The Fine Art of Forecasting Medical Costs in Personal Injury Disputes

The cost of future medical care is often one of the largest components of economic losses in personal injury disputes. Life care planners or other medical experts (medical professionals) are often engaged as experts to opine on a plaintiff’s medical conditions due to an injury, for the purpose of determining their expected future medical costs as a result of the injury.

These medical professionals generally present their opinions of the plaintiff’s future medical care needs in what is called a life care plan. A life care plan is an assessment of a plaintiff following an injury, detailing the resulting medical conditions, expected future medical needs, and the associated costs.

Medical professionals generally project the future medical costs of a personal injury plaintiff expressed in current market prices (that is, in today’s dollars), even though their projections can span years, or even decades, into the future.

Making the plaintiff whole: In personal injury disputes, the objective is to make the plaintiff whole, which includes making sure the plaintiff is awarded sufficient compensation to cover the costs for all medical needs resulting from the injury. In essence, the concept of making the plaintiff whole is to put him or her in the position that person would have been in absent the injury. Economic experts are often engaged to assist the trier of fact to determine the sum of money that would fairly and reasonably compensate the plaintiff for the economic losses he or she suffered as a result of a specific injury.

Valuing a life care plan using current market prices can leave the plaintiff without enough funds to cover all future medical needs. Therefore, it is recommended that life care plans be presented on a present value basis, meaning that the future medical costs be projected considering the expected growth in medical care costs, and also discounted to the present to account for the time value of money. The “time value of money” is the financial concept that a sum of money is worth more today than the same sum of money in the future, as money can be invested and earn interest and accrue value over time.

Calculations: Economic experts are often engaged to calculate the present value of life care plans. Most economic experts use similar methodologies to calculate the present value of a plaintiff’s life care plan, yet they can arrive at very different results. These variances are due to the economic experts’ selection of the two main variables involved in calculating the present value of a life care plan: the applied growth rate(s) and the applied discount rate(s).

Most economic experts use a tax-adjusted, risk-free discount rate to calculate the present value of the medical costs, which, for practical purposes, is generally based on a mid-to-long term Treasury bill rate(s) that is tax adjusted using the plaintiff’s expected tax rate, or based on municipal bond rate(s), which are tax-free. As interest rates have been relatively low over the past several years, the choices for discount rates are generally close and do not materially affect the present value calculation of future medical costs.

Therefore, the main driver for the difference in present valuing a life care plan is the projected growth of future medical costs over the duration of care presented in the life care plan.

Determining an appropriate basis for the applied growth rates is an essential component in calculating the present value of future medical costs. Because no official forecasts of medical costs growth is available or widely accepted, most economic experts use historical medical cost growth rates to predict the future.

Because the cost of all goods and services do not increase at the same rate, it is important to use category-specific growth rates, as opposed to using a general inflation rate for all items. As shown in the following chart, medical care costs have risen faster than general inflation (Consumer Price Index for All Urban Consumers (CPI-U)) since the early 1980s.

*Click to enlarge the image below.

General Inflation v. Medical Care Costs Inflation

Underlying data from U.S. Department of Labor, Bureau of Labor Statistics; “Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, by Expenditure Category.”

As shown in the following chart, the annual rate of medical care growth has varied widely over the last fifty-two years, but has followed a downward trend (as indicated by the dotted line).

*Click to enlarge the image below.

Annual Rate of Medical Care Growth

Economic experts generally use averages of historical medical growth rates as a basis to forecast growth rates; however, different economic experts use different periods of time. The downward trend in medical care growth rates explains why different economic experts can arrive at very different conclusions of the present value of a life care plan.

The following table summarizes the commonly used sub-categories of medical care (based on Bureau of Labor Statistics CPI-U data), and the average growth rates for different periods of time.

*Click to enlarge the image below.

Summary of Commonly Used Categories of Medical Care

As shown in the table above, averaging growth rates for a shorter period will result in a smaller forecasted growth rate for most of the identified sub-categories of medical care. When forecasting medical costs over long periods of time into the future, the differences in the applied growth rates can result in very different conclusions.

For example, assuming a $1,000 annual expense in physicians’ services over 40 years (total nominal value of $40,000) will result in a total future value of $56,870 using the 10 year average growth rate of 1.72%, $64,407 using the 20 year average growth rate of 2.29%, $69,736 using the 30 year average growth rate of 2.65%, and $87,481 using the 40 year average growth rate of 3.65%.

*Click to enlarge the image below.

Growth of $1,000 per Year in Physicians' Servicese

One factor to consider when determining the time period to use as a basis for forecasting medical growth rates is the implementation of the Affordable Care Act (ACA). The ACA, a comprehensive health care reform law, was signed into law on March 23, 2010 (the majority of the changes implemented by the ACA took effect in 2014), and had the following three primary goals:

  1. Expand health insurance coverage;
  2. Shift the focus of the health care delivery system from treatment to prevention; and
  3. Reduce the costs while improving the efficiency of health care.

Whether the ACA has affected the growth of medical costs, or whether they are just following the general downward trend seen since the seventies, is unclear. However, when using historical data to forecast future trends, it is imperative to consider any major factors that could create a shift in trends.

Another factor to consider is the effect of the COVID-19 pandemic and the ensuing period of high inflation. The growth of medical care costs remained relatively stable compared to general inflation (CPI-U) in 2020 and 2021, but increased significantly in 2022. At this time, it remains unclear whether the increase in 2022 is an anomaly that should be ignored when forecasting, or if it represents a repeatable phenomenon that should be accounted for when forecasting medical care costs.

For more information about the use of economic experts in personal injury disputes, contact us. We are here to help.

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Helga Zauner

Helga Zauner

Managing Director, Forensics and Litigation Services

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Helga A. Zauner, CVA, CFE, MAFF, is a testifying expert witness with 27 years of experience in litigation consulting, financial…

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