With the objective of reducing the overall costs associated with paying a damage award, many States have enacted legislation that allows a defendant to pay out the future damage award in installments rather than paying the full sum at once. Approximately 35 States have enacted legislation permitting or requiring periodic payment of future damages. (See Medical Malpractice Law and Strategy, May 1991.) This legislation has been a response to the "Medical Malpractice Insurance Crisis" since it is thought that periodic payment of damages will reduce the cost of medical malpractice insurance. Additionally, this legislation is thought to benefit the injured plaintiff since it has been noted that most injured plaintiffs are unable to manage and invest large lump-sum recoveries wisely. Several commentators have noted that over the past 30 years "lump-sum awards are often dissipated by improvident expenditures or investments before the injured person actually incurs the future medical expenses or earning losses." (American Bank and Trust, 36 Cal. 3d at 366.)

While it seems clear that periodic payments of damages over an appropriate number of years consistent with the injured plaintiffs needs will effectively benefit most plaintiffs and assure that compensation will be provided which will meet the needs of the injured plaintiff over time, it is not so clear that the primary objective, that of reducing defendants' costs, are met by the various statutes enacted by the States. These laws paradoxically may increase costs to defendants.

Structured judgments are different from structured settlements. Structured judgments do not have all of the benefits of structured settlements, yet it is because of the success of structured settlements, which has provided a monetary benefit to defendants and to plaintiffs. that the new statutes requiring or permitting structuring of judgments were legislated. In legislating periodic payments of future damages, some of the benefits inherent in structured settlements may have been legislated away.

The objectives of this new statutory reform is clear. Just how these statutes operate is not clear. Confusion has been characteristic of these statutes. Importantly. because of the confusion. it is not always clear that the method of structuring these judgments, which both the legislature and the courts have struggled with, actually accomplish the clearly stated objective of reducing costs to the defendant. In some instances the cost to the defendant may actually be increased! Each State has the task of resolving the confusion surrounding this statutory reform. It is also important that the defense bar in each State, determine and resolve that the statutes are being implemented in a fashion that are consistent with the objective of reducing defense costs. Such assurances are not always easy given the confusion generated by these statutes.

It appears that both the attorneys and the courts in all States have a great deal of difficulty in applying these new statutes despite experience with structured settlements. These statutes raise a multitude of questions which then must be clarified by the trial courts in order to implement these statutes. Characteristic of our legal system is a time lag for the attorneys to appreciate the impact of these new rules on evaluation, settlement, negotiation and trial of cases subject to this statutory reform. Questions have arisen that the court's must clarify. For example: How should an economist's testimony be handled? Should an economist's testimony be limited? What are appropriate instructions to the jury? How should damages be itemized? Should the jury make present value determinations? What role should inflation play? What determinations does the jury make? And what determinations and computations must the trial judge make after the jury's verdict? New questions have been created for the trial judges and the appellate courts. How each of these issues are resolved by the States may be critical in determining whether defendant is receiving a true cost benefit.

As one court stated, about to embark on an application of the periodic payment of judgments law, "The complexity of the statute is exceeded only by the com­plexity of its application. Reviewing this judgment is an honor the court would rather have avoided." (Lieberman v. Perez, 142 Misc. 2d 223 [1988]).

Itemization of Awards

Implementation of periodic payment statutes invariably requires an increase in the itemization of the jury's award. This is necessary for several reasons. Not only may different types of medical expenses require a pay out over a different period of time, but generally medical expenses would be paid out over a different period of time than loss of earnings. Similarly, the pay out time period for pain and suffering bears no relationship to the period for lost earnings or medical expenses.

In California. the courts have suggested liberal use of the special verdict procedure in the Code of Civil Procedure, Section 625. Not only should the jury designate the portion of its verdict which is intended to compensate plaintiff for past damages and future damages, but the jury should designate the portion of the future damage award which is intended to compensate the plaintiff for loss of future earnings, since damages for future earnings must continue to be paid to a plaintiff's dependents after the plaintiff's death. (American Bank and Trust v. Community Hospital, 36 Cal. 3d at 377.) The Court further suggests that the jury should be insti-ticted to separate damages into awards for loss of earnings, medical expenses, pain and suffering and other personal needs.

Similarly the applicable statute in Missouri requires that the jury itemize damages into five categories (Section 538.215.1 RSMo). In New York, itemization of damages is not only required, but not limited and in fact the statute encourages further itemization of damages appropriate to the evidence in the case (CPLR Section 4111-d). So for example, if the evidence and facts in a case permit 8 different categories of damages (such as pain and suffering loss of earnings, loss of services, custodial care and medical expenses which may include and be further itemized into: physical therapy, prosthetic devices, future surgery, drugs), since all periodic payment formulas require that the jury also separate past damages into future damages, it would mean that in a case with 8 or 9 categories of damages, the jury must make determinations for 16 or 18 awards since each category of damages would be further divided into past and future.

It is well known and generally accepted that the more items of damages necessary for a jury to determine, the higher the verdict will likely be. In fact, the highest court in New York has specifically limited plaintiffs from requesting two separate items of damages for pain and suffering and loss of enjoyment of life, believing that this would stimulate even higher awards for this noneconomic item of damages (McDougald v. Garber, 73 N.Y.2d 246). Therefore, in New York, although plaintiffs may discuss pain and suffering distinct from loss of enjoyment of life, the jury is instructed to designate one number to compensate plaintiff for those damages. Of course, now with periodic payment of damages, this noneconomic loss must be divided into past and future damages. It seems likely that increasing the itemization of the jury's verdict and then further doubling this number into past and future will increase the total amount awarded by a jury.

Reduction to Present Value

Prior to the enactment of this legislation. typically economists would reduce future damages to present value. This not only made good sense inasmuch as plaintiffs were going to receive their future damage awards in a present lump sum, but also provided a great benefit to the defendant in reducing the cost of future dam.ages (even though this was entirely justified). This "benefit" has been understandably taken away from the defendant since damages will be paid over time, which is another kind of reduction to present value. In changing from one form of reduction to present value to another, however, one has to seriously evaluate whether in fact there is any benefit to the defendant whatsoever. This fact alone may mean that the damage awards under the old and new statutes are comparable. Add to this the increase in itemization of the awards which may carry with it an inherent increase in the overall verdict, we see that cost benefits to the defendants may seriously be in question.

In California, since defendants have a choice to request that future damages be paid in periodic payments or in lump sum, the jury can be instructed to determine the gross value for each item of future damages as well as the present case value. The gross value nor reduced present value is what will be used to compute a periodic payment schedule.

If the present value determined by the jury is sufficiently low, however, the defendant might choose to pay future damages in a lump sum award. Remember that the present value determination by an economist or by the jury is a result of many factors such as their determination of plaintiff's life expectancy, their determination of how plaintiff should receive payments which, in California, may not be in equal payments, and the jury's determination of a discount rate.

In New York, defendants do not have a choice but periodic payment of future damages is mandatory in applicable cases. The jury is specifically instructed not to reduce future awards to present value (CPLR 4111[d]). Hence, defendants have traded off the reduction to present value by the jury for a structured award - hardly a clear benefit.

Treatment of Inflation

The handling of inflation under these new statutory reforms is also critical in determining whether defendants are receiving a true cost benefit. In some instances this issue alone can contribute to higher verdicts than under prior law. In New York the legislature has required that periodic payment awards be increased by 4% per year over the prior years payment. Arguably this was to take inflationary growth into account. The statute is not clear and the legislature has not said what the 4% growth is meant to represent or replace if anything. One court has just held that this 4% yearly increase is not a built-in inflation factor and has permitted plaintiff's economist to testify as to inflation. Specifically plaintiff's economist testified that plaintiff's earnings would have increased by several factors including inflation that was expected to average about 6% a year. Lost earnings totaled about $5.5 million over plaintiff's lifetime when inflation was included. He could have earned about $2-5 million without inflation being factored into the formula. (Gambardelli v. Allstate Overhead Garage Doors, Inc., New York Law Journal, November 20,1991.) Consider that by law in New York the jury may not reduce the $5.5 million lost earnings figure to present value. Additionally, that amount may be paid out over time to plaintiff adding the required 4% each succeeding year. It is difficult to see the benefits and cost savings to defendants given this decision and the periodic payment laws in New York.

In New York discount rates must be detennined by the court after verdict and before entry of judgment. In California this confusing task is left to the jury. With the bench and bar so confused, one wonders whether jurors are up to handling their duties under these new statutes.

Set-offs and Release

Under these statutes another thorny problem that is left to the courts is the proper handling of set-offs when there is a settling defendant. As one might imagine, it is not an easy task to devise an appropri­ate method to set-off a settlement; even where courts have determined appropriate methods, in many cases it is not an easy task to implement this method and apply it to a particular case. Consider a settlement which may include a lump-sum and an annuity or structured settlement. Proper allocation of a settlement set-off to the various items or damages awarded by the jury must be made lest the nonsettling defendant pay more than he should.

Interest

These new laws further complicate the calculation of interest on future damages. There should be no post judgment interest on unpaid periodic payments. Interest on future awards makes no conceptual sense yet some States have not clarified this and permit interest calculation on full damages awarded (e.g. Ursini v. Sussman, 143 Misc. 2d 727).

Economist's Role

Under these new statutory reforms, the role of the economist at trial is less clear. Some States have found that he or she has a broader role while others have considered that the new statutes require limitations on the economist's testimony. It may be that the defense should now give serious consideration to utilizing the testimony of an economist at trial. The need for a defense economist to dispute plaintiff's economist's testimony regarding inflation and interest rates may be much more crucial under the new laws. Defendants have always been reluctant to use economists believing that it is an admission to the jury of liability by focusing on the damages which plaintiff should receive. Will the necessity to use a defense econon-dst cause an increase in liability findings?

Attorney's Fee

Some states permit, while others require, that the attorney's fee be structured along with the future damage award. The use of structured attorney-fee arrangements may be drastically curtailed, however, in the wake of IRS Technical Advice Memorandum No. 83.12-00.

The memo held that, in the particular case at issue, a structured fee is counted as gross income for the tax year in which the annuity funding the deferred fee payments was purchased. This elimi­nates the tax advantage of the structured fee plans, which normally are used in structured settlements.

Technical memoranda are not binding precedent, but many of the 30 or so annuity brokers who deal in structured-settlement plans reportedly have stopped issuing attorney-fee annuities due to confusion over the memo.

The memo held that, under Section 83 of the Tax Code, a promise to pay money or property in the future is taxable in the current year if is "either funded or secured."

In the case at issue, the attorney said he did not include the entire fee as gross income because he believed that he had no rights in the annuity since the annuity was paid at the discretion of the insurance company.

The Future

In the "Healthcare Liability Reform and Quality of Care Improvement Act of 1991", President Bush has encouraged that the States adopt tort reforms including a statute "permitting healthcare providers to pay damages for future costs periodically rather than in a lump sum" (George Bush, letter to Congress, May 15, 1991). It would seem that periodic payment laws are here to stay despite the tremendous confusion and possible lack of cost benefit to the defense.

Periodic payments do however have the advantage of protecting plaintiffs from themselves by assuring that funds will be there to meet future needs. Additionally, there is one clear potential cost benefit to the defense which is created by the fact that generally payments cease upon the death of the plaintiff. In New York. by statute, and in California, by case law, payments of future damages cease upon death, other than damages for loss of future earnings which continue to be paid to plaintiff's dependents. (American Bank and Trust, 36 Cal. 3d at 368). In Missouri all future damages, other than future medical damages continue to be paid after plaintiff's death. Therefore to the extent that the annuity company evaluates plaintiff's life expectancy to be less than the life expectancy determined by the jury, defendant will realize a reduction in the cost of the annuity which he is obligated to purchase. Such a reduction to the defendant, it must be pointed out, is inherently fair, because this also results in an award which better correlates to the real damages experienced by the plaintiff. For instance, if he dies sooner than expected, then he certainly does not need to received payment for medical expenses contemplated by the jury.

If we are to continue to live with periodic payments of future damage awards, then work must be done to clarify the confusion so that the bench and bar are able to properly implement these new laws. Also, a careful analysis must be done to assure that these laws are addressing not only plaintiffs' rights to just compensation, but the prime objective which is to reduce defendants' costs. This has not been an easy task.