Now, they have phase 1 and phase 2, if "necessary", and say that the changes made in phase 1 will cheapen the cost of phase 2... Of course, insurance only pays out its max one time regardless of the phase. Is this whole phase 1 just a scam? 3/4 of the kids in my son's 4th grade class have lip bumpers... It just seems like overkill to me, but maybe I'm missing something.

No it is not a scam. During the first part of the treament you use headgear and a retainer and if the overbite is not real bad just doing that can correct it so you don't need braces. My daughter could have avoided braces if she would have been diligent with the headgear/retainer phase. Because she wasn't diligent with it she needs braces but I am waiting till my son is done with his ortho treatments.