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Are Medicare Set-Asides Required During the Settlement of Personal Injury Claims? by attorney David Brown

There has been a lot of talk amongst the plaintiff’s bar relating to Medicare Set-Asides (MSA*) and whether they are required when we recover money for a Medicare-eligible client. As one who takes a particular interest in subrogation and reimbursement issues, I have followed the MSA issue closely, and recently attended two seminars relating to Medicare and MSAs. Not surprisingly, with the current state of the law, the seminars arrived at two different conclusions, one advocating the creation of MSAs in every case, the other insisting that MSAs are not required and do not need to be created.

This issue finally came to a head in our office when the managing partner here asked me to advise one of his clients regarding his obligations to Medicare. This client was preparing to settle the case, was Medicare eligible, and was looking at future medical care arguably related to the collision that would not be covered by the settlement. It was time for me to take a position on MSAs. And here it is:

I do not believe that it is currently necessary to create an MSA for Medicare-eligible clients receiving settlement funds. Obviously, a prudent lawyer will advise the client of all the risks attendant with the decision not to create an MSA.  It is also particularly important to advise the client to be careful when speaking to their doctors and attributing current complaints with past incidents involving settlements.  Nonetheless, taking into account the current state of the law, tying up a client’s money in an MSA is unnecessary.  

Traditional Medicare reimbursement has always been premised on the Medicare Secondary Payer statute which provides that Medicare pays only after everyone else has paid, including typical automobile insurance companies:

“Medicare Secondary Payer (“MSP”) statute “assigns primary responsibility for medical bills of Medicare recipients to private health plans when a Medicare recipient is also covered by private insurance. These private plans are therefore considered ‘primary’ under the MSP and Medicare acts as the ‘secondary’ payer responsible only for paying amounts not covered by the primary plan.” Fanning v. United States, 346 F.3d 386, 389 (3d Cir.2003).

Thus, the MSP bars Medicare payments where “payment has already been made or can reasonably be expected to be made” by a primary plan. 42 U.S.C. § 1395y(b)(2)(A) (parenthetical in original). The MSP defines a “primary plan” as “a workmen's compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan) or no fault insurance[.]” 42 U.S.C. § 1395y(b)(2)(A)(ii) (parenthetical in original). This provision “is intended to keep the government from paying a medical bill where it is clear an insurance company will pay instead.” Fanning, 346 F.3d at 389 (quotation omitted).” Sipler v. Trans Am Trucking, Inc., 881 F. Supp. 2d 635, 637 (D.N.J. 2012)

However, in 2011, the Center for Medicare Services (CMS), which often enforces Medicare reimbursement, released a memorandum which raised the specter of MSAs for the first time. CMS’s memorandum articulated that, under the MSP, “[a]ll parties do have significant responsibilities under the MSP to protect Medicare's interests when resolving cases that includes [sic ] future medical expenses. A recommended method to protect Medicare's interest is a set-aside arrangement, which allocates a portion of the settlement for future medical expenses. The amount of the set-aside is determined on a case-by-case basis.” Id.

Those who advocate for the establishment of the MSA point to this memorandum form CMS along with the language from the MSP statute to justify the position that an MSA is a requirement for Medicare eligible clients recovering money and looking at future medical care that would otherwise be covered by Medicare. Possibly more persuasive is the language in the MSP, which arguably puts plaintiff’s lawyers on the hook if they do not sufficiently protect Medicare’s interests. While the risk of Medicare or CMS attempting to collect out of our trust account years after a settlement is disquieting, in the context of the MSA it is unrealistic.  When dealing with future care, Medicare’s mechanism of enforcement is simply to refuse payment until alternate sources are exhausted.  This is commonplace in workers compensation cases where MSAs are required. Thus, the real risk, which should be communicated to clients, is that Medicare will refuse to pay for future care arguably related to an earlier incident.  

Unfortunately, for those who believe that MSAs are mandatory, there exists no mechanism for the creation, maintenance, or even approval of any MSA by CMS. If a party requests that CMS approve an MSA, CMS responds with standard replies similar to this:

“Due to resources constraints, CMS is not providing a review of this proposed liability Medicare set-aside arrangement amount. Please be advised that this does not constitute a release or a safe harbor from any obligations under any Federal law, including the MSP statute. All parties must ensure that Medicare is secondary to any other entity responsible for payment of medical items and services related to the liability settlement, judgment, or award.

While CMS still refuses to approve MSAs as part of liability settlement, courts have begun to issue approvals of settlements which include provisions for an MSA to cover future medical costs. An excellent example of this is a recent decision out of New Jersey. Duhamell v. Renal Care Grp. E., Inc., L-871-09, 2013 WL 2102701 (N.J. Super. Ct. App. Div. May 16, 2013). The Court’s frustration with the current position taken by CMS is palpable, remarking that:

“The court bases its decision today on notions of fairness and public policy. In the present case, both plaintiffs have submitted expert reports determining the proposed set-aside amounts for future medical expenses. Both reports were submitted to CMS for review, and CMS responded that they did not have resources to review the proposed set-asides. CMS does not provide any other policy or procedure for determining the adequacy of protecting Medicare's interests for future medical expenses in conjunction with the settlement of plaintiffs' claims. In light of the foregoing, and given the letters issued to plaintiffs lack the force of law, to require plaintiffs to force their case to trial when they have reached an amicable resolution outside of court, runs contrary to New Jersey's strong public policy interests in encouraging settlements.” Id.

It is unsurprising then that many attorneys are not advising Medicare eligible clients to establish an MSA. This position is supported by language in the case law that undermines the legal force of the CMS memorandum. District Court Judge Debevoise in the Federal District of New Jersey stated it thus:

“However, it is well-settled that “[i]nterpretations such as those in opinion letters-like interpretations contained in policy statements, agency manuals, and enforcement guidelines ... lack the force of law....” Christensen v. Harris County, 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000); see also Shalala v. Guernsey Memorial Hosp., 514 U.S. 87, 99, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995) (definition in Medicare Provider Reimbursement Manual “is a prototypical example of an interpretive rule” that does not require notice and comment, and therefore “do[es] not have the force and effect of law and [is] not accorded that weight in the adjudicatory process[.]”).

Indeed, no federal law requires set-aside arrangements in personal injury settlements for future medical expenses. To be sure, Medicare set-asides are prudent in settlements for future medical expenditures in the worker's compensation context because, under the MSP, Medicare becomes a secondary payer for such expenditures to the extent a “compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses,” 42 CFR § 411.46(a), or “the settlement agreement allocates certain amounts for specific future medical services,” 42 CFR § 411.46(d)(2).” Sipler, 881 F. Supp. 2d at 638.

The lack of any clarity or mechanism for the establishment of the MSA, along with language from the District Courts undermining the force of the CMS memo which started all this discussion, had been sufficient authority for many lawyers to feel comfortable allowing a settlement to go through which does not contain an MSA.

The current state of the law does not justify the creation of an MSA for Medicare-eligible clients receiving settlement funds. Considering the information I have gathered, the lion’s share of which is contained above, my view is that the prudent thing to do is to advise the client of the risks, including the risk that Medicare may refuse to pay for medical care which they later deem was related to a prior incident. I tell the client they may wish to squirrel away some portion of their recovery for this eventuality. I also advise them to be very careful when discussing any future medical issues with their physicians; a flippant remark that the problem arose from an earlier accident may cause Medicare to refuse payment for the service. However, I believe that this advice is sufficient at least at this point. Until CMS or the Legislature provides more guidance on this issue, I do not believe that we are serving clients by tying up settlement proceeds in an MSA which may not turn out to have any legal authority.

*According to the Centers for Medicare and Medicaid Services (CMS), A Medicare Set-Aside Arrangement is a financial agreement that allocates a portion of a settlement to pay for future medical services related to the injury. These funds must be depleted before Medicare will pay for treatment related to the injury.

- David Brown