Hinsinger v. Showboat Atlantic City – Should a Liability MSA be Reduced by Procurement Costs? One court says yes

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

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 posts, 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 ratio 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. 

While the case does clarify the deduction of attorneys fees and costs, it does not address a very important issue which is apportionment.  When a liability case is settled, it is typically done so at a discount given a variety of factors including liability issues, policy limits or caps on damages.  Given the fact that a recovery in a liability case may be limited by factors present in the case, there should be a method to reduce the amount of the set aside to take account for these reductions in value.  On approach I have advocated is the use of the formula laid out in the Ahlborn decision because it is a rational way of dealing with this particular problem. Additionally, the foundation of the Ahlborn decision that a lien should not extend to portions of a recovery that aren’t for medical damages is applicable by analogy to Medicare Set Asides. 

Until we have definitive guidance from CMS on liability Medicare set asides, unfortunately we are going to be left with little answers.  The federal court system and state courts will have to sort through these issues.  That certainly isn’t optimal for resolving cases with Medicare beneficiaries but it is the new reality.