Present value analysis reduces a projected stream of future damages to a single lump sum equivalent in today's dollars, accounting for the time value of money and expected growth of the underlying cash flows.
When it is used
Present value analysis is used to express the future medical and non-medical care in a life care plan or medical cost projection as a single lump sum for trial or settlement purposes. The life care planner produces the year-by-year cost stream; the economist discounts it.
Select a discount rate (often Treasury-based) matched to the horizon
Apply expected growth rates or a net discount rate to the projection
Compute the present value by discounting each period back to the valuation date
Document all assumptions so alternative calculations can be performed
Data sources
U.S. Treasury yield curves
BLS Consumer Price Index, Medical Care component, for healthcare cost growth
The life care plan's itemized cost schedule and stated horizon
Limitations
Results are sensitive to the discount rate, the medical cost growth rate, and the plan horizon. Sensitivity analysis is a standard practice. The planner and the economist should use the same horizon and the same item schedule so the two reports reconcile line by line.
Admissibility
Present value methodology is well accepted for future care damages (Jones & Laughlin Steel Corp. v. Pfeifer, 1983). Disputes are typically over input choices rather than methodology. KW Life Care Planning does not perform the discounting; the plan is handed to a forensic economist for that step.
Frequently Asked Questions
What is a net discount rate?
The net discount rate is the difference between the discount rate and the growth rate, often applied in a single step to simplify present value computation when the two rates move together.
How does jurisdiction affect discount rate selection?
Some jurisdictions specify a discount rate by statute or case law (e.g., Pennsylvania's 'total offset' approach; Kaczkowski v. Bolubasz, 491 Pa. 561 (1980)). Jurisdictional rules should be identified early.
References
Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983). supreme.justia.com
U.S. Bureau of Labor Statistics. (n.d.). Consumer Price Index: Medical care [Fact sheet]. U.S. Department of Labor. bls.gov
U.S. Department of the Treasury. (n.d.). Daily Treasury par yield curve rates. home.treasury.gov
Discuss how this applies to your case
KW Life Care Planning provides independent, objective life care planning analysis for plaintiff and defense counsel nationwide. Tell us about the matter and we will scope the appropriate deliverable, or explore the relevant practice area below.