There was a recent article in Forbes magazine that discusses how there are now numerous hedge funds who “invest” in malpractice suits.  Basically, the fund finances the costs of the litigation hoping for a big payday.  This is scary to me for multiple reasons:

  • There will be less of a barrier to malpractice suits, increasing nuisance suits and the resulting defensive medicine costs
  • There will be an increase in the cost of litigation due to the possibility of financing. Consider homes, autos, and education.  As more financing options become available to pay for them, what happens to the cost?  It goes up, naturally.  You can get loans to buy a pet, loans for cosmetic surgery, and apparently, now you can even get a loan to sue someone.
  • Lastly, is this really a good investment?  I mean, the statistics show that something like 80% of malpractice lawsuits get dismissed, most of the rest are settled, and the few that do go to trial are usually won by the physician.  If a typical suit costs $50-$200K in legal fees, how many can you pay for before it isn't worth the occasional multi-million dollar verdict?

So, like you, I'm disgusted that the two biggest vultures of our society, the trial lawyers and Wall Street have seemingly found each other and are now working together.  I'm hoping that this latest enterprise doesn't work out very well and all these funds go out of business.  Financing lawsuits is still illegal in most states, but there is a trend to it becoming legal in more states all the time.  But, Wall Street has a way of wringing out every excess dime in fees.  A typical hedge fund charges 2% a year and 20% of profits in the good years.  I think malpractice suits are going to have to become a whole lot more profitable before these guys can stay in business over the long-term.  I could be wrong, but I just don't see it as a viable business model. There just isn't enough money in malpractice to pay the lawyers and Wall Street, even if the victims don't get anything.  But it'll probably increase health care costs and decrease access to health care for the rest of us anyway.

The more I think about it, this seems like a great investment FOR DOCTORS.  I mean, you know how you shouldn't invest much money in your own company's stock since you're likely to lose your job and your 401K at the same time if the company goes under.  But it seems that malpractice “profits” would be inversely correlated to physician income over time.  Perhaps this is the ultimate in diversification for doctors?  Now, if only Vanguard would come out with a low cost ETF to track the malpractice index.   (For those with a broken sarcasm sensor, I was kidding.  Don't invest in hedge funds and heaven forbid don't invest in anything that promotes malpractice litigation!)

What do you think? Would you invest in malpractice suits to “hedge your malpractice risk?” Comment below!