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Medicare and future medical expenses: does the "super lien" apply? It's common practice to accommodate Medicare liens in personal injury liability claims. But must litigants also protect Medicare from future medical expenses - i.e., those that might be incurred by the plaintiff after settlement or judgment? While the answer is far from clear, the author offers his opinions.

A little known federal statute may soon become a significant factor in settlements and judgments in liability cases. The Medicare Secondary Payer Act sets forth the statutory framework for what is commonly known as the Medicare "super lien." (1)

Simply stated, the statute provides that Medicare will not pay for medical expenses covered by workers' compensation, automobile liability, liability insurance policies, or no-fault insurance policies. (2) Liability plans, identified as "primary" plans, (3) are deemed primarily responsible for payment. Medicare is secondary to all other available healthcare payment sources and available only when those sources are exhausted. (4)

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Addressing, and ultimately satisfying, Medicare liens in personal injury liability claims is common practice. A tougher question is this one: do litigants have an obligation to protect Medicare from future medical expenses --i.e., those that may be incurred by the plaintiff after settlement or judgment?

As the following discussion shows, it is a question with no clear answer. And a lack of direction from the United States Department of Health and Human Services further complicates the issue.

The Medicare Secondary Payer Act

Medicare's status as a secondary payer arises under the Medicare Secondary Payer Act ("the Act"), significant provisions of which are found at 42 USC section 1395y(b)(2) (5) The Act states as follows, in part:

(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. In this subsection, the term "primary plan" means a group health plan or large group health plan, to the extent that clause (i) applies, and a workmen'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. An entity that engages in a business, trade, or profession shall be deemed to have a self-insured plan if it carries its own risk (whether by a failure to obtain insurance, or otherwise) in whole or in part. (6)

In addition, the statute vests Medicare with subrogation of rights as well as enforcement provisions for violations of the Act. (7)

History of the Act

Passed in 1980, the Act was designed to ensure that Medicare was not making payments for medical expenses when other insurance was available. (8) Later that same year, the Omnibus Reconciliation Act expanded Medicare's secondary payer status and right to reimbursement for conditional payments to include liability, auto liability, and no-fault insurance. (9)

Early litigation over how the Act applies to tort claims focused on Medicare's ability to recover its liens (conditional payments) (10) in tort settlements. Federal courts were divided about the propriety of the federal government's attempts to recover Medicare expenditures under the Act in tort claims.

Early attempts by Medicare to enforce the Act were rejected in several cases, including Thompson v Goetzmann, (11) In re Orthopedic Bone Screw Products Liability Litigation, (12) and Fanning v United States. (13) In many instances, the government's efforts were defeated when courts found that tort defendants were not obliged to "pay promptly" under the Act. (14)

In response to conflicting court decisions, the Act was amended in 2003. Congress approved the Medicare Modernization Act, (15) which amended the Medicare Secondary Payer Act's definition of self-insurance and deleted "prompt payment" language from section (A)(ii) of the Act.

These were efforts to revise language that had undermined the government's attempts to enforce the Act in the courts. There have been, however, no federal cases specifically addressing the Act's impact, if any, on Medicare's interest in future medical expenses in civil liability claims.

Future medical expenses and workers' comp

The Act specifically identifies and addresses previous "conditional payments" by Medicare. It does not, however, set forth specific rights or obligations for future medical expenses in liability claims.

Obligations for future medical expenses in workers' compensation claims are, however, specifically addressed in the Code of Federal Regulations ("CFR"). (16) Enacted in 1989, section 411.46 addresses lump sum settlements in workers' compensation claims and provides as follows, in pertinent part:

(a) Lump-sum Commutation of Future Benefits. If a lump-sum compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of the work-related injury or disease, Medicare payments for such services are excluded until medical expenses related to the injury or disease equal the amount of the lump sum payment.

(b) Lump-sum Compromised Settlement.

(1) A lump-sum compromise settlement is deemed to be a workers' compensation payment for Medicare purposes, even if the settlement agreement stipulates that there is no liability under the workers' compensation law or plan.

(2) If a settlement appears to represent an attempt to shift to Medicare the responsibility for payment of medical expenses for the treatment of a work-related condition, the settlement will not be recognized. For example, if the parties to a settlement attempt to maximize the amount of disability benefits paid under workers' compensation by releasing the workers' compensation carrier from liability for medical expenses for a particular condition even though the facts show that the condition is work-related, Medicare will not pay for treatment of that condition. (17)

Where a workers' compensation settlement makes an allocation for future medical expenses, the CFR provides as follows:

(2) Exception. If the settlement agreement allocates certain amounts for specific future medical services, Medicare does not pay for those services until medical expenses related to the injury or disease equal the amount of the lump-sum settlement allocated to future medical expenses. (18)

The CFR contains no similar provisions applicable to liability settlements under the Act. Although the CFR addresses recovery of conditional payments where there is a civil judgment or settlement, (19) it remains silent about future medical expenses. This lack of regulatory direction from the Department of Health and Human Services has heightened the confusion over parties' obligations to Medicare for future medical expenses.

While the Act does not specifically address future medical expenses, language of the statute appears to create a basis for claiming that parties should protect Medicare's interests in future medical expenses in settlements and judgments. Notably, the Act includes language in the past tense requiring reimbursement of conditional payments where the primary plan "has or had a responsibility to make payment with respect to such item or service." (20) Such language suggests an obligation to protect Medicare even where liability for future medical expenses has been extinguished through settlement or satisfaction of judgment.

In July of 2001, the Centers for Medicare & Medicaid Services (CMS) published the "Patel Memo" setting forth the first written policy governing the need to protect Medicare's interests in future medical expenses in workers' compensation settlements. (21) The vehicle used to satisfy these expenses is commonly referred to as a Medicare Set Aside Trust ("MSA Trust").

Under CMS policy, funds set aside in an MSA Trust are only to be used by the workers' compensation claimant for future medical expenses related to the industrial injury. (22) Once the funds are exhausted, Medicare will cover additional future medical expenses under Medicare. Medicare has also established settlement thresholds governing when a proposed set-aside arrangement should be submitted to CMS for approval. (23)

Future medical expenses and liability claims: unofficial guidance

Unlike with workers' compensation cases, CMS has failed to set forth any policy memoranda or state a clear policy about Medicare set asides in liability settlements. Unofficially, however, CMS is more forthcoming.

Representatives of the CMS Chicago Regional Office advise that CMS' position is that the Act requires liability insurers, including auto liability insurers, to protect Medicare's interests in future medical expenses if a future-medical allocation is part of the settlement. Furthermore, CMS has made the following statement about litigants' obligations to Medicare:
 CMS' position is that we expect
 any funds that are allocated for future
 medicals to be spent before any
 claims are submitted to Medicare
 for payment and the beneficiary will
 probably be asked about it on the
 initial enrollment questionnaire that
 is systems generated, but, we are not
 asking that MSAs be established in
 those cases, nor are we reviewing/approving/denying
 them. (24)


In addition, the San Francisco Regional Office has promulgated the following written statement:
 The Centers for Medicare & Medicaid
 Services (CMS) has no current
 plans for a formal process for reviewing
 and approving Liability Medicare
 set-aside arrangements. However,
 even though no formal process exists,
 there is an obligation to inform CMS
 when future medicals were a consideration
 in reaching the Liability settlement,
 judgment, or award as well as
 any instances where a Liability settlement,
 judgment, or award specifically
 provides for medicals in general or future
 medicals. (25)


Thus, it is clear, at least informally, that the CMS interprets the Act to require litigants to protect Medicare's interests in settlement or satisfaction of judgment in liability claims.

The Medicare Secondary Payer manual is contributing to the uncertainty about CMS's position. The manual was amended in 2009 to define set-aside arrangements to include liability and no fault cases. (26) But the manual further states that "there should be no recovery of benefits paid for services rendered after the date of liability settlement." (27)

In other words, the Medicare manual expands the definition of Medicare set-aside arrangements to include liability and no-fault liability cases while at the same time suggesting that Medicare benefits should not be paid for injury-related services following a liability settlement.

The CMS lacks a regulatory framework upon which to base enforcement. Until regulations are promulgated similar to those in workers' compensation, (28) litigants will have to rely on informal policy statements.

It is also possible that any effort by Medicare to enforce the statute with regard to future medical expenses in liability claims will be challenged in court. If the CMS fails to provide clear direction, the courts are likely to step into the void.

Assuming that CMS has statutory authority to require litigants to protect its interests in future medical expenses, what is its policy? The unwritten policy has been to communicate that Medicare must be protected if a tort settlement includes an allocation for future medical expenses.

But litigants rarely allocate settlement funds to a plaintiff's particular element of damages. Most settled cases instead contain a lump-sum payment for all forms of damages in exchange for a comprehensive release. There appears to be no obligation to protect Medicare's interests where the settlement includes no specific allocation for future medical expenses. (29)

Also, Medicare lacks regulatory authority to reapportion a settlement in a personal injury case that has been resolved by lump sum without a specific allocation for future medical expenses. (30) It is likely, then, that when Medicare learns of an allocation for future medical expense in a civil case, it will deny coverage for the beneficiary's related expenses until he or she has spent a sum equal to the allocation.

Currently, CMS is giving litigants no direction about what constitutes an "allocation" of future medical expenses pursuant to a settlement. Specific allocations may arise in tort cases involving mentally disabled adults or minors, where court approval of specific settlement terms is often required. But do litigants actually have a duty to allocate settlement funds for future medical expenses where they are likely and the plaintiff is or soon will be Medicare eligible? (31) That remains unclear.

The impact of SCHIP

The Medicare set-aside issue has received renewed attention in the litigation community with the enactment of the Medicare and Medicaid SCHIP Extension Act of 2007 (MMSEA). (32) The new statute creates mandatory reporting requirements for claims involving Medicare-eligible individuals. Specific obligations were placed on liability insurers, as well as workers' compensation insurers, to report such claims.

While these requirements constitute a further effort by Medicare to enforce the Medicare Secondary Payer Act, (33) the MMSEA does not explicitly change any standards governing Medicare set-aside requirements. In fact, the user guide to the MMSEA emphasizes that section 111 of the Act did not change or remove any existing Medicare Secondary Payer rules or requirements. (34) While the MMSEA will enable Medicare to identify claims where conditional payments may need to be reimbursed, nothing indicates that it otherwise affects future medical expenses in liability claims.

Options for addressing future medical expenses

As it stands, litigants have several options in attempting to comply with the Medicare Secondary Payer Act.

The most cautious approach is to specifically allocate settlement funds toward future medical expenses if the claim involves a current or future Medicare beneficiary, according to the workers' compensation standard. (35) Settlement terms would be subject to negotiation and require the plaintiff to place settlement funds allocated for future medical expenses into a self-directed Medicare set-aside account similar to those used in workers' compensation settlements. Where the allocation involves a substantial sum, litigants may consider submitting the proposed set aside to CMS for approval, although CMS has no formal review procedure for liability claims.

A less cautious approach is to use Medicare set-aside arrangements only in catastrophic-injury cases where damages include substantial future medical expenses, and only if the plaintiff is Medicare eligible. Where a substantial element of damages is the plaintiff's future medical expenses, it might be advisable to use a Medicare set-aside account. Parties can also consider using annuities to fund future medical expenses to help preserve funds over time and further protect Medicare's interests.

The least cautious approach would be to use a Medicare set aside only if the settlement or judgment specifically requires an allocation of future medical expenses--e.g., in cases of mentally disabled adults and minors. Again, a set aside should only be required if the plaintiff is either Medicare eligible or otherwise meets the current Medicare standard for future beneficiaries under workers' compensation. (36)

Cases that end in verdicts, not settlements

Cases tried to verdict raise an additional issue under the Medicare Secondary Payer Act. Future medical expenses that are an element o f damages are awarded on itemized verdict forms. When that happens, future medical expenses have arguably been allocated as a result of the verdict. That leaves defendants no procedural or legal means to protect Medicare's interests by requiring that the judgment plaintiff use a Medicare set aside.

The SCHIP Extension Act, however, will require notice to Medicare that a judgment involving a Medicare-eligible individual has been satisfied and included an itemized verdict for future medical expenses. That will put Medicare on notice that the plaintiff has received funds for future medical expenses.

This in itself, however, will probably not meet the obligation to protect Medicare's interests. Medicare is thus likely to require the plaintiff to spend the amount for future medical expenses before it pays for related treatment.

Thoughts for the future No matter how cautiously they approach the Medicare Secondary Payer Act, litigants are left with the unresolved issue of how to protect Medicare's interests in future medical expenses where settlements involve a substantial compromise. Such compromise is common in tort cases, which often settle for substantially less than full value. But the CMS methodologies for calculating Medicare set-aside proposals are designed for the full-value or no-fault nature of workers' compensation statutes. (37)

The percentage method. Litigants should take steps to minimize the risk that their compromise settlements will be construed as improperly shifting liability to Medicare for the plaintiff's future medical expenses, thus violating the Medicare Secondary Payer Act. (38)

One approach would be to calculate the amount of the compromised settlement as a percentage of the full value of the claim. A Medicare set aside can then be funded using the same percentage in relation to the full amount of anticipated future medical expenses.

For example, if the claim is settled at approximately 75 percent of full value, it would seem reasonable and defensible to fund future medical expenses in a set aside at 75 percent of the projected future medical expense.

Lack of guidance. Many questions remain about the scope of the Medicare Secondary Payer Act and the position of CMS about statutory compliance. However, the Department of Health and Human Services and the Center for Medicare Services have yet to promulgate regulations addressing future medical expenses in liability, including auto liability, claims. In the absence of those regulations, some will question whether the Medicare Secondary Payer Act even applies to liability settlements. (39)

Also, while CMS has made informal statements about Medicare set asides in liability cases, it has failed to promulgate written policies. Consequently, litigants face uncertainly about parties' obligations to Medicare under the Medicare Secondary Payer Act.

Under current law, litigants might take any of several approaches to complying with the Medicare Secondary Payer Act, ranging from not using Medicare set asides at all to using them in every personal injury settlement involving Medicare-eligible individuals with future accident-related medical expenses. Unless and until CMS weighs in, lawyers have no choice but to use their best judgment and continue to monitor developments.

(1.) 42 USC [section] 1395y(b)(2)(B)(iv). Indeed, Medicare has a statutory first right of recovery against all proceeds over all entities; the liens are statutory and notice thereof is not required. 42 USC [section] 1395y(b).

(2.) 42 USC [section] 1395y(A)(2).

(3.) 42 USC [section] 1395y(b(2)(A)(ii).

(4.) 42 USG [section] 1395y(b)(2) and [section] 1862(b)(2)(A)(ii).

(5.) 42 USG [section] 1395y(b)(2).

(6.) 42 USC [section] 1395y(b)(2). Furthermore, subsection (B) provides

(B) Conditional Payment

(i) Authority to make conditional payment

The Secretary may make payment under this subchapter with respect to an item or service if a primary plan described in subparagraph (A)(ii) has not made or cannot reasonably be expected to make payment with respect to such item or service promptly (as determined in accordance with regulations). Any such payment by the Secretary shall be conditioned on reimbursement to the appropriate Trust Fund in accordance with the succeeding provisions of this subsection.

(ii) Primary plans

A primary plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made by the Secretary under this subchapter with respect to an item or service if it is demonstrated that such primary plan has or had a responsibility to make payment with respect to such item or service. A primary plan's responsibility for such payment may be demonstrated by a judgment, a payment conditioned upon the recipient's compromise, waiver, or release (whether or not there is a determination or admission of liability) of payment for items or services included in a claim against the primary plan or the primary plan's insured, or by other means. If reimbursement is not made to the appropriate Trust Fund before the expiration of the 60 day period that begins on the date notice of, or information related to, a primary plan's responsibility for such payment or other information is received, the Secretary may charge interest (beginning with the date on which the notice or other information is received) on the amount of the reimbursement until reimbursement is made (at a rate determined by the Secretary in accordance with regulations of the Secretary of the Treasury applicable to charges for late payments). 42 USC [section] 1395y(b)(2)(B).

(7.) 42 USC [section] 1395y(b(2)(B)(iii), (iv).

(8.) 42 CFR [section] 411.40 (2000).

(9.) PL 96-499, [section] 900 et seq.

(10.) "Conditional payments" are those payments made by Medicare for services for which another payer is responsible. 42 CFR [subsection] 411.21.

(11.) 337 F3d 489 (5th Cir 2003).

(12.) 202 FRD 154, 163-169 (ED PA 2001).

(13.) 346 F3d 386 (3d Cir 2003).

(14.) See United States v Baxter Intl, Inc, 345 F3d 866 (11th Cir 2003); In re Zyprexa Products Liability Litigation, 451 F Supp 2d 458 (ED NY 2006).

(15.) PL 108-173, 117 Star. 2066 (2003).

(16.) 42 CFR [subsection] 411.40-411.47.

(17.) 42 CFR [section] 411.46.

(18.) 42 USC [section] 411.46(d)(2).

(19.) 42 USC [section] 411.37.

(20.) 42 USC [section] 1395(y)(b)(2)(B)(ii); John J. Campbell, Medicare Set Aside Arrangements for Future Medical Expenses in Third Party Liability Settlements, the Medicare Set Aside Bulletin, February 14, 2005, at http://www.jjceldertacv.com/CMS%,20TPL%20News.htm.

(21.) Memo, July 23, 2001, from Parashar B. Patel, Deputy Director of the Purchasing Policy Group Center for Medicare Management to all associate regional administrators (July 23, 2001), copy available at: http://www.curs.hhs.gov/WorkersCompAgencyServices/downloads/72301 Memo.pdf. The Center for Medicare and Medicaid Services (CMS), as well as its Coordination of Benefits Office, oversee administration of the Medicare Set Aside trusts in workers' compensation matters. Since 2001, no less than a dozen memoranda have been issued by Medicare clarifying--and at times changing--policies and procedure with regard to handling future medical expenses in workers' compensation claims.

(22.) These accounts may be established as bank accounts or investment accounts and are funded at the time of settlement of the case or through periodic payments to the MSA fund. The MSA may be managed professionally or by the claimant.

(23.) Memo from Parashar B. Patel (cited in note 21). A workers' compensation MSA may be submitted to CMA for review and approval where (1) the claimant is currently a Medicare beneficiary and the total settlement exceeds $25,000, or (2) the claimant has a "reasonable expectation" of entering Medicare within 30 months of the settlement date and the anticipated total settlement amount for future medical expenses and lost wages exceeds $250,000. An MSA is not necessary when the settlement leaves future medical expenses open.

(24.) Campbell, Medicare Set Aside Arrangements (cited in note 20). In June 2004, during a Medicare set aside conference a representative of the Office of General Counsel for the United States confirmed the intention of Medicare to begin enforcement of the Act in liability cases. See http://www.royal-msa.com/LiabilityNoFaultMSA.php.

(25.) Letter from Department of Health & Human Services, Centers for Medicare & Medicaid Services, San Francisco Regional Office (on file with author).

(26.) Medicare Secondary Payer (MSP) manual, chapter 1, Background and Overview, [section] 20-definitions (2009).

(27.) Medicare Secondary Payer (MSP) manual, chapter 7, Contractor MSP Recovery Rules, [section] 50.5 (2009).

(28.) 42 CFR 5 411.46.

(29.) Norma S. Schmidt, The King Kong Contingent: Should the Medicare Secondary Payer Statute Reach to Future Medical Expenses in Personal Injury Settlements?, 68 U Pitt L Rev 469, 489 (2006), available at http://lawreview.law. pitt.edu/issues/68/68.2/Schmidt.pdf.

(30.) Id.

(31.) In workers' compensation claims, Medicare requires that its interests be protected with a Medicare set aside arrangement where petitioners are Medicare beneficiaries or where petitioners are deemed future beneficiaries under standards set forth in CMS policy memoranda.

(32.) PL 110-173, 121 Star 2492.

(33.) 42 USC [section] 1395y(b)(2).

(34.) Matthew L. Garretson and Sylvius H. Von Saucken, Act It: Reporting obligations for settling insurers where Medicare is secondary payer; the Medicare, Medicaid and the SCHIP Extension Act of 2007, May 21, 2009, available at http://www.garretsonfirm.com/garretson/news/?newslt)=13.

(35.) The current workers' compensation standard requires that Medicare's interests be protected through a Medicare set aside under which workers' compensation claimants meet one of the following criteria: (1) the claimant has applied for social security disability; (2) the claimant has applied for and been denied social security disability; (3) the individual is in the process of appealing and/or refiling for social security disability benefits; (4) the claimant is 62 1/2 years of age or older; or (5) the claimant has end stage renal disease. Memo from Parashar B. Patel (cited in note 21). A workers' compensation MSA may be submitted to CMA for review and approval where (1) the claimant is currently a Medicare beneficiary and the total settlement exceeds $25,000, or (2) the claimant has a "reasonable expectation" of entering Medicare within 30 months of the settlement date and the anticipated total settlement amount for future medical expenses and lost wages exceeds $250,000. An MSA is not necessary when the settlement leaves future medical expenses open.

(36.) 42 USC [section] 1395y(b)(2).

(37.) Matthew L. Garretson, Making Sense of Medicare Set Asides, Trial (May 2006), available at: http://www.settlementplan.com/pdf/making_sense.pdf.

(38.) 42 CFR [section] 411.46(b)(2)(2005).

(39.) While not all statutes require regulations, for practical purposes it can generally be considered that a statute for which an implementing regulation has never been created has no administrative or judicially cognizable consequence for failing to follow the statute. Code of Federal Regulations, available at http://www.originalintent.org/edu/federalreg.php.

Bradford Peterson is a partner in the Urbana office of Heyl, Royster, Uoelker & Allen. His practice focuses on the defense of liability and workers' compensation cases. He is past chair of the ISBA Bench and Bar Section Council and serves on both the ISBA Assembly and the Workers' Compensation Section Council.
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Author:Peterson, Bradford J.
Publication:Illinois Bar Journal
Date:Jan 1, 2010
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