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ArvinMeritor v. Johnson - Who pays when an MSAT comes back higher than anticipated?

Posted date in Jason D. Lazarus, J.D., LL.M., MSCC Medicare, Medicare Secondary Payer Act, Medicare Set Asides, MSP Compliance

Johnson, the employee, contracted an occupational disease and subsequently filed a claim for workers’ compensation benefits against ArvinMeritor, Inc, his employer.  Johnson was found 100% permanently and total disabled as a result of the occupational disease he contracted in the course of his employment with ArvinMeritor.  ArvinMeritor entered into settlement negotiations to resolve the future medical and indemnity benefits owed to Johnson.  The parties petitioned the trial court to approve the settlement they reached.  Included in that petition was an agreement to fund a Medicare Set Aside Trust.  The petition indicated that the cost of the Medicare Set Aside trust was $83,936.17.  Further, it indicated that upon entry of the order approving the settlement, the employer would “contribute up to $65,000 to fund the Medicare set aside trust, with the balance of the amount necessary to fund such Medicare set aside trust to be paid by [the employee].”  Ultimately an order was entered approving the settlement as set forth in the petition.

Five months after the order was entered approving the settlement, Johnson filed a petition with the court asserting that no Medicare Set Aside Trust (MSAT) had been created as required by the order and the employer had ceased paying his medical expenses.  According to the petition, the employer had informed Johnson that the cost of the set aside trust would exceed the $83,936.17 amount detailed in the order.   Johnson sought to interplead his portion of the MSA, $18,936.17, to the clerk of the trial court pending disposition of the MSA trust and he also requested the trial court to order payment of his accrued medical expenses. 

The employer filed a response indicating that the parties had reached an agreement which required the employer to pay a maximum of $65,000 toward the cost of establishing the MSAT which totaled $83,936.17 according to the vendor that created the MSA allocation.  Counsel for the employer indicated in the response that following approval of the settlement, CMS informed the parties that the cost of establishing the MSAT would be substantially higher than the amount approved by the trial court’s order.  The employer indicated it was willing to pay the $65,000 it had originally agreed to pay but no more.  In its response, the employer took the position that the employee was obligated to pay the difference and the employee was repudiating the settlement.  The employer petitioned the court to order the employee to pay all amounts necessary to establish the MSAT that exceeded $65,000. 

The trial court conducted a hearing on the employee’s petition. During the hearing, counsel for the employer indicated that the MSA allocation vendor had made a mistake as to the amount of the MSAT and when this was discovered, the parties attempted to work out a new settlement to fund the MSAT which was not successful.  Counsel for the employee claimed that because time had expired for the employer to obtain relief from the judgment approving the settlement and because the MSAT wasn’t established, the employer was required to continue paying medical expenses.  Counsel also represented that the employee remained willing to work out a settlement with the employer to resolve the MSAT funding issue.  Counsel for the employer maintained that the parties had agreed that the employer would contribute $65,000 to fund the MSAT with the employee paying the remainder. 

After arguments, the trial court entered a judgment concluding that "[e]quity demands that the employer pay the difference between what the employer represented was the cost to fund the MSAT and the actual cost to fund the MSAT and that the employee contribute only the $18,963.17 to which he had agreed, which amount the employee was to hold in trust until the MSAT was established.”  The trial court further ordered the employer to continue to pay the employee’s medical expenses.  The order was appealed. 

On appeal, the employer argued that it couldn’t be ordered to pay the higher MSAT amount because the employee had previously agreed as part of the settlement to pay those costs.  The Alabama appeals court disagreed indicating the trial court’s judgment approved the settlement based upon the terms in the petition which indicated the cost of funding the MSAT was $83,963.17 and that the employer would pay $65,000 towards that amount and the employee would pay the balance.  The court rejected “any contention that the employee is required to pay a different amount based on any preexisting agreement that was not approved by the trial court.”  Similarly, the appeals court held that the trial court’s judgment didn’t require the employer to pay any additional amount above and beyond the $65,000.  It held that any “attempt to alter that arrangement by requiring the employer to pay more than the amount that it agreed to pay would constitute a substantive change to the terms of the settlement agreement and the judgment approving the settlement agreement and not an enforcement of their terms as the employee contends.”  The appeals court rejected the idea of using equity remedies, as the trial court seemingly did, to require the employer to pay more than the $65,000. 

Unfortunately, the holding leaves the parties in limbo as both are prepared to go through with the bargained for settlement but can’t because the MSAT according to CMS greatly exceeded the $83,936.17 figure.  Because the MSAT wasn’t established the employee argued that he was entitled to continued medical benefits.  The employer argued that since the employee had received a 3rd party recovery more than the employer had previously paid in workers’ compensation benefits, it was entitled to ceasing paying benefits under Alabama law.  The appeals court rejected this argument and held under Alabama law the employer couldn’t unilaterally terminate its right to pay the employee’s future medical expenses. 

This decision is important for a couple of reasons.  First and foremost, it illustrates the perils of a poorly drafted petition to approve a settlement.  The drafters should have clearly outlined what would happen if the MSA exceeded the amount proposed to CMS.  Second, it demonstrates the dangers of the CMS WCMSA approval process.  If an MSA is submitted to CMS for approval (which is voluntary), It is possible that CMS can come back with a higher amount possibly destroying the ability to settle a case.  This case involved an error by the MSA allocation vendor but many times CMS simply comes back with a much higher figure for the MSA.  When CMS comes back with a higher amount to fund the MSA, there is no appeal rights from that decision other than to ignore CMS’s position and put the original amount into the set aside then wait for a denial of benefits.  This puts all of the parties into an untenable position.  Finally, the ability to enter into binding settlements pre-CMS approval is jeopardized by these kinds of cases.  How can you enter into a binding settlement pre-CMS approval if there is the potential for a sizeable increase in the MSA allocation which no one wants to fund?  Employers don’t want to take on the risk of an MSA coming back at double the original estimate.  Employees can’t take on the risk that an MSA comes back at double the submitted amount. 

Case law regarding MSAs is slowly developing.  Eventually there will be sufficient case law to provide more guidance on these sorts of issues.  It is unfortunate that we still don’t have a statute or regulation on Medicare Set Asides.  Codification of MSA law would go a long way towards providing certainty for parties as well as provide due process protections that are sorely needed.