Urban Legend – Medicare Set-Asides for Third Party Liability Cases

by: Carl Fessenden, Norm Prior and Heath Langle

Since the Centers for Medicare and Medicaid Services (CMS) introduced mandatory electronic reporting requirements for all liability carriers, there has been a well-founded concern that CMS will now aggressively act to ensure its interests are protected in third-party liability settlements. Uneasiness, and confusion, has been created due to the lack of clear direction from CMS as to how parties to a settlement should act to protect Medicare’s interest. You may have heard about Medicare Set-Asides (MSAs). However, MSAs are not required in liability cases.

CMS has long recommended MSAs as a means of protecting Medicare’s interests in workers compensation (WC) settlements. The parties to a WC settlement allocate a portion of the settlement to cover projected future medical costs related to the claimed injuries that would otherwise be covered under Medicare. Typically future care projections are calculated by an MSA vendor or other MSA allocation professional. The parties may then administer the MSA account directly or arrange for professional third-party administration. Once an MSA is established, Medicare is only obligated to cover medical care after the required MSA funds have been exhausted.

Some fear MSAs are currently required in liability cases. This is an urban myth. Currently MSAs are not required, and probably not even available for review by CMS in liability cases. In fact, there is no mention of MSAs anywhere in CMS policies, and California CMS representatives have confirmed they are not reviewing MSAs in liability cases. The question then becomes how do you protect Medicare’s interests, as the law requires to avoid very significant penalties.

It is required that liability settlements paid to Medicare beneficiaries adequately protect Medicare’s interest as it relates to potential future care. (42 U.S.C. 1395y(b)(2); 42 C.F.R. 411.46(b)-(d); 42 C.F.R. 411.47) This can be a very difficult issue to address, especially in cases involving multiple defendants, disputed liability, or comparative fault. As an example, are you adequately protecting Medicare’s interest if you only set aside 50% of projected future care because you believe this is a case of 50% comparative fault? The answer may be no, as the position of CMS is that it is not bound by comparative fault allocations the parties use in a settlement agreement.

A Medicare-eligible client that runs out of settlement money for future medical expenses may turn to Medicare to cover his or her healthcare costs. CMS may deny these claims if the expenses should reasonably have been covered by the settlement, leaving the client with no medical coverage. If Medicare does pay for future treatment and Medicare believes its interests were not adequately protected, Medicare may take action against the parties to the settlement to recover the money Medicare believes was not appropriately reserved for future medical expenses.

Here are five suggestions on how to address Medicare’s interests in a settlement agreement in a liability case:

1. Allocate money in the settlement agreement for future care and have Plaintiff expressly promise to use that money for future care only.

2. Add Medicare as a payee on the settlement check and attempt to force CMS to approve the settlement agreement (including money specifically allocated for future treatment).

3. Set up blocked account for use regarding future medical expenses only.

4. Set up a Trust for future medical care.

5. Try to get Medicare to approve MSA even though they don’t actually have a mechanism in place for doing so.

If a settlement agreement contains express language allocating money for future care and Plaintiff signs off, then it can be argued a liability carrier has taken reasonable steps to protect Medicare’s interests. The language of the agreement or release should clearly state the basis upon which the amount set aside was determined. The obvious problem is that the Plaintiff may not keep the money “set -aside,” and if that occurs, Medicare may seek to collect future payment from the parties.

By adding Medicare as a Payee to a settlement check, you can attempt to force Medicare to approve the money the parties propose to allocate. Generally, if there is going to be future care, there was likely past care. If there was past care, there is a lien that must be satisfied. By making a condition of negotiating the check that Medicare approve the settlement terms, you can possibly argue that CMS cannot later claim the money allocated was not appropriate.

A blocked account or trust can also serve in demonstrating a liability carrier’s reasonable efforts to protect Medicare’s interests. These devices are appealing because of the limitations imposed regarding withdrawal of funds. The blocked account or trust can be set up so that a Plaintiff would not be able to use the money for purposes other than medical care related to injuries suffered in the lawsuit being settled. If the plaintiff exhausts the funds in the account or trust for purposes of related medical care, it is more likely Medicare will not deny future claims for related care.

Lastly, parties can submit an MSA to CMS for specific approval. However, since there is no mechanism or procedure currently in place for doing so CMS may or may not approve your proposed MSA. Moreover, it is anticipated there will be significant delays in getting a CMS response which could wreak havoc in trying to settle cases involving Medicare beneficiaries.

Understanding MSAs is important, not necessarily because you may have to create one as part of a settlement, but because of the policy underlying the existence of MSAs. If there is future care anticipated, the settlement with a Medicare eligible plaintiff must adequately take into consideration Medicare interests. That means, some mechanism must be created to have some money allocated or perhaps even set aside for future care. In the workers compensation arena, that is done by an MSA. In a liability case, it is not clear how best to accomplish the task of protecting Medicare’s interests.

The fact remains, the law is clear you must act to protect Medicare’s interest. What is not clear is how to go about protecting Medicare’s interest. Should you not adequately protect Medicare’s interest, its powers to seek reimbursement are broad and complex and can be applied to not only the Plaintiff and Plaintiff’s counsel but to Defendants, their counsel and their insurance companies.

Authors: Carl Fessenden, Norman Prior & Heath Langle