David H. Glusman and Michael J. Molder ()
Medical malpractice claims raise a variety of economic issues. In addition to fully understanding the medical and liability issues involved in the prospective matter, counsel for both the plaintiff and the defendant need to fully explore and document the economic claims. In the end, a forensic accountant or other economic damage expert addresses these economic issues without regard to causation and liability, with the ultimate result a full understanding of economic losses of the plaintiff based on the alleged medical malpractice.
There are several different categories of losses that may have occurred, or may yet occur, based on the evidentiary record. If an individual is merely an employee, and has no ownership interest or other special relationship with the employer, the determination of losses normally arises from the difference between the historical salary and the projections of what salary would have been but for the medical malpractice allegation.
As Pennsylvania is a “total offset” jurisdiction—Kaczkowski v. Bolubasz, 421 A.2d 1027 (Pa. 1980), ruled, as a matter of law, that inflationary increases to future earnings equal the impact of discounting those future earnings to present value—damages experts typically consider life expectancy and merit-based economic changes less any reduction in a plaintiff’s personal expenditures arising from the alleged injury or disability.
The most complex damage assessments in a medical malpractice action involve a business or other operating entity. The value of a business is typically measured as the present value of future benefits, or cash flow, available to the owners, and, to the extent a physician’s negligence impairs the business owner’s participation in the business and interrupts or reduces the business’ cash flow, there may be loss in the value of the business.
Consider John Doe, a hypothetical plaintiff and owner of a commercial real estate operation and an operating business, who alleges that, as a result of medical malpractice, he is no longer able to fully participate in either activity. Plaintiffs counsel needs to establish the damage amount. Defense counsel will, likewise, require all of the same information in order to determine whether there are areas of disagreement in either the underlying premise of loss, methods of calculation or historical and future information assumed.
In the case of the real estate operation, a variety of issues may need to be taken into account. Hypothetically, if the real estate is all subject to “triple net” leases, where the lessee bears the property tax, insurance and maintenance costs, with well-known, high-credit entities, and none of the leases expires in less than five years, there may be relatively little diminution of value due to John Doe’s reduced capacity for full-time participation, as his reduced participation is unlikely to affect cash flow adversely.
On the other hand, for a real estate operation with relatively high turnover, requiring his day-to-day involvement in both decision-making and marketing activities, John Doe’s incapacity could adversely affect the leasing operations. The loss of John Doe may require a third-party replacement, either short-term or permanently, depending on the nature of the incapacity, and would require calculations utilizing the relevant assumptions and market-based data to gauge the effect of that loss on the value of the entity.
In the case of an operating business, the same circumstances may apply, but they often grow even more complicated. In cases of impairment resulting from physician negligence, typically one of two circumstances may have occurred: either the plaintiff is irreplaceable as the key driver of revenue or growth, or the plaintiff’s involvement in the business can be replaced by one or more competent individuals who would be paid reasonable, market-based compensation for their services. The forensic accountant or other damages expert must consider and evaluate both of these circumstances.
In the hypothetical case of John Doe having suffered an injury from medical malpractice, if the plaintiff establishes that the underlying business is essentially decimated by the absence of John Doe from day-to-day operations, one of the most appropriate methodologies for determining a potential loss would be a business valuation, comparing the fair market value of the entity before the alleged injury to the value (most likely a liquidation-based value) after the alleged malpractice.
Potentially just as likely is the situation that while John Doe is no longer available to the business, one or more replacements can fill his role. In circumstances like this, it is important to understand John Doe’s educational and work history and to apply comparable and appropriate compensation data for the replacement personnel. The personnel changes may lead to changes in the business’ anticipated cash flows and, accordingly, result in a change in the value of the entity due to the physician’s negligence.
In both of these circumstances, counsel and their respective experts would start with a full understanding of the history of the business, including tax returns, financial statements, the capital structure, marketing material and outside economic influences on the business. Like most business valuation engagements, the valuation expert would consider three approaches to value: a net asset approach (based on the cost of replacing the business’ assets including necessary intangibles), an income approach (measuring the present value of available cash flow) and a market approach (which looks to the sales price of equity in comparable enterprises using third-party sources for private business sales or publicly traded stocks of companies with enough similarity in business model and other metrics).
Only after the parties fully exchange discovery information regarding the businesses, the role the plaintiff played in the businesses on a day-to-day basis, and all other relevant economic data can the experts properly perform their tasks, which may include providing full reports for submission to the court. In many cases, having experts go through the process, for both plaintiffs and defendants, will provide sufficient information to allow the parties to come to an understanding on the relative value of the loss, separate and apart from the determination of whether or not there is liability in the underlying medical malpractice issue. This can lead to a more rational dialogue regarding the respective claims and defenses and, possibly, to agreement on elements of the damages and a limitation on the issues to be presented at trial.
David H. Glusman is partner-in charge of Marcum LLP’s Philadelphia office
and heads the region’s litigation support services and marital dissolution practice groups. He has experience in forensic accounting and business valuation, estate and trust analysis for high-net-worth individuals, and in medical consulting for physician practices and hospital-physician-related issues.
Michael J. Molder is a senior manager in the advisory services division of the firm. He specializes in litigation support services in the firm’s Philadelphia office and is a member of its marital dissolution practice group.