Ahlborn – Application to Liability Medicare Set Asides?
You have just settled a personal injury case for a Medicare beneficiary. In an attempt to consider Medicare’s “future interest” under the MSP you obtain an allocation (estimate of future Medicare covered expenses) for your client. The allocation exceeds the net amount the client will receive. What do you do now? This is a very real problem and one I face frequently in the Liability Medicare Set Aside context. I would argue for the use of an Ahlborn type of formula to reduce the allocation amount taking into account the compromise nature of the settlement.
To understand this issue more fully, I should back up and explain a few basic issues. First, Set asides come from CMS’s interpretation of the MSP as a whole. If you review 42 USC 1395y(b)(2)(A), it says:
(2) Medicare secondary payer
(A) In general
Payment under this subchapter may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that—
(i) payment has been made, or can reasonably be expected to be made, with respect to the item or service as required under paragraph (1), or
(ii) payment has been made, or can reasonably be expected to be made under a workmen’s compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance.
The important part is in bold and is italicized. Those few words are where CMS’s mantra of considering Medicare’s future interests come from and is the basis of set asides (according to CMS). However, it is purely an interpretation of the MSP in my humble opinion. CMS says that an MSA is the “recommended method to protect Medicare's interests is a Workers' Compensation Medicare Set-aside Arrangement (WCMSA)”. Obviously that comes from the Workers’ Compensation world of MSAs, but is important to notice that CMS uses the word “recommended” and not required or mandated by statute.
For Medicare set asides, the “regulation” comes from CMS policy memorandums which have been issued over the last 9 years. These memoranda have been issued solely for workers’ compensation cases. There are no such memoranda or official policy statements for liability Medicare set asides ( see my previous blog post to see what CMS says unofficially by going to http://www.settlementlawfirm.com/post-detail.php?id=72 ). Therefore, most practitioners look to the CMS memoranda for guidance even in the liability context. The problem is that they don’t work when it comes to dealing with this specific issue. In workers’ compensation cases, the carrier is on the hook one hundred percent for future medical. Therefore, when a set aside is calculated for workers’ compensation cases it is based upon all of the future Medicare covered services. As part of the settlement, the carrier agrees to place that amount of money into a Medicare set aside.
Liability settlements are quite different. There are 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 recent Bradley decision ( see my prior post, for a full discussion of Bradley, at http://www.settlementlawfirm.com/post-detail.php?id=114 ) 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 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 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. At the end of the day, 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 (if you accept that a set asides is necessary in the first place). 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.
For help with these issues, contact my law offices. We specialize in assisting with complex settlement related issues such as this.