Property Casualty 360: Medicare Set-Asides and Third-Party Liability Cases: Part Two
When it comes to lawyers for injured parties, defense lawyers, and insurance claims professionals, Medicare is probably causing more ulcers than it has ever paid to cure. Under the rubric that "all persons must protect Medicare's interests," insurers and lawyers on both sides are being told by people who have a vested financial interest in doing so that when a liability personal injury case is resolved by judgment or even settled, a Medicare Set-Aside (MSA) account should be established. This is a groundless position, and MSAs are not required as a means of protecting Medicare's interest for future medical bills. In fact, I believe that insurers who utilize MSAs in an attempt to "safeguard Medicare's interests" for future medical costs are putting their companies at risk of increased litigation costs and possible extra contractual (bad faith) exposure.
In the second part of this three-part series, we will see that MSAs are only required in certain workers' compensation settings; no case law supports the mandatory use of an MSA in a liability case; the Centers for Medicare & Medicaid Services (CMS), the agency that handles these issues for the government, does not require MSAs and is vague about whether they should be used; and discuss why the use of MSAs in third-party liability cases is not a good idea for any involved parties and increases litigation costs dramatically while possibly exposing the carrier to bad faith damages.
When MSAs Are Required
While the current Medicare Secondary Payer (MSP) Act provisions require that MSAs must be used in certain workers' compensation situations, the current MSP provisions do not require the use of MSAs in other contexts, such as in liability insurance (including self-insurance) situations. (See, David J. Berg in "Medicare Set-Asides And Personal Injury Cases - What Is The Practitioner To Do?"). Berg explained that a "thorough review of the MSP statute, its legislative history, its related regulations, CMS's manuals and memoranda, the case law, and the federal government's pleadings in litigation involving MSAs shows that MSAs are not currently required in settlements of personal injury cases."
Pursuant to the MSP provisions, an MSA is only required in the context of settlement of a workers' compensation case where the settlement will close out existing medical expenses.
However, the claimant must also anticipate receiving medical treatment for the injury after the settlement, and the claimant must either already be Medicare-eligible or the total settlement must be over $250,000, and the claimant has a reasonable expectation of becoming a Medicare beneficiary within 30 months of the settlement date.
It is only in these limited workers' compensation claim situations that the MSP provisions require claimant Medicare beneficiary to allocate a specified portion of the settlement to an MSA. As a refresher, an MSA is a separate account which must be approved by CMS into which the claimant must place a portion of the settlement proceeds for claimant's use to pay the expected post-settlement medical bills. Medicare will not pay for the future medical expenses until the monies in this MSA are exhausted. The MSA provisions only apply to the specified workers' compensation post-settlement medical expense situation, and this is further pointed out in "The King Kong Contingent: Should the Medicare Secondary Payer Statute Reach to Future Medical Expenses in Personal Injury Settlements?" by Norma S. Schmidt. As Schmidt stated, "The regulations dealing with Medicare as a secondary payer to post-settlement Medicare expenses are specific to worker's compensation, (which weakens) the argument that the MSP statute applies to future medical expenses in personal injury cases." 68 U. Pitt. L. Rev. 469, 478-479 and n.58 (2006) (citing 42 C.F.R. §411.46).
The MSP Manual includes a subchapter entitled "Recoveries from Liability Insurance Including No-Fault Insurance, Uninsured, or Under-Insured Motorists Insurance." While the subchapter addresses Medicare's rights to receive funds from the settlement proceeds of a tort case, it does so only in the framework of Medicare's liens for payments previously made; those "conditional payments" mentioned in part one. The subchapter contains no language about MSAs.
A review of the MSP provisions (including the manuals prepared by CMS regarding these provisions) reveals that there is only one reference to a liability MSA, and this reference does not support the position that a liability MSA is required. This reference defines a "set-aside arrangement" as follows:
"Set-Aside Arrangement - An administrative mechanism used to allocate a portion of a settlement, judgment or award for future medical and/or future prescription drug expenses. A set-aside arrangement may be in the form of a Workers' Compensation Medicare Set-Aside Arrangement (WCMSA), No-Fault Liability Medicare Set-Aside Arrangement (NFSA), or Liability Medicare Set-Aside Arrangement (LMSA)"
However, while there are detailed provisions in the MSP Manual discussing both the WCMSA (workers' compensation "administrative mechanism" allocating monies for further medical expenses) and the procedures to be following regarding a WCMSA, there are no such provisions in the MSP Manual or elsewhere in the MSP provisions discussing an LMSA or NFSA or the procedures to be followed regarding either of the two.
Given this situation, why has there been a debate about whether liability MSAs are required? It is likely that the source of the debate rests in the fact that the requirement of an MSA in the above described limited workers' compensation situation has proven to be a substantial business opportunity for a significant number of professional financial consultants who specialize in setting up and administering MSAs. Such a consultant is retained by the workers' compensation claimant's attorney or insurer to review the claimant's medical records. After review, the consultant can make a recommendation concerning the amount of money that should be placed in the MSA to cover the claimant's future medical care, and additionally prepare a report to be sent to CMS for its approval. Once CMS approves the report, the MSA regarding future medical expenses will be funded by the settlement proceeds, and then the consultant will file annual accountings with CMS until the set-aside funds in the MSA care exhausted and, as a result, Medicare agrees to become the primary payer. MSAs are to these folks what a complicated tax code is to your accountant.
Clearly, these consultants have a great deal of understandable economic self-interest in seeing that the MSA procedure that is only required for workers' compensation claims involving future medical expenses is used in other contexts, including liability insurance situations. Many of these financial consultants have published numerous commentaries and articles suggesting that liability MSAs are required by the MSP provisions.
However, it appears the proper conclusion is the one reached by Berg, Schmidt, and others; there is absolutely no support for the assertion that a "liability MSA is required" in the MSP provisions. Although Congress enacted the MSP Act provisions that concern liability insurance (including self-insurance) in 1980, the related federal regulations were promulgated in 1989, and CMS has prepared an MSP Manual and revised it on numerous occasions. At the time of writing, there was no requirement of, or specified procedure for, a liability MSA.
In order for CMS to have authority to assert that liability MSAs are required, the MSP provisions, which currently do not require the use of a liability MSA, would have to be effectively amended. Any attempt by CMS to itself require the use of a liability MSA pursuant to the terms of the current MSP provisions would be invalid.
A Lack of Case Law Support
Since there is no current federal statutory or regulatory law requiring use of a liability MSA, a court cannot require such use. For example, in Zaleppa v. Seiwell, 9 A.3d 632, 2010 PA Super 208 (2010), the appellate court held that (1) naming Medicare on the payment draft satisfying the verdict, or (2) paying the verdict into court pending receipt of notification from Medicare that its lien has been satisfied, were each improper procedures because there is no legal basis under Federal law to require either procedure.
Some commentators have referenced the recent federal trial court decision in Big R Towing, Inc. v. Benoit (W.D. La., January 5, 2011) Slip Copy, 2011 WL 43219, as somehow establishing that a liability MSA is required. In a Feb. 3, 2011 article entitled " Louisiana Federal District Court Determines MSP Compliance by Ordering MSA Allocation ," author Rafael Gonzalez states, "At last, a federal district court in Louisiana has put liability Medicare Set-Asides on the map."
However, the District Court in Big R Towing did not conclude that a liability MSA was required. In Big R Towing, the parties to a Jones Act injury suit merely wanted to voluntarily use an MSA and filed a joint, unopposed, motion asking the court to determine future medical expenses for purposes of allocating the settlement. The court allowed the parties to use an MSA, but it did not conclude that one was required. The court expressly made the following finding of fact: "Medicare does not currently have a policy or procedure in effect for reviewing or providing an opinion regarding the adequacy of the future medical aspect of a liability settlement or recovery of future medical expenses incurred in liability cases."
The CMS Opinion
In a message to its members dated Aug. 11, 2009, the American Association for Justice (AAJ) explained that "statements from CMS and other federal entities make clear that the agency does not require set-asides for liability claims." This author had personally contacted CMS personnel to discuss the liability MSA issue, and my conversations mirror this statement. CMS states that it does not require MSAs in third party liability cases, but that the parties involved in a liability case settlement need to "protect Medicare's interests" and it is up to the individual parties to figure out how to do so. CMS has said that there are no statutory requirements or procedural guidelines for the use of MSAs concerning liability settlements, submission of a liability MSA is voluntary, and a liability MSA may not be reviewed.
The repeated general statement by CMS that individual parties "need to protect Medicare's interests" has become a mantra of those who would argue that liability MSAs are, even if not required, the best way to protect Medicare's interests. While Medicare's interests should be protected, I have not been able to find any authority to support the argument that a federal government agency would be entitled to claim a violation of its rules when there is no applicable existing statute, regulation or other rule to violate. The lack of any rule for CMS to refer to or rely on is likely the reason why CMS representatives are consistently vague about how to protect Medicare's interests in the liability case settlement context. CMS is left in a position where it can only respond to the question: "Is a liability MSA required" with the answer: "No, but you need to protect Medicare's interests," and cannot and will not provide you with advise as to "how to protect Medicare's interests." CMS representatives have repeated made this statement in a number of the Town Hall Teleconferences that have conducted regarding the Section 111 mandatory reporting program.
When MSAs Make Sense
An MSA is simply not appropriate in a liability case, in contrast to workers' compensation situation, because of the difference between these two types of claims. Workers compensation is a statutory scheme pursuant to which an employee obtains "the compensation bargain" whereby the employee need not prove negligence in order to become entitled to receive insurance benefits that provide wage replacement, medical benefits, compensation for economic loss past and future, as well as reimbursement or payment of medical expenses. Once a worker is injured on the job, that worker has the right to obtain future benefits directly from the carrier, and the workers compensation carrier will continue to pay those benefits for as long as is necessary. In fact, standard workers compensation policies include statements like: (1) "We will pay promptly when due the benefits required of you by the Workers Compensation Law," and (2) "We are directly and primarily liable to any person entitled to the benefits payable by this insurance. These persons may enforce our duties; so may an agency authorized by law. Enforcement may be against us or against you and us."
Thus, in the workers' compensation situation, once the insured's employee is injured during the course and scope of employment, the employee has an immediate and direct relationship with the workers' compensation insurer, and that relationship is ongoing; the insurer could be responsible for payment of lifetime benefits and future medicals. In contrast, there is no corresponding immediate direct relationship between an injured third party and the tort feasor's liability insurer. In the standard third party liability insurance situation, in pertinent part, the insurer only agrees to "... pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' ... to which this insurance applies." A showing of the insured's liability for damages because of covered injury is a prerequisite to any payment obligation. In most states, an injured party must have a judgment against the insured before the injured party can even attempt to collect against the defendant's liability insurance policy.
While, in a workers' compensation case, the insurer's payment obligations can go on for as long as the medical condition exists, in a civil personal injury suit, absent a settlement, there will be a trial and a judgment is then entered. That judgment is immediately enforceable, and once it is paid, the insurer owes no further obligation since all rights were merged into the now satisfied judgment.
In a workers' compensation setting, the carrier knows exactly what it is paying for. It is reviewing and reimbursing medical bills and other wage items. In a civil judgment situation, the defendant often is hit with a lump sum verdict, and there is no requirement that the defendant or the defendant's insurer know how much was awarded for future medical bills, lost wages, or for general damages. Sometimes, because of contribution issues and the difference between general and economic damages, there is a breakdown of amounts being paid for specific items. However, the total amount is then added to a judgment amount which then becomes the amount of money that is due and payable. Once a defendant pays the judgment amount, whether personally or by way of defendant's insurer, he or she has no continuing liability to the injured plaintiff. The defendant's insurer has only the duty to pay the judgment on behalf of its insured. Most states do not allow third-party bad-faith liability as the only real contractual duties run between the carrier and the defendant.
These essential differences between the workers' compensation and liability insurance situations explain why the drafters of the MSP provisions have treated workers compensation insurers who have a direct obligation to fund future medical costs on a continuing basis one way, and liability insurers (and self-insureds) who have no such obligation, in a completely different manner. The workers' compensation insurer is equipped to handle the obligation of future medical payments, while the liability insurer (or self-insured) is not. If liability MSAs were required or customarily used on a voluntary basis, the cost of using this administrative mechanism would both raise the cost of liability insurance and complicate the settlement and payment of judgment processes.
Second, as pointed out by Roy Franco and Jeffrey Signor in their book titled "Medicare Secondary Payer Compliance: How to Mitigate Exposure in the Medicare Beneficiary Personal Injury Case," supra, Medicare's sole remedy under the MSP Act regarding future medical expenses after settlement or payment in a liability case is to suspend the payment of benefits to the Medicare beneficiary. The MSP Act only authorizes recovery or subrogation actions for conditional payments, i.e., payments already made by Medicare prior to the judgment or settlement. There is no such authorization for any type of recovery or subrogation action for future payments. This means that the liability insurer or self insured should not be subject to an action by Medicare concerning post-settlement or judgment medical expenses; it is the Medicare beneficiary that carries the risk regarding such future medical expenses. This is proper since that person received the settlement or was paid the judgment that included funds for future losses. So, inherent to these rules is the recognition of differences between the obligation of workers' compensation carriers and liability insurers.
Third, while there is a specific procedure required for review and approval of MSAs by Medicare in the workers' compensation context, there is no such procedure in place for MSAs in the liability context. As pointed out in an article titled "More on Medicare Set Asides, Personal Injury and Medical Malpractice" published in the February 2010 issue of "The Advocate," a monthly publication of the Arizona Association for Justice/Arizona Trial Lawyers Association, submitting an MSA proposal to CMS regarding a liability case is a waste of time because there is no formal process for review and approval of a liability MSA. CMS has repeatedly stated, and affirmed during the June 2009 Arizona State Bar convention, that it "has no current plans for a formal process for reviewing and approving Liability Medicare set-aside arrangements."
Finally, a defendant simply must pay a judgment. This, of course, applies as well to the defendant's insurer of such a covered judgment. Once a judgment becomes final, the plaintiff is a judgment creditor and can enforce it. A defendant can put money into an MSA but that will not stop the plaintiff from executing against the defendant's assets or his or her insurance policy for the full amount of the judgment. As noted by the court in Zaleppe v. Seiwall (supra), putting Medicare's name on the payment check does not comport with state law because it does not fully pay the judgment to the party who is owed the judgment, the plaintiff.
Therefore, we see many reasons, strongly rooted in insurance practices and policies as well as legal principles, as to why Medicare statues and regulations were written to not include MSAs in liability cases where they cannot work, and to have MSAs in workers' compensation cases where they make complete sense given the goals of the applicable statutes.
In the final part of this series, look forward to discussion regarding the consequences insurers face when they insist on liability MSAs, alternatives to MSAs, and the possibility of congressional help in the future.
Neil Selman is a partner at Selman Breitman LLP, where he has represented insurers in a consulting capacity and litigated matters in all areas relating to insurance.
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