Playing the Odds: Financing Medical Malpractice Claims

Investors are always looking to earn an easy profit, particularly from well-managed companies. But when the profit is from a hedge fund that finances medical malpractice lawsuits aimed at driving doctors out of the profession, Wall Street may have gone too far.

An entirely new industry has cropped in recent years as trial lawyers set their sights on making money off physicians, corporations and other targets – particularly financing malpractice suits through hedge funds. In 2010, hedge funds invested $1 billion in these types of suits and much of it was for medical malpractice cases.

Frivolous lawsuits are helping drive physicians out of the profession and pushing up the cost of healthcare.  A survey conducted by Gallup which was sponsored by Atlanta-based Jackson Healthcare which was released last year found that one in every four dollars spent in healthcare is for defensive medicine.  Defensive medicine is defined as those unnecessary tests, procedures, drugs and admissions that doctors order exclusively to prevent bogus lawsuits.  Defensive medicine adds no diagnostic or clinical benefit … only billions of dollars in wasteful spending.

As 32 million new patients acquire health insurance under Obamacare and the number of the number of Medicare recipients doubles over the next decade, the physician shortage will be worse than ever. Hedge funds that target doctors will not only make healthcare more expensive but make a doctor very hard to find.

On the flip side, the rewards can be remarkable for investors, which is why dollars are flowing into these hedge funds. Payouts can result in tens of millions of dollars.

What many investors don’t realize is that the vast majority of medical malpractice claims end in the physician’s favor. It’s the nuisance and cost of these lawsuits, however, that are driving doctors to retire early or give up their practice. 

LawCash.net, a typical firm engaged in this type of speculation, is a prime example of the new hedge fund business targeting physicians. It advertises: “Will advance up to 80 percent of case cost expenses at flexible, personalized, and negotiable rates… Minimum of $10,000 and maximum of $1,000,000 advance for case cost funding.”

This kind of litigation financing is prohibited in several states. But Australia pioneered third-party financing of civil litigation in the 1990s. One study estimates that the volume of litigation in Australia rose 16.5 percent as a result of this practice alone.  Recently, the Standing Committee of Attorneys-General there recommended a regulatory structure for law firms engaged in financing litigation. There seems to be a consensus that controls need to be put in place because of the effects of more litigation on Australian society.

This spring, investment bankers held a seminar in New York to teach those with capital how to create such investment hedge funds. The summit claimed to be the first U.S. conference to tackle third-party funding of commercial litigation, bringing together the major players who are developing such a finance community.  One of the summit’s sponsors claimed to have in excess of $300 million in capital while another sponsor boasted a track record of funding more than 12,000 cases in the United States and Great Britain.

The rational response to this increased litigation will be an increase in the practice of defensive medicine, which means each of us will endure more tests and procedures, more unnecessary exposure to radiation and more out-of-pocket expense than are unnecessary. Ultimately, this type of speculative financing of possible medical malpractice claims will drive up the cost of healthcare even more. Patients will also likely spend less time with their doctor. When that type of risk becomes the norm, no one wins.

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