Part 4 - Debunking the MSA Mystery: Clues to Solving Medicare Secondary Payer Compliance in Liability SettlementsPosted date in Medicare Set Asides
MSA Case Law SURVEY
The first case that I am aware of addressing MSAs came out in 2009. Since that time there have been a handful of opinions addressing a variety of issues. All of the decisions are trial court decisions with none of them making precedential rulings on what the MSP requires in terms of compliance relative to future medicals. Some decisions are focused on approval of a set aside the parties have agreed to while others have addressed narrow specific issues. Most of the cases fall into the category of a request for approval of an MSA where the parties agree on the necessity of an MSA but CMS refuses to review and approve the same. In these cases, the court is being asked to approve the set aside amount. A second category of cases are those where the parties agree to settle but can’t agree on whether the settlement agreement includes creation of an MSA. The last category of cases deals with discrete issues surrounding MSAs. There is also some important case law related to ripeness of claims under the MSP which are explored first. The case law summary below is broken down into these specific categories.
Ripeness of MSP Claims
There are many decisions that have addressed the ripeness of an MSP related claim to be heard by a federal district court. Since the MSP does have a five level appeals process before a case is heard in federal district court, MSP related issues would have to be dealt with first through that internal Medicare appeals process. That issue hasn’t been litigated yet with respect to set asides since very few liability set asides are being reviewed at this point. As some point there will likely be an appeal stemming from the review and increase of a proposed liability set aside but we don’t have any cases yet raising the issue. There are quite a few Medicare ripeness decisions out there as it relates to the conditional payment area of the law which most likely would be controlling. A perfect example of this is Alcorn v. Pepples[i] out of the Western District of Kentucky. In Alcorn, the court held that “Alcorn's claim with respect to the Secretary arises under the Medicare Act because it rests on the repayment obligations set forth under 42 U.S.C. § 1395y. She therefore must exhaust the administrative remedies established under the Medicare Act before this court may exercise subject matter jurisdiction over her claim.”[ii] The problem with this in the context of set asides is that the internal appeals process can take up to 420 days during which time in theory the injury victim could be without Medicare benefits.
Category One – Judicial Approval of MSAs
In 2009, Finke v. Hunter’s View, Ltd.[iii], was decided by a Minnesota Federal District court which held that no liability Medicare set aside was necessary given the facts of the case. The plaintiff, Darus Finke, was paralyzed from the chest down after a 30 foot fall from a tree while using a hunting deer tree stand manufactured by Hunter’s View. Mr. Finke received both Medicaid and Medicare benefits following his injury. Medicare had approximately $18k in conditional payments. Mr. Finke also had private group health care 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.”[iv]
In 2011, Big R. Towing, Inc. v. Benoit,[v] was decided by the United States District Court for the Western District of Louisiana which 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 and was injured in 2009 while covered as a seaman under the Jones Act. The case brought by Benoit 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.
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 is 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 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.
In Schexnayder v. Scottsdale,[vi] a significant 2011 decision, the Stalcup handout was cited as a legal authority. In Schexnayder, the plaintiff was injured in an automobile accident while in the course and scope of his employment. Mr. Schexnayder was struck from behind by an 18-wheeler insured by National Casualty Company. As a result of the accident, the plaintiff underwent three surgical procedures related to his neck and back injuries. His past medical expenses exceeded $377,000. The workers’ compensation carrier that covered the employer Mr. Schexnayder worked for at the time of the accident paid a portion of the medical. The remainder of the medical expenses was paid for by private insurance and Medicare paid no portion of any of the medical bills.
The third party defendant admitted liability for the accident but defended disability, medical issues and economic losses. The case with the liability insurer was settled at mediation. Part of the agreed upon settlement was that the plaintiff would be solely responsible for protecting Medicare’s interests under the MSP. The workers’ compensation claim was also settled for waiver of a significant portion of its lien plus a partial reimbursement. An MSA was not done as part of the workers’ compensation settlement because it was determined it wasn’t necessary since Mr. Schexnayder was not a current Medicare beneficiary nor did he have a reasonable expectation of Medicare enrollment within 30 months of the settlement date.
The case came back before the court post settlement by consent of both of the parties. The court retained jurisdiction post order of dismissal if the settlement was not consummated. Because a CMS approved Liability Medicare Set Aside might not be possible and or might not occur for quite some time, the settlement couldn’t be finalized. In an effort to avoid rescinding the settlement completely, yet comply with the provisions of the MSP, the parties filed a joint motion for declaratory judgment seeking approval of the settlement and a declaration that the interests of Medicare were adequately protected by setting aside a sum of money for future medical expenses. The court held an evidentiary hearing on these issues ultimately leading to the order, which cited the Stalcup LMSA handout discussed earlier in the article.
In the order, Mr. Schexnayder was commanded to “promptly reimburse Medicare” for all conditional payments. He was also ordered to fund a $239,253.84 Medicare set aside to pay for future medical items or services which would otherwise have been covered by Medicare related to the injuries he sustained in the accident. The order also specifically required the set aside funds to be put into an interest bearing account to be “self-administered” by Mr. Schexnayder’s wife.
In the 2011 Smith v. Marine Terminals of Arkansas[vii] decision, the United States District Court in the Eastern District of Arkansas was asked to determine a set aside amount in a Longshore/Jones Act case where CMS refused to review and approve a set aside allocation. Specifically, the plaintiff, Billy Smith, asked “the court to confirm and/or determine a reasonable allocation representing the future cost of medical treatment causally related to injury sustained in plaintiff’s accident of April 14, 2006 that would also be covered by Medicare, commonly referred to as the ‘Medicare Set Aside’ (“MSA”).” In so making this determination, the Smith court addressed what is necessary in its opinion under federal law when a case is settled on behalf of a Medicare beneficiary. The court stated that because “Billy Smith is a current recipient of Social Security Disability benefits, he is currently Medicare eligible and the parties must reasonably consider and protect Medicare's interests consistent with the Medicare Secondary Payor Act, 42 U.S.C. § 1395y.”
Billy Smith filed a Longshore and Jones Act claim after being injured on a floating barge. Mr. Smith’s right hand was severely injured in April of 2006 while working on the floating barge. The Jones Act claims were dismissed on motion for Summary Judgment. Smith’s alternative claim under the Longshore and Harbor Workers’ Compensation Act survived summary judgment. The parties ultimately reached an agreement to settle the claim. As part of the settlement, the parties agreed to retain the services of a company to determine the Medicare set aside “allocation” amount and submit it to CMS for approval since it met the Workers’ Compensation Medicare Set Aside review thresholds.
A Medicare set aside allocation was created and submitted to CMS for review and approval. The set aside amount was determined to be $14,647.00. After requests for more information made by CMS and discussions with CMS, the vendor who performed the MSA allocation was unable to get CMS to provide a response to the review. CMS’s failure to review the set aside was inexplicable given the settlement amount of $1,000,000.00 and the $25,000 review threshold for current Medicare beneficiaries. Given the fact that CMS failed to review and approve the MSA, the settlement was put into jeopardy because of the risk of non-review/approval of the set aside amount. Accordingly, the parties requested the federal district court issue an order determining the set aside amount.
The court found that the MSA of $14,647.00 was a “reasonable estimate and determination of the future expected medical treatment that Billy Smith will require resulting from his accident-related injuries that would otherwise be covered by Medicare.” Additionally, the court found there was no evidence that any of the parties were attempting to shift the responsibility for future medical expenses related to the injuries suffered to Medicare. The court then went on to make its conclusions of law. The Smith court concluded as a matter of law that the parties had “reasonably considered and protected Medicare’s interest” in the settlement. Further, the set aside amount of $14,647.00 was deemed to have “fairly and reasonably” taken “Medicare’s interest into account”. Finally, the court ordered that the full amount of the set aside shall be placed in a separate bank account by Billy Smith for the “exclusive payment of future medical expenses incurred for treatment of injuries sustained in his accident of April 14, 2006 which would otherwise be paid or payable by Medicare.” Lastly and most importantly, the court ordered that the parties could rely upon the court’s acceptance of the MSA at the $14,647 figure despite the lack of CMS approval.
The decision is important from the stand point of what can be done to achieve complete compliance in a case where CMS refuses to review a set aside. Because CMS routinely refuses to review set asides in liability cases, the Smith decision provides a road map of how to get around the issue of a non-review. The parties can seek an order such as the one issued in the Smith case in similar circumstances. While CMS typically does not respect a decision allocating settlement proceeds unless it is a decision on the merits of the case, it seems improbable that CMS could prevail with that type of argument when they fail to review a set aside allocation. If they are given the necessary information to review the set aside allocation, how can CMS then claim a federal court’s decision allocating the funds is improper? It seems as though the parties in the Smith case did everything they possibly could do to comply with what they believed was necessary regarding the MSP and futures.
In an almost identical situation as Smith, a 2012 case in Louisiana called Guidry v. Chevron[viii]was decided approving an MSA where CMS failed to review. Guidry involved a Longshore and Workers’ Compensation claim which was settled contingent upon CMS approval of an MSA. CMS failed to review and the Guidry court relying upon medical testimony determined that the proposed MSA sufficiently protected Medicare’s interests. The court did note that CMS has provided no mechanism or procedures to determine whether a liability MSA adequately protected Medicare’s future interests.
In the first MSA case of 2012 which is important for its discussion of the Bradley v. Sebilius[ix] decision, Frank v. Gateway Insurance[x] , a United States District Court for the Western District of Louisiana had to consider a motion for “Determination of Need for, and Amount of Medicare Set Aside for the purpose of complying with the Medicare Secondary Payer Statute.” Mr. Frank was injured while working so this wasn’t a pure liability situation. There was a workers’ compensation component although that was not at issue in the case. Mr. Frank was unloading merchandise off of a trailer owned by the defendant in this matter who was insured by Gateway insurance. The trailer had a hole in it which Mr. Frank fell into and injured his back. Mr. Frank’s employer was not involved in this litigation.
CMS was put on notice of the hearing regarding the necessity and amount of a potential set aside but refused to participate. The court addressed the Bradley[xi] decision, which was an 11th Circuit decision that tackled the sanctity of a probate court’s allocation of settlement proceeds in a wrongful death settlement involving Medicare conditional payments. Presumably, the discussion regarding Bradley was the Frank court’s attempt to address the letter CMS had sent to the court through the US Attorney and any reliance upon the field manual to reject the court’s Medicare Set Aside allocation. Implicit in the Bradley discussion is the court’s belief that it could bind CMS by approving a liability Medicare Set Aside allocation. The portions of the Bradley opinion quoted by the Frank court seem to bolster this theory as it focused the attention on the fact that the field manual was not law and that CMS’s failure to respect a court’s allocation when the merits were not addressed encouraged litigation.
After discussing Bradley and its findings of fact, the court went on to determine as a matter of law that the sum of $3,200 was reasonable and fair thus taking into account “Medicare’s interests”. According to the court, since CMS provides no procedure to determine the adequacy of protecting Medicare’s interests for future medical in the case of a 3rd party settlement and there is a strong public policy favoring out of court settlements it was appropriate to find that Medicare’s interests were adequately protected in this case. The order stated that Frank shall fund $3,200 out of his settlement to fund future Medicare covered or reimbursable services related to what was claimed and released. The order also gave instructions for administration stating that the funds “shall” be deposited into an interest bearing account for the purpose of paying any injury related future Medicare covered services.
In a very similar case to Frank, Bertrand v. Talen’s Marine[xii], a Western District of Louisiana federal court was asked to render a declaratory judgment finding that Medicare’s interests were adequately considered by the amount being set aside for future medicals. The Bertrand court did approve the settlement. In its approval, it found the amount of $64,866 “reasonably and fairly takes Medicare's interests into account in that the figures are based on reasonably foreseeable medical needs.” Bessard v. Superior Energy Service[xiii]s, another Western District of Louisiana federal court decision, involved identical issues as raised in Bertrand. The court’s findings of fact and conclusions of law are the same as in Bertrand with the court ultimately approving an MSA of $6,100. Cribb v. Sulzer Metco[xiv], a North Carolina federal district decision,also involved the approval of a proposed liability set aside where CMS refused to review and approve. The Cribb court approved a $4,500 liability MSA. These cases demonstrate that when CMS will neither review nor approve of MSAs in the liability context, the parties can and will turn to the courts to perform that function.
In Welch v. American Home Assurance[xv], a Federal District Court was asked to determine the need for an MSA and the amount of the set aside. What is very interesting about the Welch decision is that the court does its own calculations for the amount to be set aside coming up with a figure higher than what was recommended to the court in testimony by a trained MSA allocator. The case is one which involves both a workers’ compensation claim and liability. However, future medicals were to be paid out of the liability settlement instead of the workers’ compensation settlement which is an unusual factual scenario.
The case involved a workplace injury to Welch’s left elbow. A workers’ compensation claim was filed against the employer. The employer denied compensability for the elbow injury based upon a physician’s note saying Mr. Welch had a pre-existing elbow injury. Welch prevailed in his workers’ compensation hearing and the employer/carrier began to pay benefits. Subsequently, Welch filed suit against the employer/carrier for alleged improprieties and bad faith in the denial of his claim. He claimed his elbow condition worsened as a result of the delay in treatment causing Complex Regional Pain Syndrome. The liability case settled after a settlement conference was held before the presiding federal district court judge. A condition of the settlement was that the federal district court “determine a Medicare Set Aside (MSA) such that the parties may comply with the provisions of the Medicare Secondary Payer Act, 22 U.S.C. §1395y(b)(2) and related federal regulations”. The defendant filed a motion requesting the federal district court to determine the necessity of an MSA and the amount of an MSA. The court held an evidentiary hearing and made certain findings of fact and conclusions of law.
During the hearing, a Medicare Set Aside expert testified that based upon the projected future medical estimated by the treating physician the future Medicare covered care amounted to $174,762.85. However, the federal district court judge determined based upon his calculations that the actual amount should be $278,019.08. In addition, the judge determined that Welch even though he was not a current Medicare beneficiary did have a reasonable expectation of becoming one within 30 months since he made application for Social Security Disability benefits. Given the foregoing facts, the Welch Court went on to its conclusions of law. The court decided that it did have jurisdiction over the matter since there was an actual controversy and the parties were seeking a declaration of rights and obligations to comply with the MSP for which there was no procedure in place by CMS. The court cited to other opinions such as Frank v. Gateway and Schexnayder v. Scottsdale discussed above for the proposition that other courts had decided the rights and obligations of settling parties under the MSP with respect to MSAs. The court went on to point out that since there is no procedure in place by CMS to determine how to adequately protect Medicare’s future interests and there is a strong public policy interest in resolving cases through settlement, it is necessary to decide the necessity as well as amount of any set aside.
In its conclusions of law, the court finds that Welch is a “primary payer” by virtue of receiving payment from a primary plan and thus Medicare should not be billed for those items or services until the funds received from the primary plan for that purpose are exhausted. It concluded that the sum of $278,019.08 adequately protected Medicare’s future interests and in fact exceeded what Medicare would require. The court ordered that the sum of $278,019.08 be placed in an interest bearing account to be self-administered as a Medicare Set Aside by Mr. Welch. The end result is rather strange because the court ultimately determines that the set aside amount should be more than what CMS would have accepted had it been submitted and reviewed under their own guidelines. This is noted by the court in footnote four of the opinion. The court stated that “[a]lthough $174,762.85 may be accepted by CMS as an appropriate and sufficient MSA if submitted to CMS for approval, the Court is unwilling to use that amount in a Court-determined MSA.” The question becomes shouldn’t the court apply what CMS would have approved had it been reviewed? Herein lies the problem with a system that has no regulations or statutes that codify these guidelines.
In addition, it is interesting to note that the court is ordering a self-administered MSA. For most lay people, it is nearly impossible to figure out to properly administer an MSA. To properly administer, the injury victim must know what is Medicare covered, understand ICD codes and pay providers the proper amount. They have to document every penny that is spent. How many people can do that? If the MSA is annuity funded, which many are, then you have to determine when it is exhausted on a yearly basis and then have Medicare billed. Can anyone handle that? It seems to me that it invites misuse of the funds which runs counter to the whole premise of what the court is ordering in the first place which is compliance with the MSP. A professional administration[xvi] agreement would make much more sense despite the fact that Mr. Welch is competent. A full discussion of administration of set asides is beyond the scope of this article.
[i] Alcorn v. Pepples, 2011 U.S. Dist. LEXIS 19627 (W.D. Ky. Feb. 25, 2011).
[ii] Id. See also Hicks v. Chamberlain, 2010 U.S. Dist. LEXIS 112969 (E.D. Ky. Oct. 21, 2010)(holding that “[w]hether the Secretary will seek reimbursement, and if so, how much, can only be reviewed by a federal court after Medicare's administrative procedure has been exhausted”); Black v. Doe, 2011 U.S. Dist. LEXIS 46935 (E.D. Ky. May 2, 2011); Walters v. Leavitt, 376 F.Supp.2d 746, 755-56 (E.D. Mich. 2005) (deciding it did not have jurisdiction because plaintiffs had not exhausted their remedies under § 405(g) where “Plaintiffs [were] seeking a determination of the amount of reimbursement that Defendant will seek under its subrogation rights created by the Medicare Act's MSP provisions”); Truett v. Bowman, 288 F.Supp.2d 909 (W.D. Tenn. 2003) (limiting defendants to the administrative procedure codified in § 405 though defendants sought advance knowledge of what Medicare might do in the future, and determining that defendants had not established that the Secretary had issued a final decision)
[iii] Finke v. Hunter's View, Ltd., 2009 U.S. Dist. LEXIS 126830 (D. Minn. Aug. 25, 2009).
[iv] This is the first and only decision I have come across on such an issue. It is interesting for several reasons. First, CMS has taken the position in the context of Workers’ Compensation Medicare Set Asides that the existence of private health insurance does not avoid the need to establish a set aside. The Finke case rules the opposite way on that issue. The following is CMS’s position from their website: Group Health Plan (GHP) Insurance, Managed Care Plan, and Veterans' Administration (VA) Coverage (Ref: 7/11/05 Memo Q8): “In a WC settlement, a WCMSA is recommended where the claimant is covered under a GHP or a managed care plan or has coverage through the VA. A WCMSA is still appropriate because such other health insurance or health service could in the future be canceled or reduced, or the injured individual may elect not to take advantage of such services. It is important to remember that workers' compensation is always primary to Medicare and many other types of health insurance coverage for expenses related to the WC claim or settlement.”
[v] Big R Towing, Inc. v. Benoit, 2011 U.S. Dist. LEXIS 1392 (W.D. La. Jan. 5, 2011).
[vi] Schexnayder v. Scottsdale Ins. Co., 2011 U.S. Dist. LEXIS 83687 (W.D. La. July 28, 2011).
[vii] Smith v. Marine Terminals of Ark., 2011 U.S. Dist. LEXIS 90428 (E.D. Ark. Aug. 9, 2011).
[viii] Guidry v. Chevron USA, Inc., 2011 U.S. Dist. LEXIS 148942 (W.D. La. Dec. 28, 2011).
[ix] Bradley v. Sebelius, 621 F.3d 1330 (11th Cir. Fla. 2010).
[x] Frank v. Gateway Ins. Co., 2012 U.S. Dist. LEXIS 33581 (W.D. La. Mar. 13, 2012).
[xii] Bertrand v. Talen's Marine & Fuel LLC, 2012 U.S. Dist. LEXIS 78053 (W.D. La. June 4, 2012).
[xiii] Bessard v. Superior Energy Servs. LLC, 2012 U.S. Dist. LEXIS 124690 (W.D. La. Aug. 30, 2012).
[xiv] Cribb v. Sulzer Metco (US) Inc., 2012 U.S. Dist. LEXIS 134900 (E.D.N.C. Sept. 5, 2012).
[xv] Welch v. Am. Home Assur. Co., 2013 U.S. Dist. LEXIS 25948 (S.D. Miss. Feb. 26, 2013).
[xvi] An MSA may either be “self-administered” or “professionally administered”. 10.1.6 Section 30 – WCMSA Administration Agreement, CMS Workers’ Compensation Medicare Set Aside Arrangement (WCMSA) Reference Guide (March 29, 2013).