Litigation finance: a terrible idea
I watch my share of bad commercials on TV. I don’t have cable but I have an antenna so I can receive some free TV stations, including one that is clearly meant for senior citizens called CoziTV. Cozi regularly has marathons of Murder She Wrote, Magnum P.I., Hart to Hart, and Fantasy Island, all shows that I somehow can’t stop watching, partly I think because I get so much confirmation from them about how awful my childhood was.
Anyhoo, back to the commercials. I couldn’t help notice a proliferation of ads for help with a medical condition called “transvaginal mesh injury.” Basically the ads were asking whether the viewer had such a problem, and whether they’d like to perhaps talk to a lawyer at this free phone number. Pretty much every other ad was about this condition, so it seemed like a pretty big deal, at least for the intended audience of old ladies.
Well, I didn’t pay much attention to it, until I came across this fascinating Reuters special report on corrupt medical lending practices entitled New breed of investor profits by financing surgeries for desperate women patients and written by Alison Frankel and Jessica Dye.
The article outlines the following scheme: financiers find women who need this surgery, based on a defective medical part, but don’t have the money for it and whose insurance companies won’t immediately cover it. They offer them the financing now in return for part of the eventual settlement with the company that was responsible for the faulty mesh. But then they make a deal with a surgeon to overcharge for the surgery, and they inflate the costs as well, and at the end of the whole thing they take a large part of the settlement which the woman was entitled to, and sometimes the woman even ends up owing them money.
It’s horrible, but it’s really just one example of a large industry of what is known as litigation finance, which just means the world where people with lots of money decide to bet on outcomes of court cases.
Of course, the financiers defend this practice by pointing out that, with money from people like them, a given side in a legal proceeding has more resources to make their case. They would also point out that they only put money behind cases that have at least some chance of winning.
However, there are two big problems with it as a concept. First, it means that there will be more money available to lawsuits in general. We’ve already seen what happened with college tuition when something that’s already too expensive gets access to loans: it gets even more expensive. It’s an arms race. According to Bloomberg, the typical client for these litigation finance firms are big companies which use corporate law firms.
Second, the justice system is already super unfair, and it’s not like hedge funds are running into this game to improve the system. Rather, they are there to exploit the system. That’s what hedge funds do. So if they have detected a bias in the system, they are going to treat it like an arbitrage situation and throw money at it for all they’re worth. The side effects of that will have nothing to do with justice.
The real reforms we need to see with the justice system is a way for money to be less of a factor, not more.