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Digital EditionAssessing Future Medical Costs in Catastrophic Injuries
Dubravka K. Tosic, Ph.D. is a Labor Economist and Director at Berkeley Research Group, LLC (BRG), and based in Northern New Jersey. Dr. Tosic provides consulting and expert witness assistance in all aspects of labor and employment disputes and litigation, regulatory audits, and in connection with pro-active company risk assessments. She has extensive experience in preparing various types of statistical and economic analyses and damage calculations in connection with allegations of employment discrimination, wage and hour issues, executive compensation, personal injury and wrongful death. Dr. Tosic also serves as the economist for the 9/11 Victim Compensation Fund, reporting to the Special Master’s Office. Dr. Tosic has testified as an economic expert in a number of court matters, and has worked with numerous Fortune 500 companies, law firms, government agencies, and international organizations. She has written and presented on the topic of labor market discrimination, pay equity, and economic damages. She received her Master’s degree and Ph.D. in economics from Florida State University and her Bachelor’s degree in economics from University of Maryland.
In many personal injury cases, the primary drivers of economic damages may be the estimated costs of life care plans. A life care plan is a detailed assessment of the current and future needs of an individual with a disability or injury, including medical care, therapy, equipment, and other support services. A high estimated cost of a life care plan is particularly prevalent for individuals who sustained injuries at a young age and/or who will require lifelong, complex, and costly medical care and assistance.
Determining the estimated cost of a long-term care plan consists of two critical phases:
The first phase involves determination of the lifetime components of a life care plan. Life care planners typically conduct a detailed review of medical, care, and support records; and, based on medical opinions, prepare a comprehensive list of items that an injured individual will need until their estimated life expectancy. The detailed list of items would contain their frequency (e.g., daily, monthly, annually); and current estimated costs, which are typically based on the methodology and approach the life care planner uses to value them.
Calculating the lifetime cost of a life care plan is challenging, as the plan is based on the best information currently available for each component. Medical care is continuously evolving, and what may become readily available in the future may not be known at present. An example is technological advancements in prosthetics compared to even a few years ago. A life care plan prepared ten years ago would not have considered either the prosthetics available today or their estimated costs.
Phase Two
The second phase is the calculation of the life care plan’s present value. The goal of the calculation is to provide an estimate that will allow the plaintiff to receive sufficient compensation to cover their needs and future expenses related to the injury. An economist will calculate the lifetime cost of a life care plan first by applying growth rates to each discrete item of the plan.
These growth rates are typically based on historical data and may consider future forecasts and projections, if available. The growth rates are applied until the end of each component’s need, which is sometimes the individual’s estimated life expectancy.
To calculate its present value, the economist will then apply a discount rate to the estimated lifetime value of the life care plan. The total value of future costs needs to be reduced to its present value because money available today can be invested and earn a return. By calculating the present value of a life care plan, an economist adjusts future medical costs to account for the “time value of money.”
Currently, discount rates are determined by either state statutes or case law. If the discount rate is not explicitly provided by a statute, economists base their discount rate on risk-free or low-risk interest rates. There is a direct relationship between the discount rate chosen and the present value of a life care plan: the higher the discount rate, the lower the present value. Similarly, the lower the discount rate, the higher the present value.
A challenge to calculating the present value of a life care plan is that many awards are placed in a trust. An award may be placed in a trust for various reasons, from asset protection to the preservation of potential future entitlement benefits.
A fiduciary managing a trust is subject to the Prudent Investor Rule and must “invest assets as if their own.” In today’s markets and with careful financial planning, a trustee can devise a portfolio that will allow not only for the preservation of the principal and inflation-proofing but also for additional earnings. With active financial management, they may accomplish returns well above the current risk-free rates of 3.8 to 4.8 percent.
As a result, there is a disconnect between the risk-free interest rates the economist uses to calculate the present value of a plan and the actual investing of an award, which may generate significantly higher returns. In principle, a discount rate should incorporate a level of risk commensurate with the riskiness of the portfolio of securities that a prudent investor would likely choose—a portfolio that might include equities as well as fixed-income securities.
However, in the case of the calculation of economic damages in personal injury matters, the economist’s hands are tied, as the choice of a discount rate is driven by either statute or case law. The discount rate, therefore, may not reflect the level of risk chosen by a prudent investor, and the case for using a risk-free discount rate is not based on underlying economic or financial theory. This disconnect may result in a large difference between the calculated present value of the life care plan and the ultimate lifetime value of the plan whose proceeds are managed by a fiduciary.
Take, for example, a former hedge fund manager whose pre-injury annual earnings were $20 million. As a result of sustained injuries, he is permanently disabled and requires lifelong medical care and assistance. While the economist would use either a statutory rate or risk-free rate, the hedge fund manager’s award likely would be placed in investments that yield significantly higher interest rates. This disconnect results in a potential windfall for the injured party.
Types of awards potentially susceptible to this disconnect include:
- High judgment awards.
- Life care plans involving a long time horizon.
- Younger plaintiffs whose risk appetites may be higher. Long gone are the days of putting money in a safe CD or a savings account. Many Millennials and Gen Xers are well versed in investing and may have a larger appetite for risk.
- High earners and/or sophisticated plaintiffs who are used to investing and the concepts of risk and reward.
The ultimate objective of calculating the present value of a life care plan is to put the plaintiff in the financial position they would have been in without the injury. While the emphasis in the determination of the present value of a personal injury award has always been to make the plaintiff whole, there is a potential risk that the choice of the discount rate results in a lifetime overpayment.
To address this disconnect would require statutes and/or case law to be updated to not only reflect current realities of the financial markets but also provide flexibility for economists to choose a fair discount rate based on financial principles and the specific characteristics of the plaintiff and their future needs. &
