The Role of the Economist in Life Care Planning

An economist is frequently called upon to compute the present value of the future medical and care costs set forth in a life care plan prepared by a specialist. Although the economist gener­ally will have little or no input in the development of the plan, the economist does have an interest in how the plan is structured and what it contains. This post examines the content of life care plans from the point of view of an economist and identifies some areas of potential concern.

The structure of the life care plan, including what elements are covered, will differ to some extent from author to author. Experience has shown, however, that there are a number of consistent patterns that emerge, some of which will cause difficulty for economic analysis (Dillman, 1987, 1988). The areas of concern from an economic point of view include (1) cost categories, (2) items that should be included, (3) timing of the items, (4) the use of actual or annual averages, and (5) the emphasis placed on trivial items. Each of these elements is discussed in more detail.

In making the economic evaluation, the economist must consider the fact that the costs of the various items included in the plan will not remain static over time but can be expected to increase with inflation. The historical rates of increase will differ depending upon the particular item, as the prices of some things tend to increase faster than others. For instance, the inflation of doctors’ fees and hospital costs has historically been much greater than the inflation for such items as bandages, hospital beds, and other commodities.

In considering future inflation, the economist generally looks at the past inflation of the type of good being evaluated. Although it may be possible to develop data series for many individual­ized items, the economic analysis will generally place the items into the broad classifications of medical services, nonmedical services, medical commodities, and nonmedical commodities.

Two of the categories, medical services and medical commodities, are subsets of the Consumer Price Index (CPI) and are defined by the Bureau of Labor Statistics (www.bls .gov/cpi/cpifact4.htm). These definitions as well as those for the other two categories follow.

This category involves professional and hospital services. Included are payments for physicians, dentists, and other professionals such as optometrists, ophthalmologists, opticians, psychologists, chiropractors, nurse practitioners, and therapists. The category of hospital services includes nurs­ing home care. Hospital services for inpatients, such as pharmacy, laboratory tests, radiology, short-stay units, ambulatory surgery, physical therapy, and emergency room fees billed by the hospital, also fall into this category. This category also includes fees paid to individuals or agencies for the personal care of invalids, elderly, or convalescents in the home including food preparation, bathing, light housekeeping, and other services.

The medical commodities classification includes the following:

¦   Prescription drugs and medical supplies. This includes all drugs and medical supplies dis­pensed by prescriptions. Also included are all prescription-dispensed over-the-counter drugs, that is, those drugs that are obtained over the counter but are prescribed by the doctor and dispensed by the pharmacist.

¦     Internal and respiratory over-the-counter drugs. This includes all nonprescription medica­tion taken by swallowing or inhaling, as well as suppositories or enemas.

¦     Topicals and dressings. Includes all nonprescription medicines and dressings used externally.

¦     Medical equipment for general use. Includes nonprescription medical equipment not worn or not used for supporting the body. Included in this group are nonprescription male and female contraceptives. Whirlpools and vaporizers are also included.

¦     Supportive and convalescent medical equipment. This category includes all supportive and convalescent medical equipment and auxiliaries to such equipment. Also included are pros- theses, crutches, wheelchairs, and associated accessories.

¦     Hearing aids. Includes all types of hearing aids and the cost of testing and fitting of the hearing aid.

The nonmedical services category is concerned with all personal services that are not included in medical services. Examples would include services such as housecleaning, home maintenance, lawn care, and auto repair. Some services that are medically related will fall into this group, such as wheelchair repair and maintenance of a van wheelchair lift. Nonprofessional attendant care (when not provided through a health care provider) can be classified as a nonmedical service.

Since the long-term inflation rate of nonmedical services is less than that for medical services, when there is doubt as to the correct classification, the conservative approach would be to place the service item in the nonmedical services category.

The nonmedical commodities category includes all the commodity (i.e., nonservices) items that do not fall under medical commodities. Such items might be specialty foods, housing, and alterations to housing, automobiles, games, bedding, and computers.

The historical inflation rates of each of these categories are given by the appropriate subseries of the CPI, or, in the case of nonmedical services, the average increase in hourly wages in the private nonagricultural economy. These are shown in Table 11.1 to Table 11.6.

 Consumer Price Index for Medical Components: All Urban Consumers All Items CPI 1982-1984 = 100.0Medical Care 1982-1984 = 100.0Table 11.2 (Continued) Medical Commodities 1982­1984 = 100.0Prescription Drugs 1982­1984 = 100.0Nonprescription Drugs and Medical Supplies December 1986 = 100.0Internal and Respiratory Over-the-Counter Drugs

1984-1986 = 100.0

Nonprescription Medical Equipment and Supplies 1982-1984 = 100.0Source: U.S. Department of Labor, Bureau of Labor Statistics.

The life care plan, in personal injury litigation, should include all medical and care items (both services and commodities) that will be, or should be, incurred because of the incident in question. Which specific items to include is usually not a question for the economist. The economist needs to make sure that only marginal costs are considered, that is, those items that normally would not be purchased from earnings absent the injuries.

In addition, the value of the items or services should be evaluated even if provided at no cost by family members, significant others, or some other collateral source. Each of these concepts will be briefly discussed.

A marginal cost, as it pertains to a life care plan in personal injury litigation, can be defined as an additional or extra cost that is incurred because, and only because, of the injury in question. For instance, the entire cost of a new car (every 3 years or so) would generally not be considered a marginal cost. The individual would normally need transportation even if not injured. Under normal circumstances the transportation would have been paid for out of the individual’s earning capacity, which is, of course, usually another element of potential damage. What would be appro­priate, however, is the additional cost required by the nature of the limitations. A van rather than a regular car might be necessary to transport a client in a wheelchair. If so, the additional cost of a van instead of a regular car would be appropriate. Any special modifications such as a lift or special controls would also qualify as a marginal cost. To obtain the marginal cost, one would subtract the cost of a normal item (i.e., a compact car) from the cost of the recommended item.

 Consumer Price Index for Medical Services: All Urban Consumers Medical Care Services 1982­1984 = 100.0Professional Medical Services 1982­1984 = 100.0Physician’s Services 1982­1984 = 100.0Dental Services 1984­1986 = 100.0Other

Professional Services December 1986 = 100.0

Medical Care Services 1982­1984 = 100.0Professional Medical Services 1982­1984 = 100.0Physician’s Services 1982­1984 = 100.0Dental Services 1984­1986 = 100.0Other

Professional Services December 1986 = 100.0

Source: U.S. Department of Labor, Bureau of Labor Statistics.

The life care planner should not include the value of any trade-in toward transportation. The value of a trade-in is an asset owned by the individual. The value of the vehicle to be traded in is no different than a down payment taken from savings. The measure is how much more does the new vehicle cost, given the requirements necessitated by the injury, than the type of vehicle that normally would have been purchased by the injured party. For instance, assume an individual owned a sedan with a trade-in value of $2,000. A new similar sedan could be purchased for $15,000, without trade-in, or $13,000 with trade-in. However, the nature of the injury is such that a van with lift is necessary at a cost of $25,000. The marginal cost would be $25,000 minus $15,000 or $10,000. The trade-in is completely irrelevant.

The same concept holds true for equity received in the sale of a home necessitated by the purchase of new facilities necessary to accommodate the injuries. Only the additional cost should be included in the life care plan. That cost can be estimated by the difference between the market price of the old home and that of the new one. Any equity held in the old home is irrelevant.

 Consumer Price Index for Hospital Services: All Urban Consumers Hospital and Related Services 1982-1984 = 100.0Hospital Services December 1986 = 100.0Inpatient Hospital Services December 1986 = 100.0Outpatient Services December 1986 = 100.0

The case of a renter is somewhat different. If the life care plan includes the cost of the recom­mended facility as well as the rent currently paid, the economist can compute an inputted value to the stream of rental payments. That is, the economist can estimate the value of the rented home and thus determine the marginal cost of the recommended facility.

Items such as television sets, radios, and books are often set forth in life care plans. In some cases, the inclusion of such items may be justified because of the specifics of the case, but often the items are duplications of what the individual would normally have purchased without the injury and therefore are not a marginal cost and should not be a part of the plan. Marginal costs, how­ever, may be included in the rare case where no compensation for lost earning capacity is included in the total damage estimate.