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The Periodic Payment Rule: Problems, Problems, Problems!

The Medical Care Availability and Reduction of Error Act (MCARE) made several important changes to the rules governing medical malpractice litigation in Pennsylvania, most of which apply to claims arising after March 2002. Among them is §509(b) which permits a defendant to make periodic payments to cover certain future medical expenses awarded by a jury. This significant new rule has received surprisingly little attention thus far, probably because cases subject to it, by and large, have not yet come to trial. That is all about to change in the coming months as more and more post-March 2002 claims mature for trial. While one hesitates to be overly pessimistic, this author's prediction is that, once forced to deal with it in the real world, lawyers and judges will express universal dislike for the periodic payment rule because it will prove to be complicated, time consuming, expensive, and in some cases unfair, to apply. This article will highlight many of the problems which litigants will face.

The Rule - The key elements of the rule, codified at 40 PS §1303.509(b), are as follows:

  • It applies only to future medical expenses, not other portions of the jury award.
  • It applies only to verdicts; settlements will still involve lump sum payments.
  • The future medicals must exceed $100,000.00 for the rule to be triggered.
  • Even when the rule applies, the plaintiff's attorney fees are paid in a lump sum based on the present value of the future periodic payments
  • A separate sum is to be awarded for each year of future medical expense.
  • The obligation to make payments ceases when the plaintiff dies even if the jury awarded damages for additional years.
  • The defendant can purchase an annuity to cover its future payment obligations.

A Hypothetical Case - The problems with the rule are best illustrated by reference to a hypothetical fact pattern. Let us assume a 9-year-old girl experiences a delay in diagnosis and treatment of high ammonia levels (hyperammonemia) during a lengthy hospitalization. Hyperammonemia, when not corrected, can cause progressive brain damage. As a result of the alleged malpractice, the child is left with significant cognitive and motor impairments. At the time of trial both sides agree that the future cost of custodial care will be approximately $100,000.00 per year. The parties disagree, however, over her life expectancy, i.e., for how long the future medical payments will be required. The plaintiff contends that she has a normal life expectancy of 71 years whereas the defendant says that it is only 22 additional years as a result of her brain injury. The jury, not surprisingly, compromises and awards future medicals of $100,000.00 per year for 45 years.

The Verdict Slip - The first problem that the litigants and the judge are going to face is the design of the verdict slip. Section 509(a) already requires that there be separate lines for past and future wage loss, as well as past and future pain and suffering, although these amounts are still paid in a lump sum. Now, in addition to those four entries, subparagraph (b) says the verdict slip shall contain one line for each additional year that the child will incur future medical expense. Not knowing what the jury's conclusion will be, the judge will at least have to allow for the possibility that they will accept in full the plaintiff's argument and include another seventy-one (71) lines on the verdict slip representing a normal life expectancy for a 9-year-old. Thus, lawyers and judges' secretaries who were used to preparing one-page verdict slips will now be typing forms whose length resemble that of a grocery store receipt for a family of five! That's a problem.

Bad as it is, this problem with the length of the verdict form is merely an administrative one. A more substantive concern is the rule's mandate that the jury determine the character and cost of plaintiff's medical needs on a year-by-year basis for the remainder her life. For example, in order to project the cost of on-going custodial care, the plaintiff's economist is going to have to make assumptions about future medical inflation. Suppose that at the time of trial in 2005, custodial care costs $100,000.00/year, and the plaintiff's expert projects that in year 2017 it will cost $210,000.00. What happens if, in reality, the cost of the care turns out to be $300,000.00? If the jury awarded $210,000.00 for that year based on the expert's testimony, where does the plaintiff get the remaining $88,000.00 to pay for 2017's care?

In the "old days" of the lump sum verdict, this problem could be avoided because the plaintiff could place the jury award in a trust which would have the flexibility to pay bills as they accrue. Furthermore, if prudentially invested, the trust assets would increase proportionately if inflation turned out to be greater than what was anticipated at the time of trial.

An even greater "matching" problem occurs with medical needs that arise on a one-time or sporadic basis. With on-going annual expenses such as custodial care, the issue is trying to accurately predict the rate of medical inflation, but with special expenses the problems are even greater. Suppose, for example, in our hypothetical case there is medical testimony that our 9­year-old plaintiff will require a certain very expensive surgery at some point in the future. How will the jury accurately predict in what specific year that expense will be needed? The same is true for other sporadic expenses such as a new handicapped-equipped van or a major home renovation? While the plaintiff would try to provide some guidance on those issues with a life care plan, the plan is merely an educated guess as to when those needs may materialize. If a major surgery projected to in year 2015 actually becomes necessary in year 2012, how will the plaintiff for it?

This new style of verdict slip will also likely influence the jury's actual decision-making process. Many defense lawyers have predicated that the itemized annual verdict form will put the jury in a "cash register" mentality and ultimately lead to higher total awards. It remains to be seen whether that fear is realized, but there should be no doubt that deliberations will certainly become longer and more confusing.

Attorney's Fees - The rule says that plaintiff's attorney fees are to be paid in a lump sum based on the present value of the future stream of medical payments awarded by the jury. If anyone thinks that is going to be handled with a simple post-trial stipulation as is often the case with delay damages, think again. In order to arrive at the present value of any future stream of payments, one has to make certain economic assumptions to arrive at a discount factor. Certainly the defense will have an incentive to argue that the present value is relatively low in order to reduce the fees that are owed. Conversely, the plaintiff's lawyer will be inclined to argue that the present value of the future medicals is quite high. To those familiar with the debates that have long been waged between parties about the valve of a structured settlement proposal, this situation is dripping with irony. For years, the insurance carriers have tried to convince plaintiffs' lawyers that a future stream of annuity payments had a high present value so as to enhance the attractiveness of their settlement proposal, whereas now those same carriers are going to be doing exactly the opposite in order to reduce the lump sump attorney's fees owed on the case!

Who waits reluctantly in the wings having to settle this dispute on present value? Undoubtedly, it is going to be the trial judge. Already burdened with a full docket, the last thing the judge wants to do is sit through a post-trial hearing listening to economists debate present value models. The trial judge's disdain for this exercise will probably be matched only by that of the plaintiff's counsel who will find himself/herself in the uncomfortable, and potentially adverse, position of arguing that he is entitled to a greater fee than the defense, and perhaps his own client, thinks he should received.

Cessation of Payments - Clearly, the major impetus behind passage of the period payment rule, and its most unique feature, is the defendant's right to stop making payments if the plaintiff dies prematurely. Thus, in our hypothetical, even though the jury awarded future medical expense of $100,000.00 for 45 years, if the plaintiff dies in 10 years, the defendant's obligation to make the annual payments ceases at that time. In lobbying for the Act's passage, the insurance industry successfully argued that it should not be saddled with huge jury verdicts based largely on future medical expense that may never materialize. While there is some logic to the notion that the defendant should not have to pay for medical expense that is never incurred, the rule as written is far from even-handed, for there is no provision to extend the payments beyond the last year of the jury verdict if the plaintiff lives longer than expected. Patient advocates, subscribing to the maxim that "What is sauce for the goose is sauce for the gander," would suggest that there is an inherent inequity in this scheme.

Funding the Periodic Payments - The rule indicates that the defendant is free to purchase an annuity in order to fund the periodic payments awarded by the jury. Let's think about how that is going to work. Our hypothetical jury awarded future medicals of $100,000 per year for 45 years, or an aggregate of $4,500,000 in future medicals. Assume that there is general agreement that the present value of that future stream of payments is $2,100,000 and that the plaintiff's attorney is entitled to a one-third contingency fee of $700,000.00. After paying the attorney's fees, what does the defendant pay in future periodic medical payments? Some lawyers have offered the view that the defendant still owes $100,000.00 per year for 45 years since that's what the verdict specified, but the more likely answer seems to be that they will owe $66,666.66 for 45 years, the annual amount of the jury's award minus a pro-rated share of attorney's fee.

A bigger problem will arise in regard to the cost of the annuity to fund the periodic payments. Annuities are typically sold by life insurance companies who base their cost primarily on two factors, their assumption about the rate of return they will be able to realize on the premium payment and their estimate as to how long they will have to continue to make the payments. This second factor is directly linked to the beneficiary's life expectancy, and in that regard, the life insurance companies rely on what they call an individual's "rated age." This is a fictional age assigned to a given person based on an actuarial determination of how long the person will live given their present state of health. Thus, a 45-year-old person who is very ill may be assigned a "rated age" of 60 if statistics suggest that their longevity is the same as that of the average 60-year-old. The higher a person's "rated age," the sooner the life company is predicting their payment obligation will cease, and hence, the more cheaply they will sell the annuity. Here are the likely ramifications of that dynamic.

In our hypothetical case, the jury determined the 9-year-old plaintiff would live for 45 additional years and, thus, awarded $4,500,000.00 in future medical payments. If the present value of that $4,500,000.00 is $2,100,000.00, the defendant will pay $700,000.00 in attorneys fees, and the remaining $1,400,000.00 in present value should, in theory, be spent to buy the annuity to fund future medical expenses. However, what if the defendant convinces the life company to accept the very argument rejected by the jury, namely, that plaintiff will only live an additional 22 years? They may then price the annuity at the relatively low cost of $600,000.00, in which case the defendant ends up spending $800,000.00 less in present dollars ($1,400,000.00 minus $600,000.00) than what the jury awarded.

What, if anything, is wrong with that? It depends on your perspective. Defendants will say that it should not matter if they are able to save some money on the cost of the annuity, so long as they can provide a product which covers the future obligation. Plaintiffs, on the other hand, will no doubt argue that there is something distasteful about the defendant paying less in present dollars than the jury wanted them to pay, and furthermore, that the defense should not be re-arguing life expectancy after the jury has rejected their previous estimates at trial.

Conclusion - In the next few years, trial courts and litigants will get first-hand experience in dealing with the new periodic payment rule. The prediction here is that the bench and bar will express nothing but contempt for the rule and will curse the state legislature for ever passing a provision so fraught with complexity and so out of touch with the realities of patients' needs. Here is hoping that the chorus of disenchantment reverberates from the four corners of the state to the halls of the state capitol and that lawmakers re-visit the rule before too many cases suffer under its weight. In the meantime, the only option for trial counsel is to voluntarily agree to waive application of the rule. There seems to be nothing in the statute to prevent litigants from agreeing to go "old school" and use the traditional lump sum verdict form. Indeed, one would have to anticipate that trial judges will strongly "encourage" counsel to do exactly that.

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