Who will pay for the opioid epidemic?

Who will pay for the opioid epidemic?  The millions of individuals addicted to opioids and the hundreds of thousands of individuals who have died from opioid overdose, along with their families and communities, have paid and will continue to pay a staggering amount.  The Council of Economic Advisers estimated the economic cost of the opioid epidemic to be $504 billion (2.8 percent of GDP) in 2015 alone.

Here at Praedicat, we are in the midst of a pharmaceutical extension to our mass litigation model and are closely monitoring the evolution of litigation by cities, counties, states, and other fourth-party plaintiffs seeking to hold pharmaceutical companies, distributors, pharmacies and other parties liable for the costs of the epidemic.  More than 1,000 such cases are consolidated in federal multidistrict litigation in the Northern District of Ohio and hundreds of additional cases remain in state courts.  Plaintiffs claim various causes of action including fraudulent marketing, failure to monitor and report suspicious prescriptions, and public nuisance.  Notably absent from this litigation are traditional failure to warn claims.  Opioid labeling prominently warns of addiction, which, under U.S. law, essentially precludes the possibility of recovery by individuals who suffered the direct consequences of opioid abuse and dependence.

When complete, our pharmaceutical extension will share much in common with our core mass litigation model: (1) early warning, (2) probabilistic exposure-based loss estimates driven by the evolution of science, and (3) realistic disaster scenarios that explore litigation outcomes outside the probabilistic event set.

With this framework in mind, we can offer a few observations today about the opioid litigation:

1. There was early warning.  A significant up-tick in opioid-related adverse events and scientific publications investigating hypotheses of opioid-related harm can be observed as early as 1996.  The Centers for Disease Control and Prevention didn’t report on opioid overdose deaths until 2004.
2. Plaintiffs require significant legal innovation to prevail.  If you’re familiar with Praedicat, then you know that our probabilistic model of mass litigation is driven by the probability that scientific evidence evolves to support mass litigation in the future.  But science need not evolve in the case of opioids: It’s been known for hundreds of years that opioids are addictive.  Instead, significant legal innovation is required for plaintiffs to succeed.  A complex web of statutory law and legal precedent stands between plaintiffs and the judiciary’s acceptance of causes of action argued to date.
3. Should plaintiffs prevail, losses to potentially responsible parties would be significant.  In the absence of a probabilistic model of legal change, we’ve been using scenario analysis to get a handle on the range of possible outcomes in the opioid litigation. The most extreme (but still plausible) scenario results in nearly $900 billion in losses distributed across a few hundred defendants in the opioid “liability stream of commerce.” This would be an astronomical settlement.  Recall, though, that under the Tobacco Master Settlement Agreement of 1998, states are to receive at least $206 billion in compensation through 2025 and an estimated $9 billion annually in perpetuity thereafter. That agreement was negotiated in 1998 with just four defendants and resulted largely in compensation for state Medicaid payments only.
4. Insurance coverage is disputable.  Criminal acts, foreseeable consequences, financial injury, and policy-level exclusions may significantly limit insurance coverage if defendants are eventually held liable.

The recent settlement between Purdue Pharma and the state of Oklahoma notwithstanding, many observers believe that the most likely outcome of the opioid litigation is that courts will mostly reject plaintiffs’ causes of action or, in accepting some, grant only injunctive relief.  Nonetheless, with some legal innovation and favorable interpretation of insurance contract language, large tail losses are possible.  So, we are working with our clients to explore a range of realistic opioid-related disaster scenarios in their portfolios to assist them with potential reserving and capital strategies.

Interested in exploring how the opioid litigation could play out in your portfolio?  Let us know!  We stand ready with the market’s only exposure-based, science-driven approach to identifying and quantifying casualty catastrophe events.