How the present value of future cost of care is calculated

The present value of future cost of care is what the plaintiff's future care needs are worth in today's dollars. You start from a life-care plan, take each item's cost and how often and how long it recurs, bring that stream to present value using the file's discount rate, weight it for the chance the plaintiff is alive to need it, and add every item together. The total is the present value of future care.

This article explains each step in plain language. It is background on the method, not legal or actuarial advice for a specific file.

The life-care plan is the input

Future cost of care rests on a life-care plan: a professional estimate, usually by an occupational therapist or physician, of the care a plaintiff will need because of the injury. It lists items one by one, such as therapy, medication, attendant care, equipment, and home modifications. Each item carries a cost and a schedule. The calculation does not invent care needs; it values the plan that the evidence supports.

Each item has a schedule

An item's schedule is what turns a cost into a stream over time. Three common shapes:

• Recurring costs happen every year (or several times a year) for as long as the need lasts, often for life.
• One-time costs happen once, in a given year.
• Fixed-term costs recur for a set number of years, then stop (for example, equipment replaced on a cycle, or care needed only until a certain age).

Two items with the same annual cost can have very different present values if their schedules differ, so the schedule matters as much as the dollar figure.

Bringing each item to present value

Every future amount is worth less than the same amount today, so each item's stream is discounted to a present value using the file's discount rate. A cost far in the future is discounted more than a near-term one. Each item is valued over its own horizon, then all the item values are summed into a single figure.

If you want the mechanics of discounting itself, see How present-value damages are calculated in Canada and, for the prescribed rate, Ontario Rule 53.09 and the prescribed discount rate for future damages.

Weighting for survival

Care is only needed while the plaintiff is alive, so each future year of a recurring item is weighted by the probability of surviving to that year. Those probabilities come from published actuarial mortality tables (for example, Statistics Canada life tables). Where the medical evidence supports a reduced life expectancy, that lowers the present value of long-dated, lifelong items the most.

Sales tax

Many care goods and services are taxable, so where it applies the calculation can add the relevant sales tax (for example, HST in Ontario) to an item before discounting. Whether tax applies is an item-by-item choice, because some care is tax-exempt.

What the total does and does not include

The result is the present value of future care only. It is kept separate from loss of income, which values lost earnings, so the two are not double-counted. Some heads of damages, such as management fees or a tax gross-up on the invested award, are handled outside this figure and depend on the file.

A calculation, not an opinion

DamageIQ is a calculator. It applies the schedule, discounting, and survival weighting to the life-care-plan items and assumptions you enter, and shows a transparent figure with every input traceable. It is not an expert opinion, and it never claims to be; the life-care plan and the assumptions are yours to set and to verify. A signed report is produced by a retained expert, not by a calculator; the same applies where the care plan or assumptions are in dispute.

Try it

The free PV Multiplier calculator generates the life-contingent present-value factors that future-care valuation rests on, for any age, gender, jurisdiction, and discount rate. The full DamageIQ platform builds a complete future-cost-of-care file from a life-care plan, item by item.

By Mike Austin, FCIA, FSA. Fellow of the Canadian Institute of Actuaries and the Society of Actuaries.