A Roadmap to Economic Damages in Med Mal Matters

Economic damages ' actual monetary loss caused by a tort or breach ' occur in many forms and can involve a variety of issues. A good understanding of the basic elements of damages and the issues that might be involved is essential to effective representation, because litigators who fully understand the issues will be able to better assess the value of a damages claim and the overall case value.

The basic elements of a damages claim may include lost earnings, lost fringe benefits, lost household services, and medical costs. In wrongful death matters in many jurisdictions, the decedent's likely personal consumption expenditures (his or her personal living expenses, exclusive of what he or she would have saved or spent on family support) are deducted from damages. However, the rules on deductions of collateral sources vary from jurisdiction to jurisdiction. For example, in New Jersey, Social Security payments are subtracted from damages, while in Pennsylvania, Social Security payments do not offset damages.

Below is a guide to the basic elements of damages and some of the issues that can arise when dealing with damages in medical malpractice litigation.

Lost Earnings

Lost earnings are calculated by determining how long the injury will limit the plaintiff's earning capacity; to what degree the injury will limit earnings; and what, if anything, will offset the loss (e.g., subsequent earnings). Earning capacity is the plaintiff's expected income, which takes into consideration the plaintiff's age, education, personal attributes, health, labor-market conditions and the plaintiff's actual earnings. In assessing the plaintiff's lost earning capacity, both the plaintiff's pre-incident and post-incident earning capacity must be considered.

Forensic economists often employ several bases when assessing a plaintiff's pre-incident earning capacity. If the plaintiff has an established work history, then hir or her actual earnings history is most often relied upon. When examining the plaintiff's earning history, the tax return (Form 1040 and W-2s) is often the best information. It is important to note that when requesting tax returns, the litigator should request complete returns, with all schedules. Often, there are substantial differences between gross income and taxable income after accounting for unreimbursed business expenses.

In addition to actual earning history, the plaintiff's earning capacity may be established by relying on the statistical earnings of the plaintiff's cohorts. Sources can include employment and union records, government and academic studies, trade associations and employment agencies. The economist must also take into consideration the plaintiff's physical, mental and medical status pre-incident. Were there any preexisting medical conditions that would have limited earning capacity regardless of the tort? Were there any planned or actual career or educational advancements?

As with pre-incident earnings history evidence, the plaintiff's actual post-tort earnings are always an important consideration. In injury matters, an assessment by a medical expert and/or a vocational specialist is frequently needed to determine the plaintiff's residual post-incident abilities. Will he or she be able to resume participation in the labor market and, if so, in what capacity will that resumption take place (i.e., same job or new vocation with different standard activities)? Discovery should also be conducted regarding any request of the plaintiff for Social Security Disability benefits and the Social Security Administration's determination.

The plaintiff's worklife must be considered when calculating the plaintiff's loss of earnings. Worklife is the “how long” the plaintiff would have been expected to work absent the incident. Worklife takes into account expected retirement age, including absences from the labor force. Thus, consideration must be given to the injured party's probability of living, of unemployment, and of a physical disability or other illness unconnected to the case at hand. Other matters to contemplate are the plaintiff's actual or probable pursuit of further education, need to stay home or curtail some work activities because of child-rearing duties, or other reasons that may have caused the plaintiff to be absent from the labor force. Worklife also considers the plaintiff's employment patterns, such as work seasonality, annual hours worked and overtime hours.

After determining the plaintiff's pre- and post-injury earnings, the economic expert must adjust the plaintiff's future earning capacity for inflation in order to obtain an accurate representation of the plaintiff's lost earnings. The treatment in the growth of earnings becomes very important in cases where the plaintiff was relatively young, with many years of worklife disrupted due to the incident. How would earnings have grown from one year to the next? Would the plaintiff's earnings change over time consistent with the rate of inflation (historically, approximately 3% per year) or change at a greater or lower rate over time? For example, do the plaintiff's earnings pre-incident show growth in excess of the annual inflation rate, suggesting the plaintiff had personal productivity increases?

Lost Fringe Benefits

The fringe-benefit items that generally count toward damages include company-paid health insurance, company-paid life insurance and company-sponsored retirement benefits. Losses are not the cost to the employer but the loss to the claimant, measured by replacement cost. Fringe benefits may account for a substantial component of an economic damages claim, so complete discovery must be conducted in this area. Sources of discovery may include all documents relating to retirement plans, healthcare coverage,
and terms under which benefits would have been administered.

Lost Household Services

Household services are the value of services provided by the plaintiff or decedent for the benefit of other family members. Sources for the amount of household services rendered and the value of those services include testimony of family members, government and academic studies and the cost of services from commercial providers.

Future Medical Expenses

Medical-cost specialists calculate the plaintiff's future medical expenses and provide reports referred to as “life-care plans.” A life-care plan details what type of future medical care the plaintiff will need. In instances where the injury is permanent, the cost of this element of damages is affected by the plaintiff's life expectancy.

A Special Consideration in Wrongful Death Claims: Personal Consumption

In wrongful death matters in many jurisdictions, the decedent's personal consumption expenditures offset the decedent's damages. Personal consumption is the amount the decedent would have spent on personal living expenses, not including what the decedent would have saved or spent on family support. These items often include housing (for single decedents), transportation, clothing, healthcare and food. Personal consumption items are not deducted if the decedent's family incurs such costs (e.g., housing, and utilities). Absent sufficient specific information regarding the decedent's spending patterns, forensic economists may rely on census information and other statistical data to determine the decedent's personal consumption expenditures.

Conclusion

When assessing the economic damages in a matter, it is essential to understand the elements of economic damages as well as the necessary discovery that must be conducted. A poorly prepared damages argument can affect credibility on other issues involved in the litigation, while insufficient discovery can lead to significant under- or over-valuation of the damages. To avoid these pitfalls, it is wise to retain a forensic economist early in the case preparation process. He or she will focus the litigator on what discovery needs to be completed and on what pertinent evidence must be gathered in the area of damages.

Chad L. Staller, MBA, JD, MAC, AVA, is President of The Center for Forensic Economic Studies, Philadelphia, and a member of this newsletter's Board of Editors. He can be reached at [email protected] or 215-546-5600.

Economic damages ' actual monetary loss caused by a tort or breach ' occur in many forms and can involve a variety of issues. A good understanding of the basic elements of damages and the issues that might be involved is essential to effective representation, because litigators who fully understand the issues will be able to better assess the value of a damages claim and the overall case value.

The basic elements of a damages claim may include lost earnings, lost fringe benefits, lost household services, and medical costs. In wrongful death matters in many jurisdictions, the decedent's likely personal consumption expenditures (his or her personal living expenses, exclusive of what he or she would have saved or spent on family support) are deducted from damages. However, the rules on deductions of collateral sources vary from jurisdiction to jurisdiction. For example, in New Jersey, Social Security payments are subtracted from damages, while in Pennsylvania, Social Security payments do not offset damages.

Below is a guide to the basic elements of damages and some of the issues that can arise when dealing with damages in medical malpractice litigation.

Lost Earnings

Lost earnings are calculated by determining how long the injury will limit the plaintiff's earning capacity; to what degree the injury will limit earnings; and what, if anything, will offset the loss (e.g., subsequent earnings). Earning capacity is the plaintiff's expected income, which takes into consideration the plaintiff's age, education, personal attributes, health, labor-market conditions and the plaintiff's actual earnings. In assessing the plaintiff's lost earning capacity, both the plaintiff's pre-incident and post-incident earning capacity must be considered.

Forensic economists often employ several bases when assessing a plaintiff's pre-incident earning capacity. If the plaintiff has an established work history, then hir or her actual earnings history is most often relied upon. When examining the plaintiff's earning history, the tax return (Form 1040 and W-2s) is often the best information. It is important to note that when requesting tax returns, the litigator should request complete returns, with all schedules. Often, there are substantial differences between gross income and taxable income after accounting for unreimbursed business expenses.

In addition to actual earning history, the plaintiff's earning capacity may be established by relying on the statistical earnings of the plaintiff's cohorts. Sources can include employment and union records, government and academic studies, trade associations and employment agencies. The economist must also take into consideration the plaintiff's physical, mental and medical status pre-incident. Were there any preexisting medical conditions that would have limited earning capacity regardless of the tort? Were there any planned or actual career or educational advancements?

As with pre-incident earnings history evidence, the plaintiff's actual post-tort earnings are always an important consideration. In injury matters, an assessment by a medical expert and/or a vocational specialist is frequently needed to determine the plaintiff's residual post-incident abilities. Will he or she be able to resume participation in the labor market and, if so, in what capacity will that resumption take place (i.e., same job or new vocation with different standard activities)? Discovery should also be conducted regarding any request of the plaintiff for Social Security Disability benefits and the Social Security Administration's determination.

The plaintiff's worklife must be considered when calculating the plaintiff's loss of earnings. Worklife is the “how long” the plaintiff would have been expected to work absent the incident. Worklife takes into account expected retirement age, including absences from the labor force. Thus, consideration must be given to the injured party's probability of living, of unemployment, and of a physical disability or other illness unconnected to the case at hand. Other matters to contemplate are the plaintiff's actual or probable pursuit of further education, need to stay home or curtail some work activities because of child-rearing duties, or other reasons that may have caused the plaintiff to be absent from the labor force. Worklife also considers the plaintiff's employment patterns, such as work seasonality, annual hours worked and overtime hours.

After determining the plaintiff's pre- and post-injury earnings, the economic expert must adjust the plaintiff's future earning capacity for inflation in order to obtain an accurate representation of the plaintiff's lost earnings. The treatment in the growth of earnings becomes very important in cases where the plaintiff was relatively young, with many years of worklife disrupted due to the incident. How would earnings have grown from one year to the next? Would the plaintiff's earnings change over time consistent with the rate of inflation (historically, approximately 3% per year) or change at a greater or lower rate over time? For example, do the plaintiff's earnings pre-incident show growth in excess of the annual inflation rate, suggesting the plaintiff had personal productivity increases?

Lost Fringe Benefits

The fringe-benefit items that generally count toward damages include company-paid health insurance, company-paid life insurance and company-sponsored retirement benefits. Losses are not the cost to the employer but the loss to the claimant, measured by replacement cost. Fringe benefits may account for a substantial component of an economic damages claim, so complete discovery must be conducted in this area. Sources of discovery may include all documents relating to retirement plans, healthcare coverage,
and terms under which benefits would have been administered.

Lost Household Services

Household services are the value of services provided by the plaintiff or decedent for the benefit of other family members. Sources for the amount of household services rendered and the value of those services include testimony of family members, government and academic studies and the cost of services from commercial providers.

Future Medical Expenses

Medical-cost specialists calculate the plaintiff's future medical expenses and provide reports referred to as “life-care plans.” A life-care plan details what type of future medical care the plaintiff will need. In instances where the injury is permanent, the cost of this element of damages is affected by the plaintiff's life expectancy.

A Special Consideration in Wrongful Death Claims: Personal Consumption

In wrongful death matters in many jurisdictions, the decedent's personal consumption expenditures offset the decedent's damages. Personal consumption is the amount the decedent would have spent on personal living expenses, not including what the decedent would have saved or spent on family support. These items often include housing (for single decedents), transportation, clothing, healthcare and food. Personal consumption items are not deducted if the decedent's family incurs such costs (e.g., housing, and utilities). Absent sufficient specific information regarding the decedent's spending patterns, forensic economists may rely on census information and other statistical data to determine the decedent's personal consumption expenditures.

Conclusion

When assessing the economic damages in a matter, it is essential to understand the elements of economic damages as well as the necessary discovery that must be conducted. A poorly prepared damages argument can affect credibility on other issues involved in the litigation, while insufficient discovery can lead to significant under- or over-valuation of the damages. To avoid these pitfalls, it is wise to retain a forensic economist early in the case preparation process. He or she will focus the litigator on what discovery needs to be completed and on what pertinent evidence must be gathered in the area of damages.

Chad L. Staller, MBA, JD, MAC, AVA, is President of The Center for Forensic Economic Studies, Philadelphia, and a member of this newsletter's Board of Editors. He can be reached at [email protected] or 215-546-5600.