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Medical Malpractice Hedge Funds

I was forwarded a Forbes Magazine article from an outraged physician.

The article explains how hedge funds in some states are financing medical malpractice lawsuits in exchange for a percentage of any judgment. The firm reviews the case, and, if it believes the case has merit, will provide money to finance litigation and expenses to the plaintiffs and their attorneys. One firm offers to advance up to $1 million in expenses in order to fund a case. If the plaintiff doesn’t win or settle the case, he or she owes the finance company nothing.

The Forbes article notes that when a similar system was initiated in Australia, the volume of litigation rose by 16.5%. Third party financing of plaintiff lawsuits reportedly totaled $1 billion in 2010. The article also asserts that such a system will increase defensive medicine and decrease the availability of physicians.

After reading the article, I had mixed emotions.

On its face, the concept of financing of plaintiff lawsuits seems distasteful. Giving unscrupulous attorneys a means to pursue frivolous lawsuits seems morally wrong. However, imagine that you were running such a hedge fund. Would you be willing to “invest” $100,000 into a lawsuit that didn’t have a very good chance of winning? I don’t have any information regarding the types of cases financed, but logically I can’t see these types of investments being used to advance frivolous litigation.

The article argues that there should be no third party financing of “frivolous lawsuits.” Isn’t malpractice insurance just a form of third party financing for defendants? If medical malpractice defendants have tremendous monetary resources from insurance companies in defending a case, how is providing the same resources to malpractice plaintiffs any different?

I do see a downside to such financing in “class action” lawsuits which often provide only marginal benefits to the members of the class while providing significant monetary benefits to the plaintiff attorneys. Otherwise, I’m not sure that I’m as offended by the idea as other people seem to be.

Malpractice cases should be decided on the merits of the case, not on whether one side has enough money to pursue the case.

What do you think? Is investor financing of plaintiff lawsuits a bad idea?

11 Responses to “Medical Malpractice Hedge Funds”

  1. Anonymous says:

    “Malpractice cases should be decided on the merits of the case, not on whether one side has enough money to pursue the case.”

    Well look at politics…stats have shown that typically whoever spends the most wins election. So I’m going to say that while there’s nothing legally wrong with malpractice suit bank-rolling, it probably isn’t going to end well.

  2. Derrick says:

    It isn’t the $100,000 case that will be making money for these guys… it is the 10,000 cases that will cost a few grand each to get quick 10K-50K settlements where the money will be made I predict. The rate of plaintiffs losing cases that actually get litigated would make the expensive cases a poor investment. If this does happen, we have to find a way to fight and not settle cases as quickly.

  3. Melissa says:

    It’s not much different than a sole practitioner lawyer who finds a case he thinks has merit and refers it to a friend in a bigger law firm that has the money to take the case on. The referring attorney gets a cut of the payment.

    • Aaron says:

      It is a world of difference. A referral to a more favorably situated attorney for a case at least involves some modicum of professional judgement. Hedge funds betting on trial outcomes is them betting like I do when I go to the boat while the lawyer looses the risk inherent in taking the case on contingency. If you take out the risk inherent in getting paid contingent on winning by having Mr. Gamblers at the hedge funds bankrolling cases, there isn’t much disincentive for a lawyer to refuse weaker cases anymore.

  4. [...] “Have you got a piece of this lawsuit?” Important Roger Parloff piece on litigation finance [Fortune, now out from paywall] “Hedge Funds Finance Medical Malpractice Claims” [Jeff Segal, Michael Sacopulos and Wayne Oliver, Forbes via White Coat] [...]

  5. joebob says:

    I don’t understand how investing a million dollars to win back a fraction of a doc’s policy limits makes financial sense. Or are they going for those mega-judgements? You know, the ones where a jury of a doc’s peers deems he caused pain & suffering valued at 10 times all the money he will ever make in his entire life? How often are amounts like that actually collected?

  6. Matt says:

    I worry about the way that such financing changes the plaintiffs’ incentives. If a plaintiff owes a million dollars in litigation financing, he has no reason to accept any settlement less than a million dollars. I can see this vastly increasing the number of weak claims brought to juries.

    As an added bonus, hedge fund managers will join the ranks of those opposed to tort reform.

    • Aaron says:

      I worry more about the Hedge fund that would split a million dollars in financing among a thousand suits, investing on contingency like a lawyer would. That incentive mean a lawyer with nothing better to do might as well file.

  7. I think these are great. One should always sue the financier with much more assets than the lawyer predator. Legislation must be passed to end all lawyer self-dealt immunities, including those of the buffoon on the bench and of the juries.

    Always do total e-discovery on the other side, of the plaintiff, the lawyer, the experts, the judge. These are the enemies of clinical care and their personal destruction should always be a duty of the innocent doctor. Now add huge hedge funds.

    An opportunity for doctors to plunder these hedge fund enemies of clinical care.

  8. Pam says:

    In my job, I evaluate injured workers to determine their safe capacity for work. Many of these people’s lives were changed in an instant; once productive members of society, they are now permanently disabled. For those without a spouse or family to support them, especially those who performed manual labor jobs, without the ability to work, they have no income. They can’t afford COBRA or any other type of insurance, and it can take months or years, to get Social Security Disability payments and Medicaid, if they are approved at all.

    Say what you will about lawyers, but I see the ones who agree to pay for their clients’ medical care as angels. Without them, these people would have virtually no access to healthcare. I can’t imagine an attorney would agree to pay these high medical fees unless they feel the client has a very strong case.

    Of course I do not believe this is the answer to our healthcare problems, but that is an entirely different rant. When you see a grown man crying about how he lost his job, had to foreclose on his home, and resorted to sleeping in his car, all while struggling with debilitating pain, you cannot help but be thankful that at least someone has the means and the willingness to foot the bill for expensive medical care.

  9. Pam says:

    @Joejob-
    These amounts are predicted by economists or life care planners.

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