Changing times: Government publishes response to discount rate consultation12/09/17
Last week, on the same day that the National Audit Office (NAO) produced its report on managing the cost of clinical negligence in NHS Trusts, the government published its long-awaited response to the consultation on how the discount rate should be set in future following the reduction to minus 0.75% in February this year. A new more regular review mechanism is proposed and significantly the consultation states that if the new rate were to be set today it would be between 0 and 1%.
While any change may not be made for another nine months depending on the parliamentary timetable, an increase as suggested will result in significant savings on compensation payments made by insurers, medical defence organisations and the NHS.
- In future the discount rate used in the formulae to calculate future losses will be based on investment in a low risk diversified portfolio as opposed to very low risk investments. Independent research, which the government commissioned as part of the consultation, indicated that claimants tend to assume more investment risk than the law currently assumes.
- The discount rate will be reviewed every three years by a panel of experts, chaired by the Government Actuary and including an investment manager, economist and an expert with experience of consumer investment affairs. HM Treasury must be consulted on any proposed change to the rate.
- A rate set today based on low risk investments might be in the region of 0 to 1%. It will still be possible to set different rates for different types of cases, including by reference to the length of the award.
- No change is proposed to the law on periodical payments orders.
- The Lord Chancellor and Justice Secretary indicated that ministers are keen to engage on this issue. Draft legislation has been published for comment and will be put before parliament as soon as parliamentary time permits. Once enacted, it will be brought into force in the usual way on a date to be specified. There appears to be no deadline for receipt of comments.
- The new framework will only apply if the proposed law is enacted and it will not have retrospective application.
- The Lord Chancellor, assisted by the Government Actuary, will then initiate a review of the rate within 90 days, to be completed in 180 days. A new rate will be set if a change is considered to be appropriate by the Lord Chancellor.
Impact for compensators
While it remains to be seen exactly what the discount rate will be, compared to the existing discount rate of minus 0.75% the multiplier used to calculate future lifetime losses for a 20 year old male drops from 88.96 to 67.22 (0%) or 48.35(1%). With a multiplicand of say £200,000 per annum in a catastrophic injury scenario, this results in a potential award of £17,792,000 under the present minus 0.75% rate falling to £13,444,000 (0%) or £9,670,000 (1%); a potential saving of over £8m.
The NAO report indicated that with 10,600 new clinical negligence claims registered with NHS Resolution in 2016-17 compared with 5,300 in 2006-07 , the figure of £1.6bn spent by NHS Resolution on CNST claims in 2016-17 is expected to double by 2021. The report concludes with a recommendation for a cross-government strategy to manage the cost of clinical negligence for the NHS, identifying the balance to be struck between providing access to justice and access to health services. Savings will inevitably be made through any future discount rate increase to zero or 1% but ultimately the focus, in the NHS at least, should remain on learning from errors and prevention strategies so as to reduce both the financial and human cost of medical mistakes.
Practical steps to consider
- As and when a rate change is announced compensators will need to re- reserve on some claims.
- Careful consideration should be given on open claims where early offers have been made on the basis of the minus 0.75% rate or an alternative low rate. In cases not scheduled for trial for another nine to twelve months it may result in overpayment.
- Arguments around accommodation claims and the formulae for calculating these remain ongoing and the courts will consider this further in the months ahead.
- Regular rate changes may introduce more uncertainty in the future and ultimately periodical payments are still likely to be a better and more cost-effective payment vehicle for compensators than lump sum payments.
How Capsticks can help
Capsticks is one of the leading healthcare litigation firms in the country with teams in London and Leeds acting for NHS Resolution, the MDDUS and a number of Lloyds insurance underwriters. We can support organisations and individuals in the defence of medical malpractice claims as well as advise on associated proceedings.