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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 one below, I will highlight three cases which have addressed set asides in liability settlements.


Since the Medicare, Medicaid and SCHIP Extension Act (“MMSEA”) was signed into law by President Bush at the end of 2007, significant confusion has existed regarding Medicare set asides in liability settlements. The MMSEA has nothing to do with liability Medicare set asides (“LMSA”). Instead, it creates a mandatory insurer reporting requirement for settlements with Medicare beneficiaries with stiff penalties for non-compliance. The passage of the MMSEA led to heightened scrutiny by insurers regarding their compliance with the Medicare Secondary Payer Act (“MSP”) which in turn led to questions regarding the applicability of Medicare set asides to liability settlements. Accordingly, since passage of the MMSEA case law has begun to develop and CMS has made two important pronouncements regarding Medicare set asides in liability settlements. I have outlined all of the important cases and CMS memos below in an attempt to bring some clarity to the current state of affairs.

The Medicare Secondary Payor Act (“MSP”) is a series of statutory provisions enacted in 1980 as part of the Omnibus Reconciliation Act with the goal of reducing federal health care costs. The MSP provides that if a primary payer exists, Medicare only pays for medical treatment relating to an injury to the extent that the primary payer does not pay. The regulations that implement the MSP provide “[s]ection 1862(b)(2)(A)(ii) of the [a]ct precludes Medicare payment for services to the extent that payment has been made or can reasonably be expected to be made promptly under any of the following: i) workers’ compensation, ii) liability insurance, iii) no-fault insurance.”

According to CMS, the MSP requires not only satisfaction of conditional payments (payments made by Medicare prior to settlement) but also setting aside a portion of a settlement to cover future Medicare covered services related to the personal physical injury suffered. CMS’s position is based on its interpretation of 42 U.S.C §1395 y(b)(2) which is a provision in the federal law that the agency is charged with interpreting. In a recent memo issued by Sally Stalcup, a CMS Regional Director, she gave a succinct statement of CMS’s position as to what is required when it comes to Medicare futures. She stated that “[a]ny time a settlement, judgment or award provides funds for future medical services, it can reasonably be expected that those monies are available to pay for future services related to what was claimed and/or released in the settlement, judgment, or award. Thus, Medicare should not be billed for future services until those funds are exhausted by payments to providers for services that would otherwise be covered and reimbursable by Medicare.”

The cases outlined below have discussed this interpretation and have simply assumed it has the force of law. While CMS is charged with interpreting the MSP there are no statutes or regulations it can cite to when it comes to a “set aside”. CMS’s recent memos state the agency’s interpretation of the law it is charged with interpreting. Generally agencies are afforded deference in terms of its interpretation of its own regulations under Chevron, U.S.A, Inc. v. Natural Resources Defense Council, Inc. The problem with Medicare set asides in liability settlements is that there are no regulations that exist outside of 42 C.F.R. §411.46 and 42 C.F.R. §411.47 which do not directly address “set asides” and are strictly limited to workers’ compensation matters. Nevertheless, case law has begun to develop and CMS is issuing memos as if set asides are “required” in liability settlements. Lawyers handling cases on behalf of Medicare beneficiaries and defense counsel representing insurers will have to interpret the case law and memos to make a decision as to the best course of action for their respective clients.

LMSA Case Law: Finke v. Hunter’s View, LTD. (August 2009)

In Finke v. Hunter’s View, Ltd. a Minnesota Federal District court held no liability Medicare set aside was necessary given the facts of the case. The plaintiff, Finke, was paralyzed from the chest down after a thirty foot fall from a tree while using a hunting deer tree stand manufactured by Hunter’s View. The plaintiff brought an action alleging the deer stand was defective in design and unreasonably dangerous to the user of the stand. Wal-Mart was also sued since it sold the stand. Mr. Finke received both Medicaid and Medicare benefits following his injury. Medicare has approximately $18,000.00 in conditional payments. Mr. Finke also had private group healthcare coverage. The parties negotiated a settlement of $1,500,000.

Approval of the settlement was sought from the United States District Court in Minnesota. The case is important for findings contained in the order approving the settlement. Specifically, the court 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 court pointed out that Mr. Finke was not currently receiving Medicare benefits, even though he was eligible, because he was covered by a private group health plan. The court stated “[t]he parties have considered the fact that it is not reasonably likely that Medicare will make any additional payments for future medical expenses in the reasonably foreseeable future. The parties have also considered the fact that Plaintiff Darus Finke is currently subject to coverage under his wife, Shea Finke's, policy, and benefits available through that policy are more than adequate to cover all reasonably anticipated medical expenses for the reasonably anticipated future. In view of these facts there has been no allocation in the settlement for future medical expenses.”

The court went on to make some interesting conclusions of law. First, “[t]he parties shall, and have, reasonably considered and protected Medicare's interest in this matter. Second, “Darus Finke's reasonably anticipated future medical care expenses will be reimbursed by and governed by the Grand Itasca policy which will continue to be primary over Medicare.” Third and most importantly, “[t]o the extent that the parties are obligated to reasonably consider the interest of Medicare in reaching the settlement, the Court concludes the Parties have reasonably considered the interests of Medicare. The Findings of Fact support the Conclusion that it is not reasonably likely that Plaintiff Darus Finke will require Medicare benefits in the reasonably foreseeable future. The court concludes therefore that there is no reason for the parties to set aside any certain amount for future Medicare claims.” In the order, it stated “[t]he parties have reasonably and adequately considered the interest of Medicare in this settlement, and Plaintiffs Darus Finke and Shea Finke and Defendants Wal-Mart and Hunter's View will not be subject to any claim, demand or penalty from Medicare, Medicaid, or any other party, as a result of its settlement payments in this matter.”

LMSA Case Law: Big R. Towing, Inc. v. Benoit et al. (January 2011)

In Big R. Towing, Inc. v. Benoit, the United States District Court for the Western District of Louisiana recognized an obligation to set aside funds for future Medicare covered services and allocated said funds in a non-Workers’ Compensation case. David Benoit was employed by Big R Towing as a captain aboard a tugboat. At the time he was injured in December of 2009, he was working in that capacity and was covered as a seaman under the Jones Act. Benoit suffered a back and hip injury while performing deck work on the tow. He had a preexisting spinal condition which restricted him from performing the task he was injured while completing. His treating physicians recommended surgery for his back and hip.

There was conflicting medical testimony whether his need for surgery was related to his preexisting conditions or due to the accident. Big R filed suit for declaratory relief on the issue of whether benefits were due. Benoit filed a counterclaim seeking damages under the Jones Act and general maritime law. The case was settled at mediation for a lump sum of $150,000. At the time of the settlement, Benoit was receiving Social Security disability benefits and part of the consideration for the settlement was that Benoit would be responsible for protecting Medicare’s interest under the Medicare Secondary Payer statute. Sound familiar?

An oral motion was made for the court to determine the future medical expenses in order for Benoit to set aside funding, taking Medicare’s interest into account. The parties consented to allowing the United States District Court magistrate to rule on the issue of future medical expenses and a hearing was held with medical evidence presented as to future Medicare covered services. The court made the following important findings of fact:

“1. 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.”

“2. David Wayne Benoit's date of birth is August 2, 1952 and he will not obtain the age of 65 within 30 months of the date of settlement. However, he is currently receiving social security disability benefits.”

“5. The parties have considered Benoit's projected future loss of earnings and projected future medical expenses. According to his health care providers, the future costs for low back surgery are $32,000.00, inclusive of hospital and surgical fees, and the costs for a left hip replacement are $20,500.00. The figure will not materially change if Benoit opts not to have surgery on his hip, but instead goes through palliative treatment. The combination of these two figures, $52,500.00, represents more than half of the net settlement proceeds and will be set aside by Benoit to fund these medical expenses.”

After making the foregoing findings of fact, the court made the following noteworthy findings of law:

“1. The parties shall and have reasonably considered and protected Medicare's interests in the settlement of this matter.”

“2. Medicare is a secondary payor under the Medicare secondary payor program, to the extent that there are Medicare covered expenses incurred by David Wayne Benoit, in the past or in the future, arising out of the accident and injuries alleged in this lawsuit.” (emphasis added)

“4. The findings of fact support the conclusion that it is reasonably expected that David Wayne Benoit may become a Medicare beneficiary in the future. The sum of $52,500.00 to be set aside by David Wayne Benoit out of the settlement proceeds for future medical expenses associated with lumbar surgery and left hip replacement or therapy fairly takes Medicare's interests into account and David Wayne Benoit should set aside that amount to protect Medicare's interests as the secondary payer for future medical expenses arising out of the injuries alleged in this lawsuit.” (emphasis added)

Analysis of Benoit

While this case, like the Finke decision, is not an appellate decision and is limited to the facts presented to the court, it is still noteworthy. It was the first case I am aware of that actually recognizes an obligation to set aside monies for future Medicare services and allocates the funds in a non-Workers’ Compensation matter. It is also very significant in terms of some subtle findings made by the court. The first such finding is the judicial determination of what the allocation is without a formal allocation being completed by a 3rd party company. The second noteworthy finding or lack of a finding is in regards to apportionment. There was no reduction of the set aside amount based upon the allocation encompassing more than half of the net proceeds. There was no Ahlborn type of apportionment so that the set aside only reached the medical portion of the recovery. Third, the court didn’t add the allocation amount onto the settlement, it was deducted from the gross settlement amount. Lastly, Medicare is a secondary payer in liability cases in regards to future services.

One other important point from Benoit, is the apparent judicial notice of the procedures established by CMS in terms of Medicare Set Asides for workers’ compensation settlements. The court, by reference to them in some of its findings, seems to approve their use in liability settlements. In my view this is troubling as the procedures do not take into account the unique differences between workers’ compensation settlement and liability settlements. The fact that there was no consideration given to the fact that more than half of the client’s net proceeds were being set aside even though the client was not recovering one hundred percent of future medical expenses. There was no analysis of what portion of the settlement was related to future medical. This is problematic and illustrates just one of the many problems in applying procedures meant for workers’ compensation settlements to liability settlements in the MSA context.

LMSA Case Law: Hinsinger v. Showboat Atlantic City (May 2011)

Hinsinger v. Showboat Atlantic City is another illustration of the mess that has become the norm in the world of settlements involving Medicare beneficiaries. CMS has failed to offer any guidance on handling liability Medicare set asides. As a result, cases are now being litigated in state as well as federal court regarding specific issues related to liability set asides. In Hinsinger, the question that is addressed is whether a liability set aside is reduced for procurement costs. As a matter of practice, procurement costs aren’t deducted from WCMSAs. However, liability settlements and set asides are a different animal all together.

The facts of Hinsinger are quite interesting. The case was tried and the plaintiff prevailed in 2010. Prior to trial, in 2008, the plaintiff became eligible for SSDI benefits after being declared total disabled by the Social Security Administration. Since SSDI gives you early Medicare coverage (after 24 months), the plaintiff became Medicare eligible in late 2009. After trial, the parties settled the case for $600,000. In an effort to comply with the requirements of the Medicare Secondary Payer Act (42 USC 1395y), plaintiff and defendant agreed to allocate $180,600 to a Medicare Set Aside trust (“MSAT”) to pay for Medicare covered future services related to the injury. This amount reflected the jury’s award for projected future medical needs related to the injuries. As an aside, while a set aside is typically calculated by a third party vendor who creates an “allocation” that is done prior to a trial on the merits. Once a trial fixes the amount of dollars for future medical, that is the figure that CMS would be bound by in my opinion.

After agreeing to the set aside, plaintiff counsel sought permission from the court to withdraw a portion of his fees from the money allocated to the MSAT. In arriving at its decision whether this was appropriate or not, the court discussed Medicare set asides. The court seemed to take as a given that an injury victim must take Medicare’s future interests into account under the secondary payer act when settling/resolving an injury claim. While the court did note that there is no statutory or regulatory requirements mandating Medicare Set Asides, it did recognize that CMS recommends their use and it has become a “standard practice, particularly in workers’ compensation cases, to create a set aside to protect the future interests of the injured individual and Medicare.”

The court then launched into a discussion of the appropriateness of reducing the set aside by procurement costs. While plaintiff counsel argued that the guidelines created by CMS for workers’ compensation cases didn’t apply to liability settlements, the court disagreed. It stated it’s rationale as follows:

“[T]his court finds no reason to apply a different standard to set asides created with money obtained from third-party liability claims than it applies to set asides created with money obtained from workers' compensation claims. The statutory and policy reasons for creating both of them are the same: to protect the government, and the Medicare system in particular, from paying medical bills for which the beneficiary has already received money from another source. In addition, the Center for Medicare and Medicaid Services has stated multiple times that the same statutes that necessitate or otherwise apply to Medicare set asides in workers' compensation cases apply to third-party liability situations. Transcript of Center for Medicare and Medicaid Services Conference Call, 18 (October 29, 2008) (“I don't believe there is a General Counsel Memo that says that there are no liability set asides. We, in brief, we have a very informal, limited process for liability set asides. We don't have the same extensive ones we have for workers' comp. However, the underlying statutory obligation is the same.”); Transcript of Center for Medicare and Medicaid Services Conference Call, 61 (March 24, 2009) (the statutes that apply to workers' compensation situations also apply to liability situations).”

I find this to be a very important part of the holding as it seems to be indicating that the guidelines that CMS has issued for workers’ compensation apply to liability settlements. The problem, as I have discussed in previous writings, is that the guidelines don’t work in liability settlements.

After concluding that the same regulations and directives that apply to set asides created in workers’ compensation cases apply to set asides in third party liability settlements, the court addressed whether those regulations allow for an attorney to recover fees for a judgment or settlement obtained on behalf of a client in a civil suit from the set aside itself. The court answered in the affirmative. The court’s holding rested on its interpretation of 42 CFR 411.37 which provides a reduction formula Medicare uses when a primary payment is made as a result of a judgment or settlement. 411.37 provides that Medicare reduces its recovery by the costs expended in procuring the judgment or settlement if “[p]rocurement costs are incurred because the claim is disputed” and “[t]hose costs are borne by the party against which CMS seeks to recover.” While the court acknowledged that is unclear whether 42 CFR 411.37 only applies to recovery of funds expended by Medicare in conditional payments or also to funds obtained through a settlement or judgment for future medical, it concluded it applied to funds recovered for future medical which are set aside. This conclusion, according to the court, was supported by the language of the regulation and the headings in 42 CFR Part 411. The court also reviewed the guidelines issued related to workers’ compensation set asides which don’t allow for the reduction for fees “associated with establishing the Medicare set-aside arrangement.” It stated that this directive applies only to attorney fees “specifically associated with establishing” an MSAT.

Applying the reduction for procurement costs to liability set asides was “in line with general principles of equity” according to the Hinsinger court. It stated, that “[w]here a plaintiff is, or will within a short time become, a Medicare recipient, the plaintiff's attorney also works on behalf of Medicare to secure funds to pay future medical expenses Medicare would otherwise pay.” Allowing Medicare to avoid paying its fair share of the procurement fees/costs would be unfair to injury victims. The court did identify a large problem associated with Medicare set asides in liability settlements. It stated:

“In some situations, a plaintiff may end up getting nothing after creating the set aside and paying attorneys' fees or may even have to pay money out of pocket to his attorney after a lengthy trial. Such a result would not only be inequitable, it would deter persons on Medicare who are injured by the tortious acts of others from bringing claims.”

The court ultimately allowed the plaintiff attorney to take $59,196.67 in fees from the set aside. This figure was based upon the ration of procurement costs to the total settlement which was 32.778%. Since plaintiff counsel was entitled to a total fee of 32.778% of the amount in the set aside, he was awarded $59,196.67. No request for costs to be deducted from the set aside was made thus the court didn’t reach that particular issue. Presumably the costs would be allowed based upon the same reduction formula as well under the court’s rationale.

Analysis of Hinsinger

The concept of reduction of the set aside amount by the amount of legal fees incurred makes sense given the formula for reduction of conditional payments in the Code of Federal Regulations. See 42 CFR 411.37. 411.37 allows for a pro-rate reduction of conditional payment amounts by fees and costs. Why shouldn’t a MSA be governed by the same type of reduction? A lawyer who provides services to a Medicare beneficiary that results in recovery of future medical that Medicare ultimately does not have to incur should be subjected to a reduction for procurement costs in the same way it is applied to conditional payments.

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