Trial Magazine

When you represent children in personal injury cases, you have the important duty of ensuring they will have the resources necessary to care for often significant future medical needs for the rest of their lives. Injured children cannot come back to the jury in five or 25 years if they cannot pay their medical bills. There is no perfect way to predict the future, but we must advocate for our clients’ expected future needs—and understand how future costs are calculated.

Present value. Although every jurisdiction has unique laws and requirements, most states require future costs be presented to the jury in their “present value” form. Therefore, it is imperative to determine the requirements for your specific jurisdiction. In the simplest terms, the present value of future costs is the amount that will actually take care of your clients for the rest of their lives.

Theoretically, the present value formula is a simple mathematical equation.¹ In personal injury litigation, however, a thorough present value assessment accounts for myriad, ever-changing inflation and interest rates of the U.S. economy. Determining the present value of your client’s life care plan is a two-step process: First you need to adjust your client’s life care plan value for inflation and then discount it to present value.

Adjusting for inflation. Start by looking at total future needs in your client’s life care plan.² For example, the plan might require $100,000 of medical care over the next 10 years. If you assume an average general inflation rate of 1.75%,³ then adjusting for inflation, that $100,000 will equal $118,944 by the time the 10-year life care plan is complete.

Your economist’s assessment will be far more nuanced, however, because your economist does not have to assume a general inflation rate. In fact, the economist shouldn’t. By and large, medical costs are projected to inflate at a higher rate than the average inflation rate. Using inflation rates specific to the categories of your client’s future needs will yield a more accurate number.

Here is an example of various inflation rates from an economic report in a recent case:

These rates are almost all greater than the average inflation rate. Let’s look at how this could affect your client’s life care plan. Assume the hypothetical client’s $100,000 10-year life care plan breaks down as follows:

Now your grand total is $130,187. The value of the life care plan increased by over $11,000 when using industry-specific inflation rates. Needless to say, had you not used these rates, this client’s life care plan would have been undervalued—and she may not have the resources to take care of her medical needs in the future.

Discounting. Inflation rates are only half the story though. Once the value of a client’s life care plan is adjusted for inflation, the plan is then “discounted” back to present value using the interest rate.⁴ There is a wide variety of interest rates in the world of investments—a high-risk investment like cryptocurrency will have a wildly different interest rate than a bank savings account.

The U.S. Supreme Court has opined that an injured party should not have to bear the additional risk that a normal investor is willing to take—rather the “discount rate should be based on the rate of interest that would be earned on ‘the best and safest investments.’”⁵ But the only risk-free investment available is U.S. treasury bonds—and only in some states.⁶ Note that treasuries are an appropriate vehicle for damages in states that calculate on a pre-tax basis, such as California, whereas municipal bonds may be better in states where the calculation is after tax, such as Texas.⁷

U.S. treasury bonds have the desirable characteristic of having a variety of terms—meaning that we have 30 years of interest rates at our fingertips. This is important because, practically, a party must use an interest rate that is available at the time of the verdict.⁸ Some economists will opt to use interest rates from instruments other than a U.S. treasury bond.

Getting back to our hypothetical client, assume our economist in the case uses a 10-year average U.S. Treasury bond interest rate of 2%. With this rate, the present value of the $130,187 needed for surgeries, physical therapy, and medical supplies is $106,799. Meanwhile, the defendant’s economist uses the 6% interest rate of a higher-risk investment—with that rate, the client’s medical costs are reduced to a $72,696 present value. In the words of our economist, “interest rates matter.”⁹

Be armed with the knowledge to refute defendants’ economic assessments, both in depositions and in front of a jury. Present value assessments for an injured child are not an academic exercise—the damages awarded to children must cover their care needs for years to come. As advocates, it is up to us to understand these calculations and give our clients the best chance for a future where their needs are met.

Luke Metzler is a partner at Van Wey, Metzler & Williams in Dallas and can be reached at luke@vwmwlaw.com.

Notes

1. The present value formula is PV=FV/(1+i)ⁿ. To calculate present value (PV), divide the future value (FV) by a factor of 1 + i (decimalized interest rate) for each period between present and future dates (where n is the number of periods).
2. Note that the present value calculation should be performed for all economic damages, including loss of earning capacity calculations. Also note that adjusting for inflation will generally increase the total amount of future damages unless we are in an unlikely period of deflation.
3. Here, I am using the Consumer Price Index as a proxy for the average inflation rate.
4. If you are wondering whether this math is truly necessary, you are not alone. For years, lawyers argued (and gained some traction in doing so) that inflation and interest offset each other, so no present value assessment is needed. Kaczkowski v. Bolubasz, 421 A.2d 1027 (Pa. 1980) (“as a matter of law . . . future inflation shall be presumed equal to future interest rates with these factors offsetting”). Then, in 1983, the Supreme Court conclusively ruled that the legal determination of present value was, in a word, complex and lawyers did not have to follow this simple determination. Jones & Laughlin Steel Corp. v. Pfiefer, 462 U.S. 523, 537 (1983) (holding that there are many methods for determining present value and that the appropriate discount rate should be based on the safest available investment).
5. Jones & Laughlin Steel Corp., 462 U.S. at 537 (citing Chesapeake & Ohio R. Co. v. Kelly, 241 U.S. 485, 491 (1916)).
6. Based on the author’s Mar. 18, 2022, interview with economist Robert Johnson.
7. Id.
8. For the first 30 years of a life care plan (or a plan for less than 30 years), economists simply use the government bond rates. For a life care plan of greater than 30 years, economists will project the interest rate for years 31-plus using a mathematical projection based on the bond rates.
9. Based on the author’s Mar. 18, 2022, interview with economist Robert Johnson.