Recovery powers under Medicare's Secondary Payer program.

Lawyers may inadvertently breach ethical duties to their clients by reimbursing claims too quickly.

Many attorneys have a vague idea that the Medicare agency has extraordinary collection powers and can penalize them if it deems them uncooperative in reimbursing Medicare from their clients' insurance recoveries. Because they are intimidated, attorneys may pay Medicare claims so quickly that they breach duties to their clients.

This article lays these exaggerated fears to rest by setting out the extent and limitations of the federal agency's Medicare Secondary Payer (MSP) recovery powers.(1)

Medicare provides health insurance for senior citizens and people with disabilities through a federal program established by Title XVIII of the Social Security Act.(2) In 1980 legislation, Congress provided that Medicare would pay for health services only after other responsible insurers have paid,(3) and established the Medicare Secondary Payer program.(4) Subsequent legislation has modified and expanded this program to shift more health care costs from the federal government to private insurers.

The MSP law makes Medicare payment secondary to payment by two kinds of private insurers--those providing group health insurance for employees, and those providing coverage under automobile, liability, and workers' compensation policies.(5) This article deals only with the liability insurance part of the MSP program.

If an injured Medicare beneficiary's medical expenses are covered by liability or no-fault insurance, Medicare will pay for the services only when the third-party insurance payment will not be "prompt." These Medicare payments are described as "conditional," and the program expects to recover them when the private insurance payment "has been or could be made."(6)

The Medicare administration is given specific collection powers with respect to its recovery claims by statute. The Health Care Financing Administration (HCFA) is the federal agency that administers the Medicare and Medicaid programs. HCFA has both subrogation rights and the right to bring an independent action to recover its conditional payments.

The agency is authorized to bring these actions against "any entity . . . required to pay . . . under a primary plan" and to collect double damages(7) against that primary plan entity. The agency is further authorized to bring actions against "any other entity (including any physician or provider) that has received payment from that primary plan entity."(8)

Under the Medicare statute, beneficiaries have the right to appeal the amount of the MSP recovery claims if they believe the claim is not correct.(9) Beneficiaries also have the right to ask Medicare to waive or compromise recovery under several different provisions of the law.(10)

Personal injury attorneys generally have two questions about MSP recovery rights. First, how much of their clients' insurance recoveries can Medicare take? Second, what are Medicare's powers against beneficiaries' personal injury attorneys in pursuing the collection process?

Recovery amounts

In general, HCFA may recover an amount equal to the "Medicare payment" or the "amount of the third party payment," whichever is less.(11)

In cases involving liability insurers, "Medicare reduces its recovery to take account of the cost of procuring the judgment or settlement. . . ."(12) Under this provision, a proportionate share of attorney fees and costs should be subtracted from the amount recovered by Medicare. If the primary insurer's payment is less than the MSP claim, Medicare will take it all--minus the costs of procurement.

The following example shows how the MSP recovery formula works:

Jane Hurt, an accident victim, received a settlement

of $100,000, which was the maximum

amount payable under her tortfeasor's liability

policy. Her medical expenses were $80,000, of

which Medicare paid $50,000. Her pain and

suffering were valued at $20,000; lost wages at

$40,000; and permanent loss of limb at

$60,000.

In this situation, where the settlement is only 50 percent of Hurt's damages of $200,000, Medicare would demand recovery of its entire $50,000 outlay, minus its proportionate share of the procurement costs. Assuming a 30 percent contingency fee arrangement, Medicare would actually take $35,000, Hurt's personal injury attorney would receive a fee of $30,000, and Hurt would be left with only $35,000 to meet her needs resulting from the $ 150,000 uncompensated losses.

This basic formula is limited to Medicare outlays for health services resulting from the accident or other incident that gave rise to liability. Thus, Medicare should not recover for health services to the extent that they were aggravated by, for example, a preexisting heart condition. But in calculating Medicare's claim, contractors are instructed by the Medicare Intermediary Manual (MIM) to include the cost of services for health conditions that preexisted the accident if the beneficiary argued that these conditions were exacerbated by the accident.(13)

The HCFA rule allowing Medicare to take the entire insurance payment even when the beneficiary will suffer unreimbursed damages is controversial. Several courts have held that the beneficiary must actually be entitled to receive a third-party payment for medical expenses in order for Medicare to claim reimbursement.(14)

However, in Zinman v. Shalala, the Ninth Circuit held that Medicare need not reduce its recovery proportionately when the settlement amount is less than the total amount of a beneficiary's damages.(15) The only exception Medicare makes is where allocations of liability payments to nonmedical losses are set forth in judicial or other adjudications on the merits.(16) In these cases, MSP recovery will be limited to the part of the liability payment allocated to medical expenses in the judgment.

The manual includes a form letter for the Medicare contractors to use when making initial MSP recovery demands to beneficiaries.(17) This letter advises beneficiaries of the amount claimed by Medicare, sets out the repayment process, and describes the waiver and appeal procedures. The letter also advises beneficiaries that Medicare may claim interest on unpaid claims during unsuccessful requests for waiver and/or appeal.

The MSP program has not collected interest on recoveries in the past, and its legal authority to do so is questionable. Therefore, this statement may be included in the beneficiary letter to intimidate beneficiaries into paying Medicare immediately. The reference to potential interest charges is likely to have a chilling effect on beneficiary appeals and waiver requests.

Similarly, the form letter states that Medicare may arrange for the amount of the MSP recovery claim to be deducted from the beneficiary's Social Security check. Because Medicare has very rarely done this in the past, the inclusion of the threat to reduce Social Security benefits also appears unfairly coercive.

If it appears that Medicare is demanding more of the beneficiary's award than it is entitled to under these rules, an administrative appeals process can be pursued.(18) The beneficiary must be given notice of this appeal in the demand letter from the Medicare carrier.

The process consists of a paper reconsideration by the carrier, followed by a hearing before a Social Security administrative law judge, a review by the Social Security Appeals Council, and a judicial review in federal district court if the amount in controversy is $1,000 or more.

Another opportunity for a beneficiary to reduce the amount Medicare takes is to request waiver or compromise of the MSP recovery claim.(19) The Medicare statutes and regulations set out three grounds for waiver or compromise:(20)

First, where "the probability of recovery, or the amount involved, does not warrant pursuit of the claim;"(21)

Second, where waiver is in the best interests of the Medicare program;(22)

Third, where the beneficiary is without fault--presumed for MSP waivers--and recovery would either defeat the purpose of the Social Security and Medicare programs or would be inequitable and against good conscience.(23)

HCFA staff in the central and regional offices handle all requests for waiver pursuant to the first two grounds.(24) Attorneys who wish to obtain a reduction of MSP recovery as part of an overall settlement package before resolving personal injury claims or litigation should proceed under the Federal Claims Collection Act with their HCFA regional office.(25)

The third ground for waiver is handled by the Medicare contractors. It is the one commonly used to produce a reduction in MSP recovery claims after a beneficiary has received a personal injury award that is inadequate to reimburse his or her full damages or has otherwise caused financial hardship.

Waiver factors

The MIM sets out the factors to be considered before waiver is granted: out-of-pocket expenses incurred by the beneficiary; age of the beneficiary; assets, monthly income, and expenses of the beneficiary; and physical or mental impairments of the beneficiary.(26)

The manual broadly defines out-of-pocket medical expenses not covered by Medicare to include such health-related costs as housing renovation to accommodate a beneficiary with a disability, adult diapers, and coinsurance payments. The MIM does not include funeral expenses or travel costs of relatives.(27) However, the manual does state that out-of-pocket expenses are not automatically allowed and may be denied where the beneficiary can afford to pay them out of other funds.

To obtain a waiver, the beneficiary must supply a list of specific expenses--even when the expenses are for future medical services or other needs. Documentation in the form of sworn statements, actual bills, or canceled checks is required for out-of-pocket medical expenses. Unfortunately, Medicare often denies waiver without comment--where it could be justified under the manual if a particular kind of evidence were supplied.

The "defeat the purposes of the Social Security or Medicare laws" criterion under [sections] 1395gg(c) is met when a beneficiary does not have an income or resources sufficient to meet his or her ordinary and necessary expenses.(28) These expenses include food, shelter, utilities, insurance, and medical and other health expenses not covered by other insurance; support payments; or other expenses necessary to maintain the beneficiary's standard of living.

Examples of financial hardship include cases where the beneficiary has already spent the insurance proceeds and would not have enough living expenses if he or she repaid Medicare; the beneficiary is living at the poverty level--although preexisting poverty is not in itself enough to justify waiver; and the beneficiary is burdened by an unforeseen financial circumstance such as grandchildren suddenly becoming his or her financial responsibility.

The examples set out in the manual indicate that full or partial waiver on this ground is likely when the amount of the settlement is very small, such as under $5,000. Waiver may also be granted when there are present or future uncovered medical expenses and when the beneficiary's income is both low and lower than his or her expenses.

The second [sections] 1395gg(c) waiver ground, "against equity and good conscience," looks at the degree to which the beneficiary did not contribute to causing the overpayment, whether Medicare did contribute to causing it, and whether repayment would cause undue hardship. This ground also looks at whether the beneficiary would be unjustly enriched by waiver and whether he or she was harmed by relying on erroneous Medicare information.

Examples in the manual indicate that partial waiver on this basis should occur when the beneficiary has properly documented out-of-pocket auto replacement expenses that he or she cannot pay without using part of the insurance proceeds and when a beneficiary is permanently disabled with predictable future out-of-pocket medical expenses.

The manual also gives examples of situations where waiver should not be granted. Generally, these involve situations where settlement amounts are larger, such as $20,000 or $50,000; situations where the beneficiary's income exceeds his or her living expenses; and situations where the beneficiary has substantial assets.

Collection powers

Many personal injury attorneys think they must act virtually as collection agents for Medicare in its MSP recovery efforts. This impression is based on a misreading of the Medicare statute that incorrectly gives MSP claims the status of liens, and inaccurately extends certain punitive powers over insurance companies to attorneys for beneficiaries.(29)

For many years, Medicare referred to its recovery claims as liens in communicating to attorneys and beneficiaries. As a result, attorneys believed that they owed Medicare the same duties to safeguard the lienholder's property interest in liability insurance proceeds as exists with respect to medical liens. However, in zinman, a nationwide class action that is controlling on this issue, the court held that Medicare has no lien rights.(30)

Furthermore, the court clearly ordered Medicare to stop using the term "lien": "[A]s Medicare does not have a lien on the settlement awards, the Secretary and Medicare contractors shall cease using that term to describe MSP recovery claims in communications with beneficiaries and attorneys."

Several consequences flow from the fact that the MSP recovery claim does not have lien status.

First, an attorney has no duty to contact Medicare and advise the agency that there are or may be personal injury awards due to the client. True, the Medicare regulations impose a duty of cooperation on the beneficiary(31) and a duty to notify on the insurance company.(32) However, the regulations impose no similar duties on the personal injury attorney. The attorney would simply have a responsibility to advise the client of MSP recovery program rules and let the client decide how he or she wishes to proceed vis-a-vis Medicare.

Second, if the client chooses to receive his or her part of the insurance proceeds from the attorney(33) and deal with Medicare directly, the MSP statute and regulations impose no penalty on the attorney. In many cases, the client's opportunity to qualify for a waiver of recovery under the provisions described above will be enhanced if the proceeds have already been spent for necessary items.

The Medicare statute and regulations give the agency a right of action to recover conditional payments from an attorney who has liability proceeds in his or her possession.(34) But the penalty provisions that also give the agency a right of action against an entity that has transferred proceeds without paying Medicare apply only to insurance companies.(35) Under the precise terminology of the regulations, Medicare is given no right of action against attomeys who disburse funds to their clients after properly advising them of potential MSP recovery claims.

The relevant part of the MSP statute reads as follows:

In order to recover payment under this subchapter

for such an item or service [paid conditionally

by Medicare], the United States may

bring an action against any entity which is required

or responsible under this subsection to

pay with respect to such item or service (or

any portion thereof) under a primary plan

(and may, in accordance with paragraph (3)(A)

collect double damages against that entity),

or against any other entity (including any

physician or provider) that has received payment

from that entity with respect to the item

or service. . . .(36)

The key to understanding this statutory language is the definition of "primary plan" as an insurer in the preceding section:

In this subsection, the term "primary plan"

means a group health plan or large group

health plan, . . . and a workman's compensation

law or plan, an automobile or liability insurance

policy or plan (including a self-insured

plan) or no fault insurance, to the extent

that clause (ii) applies.(37)

Carefully read, the statute clearly distinguishes between actions against insurers--which can be for double damages--and actions against other entities, such as attorneys, who have received a payment from the insurer that can only be for the payment itself.

The language of the regulations makes the same distinction between Medicare's special collection rights against insurers and its rights against others, such as attorneys.(38) Section 411.24(i) authorizes such recovery of double damages only with respect to insurance companies (third party payers). Thus, [sections] 411.24(g) should be read as authorizing recovery against attorneys only when they are still holding the insurance proceeds that they received for the beneficiary.

United States v. Sosnowski is sometimes cited to bolster the assertion that Medicare can freely choose whether to go after the lawyer or the client for recovery.(39) In that case, Medicare sued both an attorney and his client to recover a disputed conditional payment.

There is no indication that the defendant lawyer did not retain the insurance proceeds for which Medicare sued. More significantly, the case was resolved entirely on the unrelated, disputed issues of estoppel and default.(40)

Thus, neither the facts nor the holding in Sosnowski support the assertion that Medicare can choose to recover from an attorney who has distributed settlement funds to his or her client rather than going against the client for recovery.

Ethical conflict

While personal injury attorneys owe no duty to Medicare, they do have duties to their clients. An attorney was disciplined in In re Swartz for charging an excessive fee even as he neglected to seek compromise of a workers' compensation claim against his client's insurance proceeds.(41) Personal injury attorneys should take care not to act on exaggerated claims of obligation to Medicare when facilitating the Medicare collection effort would conflict with ethical responsibilities owed to their clients.

Notes

(1.) See Sally Hart Wilson, Medicare Secondary Payer Procedures for Recovery of Program Expenditures from Liability Insurance Payments, 29 CLEARINGHOUSE REV. 260 (1995).

(2.) S.S.A. [sections] 1801, codified at 42 U.S.C. [sections] 1395 (1994)

(3.) Pub. L. No. 96-499, [sections] 953.

(4.) S.S.A. [sections] 1862(b), codified at 42 U.S.C. [sections] 1395y(b).

(5.) Employer group health insurance plans (EGHPs) of specified sizes are prohibited from discriminating in health insurance benefits available to workers and their spouses eligible for Medicare because they are disabled or age 65 or older. Medicare provides only secondary coverage for such EGHP-eligible beneficiaries.(42) U.S.C. [sections] 1395y(b)(1) and (b)(2)(A).

(6.) 42 U.S.C. [sections] 1395y(b)(2)(A)(ii) and (b)(2)(B)(i).

(7.) 42 U.S.C. [sections 1395y(b)(2)(B)(ii). The double damages provision gives Medicare the right to obtain a judgment for twice the amount owed by a private insurer that refuses to pay the claim to Medicare. It is designed to provide a disincentive for withholding funds to insurance companies, which have historically been uncooperative with the MSP program.

(8.) 42 U.S.C. [sections]1395y(b)(2)(B)(ii) and (3).

(9.) U.S.C. [sections] 1395ff.

(10.) 42 U.S.C. [sections] 1395y(b)(2)(B)(iv) (waiver provisions in the MSP statute); 42 U.S.C. [sections] 1395gg(c) (general provisions for waiver of Medicare overpayments); 31 U.S.C. [sections] 3711 (the Federal Claims Collection Act).

(11.) 42 C.F.R. [sections] 411.24(c) (1996).

(12.) 42 C.F.R. [sections] 411.37.

(13.) Medicare Intermediary Manual [sections] 3418.8A. The MIM is a guide for insurance companies that administer the Medicare program under contract with HCFA. An unpromulgated document, it does not have the force of law. In a seemingly unsupportable interpretation, the manual states that costs for health services for preexisting health conditions should be included in MSP recovery claims even when all parties agree before settlement that the services were not accident-related. Id.

(14.) Waters v. Farmers Texas County Mut. Ins. Co., 9 F.3d 397 (5th Cir. .1993); Smith v. Travelers Indemnity Co., 763 F. Supp.554 (M.D. Fla.1989).

(15.) 835 E Supp. 1163 (N.D. Cal.1993), aff'd, 67 F.3d 841 (9th Cir. .1995).

(16.) MIM [sections] 3418.7.

(17.) MIM [sections] 3418.9A.

(18.) 42 U.S.C. [sections] 1395ff, 42 C.F.R. [sections] [sections] 405.801405.877.

(19.) 42 U.S.C. [sections] 411.28.

(20.) 42 C.F.R. [sections] 411.28.

(21). 42 C.F.R. [sections] 411.28(2).

(22.) See MSP section of the Medicare statute, at 42 U.S.C. [sections] 1395y(b)(2)(B)(iv).

(23.) See the overpayment recovery provision of the Medicare statute, at 42 U.S.C. [sections] 1395gg(c).

(24.) MIM [sections] 3418.15.

(25.) MIM [sections] 3418.16.

(26.) MIM [sections] 3418.13.

(27.) MIM [sections] 3418.14B.

(28.) MIM [sections] 3418.13B.

(29.) But see Thomas J. Nyzio, Medicare Recovery in Liability Cases, S.C. LAW., May/June 1996, at 20.

(30.) 835 F. Supp. 1163, 1171 (N.D. Cal. 1993), aff'd, 67 F.3d 841 (9th Cir. 1995).

(31.) 42 C.F.R. [sections] 411.23.

(32.) 42 C.F.R. [sections] 411.25. But see Health Insurance Ass'n of Am. v. Shalala, 23 F.3d 412 (D.C. Cir. 1994),cert. denied, 115 S. Ct. 1095 (1995) (expressing doubt that the insurance company must notify Medicare unless it has actual knowledge that specific conditional payments were made by Medicare).

(33.) Unless otherwise agreed between the attorney and client, the scope of representation would normally be limited to the personal injury matter.

(34.) 42 C.F.R. [sections] 411.24(g).

(35.) 42 C.F.R. [sections] 411.24(i); see also Health Ins. Ass'n of Am. v. Shalala, 23 F.3d 412 (D.C. Cir. 1994), cert. denied, 115 S. Ct. 1095 (1995).

(36.) 42 U.S.C. [sections] 1395y(b)(2)(B)(ii).

(37.) 42 U.S.C. [sections] 1395y(b)(2)(A).

(38.) 42 C.F.R. [sections] 411.24(g), (h), and (i). The regulations previously defined "third party payer" as "an insurance policy, plan, or program that is primary to Medicare." 42 C.F.R. [sections] 411.21.

(39.) 822 E Supp. 570 (W.D. Wis.1993).

(40.) The court stated that "[d]efendants Sosnowski and Weis do not contest the requirements of the above statutes and regulations (42 U.S.C. [sections] 1395y(b)(2); 42 C.F.R. [sections] 411.24(g), (h), and (i).) In fact they do not even address the applicable statutes or regulations in their brief."

(41.) 686 P.2d 1236,1244-46 (Ariz. 1984).

Sally Hart is consulting counsel to the Center for Medicare Advocacy, Inc. in Mansfield, Connecticut, and an attorney with Bogutz & Gordon in Tucson, Arizona.