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 those payments 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.

What follows 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: an estimate of the care a plaintiff will need because of the injury, prepared by a qualified professional such as an occupational therapist. It lists items one by one, such as therapy, medication, attendant care, equipment, and home modifications, each with a cost and a schedule.

Each item has a schedule

An item's schedule is what turns a cost into a stream: a series of payments over time. A one-time cost is the exception, being a single payment on a single date.

Recurring costs happen every year, for as long as the need lasts, often for life. Periodic costs recur on a cycle of several years, as with equipment replaced every few years, and can also run for life. One-time costs happen once, in a given year. A plan can also carry a reserve: a lump sum spread across the years it covers. Any of these can be given an end, whether a fixed number of years or a set age.

Two items with the same annual cost can have very different present values if their schedules differ.

Bringing each item to present value

Each item's stream is brought to present value at the file's discount rate. Where that rate is positive, a future amount is worth less than the same amount today, and a cost far in the future is discounted more than a near-term one. Each item is valued over its own horizon, then the item values are summed into a single figure.

For 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 it. Those probabilities come from published mortality tables, such as the Statistics Canada life tables. Where the medical evidence supports a reduced life expectancy, the items it affects most are the long-dated, lifelong ones.

In this calculation, survival is the only contingency applied to a care item. The disability and termination contingencies that reduce a loss-of-income claim describe the chance a wage would not have been earned, which is a different question from whether care would be needed. Where a care need has a limit of its own, it is set on the item's schedule, as an end age or a fixed term, rather than applied as a decrement across the stream.

Sales tax

Some care goods and services carry sales tax and others are exempt or zero-rated, so whether tax applies is decided item by item. Where it does apply, the relevant sales tax, HST in Ontario for example, is added to the item before discounting.

What the total does and does not include

The result is the present value of future care only. It is calculated separately from loss of income, which values lost earnings. Some heads of damages, such as management fees on the invested award, sit 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 every input is traceable in the figure it returns. It is not an expert opinion. The life-care plan and the assumptions are yours to set and to verify. A signed report comes from a retained expert, and so does the work of defending a care plan or assumptions that are in dispute.

Try it

The free PV Multiplier calculator generates the actuarial present-value factors future-care valuation rests on, for any age, gender, supported 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.