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Personal Injury Litigation: Proving or Disproving Economic Damages

Navigating Methodologies and Factors Impacting Court Awards and Best Practices for Recruiting Financial Experts

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THURSDAY, SEPTEMBER 20, 2012

Presenting a live 90-minute webinar with interactive Q&A

Ronald T . Luke, President, Research & Planning Consultants, Austin, Texas Kacy L. Turner, Vocational Consultant, Research & Planning Consultants, Austin, Texas

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5

Personal Injury Litigation: Proving or Disproving Economic Damages

Navigating Methodologies and Factors Impacting Court Awards

September 20, 2012

6

Overview

• General Concepts
• Loss of Earning Capacity
• Discounted Present Value
• Vocational Evaluation of Residual Earning

Capacity

• Life Care Planning – Clinical
• Life Care Planning – Economic

7

General Concepts I

• Economic damages analysis compares two

scenarios that start at the time of the injury

– Life with injury – Life had injury not occurred – Difference is damages

• Past and future damage calculations involve

estimates and projections of the two scenarios

• Projections are reasonable, not accurate

8

General Concepts II

• There are factors affecting future earnings and

future medical costs not related to the injury

– Individual aging – Risk of death, disability, unemployment

• Specific information about the injured party

replaces general statistics when available

– Work and earning history – Medical history

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Loss of Earning Capacity

See RPC Sample Loss of Earning Capacity Report References to Figures are to Attachment 4 of that report

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Two Concepts of Earnings

• Projected Earnings: a projection of what a

person will earn in the future

– Projected annual earnings – Work life expectancy

• Projected Earning Capacity: a projection of

what the person can earn if he fully uses his earning capacity

– Projected annual earnings – Adjustments for factors beyond person’s control

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Earning Capacity as an Asset

• A financial asset is something that can

produce income for the owner

• Earning capacity is the most valuable financial

asset most people own

• Assets have the potential to produce income

even if not doing so currently

– Idle agricultural land – Lawyer raising children full-time – Person starting new business

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Pre-injury Annual Earnings

• Person with work history

– Employed persons – Self-employed persons – Problem of undocumented income

• Person with limited or no relevant work history

– Child or student – Homemaker – Below-market wages (military, Peace Corps, etc.)

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Employed Person with Work History (Fig. 1)

• Earnings documentation
• Social Security earnings history

– Tax returns with W-2 and supporting schedules – Fringe benefits

• Education, training and experience
• Prospects for promotions
• Plans and interests

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Sample Earnings Record

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Earnings for the Self-Employed

• Salary and wages
• Financial statements
• Business tax returns (Schedule C or 1120)
• Retirement accounts
• Fringe benefits
• Interest and dividends from business
• Dual use expenditures
• Profit/retained earnings/increase in book value
• In some cases a formal business valuation may be

needed

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Undocumented Earnings

• Failure to report earnings to IRS does not

prevent claiming loss of earning capacity

• Possible evidence to estimate past earnings

– Household expenditure records – Receipt books or other business records – Bank accounts

• Question: how to handle future tax payment
• r non-payment

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Persons with Limited or No Work History

• Education, training and experience of adults
• Family education and occupational experience for

children

• Plans, interests and intentions
• Bureau of Labor Statistics data on earnings by job

and occupation over time

• Bureau of Labor Statistics data on earnings by age

and educational attainment

• Local salary data from telephone surveys or

sources like www.salary.com.

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Sample BLS Earnings Data

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Sample Salary.com Data

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Fringe Benefits (Fig. 2)

• An increasing percentage of total compensation
• Fringe benefits for a specific job

– Employee handbooks – Interview human resources staff – Special issues with government jobs

• Fringe benefit not for a specific job

– People change employers over a career – BLS statistics on fringe benefit costs by occupational group, industry and geographic region

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BLS Table Showing Benefits by Occupational Group

22

Increases in Annual Earnings (Fig. 3)

• Social Security Administration (SSA)

projections for 75 Years in the most recent Annual Report to the Trustees –Projected CPI inflation –Projected real increases in average earnings

• Past BLS data on nominal change in average

earnings in specific jobs relative to all jobs

• Assume the past relationship for a specific job

and all jobs holds in the future

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2012 Trustee Report Table V.B1

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Taxes

• Personal injury awards are not taxed, so damages

should be computed after tax

• Deduct Social Security and Medicare taxes

(compute Social Security benefits separately)

• Deduct state and federal income taxes

– Consider past income tax average and marginal rates – Consider filing status – Use current tax tables for future years – Consider change in exemptions as children age

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Adjustments to Earning Capacity for Factors Beyond the Person’s Control (Figs. 4-6)

• Death

Annual survival probabilities by age, gender and race/ethnicity from most recent life tables from National Center for Health Statistics. See Figure 4.

• Disability unrelated to subject injury

Annual probability of being unable to work due to physical

• r mental disability by age, gender and race ethnicity from

National Health Interview Survey. See Figure 5.

• Unemployment

Annual probability of being unemployed by age, gender and race from BLS data and SSA projections. See Figure 6.

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Summary of Calculation (Fig. 7)

1. Future annual wages x annual percentage increase = annual wages 2. Projected annual wages x fringe benefit percentage = fringe benefit value 3. Projected annual wages x tax rates = annual taxes 4. Annual wages + fringe benefit value – annual taxes = annual earnings 5. Annual earnings x probability alive x probability able x probability employed = expected annual earning capacity Continue to age of retirement with full SSA benefits

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27 Social Security Benefits (Figs. 8-10)

• Social Security benefits are related to earnings history

through a complex formula

• Reduced earnings will usually reduce SSA retirement

benefits

• Annual values for pre-injury and post-injury expected

earnings, excluding fringe benefits and taxes are entered into the SSA’s benefit calculator http://www.socialsecurity.gov/OACT/anypia/anypia.html

• Expected benefits = benefits x probability alive. Continue

calculation to age 100

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Future Value of Lost Earning Capacity Damages

• 1. Calculate pre-injury earning capacity
• 2. Calculate post-injury earning capacity
• 3. Subtract 2 from 1 for each year

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Calculation of Present Value (Figs. 11-13)

• 1. Determine discount rate for each year
• 2. Apply discount rate to lost earning capacity

damages for each year to calculate annual present value of that year

– For past and current years discount factor is 1.0 – For future years discount factor is <1.0

• 3. Sum annual present value separately for past

and future years for discounted present value

• f past and future damages.

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30 Determine Discount Rate (Fig. 12)

Several acceptable methods; this is RPC’s 1. Obtain annual rate for 3 month Treasury bills 1960 – present 2. Obtain annual CPI inflation rate 1960 – present 3. For each year subtract 2 from 1 to estimate real interest rate for that year 4. Compute geometric mean of real interest rates. See Figure 11 5. Obtain SSA projections of CPI from Trustees Report 6. Project nominal interest rate=[(1+CPI) x (1+Real Interest Rate)] – 1 7. Annual discount factor = 1/(1+nominal interest rate). 8. For each year multiply prior year annual discount factor by current year discount factor

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Calculate Present Value (Fig. 13)

• 1. For each year multiply damages by discount

factor for that year to calculate present value

• f damages for that year
• 2. Sum discounted present value for each year
• 3. Calculate past and future damages as of date
• f trial separately.

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Vocational Evaluation of Residual Earning Capacity

See RPC Sample Vocational Report References to Attachments correspond to those in the report.

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Qualifications of a Vocational Consultant

• Graduate degree in vocational discipline
• Certifications or Licenses

– Certified Rehabilitation Counselor (CRC) – Certified Disability Management Specialist (CDMS) – Certified Vocational Evaluator (CVE) – Certified Case Manager (CCM)

• Professional Experience

– Vocational rehabilitation counseling – Vocational testing – Forensic work

• Research Knowledge
• Involvement with professional organizations

34 Role of the Vocational Consultant

• Appropriate professional to evaluate pre-injury and

residual earning capacity

• Administer test for aptitudes, skills, interests and

intellectual ability

• Perform a Transferable Skills Analysis (TSA)
• Determine employment options consistent with

physical or mental limitations

• Perform a labor market analysis
• Identify reasonable accommodations and aids to

maximize residual earning capacity

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Key Vocational Questions in Personal Injury Cases

• Can the person return to his pre-injury job on a

full-time basis with reasonable accommodations?

• If not, what jobs are

– Consistent with the person’s current abilities and limitations? – Available where the person resides? – Minimize loss of earning capacity?

• Can residual earning capacity be increased with

reasonable education and training?

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Vocational Assessment

• Record Review

– Medical Records – Depositions – Educational – Tax/ Social Security – Employment Records

• Clinical Personal Interview
• Interview treating and consulting physicians and

read medical reports

• Administer vocational tests
• Perform Transferrable Skills Analysis

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Vocational Evaluation

• Vocational Testing

– Academic

• Reading Level
• Math Level
• Spelling

– Aptitudes

• General Reasoning
• Verbal Reasoning
• Numerical Reasoning
• Mechanical Reasoning
• Spatial and Form Perception

– Interests

• Occupational Groups

– Work Values

• Working Alone vs. in a Group
• Being the Leader vs. a Participant
• Working Repetitively or Different Duties Each Day

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Job and Labor Market Analysis (Attachment 3)

• Transferrable Skills Analysis

– Review Work History – Add in any Changes in Physical Limitations – Residual Profile to Search New Occupations – Compare New Occupations to the Residual Profile

• Labor Market Analysis

– Jobs available where person resides – Occupational Trends – Wages- National and Metropolitan Areas

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Life Care Planning

See RPC Sample Plaintiff Life Care Plan Report References to Figures are to Attachment 3 of that report

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Qualifications of a Life Care Planner?

• Hold a degree and/or license in medicine,

nursing, a vocational discipline or therapy.

• Complete a Life Care Planning Certification

Program

• Complete requirements for certification by the

Commission on Health Care Certification

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Roles of the Physician and the Life Care Planner

• Both are necessary for effective expert reports
• Physicians give medical opinions that justify

the elements in the LCP

• Physicians don’t typically discuss supplies, aids

for independent living and maintenance issues

• The life care planner looks at the whole

picture of the client, researches alternatives, and determine all costs

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A Life Care Plan (LCP) is

• Dynamic document based on published

standards of practice

• Includes comprehensive assessment, data

analysis and research

• Organized concise plan for current and future

needs

• Includes all associated costs for individuals

who have experienced a catastrophic injury

• Costs calculated as billed charges or retail

price

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The Life Care Planning Process

• Review records

– Medical – Depositions – Educational – Tax/ Social Security – Employment Records

• Conduct clinical personal interview
• Consult with treating and consulting professionals

– Physicians – Therapists – Counselors – Vocational Consultants

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The Life Care Planning Process (Continued)

• Prepare written history and assessment of

injured person

• Determine future care needs and alternatives

– Literature search – Telephone research – Consider home-based and institutional alternatives if applicable – Decide description, quantity, frequency and duration

• f elements

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Categories of Goods and Services in an LCP

• Evaluations
• Medical care
• Therapy
• Diagnostic testing
• Mobility equipment
• Orthotics/Prosthetics
• Aids for independent

living

• Home modifications
• Personal care aides
• Home furnishing

modifications

• Durable medical

equipment

• Medications
• Institutional care
• Supplies
• Transportation
• Potential Complications

46

Evaluations

• Medical/ Physicians

– Primary Care Physician (PCP) – Vision – Orthopaedist – PMR – Plastic Surgeon – Urologist

• Non Medical

– Physical Therapy (PT) – Occupational Therapy (OT) – Speech Therapy (ST) – Nutrition – Recreation – Vocational – Adaptive Equipment – Psychological

47

Therapeutic Modalities

• Physical Therapy
• Occupational Therapy
• Speech Therapy
• Individual Counseling
• Couple’s/ Family Counseling
• Adaptive Driving Training

48

Diagnostic Testing

• Neuropsychological tests
• Laboratory tests
• Vocational tests
• Imaging studies
• Functional capacity tests
• IDEA for Children

49

Mobility Aids

• Equipment

– Power Wheelchair – Manual Wheelchair – Scooter

• Accessories

– Roho Cushion – Batteries – Gloves – Backpack

• Maintenance

50

Orthotics/Prosthetics

• Bilateral Upper Extremity Splints
• Ankle Foot Orthotic (AFO)
• Bilateral Resting Wrist Splints
• Bilateral Resting Ankle Splints
• Prosthetic Leg
• Prosthetic Swimming Leg

51

Aids for Independent Living

• Wide based quad

cane

• Long handled

shoehorn

• Button aid
• Zipper aid
• Reacher
• Adaptive clothing
• Hospital bed
• Air mattress
• Shower wheelchair
• Elevated toilet seat
• Environmental

control unit (ECU)

• Adaptive computer

equipment

52

Home and Furnishing Modifications

• Wheelchair ramp
• Widened doors
• Lower counters
• Environmental controls
• Remodel for accessible bathroom
• Portable ramp
• Hoyer lift
• Elevated toilet

53

Medications

• Prescription

– Generic vs. Brand – Pain – Sleep – Depression – Stimulant – Blood Thinner – Blood Pressure

• Over the Counter

– Pain – Bowel Program – Vitamin and Mineral Replacement – Lotion – Artificial Tears

54

Home versus Institutional Care

• How much care is needed?
• What type of care is needed?
• Is care feasible in home?
• What type of facility serves the needs best?
• Home Care

– Agency – Private Hire

55

Supplies

• Bandages
• Bandage scissors
• Lotion
• Adult diapers
• Catheters
• Gloves
• Nebulizer
• Tracheostomy collar
• Hearing aid batteries
• Prism glasses
• Antibacterial gel
• Blood pressure cuff

56

Transportation

• Vehicle modifications

– Wheelchair lift – One handed steering wheel – Left foot gas/brake pedal

• Taxi
• Mileage for appointments

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Future Medical Care

• Costs for known medically necessary procedures

– Joint Replacement – Skin Grafts – Plastic Surgery – Intrathecal Baclofen Pump – Intrathecal Morphine Pump – Botox Injections

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Potential Complications

Costs that may be needed in the future, but there is no reasonable medical certainty at this time that they will be needed

• Decubitis Ulcers
• Respiratory Infections
• Urinary Tract Infections
• Arthritis
• Heterotropic Ossification
• Seizures
• Depression
• Chronic Pain

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59 Current Cost Charts (Fig. 3.1 – 3.2)

• Beginning age of person - age as of report date
• Ending age of person - duration of a service or

life expectancy

• For each plan element - average unit cost,

annual cost, and lifetime cost

• Pricing research

– CPT codes – Medical Fees in the United States and other data files – Billing records – Telephone calls – Internet research – Medicare website

• Summary of categories

60

Future Cost and Present Value of Future Medical Expenses

See RPC Sample Plaintiff Life Care Plan Report References to Figures are to Attachment 4 of that report

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Inflation Rates for Medical Expenses (Fig. 4.1 - 4.2)

• Future costs depends on the category of good or

service and the year the cost occurs.

• Overall inflation rate for medical expenses is

higher than CPI, but Inflation rates for medical goods and services cover a wide range.

• BLS currently compiles price inflation series on 19

different medical goods and services.

• Also different rates for non-medical elements in

LCPs (vehicles, construction, household services)

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BLS Inflation Series used in Life Care Plans

• Physicians’ Services
• Services by Other Medical Professionals
• Medical Care Services
• Prescription Drugs
• Medical Equipment & Supplies
• Inpatient Hospital
• Outpatient Hospital
• Care of Invalids and Elderly at Home

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Project Inflation Rates by Category (Fig. 4.3)

• 1. For years BLS publishes category, compute

compound annual rate.

• 2. For same years, calculate CPI compound annual

growth rate

• 3. Calculate category rate as percentage of CPI rate
• 4. Obtain CPI inflation forecast from SSA
• 5. Apply percentage from 3 to forecast rate
• 6. Calculate inflation factor for current category prices

for each future year in LCP.

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Calculate Future Cost of LCP (Fig. 4.4)

• 1. Prepare a grid assigning all costs to a

category and year.

• 2. For each cell in the grid, apply the correct

inflation factor to calculate future cost for the cell

• 3. Sum future cost of cells for each year to

calculate future cost for year

• 4. Sum future cost for all years for total future

cost of LCP

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Calculate Present Value of LCP (Figs. 4.5-4.7)

• 1. Use same discount factors used to calculate

present value of lost earning capacity. (Fig. 4.5 - 4.6)

• 2. Apply discount factor for each year to future

cost of LCP for that year to calculate discounted value of that year

• 3. Sum years of plan to calculate present value
• f future medical expenses. (Fig. 4.7)

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Damages and the Real Price

• f Health Care
• Most published price information for health facilities and

practitioners is gross charges, not the amounts accepted as payment in full.

• Gross charges are 3x – 6x the real price, depending on the

third party payor.

• Texas allows only evidence on actual price for past medical
• expenses. Law on price of future expenses not settled.
• Certainty of specific insurance coverage can be high

(Medicare) or low (private policy)

• Collateral source rule may affect ability to discuss why

charges and price are different.

• Defense may want repriced LCP to present with motion for

reduction of verdict .

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Ronald T. Luke Kacy L. Turner 512-371-8000 rluke@rpcconsulting.com kturner@rpcconsulting.com