legal briefing :

The NHS will be hit for millions of pounds a year in extra compensation payments after the Lord Chancellor at last set an official discount rate last month, five years after the Damages Act 1996 gave him power to do so.

The discount rate is the figure by which lump sum awards are reduced to allow for the fact that the claimant will receive a return on investing what remains of the capital over the years.

The lower the notional discount, the higher the lump sum must be to ensure it will cover care costs and loss of earnings for the duration of the claimant's working life.

In a group of test cases in 1999, the House of Lords reduced the discount rate from 4.5 per cent to 3 per cent, substantially increasing the size of the biggest awards. Accident victims, said the law lords, should not be expected to put their money into risky equities, but should be entitled to invest in risk-free gilts, which produce a lower return.

Claimants' lawyers argued that with returns on gilts today even lower than in 1999, the rate should go down to 2 per cent.

Lord Irvine has settled for 2.5 per cent. Lawyers said the result would be to increase the payout by£100,000-£200,000 in a£3m cerebral palsy birth injury case.