.[8]They are usually at least two times, and sometimes up to 10 times, what the hospital would accept as full payment from private insurers, Medicare and Medicaid for the same service or procedure.[9] Ironically, chargemaster rates are portrayed as the usual and customary rates. This implies that most patients are charged these rates on their bill, but only 1% to 3% of patients actually pay these rates.[10]
If all, or even most, patients paid chargemaster rates, hospitals would be enormously profitable. But evidence in a recent Georgia case showed that only 1.16% of the patients at a Columbus hospital paid its chargemaster rates and that, on average, it collected only about 33% of its chargemaster rates during the period of time relevant to the case.[11] There are numerous reasons why chargemaster rates are set so high, one of which is to allow for heavy discounting during contract negotiations with insurers.[12] Because almost no patients pay these rates, it strains credulity to characterize them as representing a reasonable value for medical services and procedures.
Even hospital administrators have acknowledged the irrationality of chargemaster rates. William McGowan, the former CFO and interim CEO of the UC Davis Health System, explained hospital pricing as follows: "There is no method to this madness. As we went through the years, we had these cockamamie formulas. We multiplied our costs to set our charges."[13] One respondent in a national survey of hospital pricing conducted in 2004 and 2005 said, "With over 45,000 items in the chargemaster, the vast majority of items have no relation to anything, and certainly not to cost."[14] Another respondent in the same survey said, "There is no rationality to the charge master and costs still do not have much relevance."[15] In 2013, Carol Steinberg, a vice president at the American Hospital Association from 2002 until 2016, said, "The chargemaster can be confusing because it's highly variable and generally not what a consumer would pay. Even an uninsured person isn't always paying the chargemaster rate."[16]
The Problem With Allowing Phantom Damages
Allowing past medical expenses to be recovered based on chargemaster rates violates fundamental principles of Georgia tort damages law. Yet since at least 1997, the appellate courts have allowed plaintiffs to recover the full price of their medical treatment, undiminished by any amounts written off, or any reductions made pursuant to a contract between the hospital and the plaintiff's insurer, or the rates established by Medicare or Medicaid.[17] Professor Paul Milich, a leading expert on Georgia evidence law, has questioned the logic of this rule:
It is odd to exclude evidence that an initial bill for medical expenses did not reflect the amount actually required to satisfy the patient's obligation. It is common in the medical industry for providers to negotiate group or individual payment plans that are less than the "posted" price for the service or good. This final payment amount is the true expense incurred by the patient.[18]
Allowing past medical expenses to be recovered based on chargemaster rates violates fundamental principles of Georgia tort damages law.
The purpose of compensatory damages is, as the term suggests...
To continue reading
Request your trial