Despite America’s reputation as the most litigious country in the world, the stigma isn’t founded in truth. We do, however, have the highest number of lawsuits and the most lawyers per capita—approximately one attorney per every 300 Americans. Additionally, the volume and variety of civil cases being seen in American courts are changing rapidly. According to UScourts.gov, in 2021, “filings of civil cases grew 39%, largely because cases alleging personal injuries climbed 150%.”
Phantom damages and the collateral source rule are nothing new in litigation. However, when added to the dramatic hyperinflation of medical prices, the advent of lien-based care, and litigation funding companies, these elements combine to form a nightmare scenario for insurers that have given rise to the birth of medical build-up schemes. To understand medical build-up, it’s important to first grasp the contributing factors and elements that make it possible. Here are a few definitions that will help accomplish that goal.
Phantom damages. In a tort claim or civil lawsuit, the injured party is entitled to compensatory damages. These damages provide reimbursement for economic harm caused by a negligent act. Compensatory damages include things such as lost wages, medical expenses, and the cost of any future medical needs. Phantom damages exist in the space between what the medical providers bill and what is warranted for the services provided. Known as “phantom” because no one ever pays them, these fabricated figures are not grounded in any fee schedule or customary standard amount.
The collateral source rule. Derived from common law, which dates to 1854, the collateral source rule prohibits admission of evidence in a civil lawsuit when the victim has received compensation from a source other than a defendant. In terms of an auto injury claim, this would include a scenario in which the injured party has health insurance that pays for all or part of their medical treatment after the accident. Those payments cannot be admitted as evidence or deducted from the economic damages awarded to the injured party.
Hyperinflation of medical prices. According to the U.S. Bureau of Labor Statistics, the general price of everything has increased 146% over the past 40 years, with medical service costs rising 403% and hospital costs increasing 727%. The steepest increase, however, has occurred since 2010.
Lien doctors and diagnostic facilities. While lien-based care can be an effective way for injured clients to receive the medical treatment they need, it has also created opportunities for fraud and abuse. Relationships between attorneys and medical providers can lead to larger damage awards or settlements, positioning both for increased financial gain. In this scenario, lien-based medical providers agree to provide treatment to an injured person with the expectation of receiving payment from their settlement or verdict. Due to the medical provider having a financial interest in the outcome of the claim, less-scrupulous providers sometimes provide excessive or unnecessary medical treatments to increase the value of a client’s case.
How the Scheme Comes Together
When a client is injured due to the negligence of another party, they may retain an attorney and file a personal injury lawsuit seeking compensation for damages. These damages can include medical expenses, lost wages, and pain and suffering. The attorney then sends the injured party for treatment with a lien-based care provider, with the understanding that the doctor will be paid for their services out of any award or settlement. In turn, the doctor enlists the services of a diagnostic provider, who makes a favorable finding of serious injury, empowering the provider to administer care that addresses these injuries. Treatment in these types of claims primarily consists of minimally invasive techniques, such as epidural steroid injections, facet blocks, medial branch blocks, hydrocision, and percutaneous discectomies.
Lien doctors typically do not accept Medicare, Medicaid, or private health insurance. They are not tied to fee schedules or any standard of reasonableness, so they are free to charge what they feel their services are worth rather than what is standard compensation for a procedure. This results in procedures being charged at exorbitant rates, often several times the customary charge for the same procedure at a similar provider.
Once treatment has concluded, the medical provider will submit a lien to the attorney requesting payment for services provided to the client. The attorney then uses the exaggerated medical evidence to demand a higher settlement.
Insurance companies are hesitant to litigate these claims in jurisdictions with liberal venues because phantom damage amounts are permitted to be presented to juries rather than reasonable or customary amounts. The collateral source rule prevents juries from hearing whether the injured party has insurance that could have, would have, or did pay bills. Additionally, lien doctors can testify to the medical complexity and cost justification in cases where they have a financial interest in the outcome.
When the claim resolves, the attorney negotiates the medical liens for a fraction of what was billed. The lien is paid from the client’s settlement or verdict. The attorney collects between 33%-40%, with the injured party receiving any leftover amount.
Steps in Defense
Identification of the attorneys and medical providers participating in these types of claims is essential. Thankfully, advances in AI and analytics are progressing faster than the scheme is evolving. The use of AI in claims handling will bring questionable claims to the attention of SIU. From there, link analysis can be utilized to understand billing patterns and behaviors.
Due to regulation, privacy laws, and fear of litigation, however, the insurance industry has been hindered when it comes to the communication of information. Conversely, the plaintiff’s bar hosts trainings on how to extract the maximum dollar per claim. They are highly aware of the types of injuries and claims that are being paid versus those being litigated.
Therefore, communication between carriers is more imperative than ever to identify and investigate questionable behavior. Professional organizations such as NICB, IASIU, CAIF, NAMIC, APCIA, and CLM all offer venues where information can be shared amongst peers. Relationships with these organizations and industry professionals are crucial in disseminating information about evolving trends.
With these types of civil cases on the rise, it’s critical for insurers to understand the complexities and factors that contribute to medical build-up. By presenting barriers to these behaviors, we are not only sending a clear message to those who perpetuate these scams, but also positioning our companies to protect policyholders and pass savings on to those who place their trust in us each day.