The Conflict over Medicare's 'Full Reimbursement' Rule

In tort cases brought by Medicare beneficiaries, counsel must often confront a practical question: If the Medicare beneficiary compromises the tort claim and recovers a reduced amount from the tortfeasor for medical expenses, is the government entitled to full reimbursement of its Medicare payments, or is it entitled (like its beneficiary) to only a proportionate recovery from the settlement? This issue is fundamental to the construction of the Medicare Secondary Payer Act, 42 U.S.C. ' 1395y(b) (2011).

A Case in Point

In Hadden v. United States, 661 F.3d 298 (6th Cir. 2011), the Sixth Circuit accepted the government's argument that it is entitled to seek full reimbursement of its Medicare payments (less procurement costs) from a settlement even though the beneficiary has obtained only a discounted recovery of her damages. Yet the government does not seek full reimbursement of its Medicare payments if the beneficiary receives a comparably discounted recovery after a decision on the merits.

The Sixth Circuit's Haddon opinion creates problems, both for plaintiffs and for the Medicare program. Let's take a look at some of them.

Settlements Chilled

According to the Eleventh Circuit, “Historically, there is a strong public interest in the expeditious resolution of lawsuits through settlement.” Bradley v. Sebelius, 621 F.3d 1330, 1339 (11th Cir. 2010). Yet the Sixth Circuit's Hadden opinion undermines this public policy.

In Hadden, the Medicare beneficiary brought suit against one of two motorists whose actions allegedly caused his injuries (the other motorist could not be identified). The beneficiary alleged damages that included medical expenses, and pain and suffering. The beneficiary settled his claims against the identifiable motorist for only 10% of his claimed damages. In a decision authored by Judge Raymond Kethledge and joined by Judge Sandra Beckwith, the Sixth Circuit nonetheless construed the Medicare Secondary Payer Act to allow the government to recover the full amount of its Medicare payments (less procurement costs) from the discounted settlement. “The scope of ' the beneficiary's ' obligation to reimburse Medicare ' is ultimately defined by the scope of his own claim against the third party. That is true even if the beneficiary later 'compromise[s]' as to the amount owed on the claim, and even if the third party never admits liability.” Id. at 302 (emphasis added). Judge Helene White dissented. She noted that the majority's construction of the Act “discourages settlements and may ultimately hinder [the government's] efforts to recover conditional Medicare payments.” Id. at 309 (White, J., dissenting).

The Sixth Circuit's opinion discourages settlement by according less respect to a settlement than it does to a decision on the merits. Thus, the opinion allows the government to seek full reimbursement of its Medicare payments from a settlement even if the Medicare beneficiary recovers only a fraction of her medical damages. See Hadden, at 302-03. By contrast, the government will not seek full reimbursement of its Medicare payments when a decision on the merits awards the beneficiary less than all of her medical damages.

The government's position has been stated as follows: “The only situation in which Medicare recognizes allocations of liability payments to nonmedical losses is when payment is based on a court order on the merits of the case. If the court or other adjudicator of the merits specifically designate amounts that are for payment of pain and suffering or other amounts not related to medical services, Medicare will accept the Court's designation.” Centers for Medicare and Medicaid Servs., Medicare Secondary Payer Manual, CMS Pub. 110-5, ch. 7, ' 50.4.4 (2008) (emphasis added). This discordant treatment of settlements and merits-based decisions will discourage settlement.

Personal Injuries

In lawsuits claiming damages for personal injuries, Medicare beneficiaries seek to recover more than just expenses covered by Medicare. They seek to recover damages for such items as lost earnings, lost earnings capacity, and pain and suffering. See, e.g., Christopher C. Yearout, Big Brother Is Not Just Watching, He's Suing: Medicare's Secondary Payer Statute Evolves in Aggressive Pursuit of Fiscal Integrity, 41 Cumb. L. Rev. 117, 137 (2011) (“Settlement agreements ' naturally reflect medical expenses, pain and suffering, lost wages, or any number of factors surrounding the alleged tortious conduct ' .”).

Yet the Sixth Circuit's opinion allows the government to take all such settlement amounts so long as the claims arise from Medicare-covered injuries and the taking is necessary to reimburse the government for its Medicare payments. Thus, a beneficiary must reject even reasonable settlement offers and obtain a decision on the merits to prevent the government from seeking reimbursement of its Medicare payments from the beneficiary's recoveries for lost earnings, pain and suffering, and other non-medical damages.

This construction of the Medicare Secondary Payer Act is “a financial disincentive [for beneficiaries] to accept otherwise reasonable settlement offers.” Bradley, 621 F.3d at 1339; see also In re Zyprexa Prods. Liab. Litig., 451 F. Supp. 2d 458, 470 (E.D.N.Y. 2006) (“Because it may
deprive them of any compensation for their injuries, the full reimbursement approach gives many beneficiaries little incentive ' to accept otherwise reasonable settlement offers ' .”); Yearout, supra, at 155-56
(“[P]laintiffs are tempted to 'roll the dice' in a jury trial rather than settle for full damages, which Medicare would attach in full.”); Rick Swedloff, Can't Settle, Can't Sue: How Congress Stole Tort Remedies from Medicare Beneficiaries, 41 Akron L. Rev. 557, 588 (2008) (“It should be intuitively obvious that Medicare beneficiaries will have difficulty settling tort claims under the MSP.”).

Next month, we will discuss Haddon's effects on litigation costs and government collection efforts, and the current conflicts among the circuits regarding settlements and Medicare reimbursements.

David Axelrad, a member of this newsletter's Board of Editors, and Robert Wright are partners in the civil appellate law firm of Horvitz & Levy LLP, Encino, CA.

In tort cases brought by Medicare beneficiaries, counsel must often confront a practical question: If the Medicare beneficiary compromises the tort claim and recovers a reduced amount from the tortfeasor for medical expenses, is the government entitled to full reimbursement of its Medicare payments, or is it entitled (like its beneficiary) to only a proportionate recovery from the settlement? This issue is fundamental to the construction of the Medicare Secondary Payer Act, 42 U.S.C. ' 1395y(b) (2011).

A Case in Point

In Hadden v. United States , 661 F.3d 298 (6th Cir. 2011), the Sixth Circuit accepted the government's argument that it is entitled to seek full reimbursement of its Medicare payments (less procurement costs) from a settlement even though the beneficiary has obtained only a discounted recovery of her damages. Yet the government does not seek full reimbursement of its Medicare payments if the beneficiary receives a comparably discounted recovery after a decision on the merits.

The Sixth Circuit's Haddon opinion creates problems, both for plaintiffs and for the Medicare program. Let's take a look at some of them.

Settlements Chilled

According to the Eleventh Circuit, “Historically, there is a strong public interest in the expeditious resolution of lawsuits through settlement.” Bradley v. Sebelius , 621 F.3d 1330, 1339 (11th Cir. 2010). Yet the Sixth Circuit's Hadden opinion undermines this public policy.

In Hadden, the Medicare beneficiary brought suit against one of two motorists whose actions allegedly caused his injuries (the other motorist could not be identified). The beneficiary alleged damages that included medical expenses, and pain and suffering. The beneficiary settled his claims against the identifiable motorist for only 10% of his claimed damages. In a decision authored by Judge Raymond Kethledge and joined by Judge Sandra Beckwith, the Sixth Circuit nonetheless construed the Medicare Secondary Payer Act to allow the government to recover the full amount of its Medicare payments (less procurement costs) from the discounted settlement. “The scope of ' the beneficiary's ' obligation to reimburse Medicare ' is ultimately defined by the scope of his own claim against the third party. That is true even if the beneficiary later 'compromise[s]' as to the amount owed on the claim, and even if the third party never admits liability.” Id. at 302 (emphasis added). Judge Helene White dissented. She noted that the majority's construction of the Act “discourages settlements and may ultimately hinder [the government's] efforts to recover conditional Medicare payments.” Id. at 309 (White, J., dissenting).

The Sixth Circuit's opinion discourages settlement by according less respect to a settlement than it does to a decision on the merits. Thus, the opinion allows the government to seek full reimbursement of its Medicare payments from a settlement even if the Medicare beneficiary recovers only a fraction of her medical damages. See Hadden, at 302-03. By contrast, the government will not seek full reimbursement of its Medicare payments when a decision on the merits awards the beneficiary less than all of her medical damages.

The government's position has been stated as follows: “The only situation in which Medicare recognizes allocations of liability payments to nonmedical losses is when payment is based on a court order on the merits of the case. If the court or other adjudicator of the merits specifically designate amounts that are for payment of pain and suffering or other amounts not related to medical services, Medicare will accept the Court's designation.” Centers for Medicare and Medicaid Servs., Medicare Secondary Payer Manual, CMS Pub. 110-5, ch. 7, ' 50.4.4 (2008) (emphasis added). This discordant treatment of settlements and merits-based decisions will discourage settlement.

Personal Injuries

In lawsuits claiming damages for personal injuries, Medicare beneficiaries seek to recover more than just expenses covered by Medicare. They seek to recover damages for such items as lost earnings, lost earnings capacity, and pain and suffering. See, e.g., Christopher C. Yearout, Big Brother Is Not Just Watching, He's Suing: Medicare's Secondary Payer Statute Evolves in Aggressive Pursuit of Fiscal Integrity, 41 Cumb. L. Rev. 117, 137 (2011) (“Settlement agreements ' naturally reflect medical expenses, pain and suffering, lost wages, or any number of factors surrounding the alleged tortious conduct ' .”).

Yet the Sixth Circuit's opinion allows the government to take all such settlement amounts so long as the claims arise from Medicare-covered injuries and the taking is necessary to reimburse the government for its Medicare payments. Thus, a beneficiary must reject even reasonable settlement offers and obtain a decision on the merits to prevent the government from seeking reimbursement of its Medicare payments from the beneficiary's recoveries for lost earnings, pain and suffering, and other non-medical damages.

This construction of the Medicare Secondary Payer Act is “a financial disincentive [for beneficiaries] to accept otherwise reasonable settlement offers.” Bradley, 621 F.3d at 1339; see also In re Zyprexa Prods. Liab. Litig., 451 F. Supp. 2d 458, 470 (E.D.N.Y. 2006) (“Because it may
deprive them of any compensation for their injuries, the full reimbursement approach gives many beneficiaries little incentive ' to accept otherwise reasonable settlement offers ' .”); Yearout, supra, at 155-56
(“[P]laintiffs are tempted to 'roll the dice' in a jury trial rather than settle for full damages, which Medicare would attach in full.”); Rick Swedloff, Can't Settle, Can't Sue: How Congress Stole Tort Remedies from Medicare Beneficiaries, 41 Akron L. Rev. 557, 588 (2008) (“It should be intuitively obvious that Medicare beneficiaries will have difficulty settling tort claims under the MSP.”).

Next month, we will discuss Haddon's effects on litigation costs and government collection efforts, and the current conflicts among the circuits regarding settlements and Medicare reimbursements.

David Axelrad, a member of this newsletter's Board of Editors, and Robert Wright are partners in the civil appellate law firm of Horvitz & Levy LLP, Encino, CA.