How a chop in the discount rate will cost the NHS £1bn*

The discount rate used to calculate clinical negligence claims has been chopped from 2.5% to -0.75%. A huge change that will cost the NHS c.£1bn extra each year.

When a hospital trust is negligent, a payment is made – often as a lump sum to the patient. This might be because a patient contracted MRSA in hospital due to poor hygiene on a ward or fell over and broke their arm.

These payments are usually made by the NHS Litigation Authority (NHSLA) who operates a risk pooling scheme. Under this, hospitals pay an annual contribution in return for NHSLA settling all clinical negligence claims.

A district general hospital may make payments in the region of £4m, which is about 2% of their total annual turnover for the cover provided. Large hospital pay a lot more – e.g. Barts had a premium of £34m in 2015.16.

Now the cost of the claims covered by this insurance will go up significantly. Consider the following example – a simplified example for someone that is awarded 10 payments of £50,000.

Yesterday the discount rate of 2.5% would have meant a lump sum payment of £437,603.

Today, the same person would have been awarded a lump sum of £521,259. An increase of £83,656 or 20%.

The Huffpost estimates the total impact could be in the region of an extra £1bn per year as a result of the change. For a sector in financial turmoil, this is a huge amount to pay. Many will argue a the huge sum of money could be better spent on providing better care to avoid the risk of claims happening in the first place – more nurses!

As the rate affects many private insurance companies as well, they have seen their share prices plummet.

This is happening because the discount rate (known as the Ogden rate) has changed – a lot.

The discount rate is the rate of return expected from an investment of a lump sum award of personal injury damages. A higher discount rate means that the individual is expected to be able to invest their lump sum award to help pay for their future costs. But interest rates have been low for some time and investments that yield 2.5% return are considered risky.

So the rate has been cut from 2.5% to -0.75%. A bigger change than many in the industry were expecting. Good for people that suffer a personal injury. But costly for those that receive claims.

Many people in the insurance industry are questioning whether the huge rate change was justified.

For people that have suffered as a result of negligence, the change will be welcomed. For an NHS that is struggling with existing financial pressures, the increase will have serious financial consequences.

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