Subrogation traps for vulnerable plaintiffs: a plaintiff who has received a damages award may be forced to repay government benefits. Here's how to help your clients protect their just compensation.

The job of plaintiff attorneys is to redress injuries suffered by clients at the hands of tortfeasors, and they work hard to obtain compensation for their clients. But if a client has received payments from a government agency through Medicare or Medicaid, the agency may have the right to be repaid out of a settlement or damages award through the right of subrogation. Lawyers have an obligation to advise clients of this possibility and to avoid subrogation traps that may lurk in their cases.

Subrogation is "the right of one who has paid an obligation which another should have paid to be indemnified by the other." (1) It developed as an equitable doctrine to prevent a plaintiff from receiving double recovery, but today the right of subrogation in personal injury actions usually arises out of contract or statute.

Medicare is the federal program that provides health insurance for the elderly and disabled. Medicaid is generally administered by a state or county agency and provides medical expense coverage to certain residents whose income falls below a specified level. It is better known as welfare or general assistance.

Administrators of these programs have become aggressive about collecting their subrogation claims. A lawyer who wins the battle by obtaining a settlement or damages award for a client may end up losing the war because the money must be turned over to a subrogated entity.

If a client is faced with a claim for reimbursement of Medicare or Medicaid payments, the attorney must be familiar with the rules and regulations governing these programs in order to seek a waiver or to structure a payment plan. Attorneys representing disabled clients should also be aware that a supplemental needs trust may sometimes be used to provide money for such clients' special needs without jeopardizing their eligibility for Medicaid.

Medicare and subrogation

Congress enacted the Medicare Secondary Payer (MSP) statute in 1980. It provides that Medicare is required to pay benefits only secondarily--after certain other kinds of insurance have paid eligible claims. MSP makes Medicare payments secondary to employer group health plans, liability insurance covering personal injury actions, and workers' compensation insurance. (2)

When an injured party's medical expenses are covered by other insurance, Medicare may pay the expenses first, but only when the other insurer will not pay promptly. Medicare payments are made conditionally. When the other insurer's payment has been made or could be made to the injured party, the government is entitled to recover what it paid.

Medicare benefits are administered by the Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration. CMS is an agency of the Department of Health and Human Services (HHS). The agency is empowered to handle disputes over Medicare payments.

The HHS has published regulations to implement the secondary-payer statute. (3) These regulations give CMS broad subrogation rights. (4) The agency has the right to recover its payments from any entity--including an insurance beneficiary, health care provider or supplier, physician, attorney, state agency, or private insurer--that has received a third-party payment. (5) If the entity has received payment, it must reimburse Medicare within 60 days. (6)

These regulations also grant Medicare subrogation rights that are superior to any other lien or interest on the proceeds of a damages award, including Medicaid. These rights apply even when the agency does not give notice to the parties of its claim. They also apply even when the liability insurer and the parties' attorneys did not actually know that the plaintiff received Medicare payments, if they should have known of Medicare's potential claim. The Medicare lien also takes priority over an attorney's lien for fees and expenses.

The secretary of HHS is authorized to contract with fiscal agents to administer the Medicare program. These agents determine whether benefits are due and their amounts, and they make the benefit payments to claimants.

Agents that administer "Part A" benefits--expenses for hospitals, skilled nursing facilities, home health agencies, and similar services--are known as intermediaries. Agents that administer "Part B" benefits--expenses for services rendered by physicians and most ambulance providers and for durable medical equipment--are known as carriers.

When a Medicare beneficiary receives payment from a third party as a result of a judgment or settlement, CMS is generally entitled to recover the total amount of its "overpayment." Repayment is made either in a lump sum or in installments, with interest added. (7) But a recipient of Medicare can raise defenses to defeat or reduce Medicare's claim on third-party liability insurance payments by requesting compromise or waiver of the claim.

First, a Medicare beneficiary can seek a compromise of the amount sought by CMS for reimbursement. The amount recovered through a compromise must bear a reasonable relationship to the amount of the claim, and it must be recoverable by CMS through its collection procedures.

In deciding whether to compromise a claim, CMS considers the likelihood of collecting 100 percent of the claim. Factors the agency considers in this determination include the recipient's age, health, present and potential income, and whether or not CMS is likely to obtain a judgment against the recipient.

Medicare will generally reduce its claim to take into account the costs that it would incur in procuring an award against a beneficiary, including attorney fees and court costs. (8)

A client can also ask Medicare to waive its claim in whole or in part. Medicare will not consider a waiver request until the client receives the third-party payment. Interest begins to run on a Medicare demand for repayment 30 days from the date of demand. Plaintiff attorneys should, therefore, consider advising their clients to pay Medicare claims while negotiating a waiver. If Medicare grants a waiver request, the client's payment will then be refunded.

Federal regulations govern the waiver process. (9) Generally, Medicare will waive its claim if assertion of the claim would defeat the purpose of the Medicare program. This standard is ordinarily satisfied when a Medicare repayment would deprive a person of income required for ordinary and necessary living expenses. The critical question is whether a settlement or damages award will be used for the client's treatment and care. If so, a waiver request will generally be granted.

Medicaid and supplemental needs trusts

State-administered Medicaid programs vary among states, but there are many similarities in the way subrogation claims are handled.

For example, state Medicaid administrators may compromise claims using criteria similar to those used under Medicare. Requests for compromise are usually sent to the department of human services for the state or county where the Medicaid beneficiary resides. Also, state Medicaid administrators will often negotiate reductions in their claims for the potential costs of collecting the claims.

Medicaid eligibility is based on financial need, and most of a person's assets are included in determining eligibility for the program--even assets that have been placed in a trust. This means that people who have special health care needs, such as the disabled, can be forced to exhaust all their financial resources before they become eligible for assistance.

A supplemental needs trust is one device that can blunt the impact of Medicaid eligibility determinations. It allows some disabled people to maintain a reserve fund for special needs without jeopardizing their eligibility, because assets in the trust are not counted. (10)

The 1993 amendments to the Omnibus Budget Reconciliation Act federalized the treatment of these trusts, known as "(d)(4)(C) trusts" for the section of the U.S. Code that governs them. (11) Before 1993, some states counted assets in a supplemental needs trust toward Medicaid eligibility, and other states did not. (12)

Supplemental needs trusts can be established for the benefit of disabled victims of wrongdoing. They can be used during the disabled person's lifetime for educational, recreational, and leisure activities or services, as well as for medical care not covered by insurance, government benefits, or other funds. (13)

The following requirements must be met to establish a supplemental needs trust:

* The trust must be established by a parent, grandparent, or legal guardian of the disabled person, or by a court, even when the trust is supported by the disabled person's own funds.

* The trust cannot be created after the person reaches the age of 65.

* The beneficiary of the trust must be "disabled"as defined by the Supplemental Security Income program. (14)

* When the beneficiary dies, the trust is required to reimburse the state for any Medicaid assistance paid on his or her behalf. (15)

Representing vulnerable clients such as the disabled, the elderly, and those with limited assets is rewarding, but negotiating the Medicare-Medicaid maze can be daunting.

Plaintiff attorneys new to this arena are not alone: The U.S. attorney for each state is a good source of information on Medicare regulations, and help is available from the National Academy of Elder Law Attorneys. Helping vulnerable clients protect their settlements or damages awards from subrogation traps is worth the trouble of studying the intricacies of Medicare-Medicaid law.

Notes

(1.) BLACK'S LAW DICTIONARY 1427 (6th ed., West 1990).

(2.) 42 U.S.C. [section] 395y(b)(2)(A)(ii) (1991).

(3.) See 42 C.F.R. [subsection] 405.322-405.325 (2002). Effective Nov. 13, 1989, certain portions of 42 C.F.R. [section] 405 were amended and redesigned under a new section, [section] 411. See Medicare as Secondary Payer and Medicare Recovery Against Third Parties, 54 Fed. Reg. 41,716-17 (Oct. 11, 1989). The redesignation table for 42 C.F.R. [section] 405 Subpart C is located at 54 Fed. Reg. 41,733.

(4.) 42 C.F.R. [subsection] 411.26(a)-(b).

(5.) Id. [section] 411.24(g).

(6.) Id. [section] 411.24(h).

(7.) Id. [section] 401.607.

(8.) Id. [section] 411.37(a)(1).

(9.) See 20 C.F.R. [subsection] 404.506-404.512.

(10.) See A. Frank Johns, Preserving Assets with Supplemental Needs Trusts, TRIAL, Nov. 1998, at 90.

(11.) 42 U.S.C. [section] 1396p(d)(4)(C).

(12.) For examples of cases holding that assets placed in supplemental needs trusts are not included in determining Medicaid eligibility, see Zeoli v. Comm'r of Soc. Servs., 425 A.2d 553 (Conn. 1979); Ala. Medicaid Agency v. Primo, 579 So. 2d 1355 (Ala. Civ. App. 1991); Kegal v. State, 830 P.2d 563 (N.M. Ct. App. 1992). For cases holding that such assets are included, see Ark. Dep't Human Servs. v. Donis, 655 S.W.2d 452 (Ark. 1983); Barham v. Rubin, 816 P.2d 965 (Haw. 1991).

(13.) Johns, supra note 10.

(14.) 42 U.S.C. [section] 423(d)(1).

(15.) See William L. Winslow, Safeguarding Benefits for the Injured, TRIAL, June 1996, at 58.

J. Thomas Henretta practices law in Akron, Ohio. He wishes to thank Caroline D. Imhoff for her research and assistance with this article.