STATS ARTICLES 2005
Dueling Numbers on Asbestos Claims
November 10, 2005
Rebecca Goldin Ph.D.
STATS Study: What’s fairer for asbestos victims - the tort system or the FAIR asbestos act?
The U.S. government is considering adopting the Fairness in Asbestos Injury Resolution Act of 2005 (S. 852). The beauty of the Act is that it exchanges litigation in the tort system (i.e. lawsuits against companies for damage due to asbestos) for an entitlement: show that you’re a victim of asbestos, and the U.S. government will compensate you. Where does the money come from? Companies that have a history of using asbestos. It sounds perfect – the guilty companies pay, and asbestos victims receive, without having to go through the difficult and stressful judicial system.
The theory behind this kind of program is appealing. Most importantly, in the current system, asbestos victims are not getting compensated fully, equitably, or in a timely fashion. Currently operating trust funds for asbestos victims are paying between five and ten cents on the dollar for asbestos claims; they just don’t have the money. Companies that have lost big money in the courts have been forced into bankruptcy. Victims take years to recoup any compensation through the tort system. Only the lawyers are getting their share.
A federal trust could solve the problem, so goes the theory. We could pay out claims quickly. We could save money for the plaintiffs and defendants by cutting out the lawyers. We could reduce administrative costs by categorizing the levels of harm that can be done by asbestos. We can make it equitable by fixing the payout in each category for anyone who can prove harm. Make the companies pay for the program, and everyone goes home happy – well, for the asbestos victims, happier than without the money.
Everyone is happy, that is, except tax payers who think corporations will foot the whole bill. According to the Congressional Budget Office (CBO), payouts over the next 50 years will total about $120 to $150 billion, and revenue from the companies will be about $140 billion. So it seems, it’s a zero-sum game.
But according to another economic report (Bates-White), even under conservative assumptions, it will cost the U.S. government over $300 billion dollars to pay for the trust. Assuming the same $140 billion of revenue, that puts this program about $160 billion in the red. These conservative assumptions are similar to those assumed by the CBO – they don’t account for a lot of possible risks that could increase the payout of the program substantially.
Who is right? The two important issues in an economic report of this nature are: what is the revenue, and what are the payouts. CBO and Bates-White disagree about the payouts, so STATS took a look at the underlying assumptions of these reports. The main difference is how the two studies estimate the number of claimants. How many people will have worked with asbestos, come down with an asbestos-related illness, and file a claim? Methods that could lead to an answer include:
1) Find out how many people have already filed a claim through the courts. This (might) give a good picture of how many people will file in the future.
2) Look at how many people filed for asbestos claims with other asbestos trusts (such as the Manville Trust). (Perhaps) this is similar to how many will file a claim with a government trust.
3) Examine the medical literature to evaluate the prevalence of asbestos-related disease. Then estimate the number of those people who will file a claim.
The number (and composition) of pending cases is a bad model for how claimants would respond to an asbestos trust. There is a big difference between going to court (or attempting to settle) – a process that involves a lot of time, and a fair amount of stress – and filing for a claim by filling out some paperwork, knowing that you have an entitlement to compensation. Obviously there will be more claimants when the process is streamlined, and victims are guaranteed compensation if they meet the medical criteria. In the current tort system, cancer victims have a hard time winning their case, since cancer can be caused by many factors (including asbestos). Plus, who wants to go to court when you’re about to die?
The second method also has some serious flaws: most important is the fact that the Manville Trust currently pays about five cents to the dollar on approved claims. How many people are bothering? A person dying of asbestos-related gastrointestinal cancer might get as much as $10,000 (as compared to about $200,000 if the new trust becomes law). The incentive to rush to get the bucks just isn’t there.
The third method is probably the most accurate measure of how many people will apply; instead of worrying about incentives or disincentives to apply, you simply figure out how many people suffered the injuries. Then you estimate the percentage of those people who would know about and file for their deserved claim.
Need it be said? The CBO used the first two points to evaluate who will file. They even undermine their own findings: according to the CBO, current estimates are that the Manville Trust will receive 1.2 million additional claims, of which about one in eight are for malignant conditions. By our count, that is about 150,000 claims for the highest payments. But the CBO estimates only 78,000 claims for malignant conditions in the next 50 years. And it’s worth noting that Senator Chuck Hagel of Nebraska (a supporter of the legislation) says the most recent estimate of additional claims to the Manville Trust is somewhere between 750,000 and 2.7 million. CBO is assuming the minimum.
Bates-White used the third technique for evaluating the number of future claims. Their conservative estimates are that 350,000 people will be entitled to compensation due to lung and other cancers associated with asbestos. They figure that someone who meets the criteria for compensation is extremely likely to file a claim: half a million dollars is a lot of money. It seems unlikely that only 22 percent, or 78,000 people, would file their claim. Bates-White’s analysis of the payout accounts for the fact that a Trust inevitably changes the composition of claimants. And a well-funded entitlement program has a higher level of participation than the tort system.
Those opposed to the legislation claim that asbestos victims do not benefit: this is disingenuous. They do benefit, in the form of system that pays consistently and equitably, without hassle. A claimant may get less money than he or she would if victorious in the tort system, but many claimants whose claims would be difficult to prove in court would get money. Funds that are currently used to pay for litigation are essentially diverted to go directly to the victims.
On the other hand, the assertion that the trust solves the asbestos problem is disingenuous as well: the money just isn’t there. When the money runs out, either the U.S. government will have a large unfunded obligation to victims of asbestos, or the victims will not get what they deserve. The only solutions are to hedge against the likely financial shortfall by collecting more revenues from the funding companies, change the funding source after the money runs out, or guarantee less compensation to the victims