Cases involving personal injury and product liability increasingly feature the use of third-party litigation financing, wherein a medical funding or medical financing company (referred to interchangeably hereafter as “MFCs”) has undertaken responsibility to pay providers for services rendered (i.e., post-incident but not including alleged future care). Although the specific structure and form of MFC arrangements vary, in general these arrangements involve a third-party entity assuming responsibility for payment of medical services.[1] These arrangements are most often observed in personal injury cases where the MFC receives a percentage of the damages amount resulting from a settlement (or post-trial verdict) or a compounding interest payment on amounts owed. MFCs have also been observed in mass tort product liability cases.[2] Nominally, proponents submit that these arrangements improve access to care for those with injuries, care that they allegedly may not have otherwise been able to obtain in the absence of third-party funding. There has been considerable growth in the MFC industry, with reports of approximately 30% growth in the number of requests from 2017 to 2021.[3] Though these arrangements have generally been considered legal, several serious concerns have been raised by observers and experts, and such concerns have led to numerous calls to further regulate MFCs, which currently operate with virtually no oversight.[4] Specifically, there are four serious concerns with MFCs, each of which is discussed below.
First, the use of MFCs is largely an attempt on the part of plaintiffs to circumvent the reasonable value of medical expenses. Courts generally allow for damages equal to the “reasonable value,” “fair market value,” or “relative market value” of medical expenses to be recovered by plaintiffs in personal injury and product liability cases. In many cases, MFCs are used to obfuscate the reasonable value of incurred expenses and to otherwise circumvent courts’ rules regarding reasonable value, and in some cases result in financed amounts that far exceed providers’ UCR charges.[5] In cases where MFCs have been engaged, medical losses should continue to be based on the reasonable value of services rendered, regardless of the specifics of the MFC arrangement. In fact, MFCs are often the source of claims for inflated future medical expenses because past medical expenses are themselves inflated.
Second, the nominal justification for MFCs that they help improve access to care for injured individuals, is completely baseless and without merit. Due to the Affordable Care Act (“ACA”), rates of insurance in the U.S. general population have risen to 90%, and 91% among working individuals.[6] At the same time, the prevalence of serious injury in the U.S. population has declined significantly over the past decade, by as much as 20%.[7] The combination of increasing insurance coverage and decreasing injury incidence suggests that any “gaps in access” to health care by injured individuals would have narrowed substantially over the years, the same period over which MFCs increased in number and caseload. This strongly suggests that MFCs are not merely responding to some sort of problem in access to treatment; if they were, their caseloads would be declining not increasing. Indeed, observers have argued that the motivation for MFCs is, instead, strictly the ability to earn windfall profits from plaintiffs and defendants in personal injury litigation,[8] so much so that hedge funds seeking high returns on investment have become increasingly involved in litigation funding.[9] In addition, there is no evidence that MFCs provide financing of treatment that is not part of litigation, which again further undermines the credibility of their alleged mission to increase access to care.
Third, related to the previous concern, plaintiff attorneys and MFCs argue that the service is the only means through which injured persons can obtain treatment. This is simply not true. The typical MFC contract requires individuals (and their providers) not to submit claims to any third-party payers. Even in the absence of coverage, it is widely known that individuals can negotiate with health care providers.[10] Most providers will accept as payment in full amounts equal to or even lower than fair market or reasonable value and are likely to accept, as payment in full, amounts as low as their marginal costs (i.e., the lowest amount at which they can “cover” their costs).
Fourth, most MFCs empanel physicians (e.g., pain specialists and orthopedic surgeons) who agree to provide services initially at a discount in exchange for larger payments post-settlement or verdict, in some cases involving liens or letters of protection (“LOP”). Such arrangements provide powerful financial incentives for physicians to overtreat and turn away non-litigation patients in favor of litigation patients.[11] Consider the following hypothetical example. An orthopedic surgeon might normally charge $100,000 for spinal surgery and might normally accept $20,000 as payment in full for that surgery (i.e., the fair market RV of the service is $20,000). In a personal injury case with an MFC, the MFC might offer to pay $150,000 for the same service, initially paying the surgeon his regular $100,000 full charge (which he rarely, if ever, receives as payment in full in a normal transaction not involving an MFC), and then another $50,000 later in the event of a settlement or verdict in favor of the plaintiff.[12] This enables the plaintiff to argue that she has already paid the full amount (via the MFC). The result is a net windfall gain to the surgeon of $130,000 more than what he would normally accept as payment in full. In other words, he will receive more than six times more than what he normally receives for the same procedure. There is ample evidence that physicians, when faced with these types of financial incentives, are more likely to perform services that they would not otherwise perform, which in turn leads to higher rates of medically inappropriate or unnecessary treatment.[13] Indeed, there is evidence that litigation funding and MFCs result in higher rates of unnecessary treatment.
(By John E. Schneider, PhD & Cara M. Scheibling, MBA) (2023)
1) See generally GAO, “Third-Party Litigation Financing: Market Characteristics, Data, and Trends,” in Report to Congressional Requesters (Washington, D.C.: U.S Government Accountability Office, 2022).
2) See, for example, M. Goldstein and J. Silver-Greenberg, “Hedge Funds Look to Profit From Personal-Injury Suits,” New York Times June 25 (2018).
3) GAO, “Third-Party Litigation Financing: Market Characteristics, Data, and Trends.”
4) See generally ibid.; D.I. Spector and C.F. Saladrigas, “Greater Transparency Can Expose the Illusion of Medical Receivable Funding in Tort Litigation,” in Legal Backgrounders (Washington, D.C.: Washington Legal Foundation, 2020).
4) See generally S. Randazzo, “Who Wins in a Personal-Injury Lawsuit? It Can Be the Doctor,” Wall Street Journal Jan. 8 (2020).
5) Tolbert, P. Drake, and A. Damico, “Key Facts about the Uninsured Population,” (Kaiser Family Foundation, 2022).
6) See, for example, E. W. Lundstrom et al., “Temporal trends in occupational injuries treated in US emergency departments, 2012-2019,” Inj Epidemiol 10, no. 1 (2023). In trend analysis, the study found that “total injury rates decreased significantly throughout the 2012-2019 study period (- 18.5%). Significant decreases were also detected for injuries associated with contact with foreign object and equipment (- 26.9%), transportation incidents (- 23.2%), and falls, slips, and trips (- 18.1%).
7) See generally Spector and Saladrigas, “Greater Transparency Can Expose the Illusion of Medical Receivable Funding in Tort Litigation.”
8) See generally Goldstein and Silver-Greenberg, “Hedge Funds Look to Profit From Personal-Injury Suits.”
9) See generally M. Evans and A.W. Mathews, “How to Negotiate Your Medical Bills and Debt With Your Hospital,” Wall Street Journal Nov. 9 (2021); M. Fox, “Yes, you can negotiate your medical bills. Here’s how to lower your costs,” (CNBC, 2020); G. Williams and J. Ortiz, “How to Negotiate Your Medical Bills,” U.S. News & World Report Jan. 9 (2023).
10) See generally Randazzo, “Who Wins in a Personal-Injury Lawsuit? It Can Be the Doctor.”
11) Or, alternatively, providers are paid very high rates of interest (compounded) on unpaid bills.
12) See generally J. Clemens and J.D. Gottlieb, “Do Physicians’ Financial Incentives Affect Medical Treatment and Patient Health?,” American Economic Review 104, no. 4 (2014); A.J. Epstein and S.J. Johnson, “Physician response to financial incentives when choosing drugs to treat breast cancer,” International Journal of Health Care Finance and Economics 12, no. 4 (2012).
13) For example, refer to U.S. Attorney’s Office, “New York Doctor Who Performed Unnecessary Back Surgeries Pleads Guilty To Participating In Trip-And-Fall Fraud Scheme,” in Press Release (New York, NY: U.S. Attorney’s Office, Southern District of New York, 2022).