Medicare Set-Asides in Med-Mal and Personal Injury Litigation

An issue that arises with increasing frequency in the context of medical malpractice and other personal injury settlements is whether, and to what extent, funds should be allocated from a settlement to provide for future medical costs that Medicare would otherwise be required to pay. The good news is that, contrary to popular belief, section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) does not require Medicare set-asides (MSAs) in the liability insurance context. See David J. Berg, “Medicare Set-Asides and Personal Injury Cases ' What Is the Practitioner to Do?” www.massbar.org/publications/section-review/2010v12-n2/medicare-.

Section 111 merely imposes requirements, under threat of substantial penalties, on “responsible reporting entities” (RREs) such as liability insurers and self-insured entities to report any settlement, judgment or other payment involving a claimant who may be entitled to Medicare to the Centers for Medicare and Medicaid Services (CMS).

Nor, as yet, have any regulations been promulgated requiring set-asides in the third-party liability context, and at least one commentator has concluded that it is unlikely that MSAs could be required in tort cases in the absence of regulations. Id. Moreover, CMS has held a series of “Town Hall” telephone conferences since the enactment of MMSEA to discuss the impact of the Section 111 reporting requirements. In these conferences, transcripts of which are available on the CMS website, CMS has specifically taken the position that Section 111 does not mandate or specify anything about liability set-asides; that the set-aside process is separate from the Section 111 reporting process; and that CMS does not anticipate changing its routine recovery process. See MSA White Paper: The Use and Propriety of Medicare Set-Asides in Liability Settlements, The Garretson Resolution Group, www.garretsonfirm.com/garretson/news/?newsID=92.

Medicare Can Recoup

On the other hand, Medicare does have the right to recoup not only past payments, but also future payments that “can reasonably be expected to be made promptly, under a liability insurance policy or plan.” 42 U.S.C. 1395y(b)(1); 42 C.F.R. 411.24(b). The underlying rationale here is that Medicare is considered a secondary payer or payer of last resort, whose obligation is secondary to that of a defendant or a defendant's liability insurer. Where another source of coverage is available ' as, for example, a portion of a settlement allocated to future medical expenses ' the plaintiff or claimant is expected to exhaust those funds before turning to Medicare.

This raises the possibility that in some instances the use of an MSA may nevertheless be advisable in a medical malpractice or other personal injury case, even if it is not explicitly required. It has been suggested that in the absence of any currently enacted law or guidance specific to the use of MSAs in a liability settlement, MSAs are appropriate only in a case where there is a definitive allocation to future medical expenses in a settlement release or a line item for future medical expenses on a jury verdict form, plus a permanent burden shift to Medicare. The Garretson Firm, MSA Guidelines in Liability Cases, April 18, 2011, http://lienresolutionblog.garretsonfirm.com/.

Of course, many medical malpractice/personal injury cases do involve substantial awards or settlements for future medical expenses. If the plaintiff in such a case is or may soon become eligible for Medicare, it is probably advisable for counsel to consider the possibility of an MSA. For example, assume that the plaintiff has been rendered paraplegic or quadriplegic as a result of a fall from a scaffold or negligence in performing spinal surgery and is on Social Security Disability, which makes him eligible for Medicare; or that the plaintiff, who is already a Medicare beneficiary, will require ongoing dialysis as a result of negligence in diagnosing and treating a kidney condition; or that the plaintiff will require future hip replacements or other types of surgery on a periodic basis and is expected to enroll in Medicare in the next 30 months. In each of these fact patterns it is likely that there would be a definitive allocation to future medical expenses in a settlement release or a line item for future medical expenses on a jury verdict form, and that the plaintiff would be entitled to Medicare. As indicated above, this is the type of situation where it has been suggested that an MSA would be appropriate. Id.

Even though an MSA is apparently not required even in this type of setting at the present time, if an MSA is not used in such a case, counsel should document their file and memorialize how they did consider and protect Medicare's future interest, and how they arrived at the conclusion that an MSA was not appropriate. It has been suggested that this might be accomplished by obtaining an MSA evaluation from a neutral third party, or a note from the treating physician that the plaintiff does not require any future injury-related care that would otherwise be covered by Medicare. See “Medicare Set Aside Arrangement Terms,” The Garretson Resolution Group, http://lienresolutionblog.garretsonfirm.com/2010/03/medicare-set-aside-arrangements-terms.html.

Getting Guidance from MSAs in Workers'
Compensation Cases

While MSAs may be appropriate in the type of case discussed above even in the absence of specific regulations or guidance from CMS, it is possible, and perhaps probable, that regulations requiring MSAs in the liability context will be promulgated in the future. In the event MSAs are required, it is likely that the applicable guidelines will be similar to those currently applicable to Workers' Compensation cases.

In Workers' Compensation cases, 42 C.F.R. 411.46 and 411.47 provide that Medicare's interest must be “considered” when future medical expenses represent a portion of a settlement. It is generally accepted that MSAs are required when the claimant is a Medicare beneficiary and the settlement is greater than $25,000, or when there is a reasonable expectation that the claimant will enroll in the next 30 months and the total settlement for future medical expenses exceeds $250,000. Since settlements in medical malpractice and other personal injury actions, particularly those involving catastrophic injuries, often involve an allocation for future medical expenses in excess of $250,000, it is likely that if regulations are promulgated requiring MSAs in personal injury actions, similar thresholds would be imposed.

Guidelines issued by CMS, which are available on its website, indicate that the amount of a set-aside is determined on a case-by-case basis and should be reviewed by CMS where appropriate. CMS has indicated that a set-aside may be submitted to CMS for review in the situations noted above where the claimant is a Medicare beneficiary and the settlement is greater than $25,000, or where there is a reasonable expectation that the claimant will enroll in the next 30 months and the total settlement for future medical expenses exceeds $250,000. The claimant is responsible for filing yearly accountings with CMS until the account is exhausted. Greg Lois, “Medicare Secondary Payer ' The Latest 'Best Practices' for Practitioners,” Defending Employers/Workers' Compensation Defense NY & NJ, available at http://greglois.com/files/c4dc202f743b6ab4f3c5118320392ab7-156.html. Only after the set-aside has been exhausted and accurately accounted for to CMS will Medicare agree to act as the primary payer for future Medicare-covered expenses related to the Workers' Compensation injury. www.cms.gov/workerscompagencyservices/04_wcsetaside.asp.

Computing the Total Settlement Amount

CMS has also indicated that the computation of a total settlement amount includes, but is not limited to, wages, attorneys' fees, all future medical expenses (including prescription drugs) and repayment of any Medicare conditional payments. In the personal injury context, of course, the total settlement amount would likely include pain and suffering as well.

In addition, in determining the total amount of a settlement when using an annuity, as in a structured settlement, CMS requires that the payout totals (i.e., the future value) of any annuities be used rather than the cost or present value of the annuities. Id. CMS gives the example of a settlement that is to pay $15,000 a year for the next 20 years to a person who has a “reasonable expectation” of Medicare enrollment within the next 30 months. The settlement is to be funded by an annuity that will cost $175,000. Such a settlement would be appropriate for review by CMS, since the total payout of $300,000 ($15,000 a year x 20 years) is greater than $250,000.

An MSA can take the form of a bank or investment account, which can be funded either with a lump sum cash payment at the time of settlement or through periodic annuity payments. Structured settlements are frequently used in medical malpractice cases, and some states, such as New York, require the use of structured judgments and the payment of future damages over time. Many insurance carriers are likely to have relationships with structured settlement brokers who can assist in setting up an MSA account.

When Is an MSA Not Appropriate in a Workers' Comp Case?

CMS has indicated that an MSA is not warranted in a Workers' Compensation case in the following circumstances:

• When the facts of the case demonstrate that the injured person is only being compensated for past medical expenses;
• When there is no indication that the injured person is attempting to maximize the other aspects of the settlement (i.e., lost wages and disability portions) to Medicare's detriment; or
• When the injured person's treating physicians conclude (in writing) that to a reasonable degree of medical certainty, the injured party will no longer require any Medicare-covered treatments related to the injuries. www.cms.gov/workerscompagencyser vices/04_wcsetaside.asp

Once again, it is likely that similar guidelines would be made applicable to personal injury actions. It should be cautioned, however, that in any of these circumstances, Medicare still will be entitled to recovery of any conditional payments made prior to the date of the settlement.

Planning for an MSA

In a case where use of an MSA would potentially be appropriate, based on the likelihood of a substantial allocation to future medical expenses in a settlement or judgment, plaintiff's and defense counsel should ensure, as a starting point, that they have all the plaintiff's medical records. This should preferably occur early in the litigation, well in advance of any settlement or mediation. The medical records and the plaintiff's life care plan, if any, should be carefully reviewed in an attempt to estimate what portion of a settlement should be allocated to future medical expenses. An expert economist can be consulted to project the total future medical expenses based on the types of treatment and the annual or periodic costs delineated in the life care plan. Where counsel agree that an MSA should be employed, the settlement agreement can so provide, and can specifically document the plaintiff's obligations regarding the exhaustion of settlement funds allocated to future medical expenses.

It has been suggested that the standard to be applied to MSA analysis in liability settlements is “substantial compliance” grounded in good faith. In other words, if a reasonable person would surmise that an actual allocation of future injury-related medical expenses exists in the settlement such that the plaintiff voluntarily chooses to pursue a set-aside, two options exist: 1) Identify the appropriate allocation and ensure that those funds are indeed spent on future medical expenses that would otherwise be covered by Medicare; and/or 2) Contact the appropriate regional Medicare office and determine whether it would elect to review and approve the allocation. See MSA White Paper: The Use and Propriety of Medicare Set-Asides in Liability Settlements, The Garretson Resolution Group, www.garretsonfirm.com/garretson/news/?newsID=92. The funds so allocated can then be put in a separate account.

At least for the present, CMS will probably decline to review and approve an MSA in a tort case, but making the effort ' and documenting it ' will confirm that Medicare's interests were considered. Moreover, since RREs are now required to report settlements of personal injury actions to CMS, substantial settlements are likely to be subject to increased scrutiny, so that in a “worst-case” scenario, if no thought were given to Medicare's interest at the time of a settlement, the plaintiff might risk the loss of entitlement to Medicare benefits. See 42 C.F.R. 411.50. It is true that there is as yet no statutory or regulatory basis for recovery of Medicare payments from an RRE where there was no set-aside, and it has been suggested that an insurer or defendant does not need to play a role in setting up an MSA. The Garretson Firm, MSA Guidelines in Liability Cases, April 18, 2011, http://lienresolutionblog.garretsonfirm.com/. Still, this may be only a matter of time. See Gilbert, Richard L., “Medicare 'Set-Aside' Requirements in Third Party Liability Cases Panic: No/Prepare: Yes,” www.rgilbertadr.com/medicaresetasides.html.

Finally, since the concept of MSAs in tort settlements is relatively new, counsel should regularly consult the User Guide and the CMS website for “alerts” to stay abreast of current developments. Again, it is entirely possible that at some point, perhaps in the very near future, regulations will be promulgated requiring the use of MSAs in tort actions. When and if that happens, counsel who are already familiar with the concept will have a distinct advantage in representing their clients in this complex and evolving area.

Barbara D. Goldberg, a member of this newsletter's Board of Editors, is a partner with New York's Martin Clearwater & Bell, LLP, where she is Head of the firm's Appellate Department.

An issue that arises with increasing frequency in the context of medical malpractice and other personal injury settlements is whether, and to what extent, funds should be allocated from a settlement to provide for future medical costs that Medicare would otherwise be required to pay. The good news is that, contrary to popular belief, section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) does not require Medicare set-asides (MSAs) in the liability insurance context. See David J. Berg, “Medicare Set-Asides and Personal Injury Cases ' What Is the Practitioner to Do?” www.massbar.org/publications/section-review/2010v12-n2/medicare-.

Section 111 merely imposes requirements, under threat of substantial penalties, on “responsible reporting entities” (RREs) such as liability insurers and self-insured entities to report any settlement, judgment or other payment involving a claimant who may be entitled to Medicare to the Centers for Medicare and Medicaid Services (CMS).

Nor, as yet, have any regulations been promulgated requiring set-asides in the third-party liability context, and at least one commentator has concluded that it is unlikely that MSAs could be required in tort cases in the absence of regulations. Id. Moreover, CMS has held a series of “Town Hall” telephone conferences since the enactment of MMSEA to discuss the impact of the Section 111 reporting requirements. In these conferences, transcripts of which are available on the CMS website, CMS has specifically taken the position that Section 111 does not mandate or specify anything about liability set-asides; that the set-aside process is separate from the Section 111 reporting process; and that CMS does not anticipate changing its routine recovery process. See MSA White Paper: The Use and Propriety of Medicare Set-Asides in Liability Settlements, The Garretson Resolution Group, www.garretsonfirm.com/garretson/news/?newsID=92.

Medicare Can Recoup

On the other hand, Medicare does have the right to recoup not only past payments, but also future payments that “can reasonably be expected to be made promptly, under a liability insurance policy or plan.” 42 U.S.C. 1395y(b)(1); 42 C.F.R. 411.24(b). The underlying rationale here is that Medicare is considered a secondary payer or payer of last resort, whose obligation is secondary to that of a defendant or a defendant's liability insurer. Where another source of coverage is available ' as, for example, a portion of a settlement allocated to future medical expenses ' the plaintiff or claimant is expected to exhaust those funds before turning to Medicare.

This raises the possibility that in some instances the use of an MSA may nevertheless be advisable in a medical malpractice or other personal injury case, even if it is not explicitly required. It has been suggested that in the absence of any currently enacted law or guidance specific to the use of MSAs in a liability settlement, MSAs are appropriate only in a case where there is a definitive allocation to future medical expenses in a settlement release or a line item for future medical expenses on a jury verdict form, plus a permanent burden shift to Medicare. The Garretson Firm, MSA Guidelines in Liability Cases, April 18, 2011, http://lienresolutionblog.garretsonfirm.com/.

Of course, many medical malpractice/personal injury cases do involve substantial awards or settlements for future medical expenses. If the plaintiff in such a case is or may soon become eligible for Medicare, it is probably advisable for counsel to consider the possibility of an MSA. For example, assume that the plaintiff has been rendered paraplegic or quadriplegic as a result of a fall from a scaffold or negligence in performing spinal surgery and is on Social Security Disability, which makes him eligible for Medicare; or that the plaintiff, who is already a Medicare beneficiary, will require ongoing dialysis as a result of negligence in diagnosing and treating a kidney condition; or that the plaintiff will require future hip replacements or other types of surgery on a periodic basis and is expected to enroll in Medicare in the next 30 months. In each of these fact patterns it is likely that there would be a definitive allocation to future medical expenses in a settlement release or a line item for future medical expenses on a jury verdict form, and that the plaintiff would be entitled to Medicare. As indicated above, this is the type of situation where it has been suggested that an MSA would be appropriate. Id.

Even though an MSA is apparently not required even in this type of setting at the present time, if an MSA is not used in such a case, counsel should document their file and memorialize how they did consider and protect Medicare's future interest, and how they arrived at the conclusion that an MSA was not appropriate. It has been suggested that this might be accomplished by obtaining an MSA evaluation from a neutral third party, or a note from the treating physician that the plaintiff does not require any future injury-related care that would otherwise be covered by Medicare. See “Medicare Set Aside Arrangement Terms,” The Garretson Resolution Group, http://lienresolutionblog.garretsonfirm.com/2010/03/medicare-set-aside-arrangements-terms.html.

Getting Guidance from MSAs in Workers'
Compensation Cases

While MSAs may be appropriate in the type of case discussed above even in the absence of specific regulations or guidance from CMS, it is possible, and perhaps probable, that regulations requiring MSAs in the liability context will be promulgated in the future. In the event MSAs are required, it is likely that the applicable guidelines will be similar to those currently applicable to Workers' Compensation cases.

In Workers' Compensation cases, 42 C.F.R. 411.46 and 411.47 provide that Medicare's interest must be “considered” when future medical expenses represent a portion of a settlement. It is generally accepted that MSAs are required when the claimant is a Medicare beneficiary and the settlement is greater than $25,000, or when there is a reasonable expectation that the claimant will enroll in the next 30 months and the total settlement for future medical expenses exceeds $250,000. Since settlements in medical malpractice and other personal injury actions, particularly those involving catastrophic injuries, often involve an allocation for future medical expenses in excess of $250,000, it is likely that if regulations are promulgated requiring MSAs in personal injury actions, similar thresholds would be imposed.

Guidelines issued by CMS, which are available on its website, indicate that the amount of a set-aside is determined on a case-by-case basis and should be reviewed by CMS where appropriate. CMS has indicated that a set-aside may be submitted to CMS for review in the situations noted above where the claimant is a Medicare beneficiary and the settlement is greater than $25,000, or where there is a reasonable expectation that the claimant will enroll in the next 30 months and the total settlement for future medical expenses exceeds $250,000. The claimant is responsible for filing yearly accountings with CMS until the account is exhausted. Greg Lois, “Medicare Secondary Payer ' The Latest 'Best Practices' for Practitioners,” Defending Employers/Workers' Compensation Defense NY & NJ, available at http://greglois.com/files/c4dc202f743b6ab4f3c5118320392ab7-156.html. Only after the set-aside has been exhausted and accurately accounted for to CMS will Medicare agree to act as the primary payer for future Medicare-covered expenses related to the Workers' Compensation injury. www.cms.gov/workerscompagencyservices/04_wcsetaside.asp.

Computing the Total Settlement Amount

CMS has also indicated that the computation of a total settlement amount includes, but is not limited to, wages, attorneys' fees, all future medical expenses (including prescription drugs) and repayment of any Medicare conditional payments. In the personal injury context, of course, the total settlement amount would likely include pain and suffering as well.

In addition, in determining the total amount of a settlement when using an annuity, as in a structured settlement, CMS requires that the payout totals (i.e., the future value) of any annuities be used rather than the cost or present value of the annuities. Id. CMS gives the example of a settlement that is to pay $15,000 a year for the next 20 years to a person who has a “reasonable expectation” of Medicare enrollment within the next 30 months. The settlement is to be funded by an annuity that will cost $175,000. Such a settlement would be appropriate for review by CMS, since the total payout of $300,000 ($15,000 a year x 20 years) is greater than $250,000.

An MSA can take the form of a bank or investment account, which can be funded either with a lump sum cash payment at the time of settlement or through periodic annuity payments. Structured settlements are frequently used in medical malpractice cases, and some states, such as New York, require the use of structured judgments and the payment of future damages over time. Many insurance carriers are likely to have relationships with structured settlement brokers who can assist in setting up an MSA account.

When Is an MSA Not Appropriate in a Workers' Comp Case?

CMS has indicated that an MSA is not warranted in a Workers' Compensation case in the following circumstances:

• When the facts of the case demonstrate that the injured person is only being compensated for past medical expenses;
• When there is no indication that the injured person is attempting to maximize the other aspects of the settlement (i.e., lost wages and disability portions) to Medicare's detriment; or
• When the injured person's treating physicians conclude (in writing) that to a reasonable degree of medical certainty, the injured party will no longer require any Medicare-covered treatments related to the injuries. www.cms.gov/workerscompagencyser vices/04_wcsetaside.asp

Once again, it is likely that similar guidelines would be made applicable to personal injury actions. It should be cautioned, however, that in any of these circumstances, Medicare still will be entitled to recovery of any conditional payments made prior to the date of the settlement.

Planning for an MSA

In a case where use of an MSA would potentially be appropriate, based on the likelihood of a substantial allocation to future medical expenses in a settlement or judgment, plaintiff's and defense counsel should ensure, as a starting point, that they have all the plaintiff's medical records. This should preferably occur early in the litigation, well in advance of any settlement or mediation. The medical records and the plaintiff's life care plan, if any, should be carefully reviewed in an attempt to estimate what portion of a settlement should be allocated to future medical expenses. An expert economist can be consulted to project the total future medical expenses based on the types of treatment and the annual or periodic costs delineated in the life care plan. Where counsel agree that an MSA should be employed, the settlement agreement can so provide, and can specifically document the plaintiff's obligations regarding the exhaustion of settlement funds allocated to future medical expenses.

It has been suggested that the standard to be applied to MSA analysis in liability settlements is “substantial compliance” grounded in good faith. In other words, if a reasonable person would surmise that an actual allocation of future injury-related medical expenses exists in the settlement such that the plaintiff voluntarily chooses to pursue a set-aside, two options exist: 1) Identify the appropriate allocation and ensure that those funds are indeed spent on future medical expenses that would otherwise be covered by Medicare; and/or 2) Contact the appropriate regional Medicare office and determine whether it would elect to review and approve the allocation. See MSA White Paper: The Use and Propriety of Medicare Set-Asides in Liability Settlements, The Garretson Resolution Group, www.garretsonfirm.com/garretson/news/?newsID=92. The funds so allocated can then be put in a separate account.

At least for the present, CMS will probably decline to review and approve an MSA in a tort case, but making the effort ' and documenting it ' will confirm that Medicare's interests were considered. Moreover, since RREs are now required to report settlements of personal injury actions to CMS, substantial settlements are likely to be subject to increased scrutiny, so that in a “worst-case” scenario, if no thought were given to Medicare's interest at the time of a settlement, the plaintiff might risk the loss of entitlement to Medicare benefits. See 42 C.F.R. 411.50. It is true that there is as yet no statutory or regulatory basis for recovery of Medicare payments from an RRE where there was no set-aside, and it has been suggested that an insurer or defendant does not need to play a role in setting up an MSA. The Garretson Firm, MSA Guidelines in Liability Cases, April 18, 2011, http://lienresolutionblog.garretsonfirm.com/. Still, this may be only a matter of time. See Gilbert, Richard L., “Medicare 'Set-Aside' Requirements in Third Party Liability Cases Panic: No/Prepare: Yes,” www.rgilbertadr.com/medicaresetasides.html.

Finally, since the concept of MSAs in tort settlements is relatively new, counsel should regularly consult the User Guide and the CMS website for “alerts” to stay abreast of current developments. Again, it is entirely possible that at some point, perhaps in the very near future, regulations will be promulgated requiring the use of MSAs in tort actions. When and if that happens, counsel who are already familiar with the concept will have a distinct advantage in representing their clients in this complex and evolving area.

Barbara D. Goldberg, a member of this newsletter's Board of Editors, is a partner with New York's Martin Clearwater & Bell, LLP, where she is Head of the firm's Appellate Department.