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Using Medicare Set-Aside Arrangements In Third Party Liability Cases

by: Begley Admin

Medicare Set-Aside Arrangements (MSA) have long been used in the workers compensation arena. Because of the enactment of the Medicare, Medicaid and SCHIP Extension Act of 20071 it appears that MSAs are now going to be required in third party liability cases. In some cases special needs trusts will be required in order to protect the injured plaintiff’s public benefits.

The Legal Authority for Requiring a Medicare Set-Aside Arrangement.

  • Medicare Secondary Payer Act2The authority for the Centers for Medicare and Medicaid Services (CMS) to require a Medicare Set-Aside Arrangement (MSA) is found in the Medicare Secondary Payer Act (MSPA). Under the MSPA Medicare is generally precluded from paying the beneficiary’s medical expenses when payment “has been made or can reasonably be expected to be made under a worker’s compensation plan, an automobile or liability insurance policy or plan (including a self-insured plan) or under no-fault insurance.3 For many years workers’ compensation insurers would settle a claim resulting in a burden to Medicare for future payments. Parties would calculate a dollar amount that would cover expected future medical costs and expenses related to the injured worker’s claim. The settlement proceeds would then be conveyed to the claimant, who then turned to Medicare to pay for the on-going cost of injury-related care. The MSP was enacted in 1980 but enforcement did not begin until 2001 with the issuance of the Patel memorandum on July 23, 2001.4 Enforcement began and to date has been confined to workers’ compensation (WC) cases.

    Medicare payments are conditional on reimbursement from the primary payer.5

  • The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) 42 USC §1395Y(b)(2)(A) and (B).The Medicare Prescription Drug, Improvement, and Modernization Act amended the MSPA. The law expanded the definition of an insurance plan to include uninsured businesses and clarified when a primary plan’s responsibility for reimbursement to Medicare begins. This amendment ensured that persons responsible “for an insured to a Medicare recipient” pay for medical care that Medicare would otherwise cover.
  • Medicare, Medicaid and SCHIP Extension Act of 2007. Historically, CMS has enforced the provisions of the MSPA only in worker’s compensation cases. However, the passage of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) requires all insurers, third party administrators for group health plans, self-insured plans, and self-administered plans to identify situations where the plan is or has been a primary plan to the Medicare program. There is a civil penalty of $1,000 per day for non-compliance. The plan shall determine whether a claimant is entitled to benefits under the Medicare program. If the claimant is determined to be so entitled, the plan must submit a report including the identity of the claimant and such other information as the secretary shall specify.

    The reporting requirements for group health plans begin January 1, 2009. The reporting for liability cases begins July 1, 2009. The report includes the contact information for the personal injury attorney. MMSEA clearly signals the intention of CMS to increase its enforcement in the liability settlement arena. It is likely that reporting enforcement activities for third party liability cases will be similar to those in workers’ compensation settlements.

  • CMS Regional Coordinator Pronouncement. According to Sally Stalcup, Region VI, MSP Regional Coordinator, CMS, “At this time, the Centers for Medicare and Medicaid Services (CMS) is not soliciting cases solely because of the language provided in the general release. CMS does not review or sign-off on counsel’s determination of the amount to be held to protect the Trust Fund in most cases. If we do, however, urge counsel to consider this issue in settling the case and recommend that their determination as to whether or not the case provided recovery funds for future medicals (emphasis added) be documented in their records. Should they determine that future services are funded, these dollars must be used to pay for future otherwise Medicare covered case-related services. There is no formal CMS review process in the liability arena as there is for worker’s compensation. On rare occasions, when the liability is large enough or other unusual facts exist within the case, the CMS Regional Office will review the settlement and help make a determination on the amount to be available for future services.6
  • Anticipated Impact of the Medicare, Medicaid and SCHIP Extension Act of 2007.The likely outcome of the reporting requirements of the Medicare, Medicaid and SCHIP Extension Act of 2007 is that insurance companies will begin to require MSAs in third party liability cases. There is no reason for insurance companies to run the risk of failing to establish an MSA.

The Theory Behind a Medicare Set Aside Arrangement.

  • Contrived Shift. Under the Medicare Secondary Payer Act, Medicare makes conditional payment for medical expenses for beneficiaries with the understanding that Medicare will be paid when the beneficiary receives payment from a third party. Medicare is opposed to any settlement that results in a contrived shift to Medicare of responsibilities of a claimant’s future medical care. In settling claims, Medicare’s interest must be considered. The solution to the problem of burden shifting is to establish a Medicare Set-Aside Arrangement
    (MSA).
  • Past and Future Medical Bills. Medicare has a right of recovery for past medical bills up to the date of the settlement.7 The Medicare Secondary Payer Act also applies to third party liability situations in which the settlement or award includes payment for future medical expenses. Medicare is not bound by the release with respect to an allocation for future medical expenses. If Medicare determines that the injured party will have future medical expenses then a Medicare Set-Aside Arrangement is expected.

Liability For Non-Compliance.

Medicare has a right of action against a primary payer, and any entity that receives payment from a primary payer, if it has demonstrated that the primary payer has or had a responsibility to make payment8. Medicare is entitled to recover the amount of the Medicare primary payment9. If it is necessary for CMS to take legal action against the primary payer, CMS may recover twice the amount. The Regulation imposing double damages has been upheld.10 The amount of the recovery is not limited to cases where the settlement proceeds or part thereof, can be identified as being for items or services for which Medicare payment may be made. The Court noted that when a judgment is entered or an arbitration award rendered and amounts are identified as being for medical expenses and/or pain and suffering, Medicare seeks reimbursement only from that portion of the judgment or award identified as for medical expenses. But, the Court also reasoned that nothing in the statute prohibits Medicare from recovering the full amount it has paid for any item or service. The Court concluded that Medicare beneficiaries who had received settlement payments from third-party payers, without any part of the settlements being identified as being for medical care, had failed to show that the government’s practice of seeking recovery of such settlements violates the Medicare Secondary Payer Act.11 Recovery may be made from parties that receive primary payment including a beneficiary, provider, supplier, physician, attorney (emphasis added), State agency or a private insurer that has received a primary payment.12

When is an MSA Required?
While the MSPA clearly establishes a requirement that Medicare’s interest be considered in liability cases,13 there are no rules or regulations under the MSPA. There are rules in Worker’s Compensation (WC) cases and the prudent course of action might be to follow those in liability cases. That would mean that an MSA is required if:14

• the settlement exceeds $25,000 and the claimant is currently eligible for Medicare; or

• the settlement is for more than $250,000 and the plaintiff can reasonably be expected to become eligible for Medicaid within 30 months.

If an individual is in the process of filing, appealing or re-filing for SSDI, that person is included in the 30-month window notwithstanding the fact that a previous application may have been denied and have not been appealed. An individual who is 62 years and 6 months of age could be eligible within 30 months, and an individual suffering from End-Stage Renal Disease (ESRD), but who does not yet qualify for Medicare based on ESRD, would also be considered a person having a “reasonable expectation” of Medicare enrollment within 30 months.15

In determining whether the $250,000 threshold is met, if there is a structured settlement the value of the structure rather than the cost is used. Also, in determining whether the $250,000 threshold is met, past medicals, future medicals, attorney’s fees and costs are included.16

If none of these criteria are met, there is no need for an MSA. If it is absolutely clear that there will be no future medicals as a result of the injury subject to the litigation, then no MSA is required.

How is the Set-Aside Amount Determined?
There are companies that will calculate the set-aside amount. The amount is determined by evaluating past medical treatment, current medical condition, and the probability of future medical needs, as well as other factors. Future medicals are limited only to those expenses that Medicare would pay that are related to the injury. Medicare does not pay all medical expenses. There are some services that are not covered; there are deductibles, copayments and maximums per spell of illness. The MSA need not contain monies for those services that would not be covered by Medicare. In calculating the set-aside amount the plaintiff’s life expectancy is considered. It is often useful to obtain a rated age as a part of this process. The rated age shows that a person’s actual life expectancy may be considerably shorter than their actuarially life expectancy, so that less money is required to be set aside.

Once a Medicare Set-Aside amount is calculated in a worker’s compensation case, it is submitted to Medicare for approval. While CMS maintains that a set-aside is necessary in liability cases, there is no mechanism for approval at this time.

CMS is not bound by an allocation for future medicals made by the parties in the settlement agreement. CMS may disregard any such allocation and make its own calculation as to the cost of future medicals.

The cost of future prescription drugs must be considered in calculating the set-aside amount.

Administering the MSA.

There are four possibilities for administering an MSA:

  • Self-Administered Accounts. These accounts are usually small accounts and are administered by the claimant. No formal agreement is necessary. The claimant must follow the same accounting rules as a professional administrator, but it is likely that most claimants will not comply, but the liability of the personal injury lawyer should terminate when the MSA is established.
  • Custodial Account. A larger account is usually administered by a custodian. These are professional organizations that have expertise in medical claims administration. They charge a fee and are recommended where financially justified.
  • Medicare Set-Aside Trusts. A Medicare Set-Aside Trust is a formal trust with a trustee. These are usually used for large accounts. They are also used in connection with Special Needs Trusts if the plaintiff is receiving means-tested public benefits such as SSI, Medicaid, Food Stamps, Veterans Benefits or Section 8 Housing.
  • Pooled Trusts. In smaller cases where the plaintiff is receiving any of these means-tested public benefits, a Pooled Trust may be considered. A Pooled Trust is operated by a non-profit. The plaintiff’s money is pooled with other persons’ money for investment purposes, but each member has an individual sub-account. Whenever a trust or a Pooled Trust is used, a sub-trust is established for the Medicare Set-Aside funds.
  • No Public Benefits Public Benefits*
    Small Settlement Self Administered Pooled Trust
    Large Settlement Custodial Agreement/ Professional Administrator Stand Alone Special Needs Trust

    Note: As used above the term “Public Benefits” applies to only means tested public benefits where there are financial eligibility rules pertaining to income and/or assets of the beneficiary and/or his or her family or household. These benefits typically include SSI, Medicaid, Veteran’s Benefits, Section 8 Housing and Food Stamps. For purposes of the chart, public benefits does not only include SSDI and Medicare, but a MSA will always be required if the plaintiff is receiving or will receive these benefits.

  • Fees and Expenses. Administrative fees/expenses for administration of the Medicare Set-Aside arrangement and/or attorneys’ costs specifically associated with establishing the Medicare Set-Aside arrangement cannot be charged to the Set-Aside arrangement. CMS will no longer evaluate the reasonableness of any of these costs, because the payment of these costs must come from some other payment source, which is completely separate from the Medicare Set-Aside arrangement funds.17

    This ARA memorandum replaces the policy that was outlined in the ARA memorandum issued July 23, 2001, commonly referred to as the Patel Memorandum, and the answer to question 7 from the April 21, 2003, frequently asked questions.

    The additional income tax due by virtue of interest income earned on a MSA account may be paid from the MSA assuming there is adequate documentation for the amount of the incremental tax. Payment may be made as a “cost that is directly related to the account” to cover the additional tax liability.18

  • Presumption of Medicare Payments. Medicare will not make any payments for any services related to the work-related injury or disease until the funds in the MSA have been exhausted.19 The MSA is designed to pay all of the work-related injury over the remaining lifetime of the injured claimant. Medicare will continue to pay for medical services on behalf of the injured claimant that are not related to the work-related injury or disease. These expenses should not be paid from the MSA.
  • Non-Recognition of Waiver. A claimant cannot waive his or her right to specific services related to a WC case in order to reduce the amount of the MSA.20
  • The Interplay Between MSA and Medicaid. In the elder and disability law world there is a significant issue as to the interplay between the MSA and Medicaid. Generally, the funds in the MSA are available and counted as resources for Medicaid eligibility purposes. In cases where Medicaid is important, the MSA must be wrapped in a self-settled special needs trust.21

Prescription Drugs

All WC and Third Party Liability settlements must consider and protect Medicare’s interest when future treatment includes prescription drugs along with future medical services that would otherwise be reimbursable by Medicare.22 The submission for MSA approval must include separate amounts for (1) future medical treatments, and (2) future prescription drug treatment. In addition, the cover letter must include an explanation as to how the submitter calculated the future prescription drug treatment amount (i.e., actual costs, average wholesale price, etc.).23

In computing the total settlement amount, prescription drugs must be included if future treatment indicates the claimant has been prescribed drugs and/or may need drugs in the future. The total settlement amount includes, but is not limited to, wages, attorney’s fees, all future medical expenses, and repayment of any Medicare conditional payments. Payout totals for all annuities to fund the above expenses should be used instead of cost or present values of any annuities.

Claimants who have not enrolled in Part D need to include future prescription drug expenses in their MSA proposals, if the current treatment records indicate that the claimant has been prescribed drugs and/or may need future prescription drug treatment related to the injury.24

The administrator of the MSA must forward an annual accounting separately identifying the expenditures for medical treatment and prescription drug treatment to the Medicare contract.25

Special Needs Trusts

If the Plaintiff in a third party liability case is receiving means-tested public benefits, the existence of assets held in a Medicare Set-Aside Arrangement would disqualify the plaintiff from receiving those benefits. Assets in a MSA are available to the plaintiff. In order to protect the plaintiff’s public benefits a self-settled special needs trust must established to include not only the settlement proceeds being paid to the plaintiff with disabilities but also the amount of the set-aside arrangement. The trustee of the special needs trust must either have in-house expertise for administering the MSA or must be willing to retain the services of outside providers with this expertise. The trust document must contain language sufficient to satisfy CMS that the MSA is being properly administered. This would include language prohibiting the payment of fees and expenses from the MSA amount, a requirement that the proceeds of the MSA be invested, provisions for accounts to CMS for distributions, and limitations on the distributions that can be made from the MSA. In most cases involving an MSA of any size it is funded in part by a structured settlement. It is important that sufficient case be set aside as seed money to cover the first two years of anticipated medical bills and/or the first surgery.26

In cases where the total recovery or settlements are small it is more difficult to find a trustee with the expertise and the willingness to administer the MSA. In smaller settlements a pooled trust is usually the best way to protect the plaintiff’s means-tested public benefits but most non-profit operators of pooled trusts lack the expertise to administer the MSA.

Conclusion
Most plaintiffs in third party liability cases involving MSA’s will not be receiving means-tested public benefits. However there will be a significant number where public benefits are involved. Workers compensation cases tend to result in smaller settlements so a higher percentage of those cases are self-administered MSA’s. Settlements in third party liability cases tend to be larger. It is likely that a higher percentage of third party liability cases will result in stand-alone special needs trusts.



1. 42 U.S.C. §1305, Medicare, Medicaid and SCHIP Extension Act of 2007
2. 42 U.S.C.§1395y(b)(2)
3. 42 U.S.C. §1395y(b)(2)(i)
4. Medicare Set-Aside Arrangements Transmittal (Patel Memo), July 23, 2001
5. 42 U.S.C. §1395y(b)(2)(B)
6. Sally Stalcup, Region 6 MSP Regional Coordinator
7. 42 U.S.C. §1396y(b)(2)(B)(ii); 42 CFR §411.24
8. 42 CFR §411.22(a)
9. 42 CFR §411.22(c)
10. Health Ins. Ass’n of Am v. Shalaa 23 F.3d 412, 306 U.S. App D.C. 104 (1994)
11. Zinman v. Shalaa, 23 F.3d 412, 306 U.S. App D.C. 104 (1994)
12. 42 CFR §411.24(g)
13. Medicare Set Aside Arrangements Transmittal (Patel Memo), July 23, 2001; Medicare Secondary Payer – Worker’s Compensation (WC) frequently Asked Questions; (undated) Thomas L. Grissom; Medicare Secondary Payer-Worker’s Compensation (WC) information May 7, 2004; Medicare Secondary Payer (MSP)-Worker’s Compensation (WC) additional frequently asked questions, May 23, 2003; Medicare Secondary Payer (MSP) Worker’s Compensation (WC) additional frequently asked questions, Oct. 15, 2004; Medicare Secondary Payer (MSP) Worker’s Compensation (WC) additional frequently asked questions July 11, 2005; Part D and Worker’s Compensation Medicare Set-Aside Arrangements questions and answers, Dec. 30, 2005; Worker’s Compensation Medicare Set-Aside Arrangements (WCMSAs) and revision of the Low Dollar Threshold for Medicare beneficiaries, Oct. 25, 2006; Questions and Answers for Part D and Worker’s Compensation Medicare-Set Aside Arrangements, July 24, 2006
14. Medicare Set Aside Arrangements Transmittal (Patel Memo), July 23, 2001
15. Medicare Secondary Payer-Worker’s Compensation (WC) frequently asked questions (2)
16. Medicare Secondary Payer (MSP) Worker’s Compensation (WC) additional frequently asked questions, May 23, 2003
17. All Regional Administrators Memorandum dated May 7, 2004
18. Medicare Secondary Payer (MSP)—Workers’ Compensation (WC) Additional Frequently Asked Questions, A6, July 11, 2005
19. CMS Memorandum, Medicare Secondary Payer – Worker’s Compensation, Aug. 25, 2008
20. Medicare Secondary Payer (MSP) – Worker’s Compensation (WC) Additional Frequently Asked Questions, May 23, 2003
21. Medicare Secondary Payer (MSP) – Worker’s Compensation (WC) Additional Frequently Asked Questions, Q13, July 11, 2005
22. CMS Memorandum Part D and Workers’ Compensation Medicare Set-Aside Arrangements (WCMSAs) Questions and Answers (Dec. 30, 2005), answer 1
23. CMS Memorandum Part D and Workers’ Compensation Medicare Set-Aside Arrangements (WCMSAs) Questions and Answers (Dec. 30, 2005), answer 2
24. CMS Memorandum: Questions and Answers for Part D and Workers’ Compensation Medicare Set-Aside Arrangements (July 24, 2006), answer 7
25. CMS Memorandum: Questions and Answers for Part D and Workers’ Compensation Medicare Set-Aside Arrangements (July 24, 2006), answer 8
26. Medicare Secondary Payer Act (MSP)-Workers Compensation (WC) Additionally Frequently Asked Questions,
A-5, Oct. 15, 2004