They're angels of course, best to use their time efficiently - Copyright NHS Public Domain

A story that near all of the papers seem to have this morning – that the NHS has paid £19 million in compensation for brain damaging a kid. This isn’t so, they’ve not paid that much in compensation at all. What they have done is cough up the cost of treatment for her for the rest of her life. It’s not what we all would understand as “compensation.” It isn’t “Sorry, we screwed up your life, here’s some money to make up for it” at all.

A nine-year-old girl has been paid £19 million compensation by the NHS after shortcomings in her care left her with catastrophic brain damage.

It isn’t true, the way most people will read that. Say, the NHS cuts your leg off by mistake. They will indeed compensate you for the loss of your leg. Your life will be worse as you are legless – or perhaps monopedal. Here, have some cash to make up for it.

There’s no way that any form of brain damage is “worth” £19 million in such compensation. That’s very much higher than the value of a life.

The nine-year-old was born at King’s College Hospital with severe jaundice and her lawyers claimed there was a negligent delay in giving her a total blood transfusion.

NHS lawyers accepted that there had been “shortcomings” in her care – and agreed to what is believed to be a near record settlement of her claim.

Approving the payout, Sir Robert Francis said: “This is very near to the top end of the scale for a brain injury”.

So, what does someone with severe brain injury need? Lifelong and 24/7 nursing care, that’s what.

Stricken by severe behavioural difficulties, the youngster has ‘insight’ into her condition and has a very long life expectancy, he said.

She’s not exactly going to smoke or drink herself into an early grave, get stabbed by an excessively vibrant boyfriend or anything now, is she? There’s 80 years of that ’round the clock nursing care to pay for.

That’s also something the NHS itself doesn’t provide, not at home it doesn’t. And no, no one is going to stick her in a side ward of Great Ormond Street for the bulk of the next century.

This isn’t compensation – well, there might be a component of it in there of course but it’ll be a small part of that total number – this is forward payment of that nursing care.

Do note that the NHS provides medical care free of charge at the point of use, subject only to medical need, for all of us. Even without any system of compensation as here the NHS is still going to be on the hook for that medical care, isn’t it?

Which is where the economics bit comes in – you knew there would be an economics bit, right? The Ogden Rate. This is the rate at which we discount future such payments. If we stick £19 million into an account then obviously there is some interest that is received. So, we don’t in fact have to prefund her care in 2093. Or not all of it. We can make some assumption about how much interest the £19 million will earn in the interim and use that accumulated interest to pay at least some of the bill in 2093.

We discount to the net present value of the amount needed to pay for her future treatment that is. The Ogden Rate is this rate to be used in such legal settlements. It’s linked to the gilts rate. On the grounds that we’re not going to stick that future nursing care money into stocks, far too risky (well, not really, but….), it’ll all be in gilts.

The thing about the current Ogden Rate – unless they’ve changed it again in the last couple of months – is that it is negative. We are assuming that the £19 million capital sum loses value over the years. If nursing care costs £200,000 in 2093 then we’ve got to put £220,000 into the pot today to pay for it (interest rate made up there).

And that’s a major reason that this is a record “compensation” sum. The interest rate we use to work out how much that nursing care is going to cost near a century hence.

Those with a mathematical bent might care to work out the effects of that interest rate. As far as I know at least the Ogden Rate today is – 0.75%. We’re forecasting forward perhaps 80 years from today. What would that capital sum be if it were the former 2.5% positive rate?

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jgh
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jgh

200,000 at -0.75% compounded annually for 80 years gives 109,514.

200,000 at 2.5% compound annually for 80 years gives 1,474,740 by which time it will probably be worth 109,514.

200000 * (0.9925^80) vs 200000 * (1.025^80)

RMurphyisabellend
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RMurphyisabellend

Tim

You probably know this, but not sure it comes across in your article.
The Ogden rate is a real discount rate, not a nominal one.
This takes into account the fact that, for risk free assets such as inflation-linked bonds, inflation is expected to be higher (0.75%) than the interest paid on the bond.

BB01
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BB01

Should read: Taxpayers have paid/will pay £19 million…

It’s an interesting set-up whereby victims of malpractice in the World Class NHS pay themselves compensation rather than the malpractioner paying it. But then that is what makes it ‘Pride of the Nation’ ™ and ‘World Class’ ™.