Medicare Secondary Payer Compliance in 2012

A Formalized Approach to the Question of Medicare Set-Asides for Civil Plaintiff & Defense Counsel

The Medicare Secondary Payer (“MSP”) Act [1] obligates parties resolving liability insurance claims to address two broad obligations: 1) reimbursement/ resolution; and 2) reporting. [2] Within the reimbursement/resolution prong lie two components, past medicals and future medicals. [3] To comply with future medical obligations, parties should screen the case to determine if a Medicare Set-aside Arrangement (“MSA”) is appropriate under the case-specific facts. The MSA obligation is the subject of debate and uncertainty nationwide. The purpose of this article is to provide a formalized approach to addressing the MSA issue in a 2012 liability insurance settlement. [4]

Whether an MSA is the appropriate way to consider and protect Medicare’s future interest in liability settlements must be based upon a formalized, case-specific analysis that meets the following standard: “reasonable good faith effort at compliance” (the “Good Faith standard”). Meeting the Good Faith standard adheres to all relevant statutory, regulatory and administrative guidance from the Centers for Medicare & Medicaid Services (“CMS”).

The MSA obligation in a liability settlement 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. For example, a liability MSA would be properly considered in the case where a liability action proceeds to trial, results in a judgment in favor of a Medicare beneficiary, and the trier of fact determines that a specific portion of the judgment is to be applied to pay for future medical expenses, because there would be an identifiable portion of the judgment against which to apply future medicals. In that setting, and if there is no other payor apart from Medicare obligated to pay for that future injury- related care, establishing an MSA and seeking CMS approval may be the best, but not only, way to ensure compliance. [5]

On the other hand, in the majority of settlements where the parties settle liability claims using a broad, general release of all claims and do not specify or otherwise allocate settlement proceeds to particular damages, whether due to policy limitations or other confounding factors to a claimant’s full recovery of damages sustained, the procedures by which one can determine the propriety of an 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”), a future medical expense component is not readily identifiable. The mere fact that an injured person has pled for future medical expenses as part of the claim or the insurance carrier is being released (under the terms of the settlement) from the obligation to pay for future medical expenses going forward does not necessarily mean the gross recovery contains proceeds for future medical expenses. Even the presence of a life care plan does not mean that the gross recovery contains proceeds for future medical expenses. While a claim may contemplate future medical expenses, that in and of itself does not guarantee the gross recovery contains proceeds for future medical expenses, even if the release makes reference to “all claims past and future.”

To meet the Good Faith standard settling parties should take steps to:

1. determine whether an MSA is appropriate under the case-specific facts; and then
2. document the file accordingly.

By screening every case with a formalized approach to verifying, resolving and satisfying potential MSA obligations, and documenting the file to demonstrate the steps the parties took, settling parties will ensure the following:

1. Medicare’s future interest has been considered and protected appropriately;
2. the settling parties are fully compliant with the Medicare Secondary Payer Act (statute and regulations); and
3. the injured person’s Medicare benefits are protected going forward.

Screen

Only after finding an injured person to be a candidate for use of an MSA (based on case-specific facts such as claimant’s Medicare enrollment status, determining if claims resolution results in future medicals being closed such that Medicare becomes the primary payer of future injury-related medicals going forward [6], as well as other relevant factors) can it be said that an MSA may be warranted. [7] MSA allocation created without first determining an injured person’s candidacy for an MSA may be creating an obligation which would not otherwise exist for the settling parties.

If an injured person is not deemed to be a candidate for an MSA, then the settling parties are compliant with the MSP Act by simply documenting their respective files as to the reason why an MSA was not appropriate based on the case-specific facts.

Assess

If the injured person is an MSA candidate, the parties must next determine if the (potential) gross settlement proceeds contain sufficient dollars to fund any MSA obligation through an allocation to future medicals. To do this, parties should assess the damages sustained, compare those to the gross recovery and conclude whether:

i) the gross recovery actually contains dollars for future medicals; or

ii) whether due to the case-specific facts, the injured person is not being compensated for future medicals despite the fact that future medicals are a damage component being pled and released and/or a life care plan may be in existence, evidencing the injured person’s need for certain future injury-related care. [8]

Parties should rely on standardized damage allocation methodology in making this determination, ensuring a consistent application of these principles if challenged by CMS at a later date. [9] Such a standardized methodology should be based on all guidance in existence at the time of settlement (including statutory, regulatory and administrative guidance from CMS as well as relevant case law). Absent such a thorough methodology being applied, the parties could be led off the path one way (funding an MSA when not warranted) or another (failing to fund an MSA when warranted).

If an allocation exists for future medicals, then an MSA is warranted. The amount of the future medical allocation figure represents 100% value for all future medicals funded within the gross award and the maximum possible MSA figure. It does not, however, represent the final MSA amount. To determine that figure, the parties should proceed to Valuing the future medical damages component; step three of
the analysis.

Value

To identify the appropriate MSA amount to ensure compliance (and protect the injured person’s Medicare card), a future cost of care (“FCC”) analysis should be conducted to identify all future injury-related care services/expenses expected to be incurred by the injured person, and then divide those services/expenses between Medicare-covered services/expenses and non-Medicare covered services/expenses. The MSA would be fully funded (and the MSA obligation fully addressed) for the lesser of the future medical allocation and the FCC analysis.

Educate

At this point, the injured person faces the same funding and administrative decisions presented in the workers’ compensation context. Liability MSAs may be funded either with a full lump sum dollar amount up front or with an initial lump sum, combined with the purchase of an annuity or other structured settlement vehicle. Liability MSAs may either be self-administered or administered by a professional custodian.

What differs greatly from the workers’ compensation context at this point is the ability to submit the MSA proposal to CMS for review and approval. While workers’ compensation MSAs are submitted to a central CMS office and CMS has a formalized approach to the review of workers’ compensation MSAs, liability MSAs may be properly submitted only to the appropriate CMS regional office. The CMS does not have the same formal review process for liability MSA proposals as it does for workers’ compensation MSA proposals, and it may prove difficult to get CMS to review and approve a liability MSA proposal.

As of the date of this article, CMS does not encourage parties to submit a liability MSA for review and approval. Nevertheless, even though CMS does not currently have the resources to review liability MSAs (as a general rule), that does not mean that analysis and (perhaps) ultimately funding a liability MSA is unnecessary in today’s environment. CMS officials have stated that its right to NOT pay for future medical expenses in certain liability cases comes from the same statutory rights under 42 U.S.C. §1395y(b)(2) and its accompanying regulations as do its rights to not pay for future medical expenses in the workers’ compensation arena.

Conclusion

A formalized approach equals compliant results. By determining if an MSA is appropriate under your case-specific facts and then documenting your file accordingly, you will have achieved the Good Faith standard that will lead to the protections the settling parties seek. If liability MSAs are not yet on your radar as a standard question you must ask and answer in settling a personal injury case, it is likely that you have not yet had a settling party mandate that a liability MSA must be funded in order to disburse settlement proceeds. Instead of being blindsided in the last ten minutes of mediation by this “requirement” which seemingly comes out of left field, you have the ability to short-circuit the argument if you have applied a formalized approach and have documented your file.

We submit this article to assist settling parties in better understanding the use of MSAs in a liability settlement context. At the same time, hopefully, we have provided some practical guidance/ tips for dealing with situations where the settling parties are confused about their MSP compliance obligations, especially with respect to the related requirements (or lack thereof) concerning MSAs in liability settlements. For more information, please visit our website: www.garretsongroup.com

John Cattie is our company’s lead contact to initiate any case/fact-specific discussions.:
John Cattie: 704-559-4300 jcattie@garretsongroup.com

Footnotes:

[1] 42 U.S.C. §1395y(b)(2).

[2] 42 U.S.C. §1395y(b)(8).

[3] Technically, as opposed to a right of reimbursement for future injury-related medicals, the MSP Act endows CMS with the implicit right to NOT make payments for an injured person’s future injury-related care when another primary plan or payer has already accepted responsibility for such payments and has made payment to an injured person of such funds allocated to the injured person’s future cost of care needs. It is this right NOT to make a future payment which distinguishes this right from rights to reimbursement for any conditional payments made under the reimbursement provisions of the MSP Act.

[4] Throughout this Article, when the term “settlement” is used, it encompasses settlements, judgments, awards and other payments where CMS’s right of recovery ripens under the MSP Act.

[5] But, see Schexnayder v. Scottsdale Insurance Company, Civ. No. 6:09-cv-1390, 2011 U.S. Dist. LEXIS 83687, 2011 WL 3273547 (W.D. La. July 29, 2011) and Smith v. Marine Terminals of Arkansas, No. 3:09-cv-00027-JLH, 2011 U.S. Dist. LEXIS 90428, 2011 WL 3489806 (E.D. Ark. Aug. 9, 2011), where parties were unable to gain CMS’s approval of the MSA proposal as a condition of settlement.

[6] Finke v. Hunter’s View, Ltd. and Wal-Mart Stores, Incorporated, Civ. No. 07-4267 (WRW/RLE), 2009 WL 6326944 (D. Minn. Aug. 25, 2009).

[7] Big R Towing v. Benoit, Civ. Action No. 10-538, 2011 WL 43219 (W.D. La. Jan. 5, 2011).

[8] See Zinman v. Shalala, 67 F.3d 841, 846 (9th Cir. 1995). where the Court foresaw this inherent problem in liability settlements under the MSP Act.

[9] Guidry, et al. v. Chevron USA, Inc., Civ. No. 6:10-cv-00868, 2011 U.S. Dist. LEXIS 148942 (W.D. La. December 28, 2011).