In medical malpractice cases filed in Pennsylvania, there is often a claim for future life care plan costs. The Pennsylvania 2002 Medical Care Availability and Reduction of Error Act specifies that future damages for medical and other related expenses shall be paid as periodic payments after payment of the proportionate share of counsel fees and costs based upon the present value of the future damages awarded. The trier of fact may vary the amount of periodic payments for future damages from year to year for the expected life of the claimant to account for different annual expenditure requirements, including the immediate needs of the claimant. The trier of fact shall also provide for purchase and replacement of medically necessary equipment in the years that expenditures will be required as may be necessary. Finally, the trier of fact may incorporate into any future medical expense award adjustments to account for reasonably anticipated inflation and medical care improvements as presented by competent evidence.
A life care plan expert will often project the annual life care plan costs, and an economist will adjust those cost projections for anticipated future inflation on an annual basis. The expertise of the economist regarding the correct inflation rate to use and the calculations of future annual costs thereof is necessary to provide an accurate and competent annual award of life care plan costs to the claimant. The economist should also provide competent evidence of an appropriate discount rate used to determine the present value of the future damages awarded so that the proportionate share of counsel fees and costs can be ascertained.
Historic medical inflation is reported by the Bureau of Labor Statistics. It is actually one of many components of the overall inflation rate that is reported in the United States, and accounts for approximately 6.5 percent of the overall inflation rate.
The medical inflation rate is composed of two main cost components: (1) medical care services (MCS); and (2) medical care commodities (MCC). MCS is approximately 75 percent of the overall medical inflation rate. The largest sub-component cost categories of MCS are physician services, which account for 22 percent of medical inflation; hospitalization, which accounts for 21 percent of medical inflation; and non-physician services (such as dental, eye care, physical therapy, etc.), which account for approximately 21 percent of medical inflation.
MCC cost components make up the remaining 25 percent of medical care inflation, and include prescription and non-prescription medicine, durable medical equipment and supplies.
The various sub-components of MCS and MCC costs have experienced inflation rates that historically have been very different when compared to one another. This is important to the economic expert who is projecting the future life care plan costs with inflation as is required under MCARE. The inflation-rate assumption should be based on the types and weighting of different costs included in the life care plan and not simply based on either an overall inflation rate or an overall medical inflation rate that fails to consider the mix of costs in the life care plan.
By way of example, historical overall medical inflation has averaged 3.8 percent over the past 10 years, according to data published by the Bureau of Labor Statistics. Some economists use an inflation-rate assumption of this approximate amount in their calculations. However, doing so can lead to inaccurate results because this inflation rate would only be reasonable if the weighting of costs within the life care plan approximated the weighting of costs used to calculate this rate. In other words, if the life care plan includes physician services, hospitalization, non-physician services and medical care commodities in relatively equal weights, then an inflation-rate assumption of 3.8 percent might be appropriate.
In doing the work I do, I have seen hundreds of life care plans. In many of them, the largest cost component by far is the cost of home care services (nursing, home health or attendant care services) for the injured party. The Bureau of Labor Statistics tracks costs specifically for home nursing and attendant care and has published the average monthly inflation of these costs since 2006. These costs have increased at an average annual inflation rate of 1.95 percent during this period of time. Thus, this average inflation rate is much more realistic and supportable to use for this cost component than the average overall medical inflation rate of 3.8 percent. Using the overall inflation rate would likely overstate the future inflated costs significantly.
Let me give an example of the potential overstatement. Assume a child is injured at birth and as a result of the injury will require 16 hours of home nursing and attendant care daily at a cost of $20 per hour for a remaining life expectancy of 77 years. With a realistic inflation rate of 1.95 percent, these inflated costs would total $20.5 million over the injured party’s lifetime. Alternatively, if one used the overall medical inflation rate of 3.8 percent, these inflated costs would total $51.2 million — an overstatement of almost 150 percent.
It is worth noting that even though home care services are often the largest category of costs found in a life care plan, they are less than 2 percent of the overall medical inflation rate calculation. This is another reason why the overall medical inflation rate should not be used in such projections.
Another large category of costs often found in life care plans is for therapeutic modalities (such as physical and occupational therapy). These costs fall under the non-physician services subcomponent of MCS. In the most recent 10-year period, such costs have increased at an average rate of 2.5 percent. Thus, using the average overall medical inflation of 3.8 percent for the past 10 years as the projected inflation rate for these costs would overstate the future inflated life care plan costs of this category.
Physician services costs have increased at an average inflation rate of 2.91 percent over the past 10 years, and MCC have increased at an average inflation rate of 2.67 percent over the past 10 years.
Given this information, what costs have caused the overall medical inflation rate to be 3.8 percent on average over the past 10 years? The answer is hospitalization costs. Hospitalization costs have increased at an average rate of 6.5 percent annually during the past 10 years. Because such costs are about one-fifth of the medical inflation rate, the relatively large increase in hospitalization costs results in a higher overall medical inflation rate.
Practically speaking, many life care plan costs do not include many costs for future hospitalization because the need for future hospitalization tends to be more speculative because of the acute crisis nature of this need when compared to other, more predictable life care needs.
Finally, I note that some economists will project future life care plan annual costs using several optional inflation rates applied to all costs, leading to several choices for a trier-of-fact to pick. In my opinion, this approach is not helpful. It provides no expert insight regarding which inflation rate option is appropriate. Furthermore, the inflation rate options that I have seen presented as expert calculations can be materially misleading. For example, I often see a 6.5 percent inflation-rate assumption as an alternative. Using a 6.5 percent overall life care plan inflation-rate assumption and applying it the home care services scenario described earlier in this article would result in future costs of more than $227 million. This is $200 million more than the future cost would be using a more realistic and supportable inflation rate for this category of costs. Unfortunately, such mistakes are often presented as expert calculations.
In summary, when inflating future
life care plan costs, the economic expert should be aware of and use the different medical cost component inflation rates for future loss calculations. Failing to do so leads to calculation results that are not reasonably supported and can be materially misleading. •
William E. Harris is a shareholder in ForensicDamages LLC. He has 22 years of experience in damage-related disputes. He has taught economic damage related issues locally, nationally and internationally. He works in his Philadelphia and Haddonfield, N.J., offices and can be reached at email@example.com or 215-720-1570