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Preservation of the Medicare trust fund has become an increasingly important issue given projections that it will be exhausted by 2024. In 2010, 47.5 million people were covered by Medicare with 39.6 of them by virtue of age and 7.9 million of them by virtue of disability. A very easy way to cut down on Medicare’s spending every year is to eliminate spending on Medicare beneficiaries who have recovered damages for personal physical injuries. This is precisely what CMS is doing by discussing the need to establish a Medicare set aside in liability settlements. It is the new frontier and I will summarize the current state of affairs in a multi-part blog post on set asides. In part three below, I will highlight a recent CMS memo on liability Medicare set asides; an analysis of what to do when settling a case for a Medicare beneficiary and tactics to reduce a set aside if one is being contemplated.

9/29/11 CMS LMSA Memo

On 9/29/11, CMS issued a memorandum indicating there is no need for a liability Medicare set aside and that its interests would be satisfied if the treating physician certifies in writing that treatment for the alleged injury related to the liability insurance has been completed as of the date of settlement.

Many have been asking for formal guidance regarding Medicare set asides in liability settlements. It seemed as though that was never going to happen. That came to an end in May of this year with the release of a memo from the Region 6 CMS office regarding liability Medicare set asides. Up until last week there was nothing from the Baltimore headquarters for CMS. In the first memo coming from CMS HQ regarding Liability Medicare Set Asides, Charlotte Benson, Acting Director Financial Services Group for CMS, gives us an exception to the need to create a set aside in liability cases. According to the memo, a liability Medicare set aside isn’t necessary when the Medicare beneficiary’s treating physician certifies in writing that all of the care related to the claimed injury has been completed as of the date of the settlement.

The memo says:

“Where the beneficiary’s treating physician certifies in writing that treatment for the alleged injury related to the liability insurance (including self-insurance) “settlement” has been completed as of the date of the “settlement”, and that future medical items and/or services for that injury will not be required, Medicare considers its interest, with respect to future medicals for that particular “settlement”, satisfied. If the beneficiary receives additional “settlements” related to the underlying injury or illness, he/she must obtain a separate physician certification for those additional “settlements.”

When the treating physician makes such a certification, there is no need for the beneficiary to submit the certification or a proposed LMSA amount for review. CMS will not provide the settling parties with confirmation that Medicare’s interest with respect to future medicals for that “settlement” has been satisfied. Instead, the beneficiary and/or their representative are encouraged to maintain the physician’s certification.”

Analysis of 9/29/11 CMS LMSA Memo

The memo is very important for a number of reasons. First, it is the first official memorandum from the CMS central office in Baltimore to substantively address liability Medicare set asides. Second, it provides a mechanism, if the case facts fit the criteria, to avoid the necessity of creating a liability Medicare set aside. It is a limited exception as the treating doctor must attest in writing that all of the treatment for the released injuries was completed at the time of settlement. Third, it avoids the need to request CMS review of a proposed “zero” liability Medicare set aside and the parties just need to retain a copy of the doctor’s letter/certification. Fourth, and most importantly, it reinforces the negative in that if you don’t fall within this exception then a liability Medicare set aside should be considered.

Despite the foregoing, every lawyer (plaintiff or defense) should read the Sally Stalcup memo regarding liability Medicare set aside arrangements. The memo was issued back in May of this year by the Dallas Region 6 CMS office. The memo, to summarize, indicates that “Medicare’s interests must be protected; however, CMS does not mandate a specific mechanism to protect those interests.” Furthermore, the law “does not require a ‘set-aside’ in any situation.” Nevertheless, the law does require “that the Medicare Trust Funds be protected from payment for future services whether it is a Workers’ Compensation or liability case.” From CMS’s perspective, a set aside is their “method of choice and the agency feels it provides the best protection for the program and the Medicare beneficiary.”

If an injury victim is a Medicare beneficiary or has a reasonable expectation within 30 months of becoming a Medicare beneficiary, a set aside should be considered. If however a treating physician certifies that all treatment for the released injuries is complete as of the date of settlement, then no set aside is necessary. Navigating the MSP related issues at settlement can be difficult as well as confusing. From the lawyer’s perspective, the most important thing is to make sure the injury victim client completely understands the potential impact of settling the case has upon future Medicare coverage of injury related care.

What Does This All Mean & What Do You Do?

In light of the case law I have outlined and the two memos issued by CMS regarding liability Medicare set asides, the tough question for all parties is what to do when a settlement is reached on behalf of a Medicare beneficiary or someone with the “reasonable expectation” within 30 months. First and foremost, the parties must realize what is at stake. Failure to establish and fund a set aside may jeopardize future eligibility for Medicare covered injury related care for the injury victim. With mandatory insurer reporting beginning with settlements occurring as of 10/1/2011, Medicare will be on notice of all settlements with Medicare beneficiaries and the ICD9 codes for the injury related care. This will enable Medicare to flag injury victim’s Medicare numbers to prevent payment for injury related care when the involved ICD9 (soon to be ICD10) codes are submitted for payment. Accordingly, the injury victim takes a large risk if the case is settled without a set aside as Medicare coverage which could greatly exceed the set aside amount would be lost.

There are no penalties or damages provisions related to failure to establish a set aside that I can find in the MSP. Some have pointed to provisions that provide a mechanism for recovery of conditional payments and double damage provisions relating to the same as evidence of liability for damages if a set aside isn’t established. However, there is not a single case I am aware of where the government has pursued damages related to set asides by extending the application of those provisions beyond conditional payments. The lawyers who are involved in a settlement do have personal liability when it comes to conditional payments. See U.S. v. Harris. However, there isn’t any legal basis for similar liability when it comes to Medicare futures. That being said, if an injury victim settles their case without a set aside and isn’t informed about the option to create one or the risk of failing to create one, a legal malpractice claim against the attorney handling the case on their behalf might result.

For insurers, the focus should be on making sure they report under the MMSEA when they settle with Medicare beneficiaries and mandating the satisfaction of Medicare conditional payments. If conditional payments are not satisfied, the insurer can be held responsible for the repayment of the conditional payment even if they paid the injury victim already and they are exposed potentially to double damages. It is important to note that there is no case I am aware of where the government has sought double damages related to failure to repay conditional payments. Even in the landmark recovery action brought by the government in US v. Stricker seeking in excess of three hundred million in non-reimbursed conditional payments, the government didn’t seek double damages. When it comes to Medicare futures and set asides, there simply aren’t any penalties or damages which could be asserted since there is no statutory or regulatory basis for such.

In the May of 2011 CMS memo, Sally Stalcup outlined the responsibilities of the parties under the MSP when it comes to Medicare futures. According to Ms. Stalcup, each “attorney is going to have to decide, based on the specific facts of each of their cases, whether or not there is funding for future medicals and if so, a need to protect the Trust Funds.” “They must decide whether or not there is funding for future medicals. If the answer for plaintiffs counsel is yes, they should to [sic] see to it that those funds are used to pay for otherwise Medicare covered services related to what is claimed/released in the settlement judgment award.” “If the answer for defense counsel or the insurer, is yes the should make sure their records contain documentation of their notification to plaintiff’s counsel and the Medicare beneficiary that the settlement does fund future medicals which obligates them to protect the Medicare Trust Funds.” “It will also be part of their [sic] report to Medicare in compliance with Section 111, Mandatory Insurer Reporting requirements.” There is no mention of penalties, fines or damages.

The question for attorneys representing a Medicare beneficiary is what do I do to comply with what CMS expects? The answer is, in my opinion; educate the client on the risks of failing to set aside the money for future Medicare covered services. Given the fact that Mandatory insurer reporting of settlements with Medicare beneficiaries will allow Medicare to know every facet of a settlement and will give Medicare the ability to flag a Medicare beneficiary’s number then refuse to pay for Medicare covered services related to the injury, a Medicare eligible injury victim must understand that this risk is present when they settle their case. A plaintiff attorney’s closing statement should be amended to address this issue, he or she should consider using a waiver if the client refuses to do the set aside and should develop a comprehensive letter to address these issues with a client when a settlement is reached.

A large problem with today’s MSP compliance hysteria is that defense attorneys and insurers are routinely including “kitchen sink” language in their releases to address Medicare. This language frequently shifts all of the responsibility of creating a Medicare set aside to the injury victim while identifying an arbitrary amount to be set aside. This practice is dangerous because those releases typically have the injury victim acknowledge a responsibility to set funds aside while picking an arbitrary, usually small, amount to be set aside. This is a bad practice and exposes the injury victim as well as plaintiff counsel since if CMS ever refused to pay for Medicare covered services related to the injury there would be no way to justify the amount of the set aside. A better practice is to actually do an MSA analysis, which may or may not include getting a formal MSA allocation done. There are certain instances where an MSA may be unnecessary based upon factors present in the case such as a private primary health insurance policy, Workers’ Compensation coverage for future medical or where there is no future Medicare covered expenses related to the injury. These should be identified and the release language specifically tailored to that exception but with an indication that Medicare’s future interests where considered with nothing needing be set aside. If the case requires the full-blown MSA analysis, it should be done and the cost of doing so passed along as a client cost. Most MSA allocation reports cost between two thousand and three thousand dollars, which is a small price to pay for the proper analysis of the client’s future Medicare covered services. The allocation gives all parties the proper amount to be set aside, arguably subject to a reduction formula.

LMSA Reduction Methodology

While I applaud Sally Stalcup’s May 2011 efforts to clarify things with respect to liability Medicare set asides, application of what she suggests is a little more difficult in the real world with certain types of settlements. What happens with the $25,000 policy limits settlement where future Medicare covered services are $200,000? How do you deal with that situation? What about a settlement where the recovery is $1,000,000 but the MSA allocation is $2,000,000 and damages exceed $40,000,000? There are ways in my opinion to deal with these situations using a reasonable reduction formula discussed more fully below.

Limited recoveries happen every day in liability settlements. There are a myriad of factors that lead to a compromise settlement and in turn limit the recovery for future medical care. For example, there are policy limits; caps on damages; comparative fault issues and liability issues which impact the value of a case. In addition, liability settlements are not allocated like they are typically in workers’ compensation cases. A settlement will typically be for all the various components of the claim which can include non-economic damages, economic damages and medical. If a case is settled for pennies on the dollar and the medical recovery is significantly reduced due to factors present in the case, the question becomes how to account for those issues when a settlement is achieved for a Medicare beneficiary and a set aside is contemplated. Why should Medicare’s “future interest” apply beyond the medical portion of the recovery or possibly exceed the net proceeds to the client?

Obliviously, it does not work to have one hundred percent of a settlement consumed by a Medicare Set Aside that the client can’t touch except to pay for future Medicare covered services. I would argue that this gets to the very root of the issue dealt with in the Ahlborn US Supreme Court decision. The Ahlborn decision forbids recovery by Medicaid state agencies against the non-medical portion of the settlement or judgment. While admittedly that decision dealt with Medicaid lien issues and the Medicaid anti-lien statute, the arguments by analogy can be applied in the Medicare set aside context. The Ahlborn holding gets at the fundamental issue of whether a lien can be asserted against the non-medical portion of a personal injury recovery. Justice Stevens, in stating the majority opinion, said “a rule of absolute priority might preclude settlement in a large number of cases, and be unfair to the recipient in others.” Isn’t this so in the Medicare set aside context (which is really a future lien)? How do you settle a case for an injury victim when all of the proceeds would have to go into a set aside? Wouldn’t that force cases to trial where damages could be allocated to different aspects of the claim and a larger recovery might be possible?

In addition, the 11th Circuit Bradley decision addressed the issue of Medicare’s lien rights in the context of Florida’s wrongful death statute. In Bradley, CMS took the position that only an allocation on the merits of a case would be recognized in terms of reducing a Medicare conditional payment obligation. The 11th Circuit approved a probate court’s equitable distribution findings to reduce a Medicare conditional payment obligation. In so doing, the court found that it would be improper to require a trial on the merits of a case to determine an allocation for purposes of Medicare conditional payment resolution. The Bradley court focused on the strong public policy favoring “expeditious resolution of lawsuits through settlement.” According to the Bradley court, Medicare’s position would have a “chilling effect on settlement.” This is so because Medicare’s position compels plaintiffs to force their tort claims to trial, burdening the court system. The same argument could be made in the Medicare set aside context for liability settlements that are compromised significantly. Why would an injury victim settle his case if it will all go into a set aside?

There is some basis in CMS’s own regulations for a reduction. In 42 C.F.R. 411.47 there is a computation example for workers’ compensation settlement where there is no allocation in a compromise situation. It is as follows:

As the result of a work injury, an individual suffered loss of income and incurred medical expenses for which the total workers’ compensation payment would have been $24,000 if the case had not been compromised. The medical expenses amounted to $18,000. The workers’ compensation carrier made a settlement with the beneficiary under which it paid $8,000 in total. A separate award was made for legal fees. Since the workers’ compensation compromise settlement was for one-third of the amount which would have been payable under workers’ compensation had the case not been compromised ($8,000/$24,000=1⁄3), the workers’ compensation compromise settlement is considered to have paid for one-third of the total medical expenses (1⁄3×$18,000=$6,000).

Admittedly, this particular regulation deals with conditional payments and has been flatly rejected by CMS in terms of its use in the context of reducing workers’ compensation Medicare set aside arrangements. Nevertheless, this type of analysis makes a lot of sense in the context of liability Medicare set asides. Considering CMS has not given any guidance in the liability Medicare set aside area, how can CMS argue it is improper to employ such methods?

So how would a calculation be made to determine the amount of reduction of the set aside? You could take the approach found in 42 C.F.R. 411.47 or an Ahlborn approach. The Ahlborn approach would necessitate an estimate of the total value of the claim which would then be compared to the actual recovery. From there, you would determine the percentage of recovery that the settlement represented when compared to the total value of all damages. That type of analysis might look like the following:

$4,000,000 = Total Case Value

$1,000,000 = Settlement

$400,000 = Fees (40% fee)

$600,000 = Net

$200,000 = Set Aside

$30,000 = Reduced Set Aside (Client recovered 15% of total damages)

I want to make it very clear that there are no guarantees that CMS would ever approve of either method to reduce a liability Medicare set aside. However, CMS submission of a liability set aside (and for that matter workers’ compensation as well) is voluntary. Accordingly, if one of these methods was utilized and the case was not submitted to CMS for review and approval, I believe CMS would be hard pressed to argue that it was an inappropriate course of action. Given the fact that CMS has ignored questions about how to deal with these issues for liability Medicare set asides and failed to provide any meaningful guidance whatsoever in this area, I believe one could make an estoppel type of argument if CMS ever claimed it was improper.

For liability Medicare set asides to work there has to be some methodology to deal with the realities of liability settlements. Liability cases are settled every day for significantly compromised amounts due to various issues in the case. There has to be a way to address these issues when calculating what amount of money should be set aside. Since CMS has chosen to remain silent regarding this issue, I would argue that any reasonable method employed to address the reduction is appropriate. Nevertheless, none of the foregoing is legal advice which can be relied upon and certainly no one can guarantee what CMS’s response would be if they ever answered this question.

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