Propriety of Medicare Set Asides in Liability Settlements

Garretson Firm Resolution Group, Inc.: "MSA White Paper: The Use and Propriety of Medicare Set Asides in Liability Settlements"


In all settlements, compliance with Medicare rules and regulations can involve two obligations: i) the satisfaction and discharge of Medicare’s reimbursement claim for injury-related care from the date of injury through the date of settlement; and ii) the evaluation of obligations associated with future costs of care that may be provided to the claimant from date of settlement onward. In our experience, the most logical way to assure that these obligations have been satisfied is to review the relevant statutes as well as any guidance from the Centers for Medicare & Medicaid Services (“CMS”)[1] interpreting those statutes and apply this information to the facts of each case. Accordingly, this White Paper is based on the currently available guidance concerning satisfaction of Medicare’s future interest in liability settlements.

MSA Overview

The MSA obligation in a liability settlement is more complex and amorphous as compared to the traditional application in a workers’ compensation (“WC”) settlement. If settlement involves a claimant who is entitled or soon to be entitled to Medicare, a WC settlement (indemnity and medical) has a definitive shift of future health care expenses from the WC carrier to Medicare. This shift-of-burden carries a clear obligation to protect Medicare’s interest. In WC settlements involving Medicare beneficiaries, federal regulations provide that the liability for medical expenses incurred due to work-related injuries should not be shifted to Medicare from the responsible party.[2] However, CMS’ recommended means to protect Medicare’s interest involves defining that portion of a Medicare beneficiary’s WC settlement which relates to future cost of care. According to CMS’ Memoranda, these monies should be set aside to pay for the beneficiary’s future work-related injury and/or illness.[3]

Medicare’s Recovery Rights (the law)

Medicare’s right of recovery extends both to the past and the future.[5] This is the case for both liability and WC cases. In the case of future payments where a lump sum compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of the work-related injury, or disease, federal WC regulations provide a mechanism whereby Medicare does not pay for such expenses until the amount of the medical expenses equal that part of the lump sum payment. Where a compr omise settlement allocates a portion for medical expenses and reasonably recognizes the income replacement element (indemnity portion), CMS can accept such apportionment as a basis for determining Medicare’s future payments.[6] In the case of past payments, Section 1862(b)(1) of the Social Security Act (42 U.S.C. §1395y(b)(1)) provides that payment may not be made under Medicare for covered items or services to the extent that payment has been made, or can reasonably be expected to be made promptly, under a liability insurance policy or plan (including a self-insured plan).[7] Thus, all past Medicare payments are conditioned on reimbursement to the Medicare program to the extent that payment with respect to the same items or services has been made, or could be made, under a liability insurance policy or plan (including a self-insured plan).

While CMS has released a myriad of memoranda formalizing MSA procedures for WC cases, it has yet to release formal standards or guidance for review of liability insurance settlements. Nevertheless, the law currently exists to expand the scope of MSAs to liability settlements should CMS choose to publish guidance doing so. To date, CMS has not chosen to expand its MSA guidance to specifically include liability settlements.


Liability Settlements (and MSAs)

The fundamental statutory principle requiring settling parties to consider and protect Medicare’s interest in WC settlements already exists and appears to apply to liability settlements as well. The Medicare Secondary Payer (“MSP”) provisions state Medicare is always secondary to WC and other insurance, including no-fault and liability insurance.[15] Again, under the Social Security Act, payment “may not be made under Medicare for covered items or services to the extent that payment has been made, or can reasonably be expected to be made promptly, under a liability insurance policy or plan.”[16] Also, Medicare’s authority to review liability settlements arises under the same statute as does its authority to review WC settlements.[17]

The MSA obligation in a liability settlement, however, is only clear (on its face) in the specific case where a definitive allocation for future injury-related medical expenses exists for an injured Medicare beneficiary. An example is a verdict sheet with a future medical expense line item or - albeit rare - a settlement release with a definitive allocation for future medical treatment, such as a surgery contemplated by the parties and specifically listed on the settlement documents to ensure no future liability exists for that specific line item expense. We further submit that certain large settlements wherein damage elements other than future medicals are capped (such as pain and suffering) or non-existent (such as other economic damages, like lost wages) may fit this same unique mold. On the other hand, in the majority of settlements where the parties settle liability cases using a broad, general release of all damages and do not specify or otherwise allocate them, whether due to policy limitations, or other confounding factors, the ability to determine the propriety of a MSA becomes much less clear. When settling a liability case in which payment for future medical expenses is not specifically negotiated, if a general release is implemented that uses broad language (for example, referring to “all claims past and future”), our current standard is to facilitate a damages/recovery “reasonable person” analysis to determine if a portion of the recovery definitively recognizes future injury-related care and then further determine the amount of future injury-related care for which Medicare would otherwise be responsible. Our firm currently employs the reasonable person operating in good faith standard where liability settlements either (1) fall in the range of one million dollars ($1,000,000.00) or more, or (2) fall into those isolated, lower value cases where the settling parties acknowledge future medical expenses account for the majority of damages. In either case, the Garretson Firm Resolution Group, Inc. (“GFRG”) is frequently asked to provide an independent evaluation of Medicare’s future interest. First and foremost, the analysis of any fact pattern must take place in light of the following context: At this time, there are no statutory requirements promulgating the use of MSAs, or any other vehicle, in liability settlements. In fact, the term “MSA” does not appear in any currently enacted statute, and is nowhere defined in any currently enacted regulation. Nor – as discussed more fully below - is there any guidance from CMS. In fact, CMS, in town hall teleconferences related to the implementation of the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”) has told the legal community t hat CM S ’ routine recovery processes have not changed. For a specific example, one can look at the call transcript dated March 24, 2009.[18] Here, we see that the set-aside process (whether it is for WC or liability) is: 1) voluntary, not mandatory; and 2) the same as it has been in the past. No new guidance has been issued by CMS mandating the use of MSAs in liability settlements.

The discussion regarding the use of an MSA in liability settlements has been borrowed from guidance received related specifically to WC settlements. Currently, there are twelve (12) memoranda from CMS about the use of MSAs in WC settlements and zero (0) memoranda about the use of MSAs in liability settlements. The reason for the guidance in the WC situations is that CMS is interpreting the MSP statute, namely 42 U.S.C. §1395y(b)(1). If CMS intended for MSAs to be used routinely in liability settlements, it would issue similar guidance specific to the use of MSAs in liability settlements.

Furthermore, when reviewing the regulations that interpret the Medicare Secondary Payer statute, it is relevant to note that remedies for failure to properly consider Medicare’s past payments, as a function of its conditional payment reimbursement rights include direct recovery against the third party (primary) payer[19], but nowhere in the statutes which address future medical expenses is there a similar recovery right against third parties. Instead, the nomenclature is couched in terms involving a loss of coverage for those beneficiaries. Where, then, is the defendant-directed liability for failure to use MSAs in settlements coming from? It is certainly not coming from statutes or from the regulations. Instead, it appears to be driven by other external settlement forces, which may have financial incentives to create a MSA requirement for liability settlements where none exists.In sum, the standard to be applied to MSA analysis in liability settlements is “substantial compliance” grounded in good faith, appreciating the fact that there is neither a statutory requirement nor guidance for the use of MSAs in liability settlements. If, however, in good faith, a reasonable person would surmise that an actual allocation for future injury-related medical expenses exists in the settlement (which should be the exception and not the rule) such that the claimant voluntarily chooses to pursue a set aside arrangement, two options exist: i) identify the appropriate allocation and educate the claimant to ensure that those proceeds are spent down on future injury-related care (for which Medicare would otherwise pay); and/or ii) contact the appropriate Medicare regional office, share the fact pattern of the case and determine whether they elect to review and approve the allocation. The regional offices make these elections based on workload thresholds and are subject to change without notice.


The New MMSEA Statute Does Not Require MSAs Despite considerable urban legend, the new MMSEA statute does not contain any new guidance or requirements related to MSAs. The MMSEA statute requires defendants/insurers to report certain information regarding settlements with Medicare beneficiaries to the Secretary of Health and Human Services.[20] In fact, the sole purpose of Section 111 of the MMSEA is to ensure that settling parties fully comply with the Medicare Secondary Payer requirement – that is, past Medicare payments must be verified and resolved in all liability, workers’ compensation and no-fault settlements. In this regard, if plaintiff’s counsel is already verifying and resolving Medicare’s reimbursement claim in all settlements, as far as MMSEA is concerned, it is busine ss as usual for plaintiff’s counsel and his/her clients. This new law (to date) has nothing to do with identifying Medicare-covered future costs of care, which leads to MSA issues and analysis. As mentioned above, CMS has clarified in several recent town hall meetings that CMS’ recovery practices have not changed on account of MMSEA. Furthermore, CMS has published several “user guides” and interpretative “alerts” and at no time have they stated that they intend to now require MSAs for liability settlements.[21] Perhaps more persuasive to this point is the Congressional Research Service (“CRS”) analysis of the MMSEA statute. This comprehensive analysis of the new legislation (and its intent) does not mention, at any point, the concept of Medicare Set Asides in liability cases. Certainly if such purpose (i.e. requiring MSAs in liability settlements) were part of the Congressional intent of MMSEA, one would reasonably expect it would have been in the CRS analysis (after all it would be a rather notable revenue-generating component of such new law if it were a part of it).

Practical Guidance

While the above is intended to help a personal injury practitioner sift through the misinformation and emerge with a better understanding of the appropriateness of MSAs, no analysis would be complete without a discussion of what to do if a settling party is misinformed and/or shares a differing opinion about such MSA-related law/guidance and is requiring that an injured plaintiff establish a MSA as a condition of settlement. (As we wrote in a recent practice tip, “we realize we all may be trying for some time – as cowboy wisdom goes - to stuff feathers into a pillowcase during a wind storm”).When confronted with such situations (and the injured plaintiff would still like to proceed with settlement) we have proceeded as follows:

First, we have provided settling parties and their representatives with this White Paper as well as a copy of a comprehensive article regarding MMSEA entitled, “Act II: Reporting Obligations for Settling Insurers where Medicare is a Secondary Payer: The Medicare, Medicaid and SCHIP Extension Act of 2007.” [See http://www.garretsonfirm.com/garretson/news/index.cfm?newsID=13];
Second, the Garretson Firm Resolution Group has provided an opinion letter that states our experience and qualifications in such matters as well as provides a fact-specific analysis of the case (i.e. analysis of the claimant’s present or pending Medicare entitlement status; determination of the definitive (if any) future medical allocation in the settlement; analysis of the percentage of past vs. future medicals reasonably associated with the allocation; analysis and documentation of the claimant’s true future injury-related care requirements;
Third, if the first two steps fail to carry the day, we have recommended that the plaintiffs agree to indemnification language in the settlement/release agreement with defendants which keeps the focus on the law and not the conjecture around Medicare compliance. In this regard, such indemnification language may state that plaintiffs will indemnify defendants from any and all injury-related obligations/Medicare rights (past, present or future) arising out of 42 U.S.C. §1395y(b)(2);
Fourth, if a MSA is still being demanded as a condition of settlement, proceed with obtaining a MSA evaluation from a qualified Medicare Set Aside allocation provider and consider submitting such evaluation including a damages/ recovery allocation performed by a qualified resource to the appropriate Medicare Regional Office. (It is quite possible the response received will be that the R.O. is not reviewing and approving such submissions in liability settlements).
Finally, regardless of the outcome of the four steps above, we recommend always disclosing to the injured claimant the analysis above to ensure he/she is fully informed about why a MSA is or is not being established. An example of such a disclosure statement is contained in the booklet entitled “Medicare, Medicaid & Private Health Insurance Plans: Important Information about Healthcare Liens in Personal Injury Settlements” which can be accessed at http://www.garretsonfirm.com/garretson/resources/?pageID=49.

Conclusion

To be sure, the use of MSAs is a topic of great conversation nationwide. The debate gets slightly more complicated when considering the lack of any statutory requirement. While the legal community can follow guidance about how to use MSAs in WC settlements to properly consider Medicare’s interest, no similar guidance exists about how to use MSAs in liability settlements. As a result, any entity professing that MSAs are now routinely required in all liability settlements absent: (1) a true good faith analysis, such as that discussed above; and (2) specific guidance published by CMS; and/or 3) a bill passed by Congress and signed into law regarding the use of MSAs in liability settlements is not providing sound advice and may, in fact, be improperly promoting a cost recovery mechanism that has no legal foundation.This White Paper is based on our firm’s many years of experience with Medicare compliance issues. While our analysis is subject to interpretation, having specifically addressed this issue in both single event and mass tort settlement programs, we submit that until actual statutory guidance or any type of CMS guidance is provided, the question whether an MSA is required in liability settlements will be extremely fact-intensive, with the required elements leading to an affirmative answer being few and far between, as the majority of liability settlements do not include the same carve out for future medicals that WC settlements do. We submit this White Paper to assist settling parties with better understanding MSAs. At the same time, hopefully, we have provided some practical guidance/tips for dealing with situations where a settling party (perhaps misinformed about the related requirements [or lack thereof]) is demanding a MSA in a liability settlement.

The authors of this White Paper may be contacted as follows:
Matt Garretson:




[1] CMS is the federal agency charged by the U.S. Department of Health and Human Services with the administration of Medicare programs, including Medicare Secondary Payer (“MSP”).
[2] 42 C.F.R. §411.46.
[3] CMS has issued 12 policy memoranda, from July 21, 2001 through April 3, 2009.
[4] 4 2 C.F.R. §411.46.
[5] Memorandum from Thomas L. Grissom, Director, CMS Center for Medicare Management, to All Regional Administrators, “Medicare Secondary Payer-Workers Compensation (WC) Frequently Asked Questions”, question & answer No. 13 (April 22, 2003), available at www.cms.hhs.gov/WorkersCompAgencyServices/ (last visited August 17, 2009).
[6] 42 C.F.R. §§411.46(a), (b) and 411.47(a).
[7] 42 U.S.C. §1395y(b)(2), amended by Pub. L. No. 109-171, 120 Stat. 4 (2006).
[8] 42 C.F.R. §§411.46 and 411.47.
[9] Memorandum from Parashar B. Patel, Deputy Director, CMS Purchasing Policy Group, Center for Medicare Management, to All Associate Regional Administrators, "Workers’ Compensation: Commutation of Future Benefits" (July 23, 2001), available at http://www.cms.hhs.gov/WorkersCompAgencyServices/ (last visited August 17, 2009).
[10] Social Security Act §1862, as amended, 42 U.S.C. §§ 1395y(b)(2), 1395y(b)(5)(d), 1395y(b)(6), amended by Pub. L. No. 109-171, 120 Stat. 4 (2006); see also Memorandum from Gerald Walters, Director, CMS Financial Services Group, Office of Financial Management, to All Regional Administrators, “Medicare Secondary Payer (MSP) – Workers’ Compensation (WC), Additional Frequently Asked Questions”, question & answer No. 2 (July 11, 2005), available at http://www.cms.hhs.gov/WorkersCompAgencyServices/ (last visited August 17, 2009); amended by Memorandum from Gerald Walters, Director, Financial Services Group, Office of Financial Management, to All Regional Administrators, “Workers’ Compensation Medicare Set-Aside Arrangements (WCMSAs) and Revision of the Low Dollar Threshold for Medicare Beneficiaries” (April 25, 2006), available at http://www.cms.hhs.gov/WorkersCompAgencyServices/ (last visited August 17, 2009).
[11] Memorandum from Parashar B. Patel, Deputy Director, CMS Purchasing Policy Group, Center for Medicare Management, to All Associate Regional Administrators, "Workers’ Compensation: Commutation of Future Benefits" (July 23, 2001), available at http://www.cms.hhs.gov/WorkersCompAgencyServices/ (last visited August 17, 2009). Here, CMS suggests that workers’ comp claims should not be settled until CMS can review the settlement and approve the set-aside allocation.
[12] Memorandum from Gerald Walters, Director, CMS Financial Services Group, Office of Financial Management, to All Regional Administrators, "Medicare Secondary Payer (MSP)--Workers' Compensation (WC) Additional Frequently Asked Questions," question & answer No. 2 (July 11, 2005), available at http://www.cms.hhs.gov/WorkersCo m pAg e nc y S erv ices/ (last visited August 17, 200 9). Here, Medicare asserted its authority to disregard any settlement that does not protect Medicare’s past and future interest.
[13] If CMS approves the set-aside, you can be certain Medicare will resume primary coverage after the claimant demonstrates that the set-aside proceeds were properly depleted. While such certainty gives some peace of mind, obtaining it often comes at a price of additional time and money. Parties are forced to accept CMS’ methodologies for calculating the set-aside without any right of appeal, and the agency may take six months or longer to review and approve the calculations submitted.
[14] Memorandum from Thomas L. Grissom, Director, Center for Medicare Management, to All Regional Administrators, “Medicare Secondary Payer – Workers’ Compensation (WC) Frequently Asked Questions,” question & answer No. 20 (April 22, 2003), available at http://www.cms.hhs.gov/WorkersCompAgencyServices/ (last visited August 17, 2009). “It is unnecessary for the individual to establish a set-aside arrangement for Medicare if all of the following are true: a) The facts of the case demonstrate that the injured individual is only being compensated for past medical expenses (i.e., for services furnished prior to the settlement); b) There is no evidence that the individual is attempting to maximize the other aspects of the settlement (e.g., the lost wages and disability portions of the settlement) to Medicare’s detriment; and c) The individual’s treating physicians conclude (in writing) that to a reasonable degree of medical certainty the individual will no longer require any Medicare-covered treatments related to the WC injury.”
[15] 42 U.S.C. §§1302, 1395w-101 through 1395w-152, 1395hh (2000 & Supp. 2004); see also 42 C.F.R. §411.40.
[16] 42 U.S.C. §1395y(b)(2), amended by Pub. L. No. 109-171, 120 Stat. 4 (2006).
[17] Social Security Act §1862, as amended, 42 U.S.C. §§1395y(b)(2), 1395y(b)(5)(d), 1395y(b)(6), amended by Pub. L. No. 109-171, 120 Stat. 4 (2006).
[18] http://www.cms.hhs.gov/MandatoryInsRep/07_NGHP_Transcripts.asp#TopOfPage (last visited August 17, 2009).
[19] 42 C.F.R. §411.24(e).
[20] GFRG regularly updates the dedicated MMSEA section of our website. See www.garretsonfirm.com for further information regarding MMSEA and related practice tips.
[21] For instance, see http://www.cms.hhs.gov/MandatoryInsRep/Downloads/RevisedSection111022309.pdf. “Unless you are a business entity which qualifies as [a required reporting entity (RRE)] for purposes of Section 111, you do not need to initiate any specific actions in connecti on with Section 111.” See also &l t ; ; a>http:// www.cms.hhs.gov/MandatoryIn sRep/Downloads/AlertToEmployers050609.pdf. “Section 111 information helps the Medicare program determine primary versus secondary payment responsibility. Section 111 requires that in certain situations, entities will electronically send health insurance benefit entitlement information.” See also http://www.cms.hhs.gov/MandatoryInsRep/Downloads/RevisedSection111022309.pdf. “The new Section 111 requirements do not change or eliminate any existing obligations under the MSP statutory provisions or regulations.”