Michael J. Sacopulos, JD
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, much of it for medical malpractice cases.
Frivolous lawsuits are helping drive physicians out of the profession and pushing up the cost of health care. A Gallup-Jackson health care survey released last year found that $1 in every $4 spent in health care is for unnecessary tests and procedures that doctors order to prevent from being sued.
As 32 million new patients acquire health insurance under ObamaCare and 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 health care more expensive, but they will 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. But speculators don’t care. They see it as playing the odds, just as if they were in Las Vegas. They spread their bets across many cases and invest on a big payout since some cases result in huge jury awards and a big return on their investment.
LawCash.net, a typical firm engaged in this type of speculation, is a prime example. It advertises: “Will advance up to 80% 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. It is considered unethical by certain state bars. But in 2007, Maine enacted legislation permitting financing of such litigation and a handful of other states have followed thanks to the trial lawyer lobby.
Australia pioneered third-party financing of civil litigation in the 1990s. One study estimates that the volume of litigation in Australia rose 16.5% 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.
According to the publication AANS Neurosurgeon, a 2009 survey showed that the average defense for a neurosurgeon’s malpractice suit was $86,882–but that defense grew to $182,734 if a case went to trial.
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 than are necessary and will likely drive up the cost of health care even more. Patients will also likely spend less time with their doctor.
Unfortunately, the new health reform law does nothing to protect physicians and patients from this new phenomenon. The only chance we have may be if the new health care law is overturned by the U.S. Supreme Court. Then, when there is an opportunity to repeal and replace it, Congress should enact civil justice reform and make it illegal to finance frivolous lawsuits through third-party funds.
