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When is a medicare set aside necessary

when is a medicare set aside necessary

Issue #59 February 21, 2012


By, John J. Campbell, CELA, MSCC

Beginning in 2005, representatives from the Centers for Medicare and Medicaid Services (CMS) have been stating that it is CMS’ position that Medicare retains its secondary payer status after settlement of liability claims, as well as WC claims. Until now, CMS only actively asserted its post-settlement status as secondary payer following settlement of WC claims. In liability cases, Medicare had only been requiring that its interests as secondary payer be considered with regard to any Medicare payments that might have been made prior to settlement.

According to CMS, its position regarding liability settlements is not new, but is based upon a statutory provision that has been in effect since December of 1980. The Medicare Secondary Payer (MSP) statute, at 42 U.S.C. §1395y(b)(2)(A) states:

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.

(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.

42 U.S.C. §1395y(b)(2)(A)(ii) (emphasis added). CMS' position is based on its interpretation of the MSP statute as providing that a liability settlement that closes out future medical expenses represents a situation in which "payment has been made. under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance” for an item or service otherwise covered by Medicare.

CMS' ability to be able to determine whether an allocation to future medical expenses in a settlement represents a reasonable consideration of Medicare's interests is based upon the MSP regulations that apply to WC settlements. In particular, those regulations, found only under the MSP regulatory provisions applicable to WC settlements, state:

§ 411.46 Lump-sum payments.

(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 compromise 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.

(42 C.F.R. §411.46.)

These provisions in the MSP WC regulations arguably provide the only authority for CMS to review the "reasonableness" of an allocation for future medical expenses or to disregard a settlement if it appears to be an attempt to shift responsibility for future medical expenses to Medicare. Thus, CMS may not legally be able to make this determination in any settlement other than a WC settlement. The same is true of the regulation that allows CMS to determine its own "reasonable allocation" of a settlement. (42 C.F.R. §411.47.)

CMS arguably appears to have the statutory authority, following a liability settlement, to consider a portion of any liability settlement allocated to future medical expenses as being a "payment that has been made" for an item or service covered by Medicare. However, CMS does not appear to have any authority under any current statute or regulation to independently determine which portion of a liability settlement represents payment for a future "item or service" absent an allocation in the settlement itself. Further, CMS appears to have no specific authority in a liability settlement to determine the reasonableness of the settlement's allocation to future medical expenses or to calculate its own allocation.

CMS' has not yet published detailed policy on this issue in any official written statement. The only LMSA policy memorandum from CMS thus far (dated September 29, 2011) states only the CMS will not review LMSA proposals where there is a treating physician’s letter in the file stating that no future injury-related care will be needed. Representatives from the agency have indicated that they are in the process of developing policies and procedures that will hopefully provide guidance on what the agency expects or requires. Those polices and procedures are to be published on CMS' web site, but CMS has not stated when this will be.

Until official policies and procedures are published, the following guidance, provided approximately 6 years ago by the Medicare Secondary Payer (MSP) Coordinators from two of the CMS Regional offices, is offered:

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 MSA's be established in theses cases, nor are we reviewing/approving/denying them.


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 settlement, judgment or award specifically provides for medicals in general or future medicals.

Thus, CMS currently has no official procedure for review of MSA's in liability settlements. However, CMS does require that the parties "reasonably consider Medicare's interests" in liability settlements. Further, it is necessary to notify CMS of any liability settlement in which future medical expenses is a consideration or in which there is a specific provision for past or future medical expenses. Medicare will require that any funds which are allocated to future medical expenses in the settlement be spent on injury related medical expenses before any claims are submitted to Medicare.

In the past 4-5 years, several of CMS’ Regional Offices have begun reviewing some MSA proposals in liability settlements. However, these reviews are purely discretionary. There is no guaranty that CMS will agree to review any particular liability MSA that may be submitted. On the other hand, it appears that many proposals for liability MSAs that are reviewed by the Regional Offices are mistakenly being reviewed according to CMS’ guidelines regarding WCMSAs, since no guidelines, policies or procedures have been published by CMS to date regarding liability MSAs.

This represents a serious problem in that, in most instances, CMS seems to be equating WC law with liability law when determining whether the consideration of Medicare’s interests in the context of a settlement is considered “reasonable.” However, there are vast differences between WC and liability that translate into respective differences in what is or should be considered “reasonable” in each context. Unfortunately, CMS does not allow any process to appeal its decisions upon a review of a proposed WC or liability MSA.

For example, in WC, all that is typically required to establish the employer’s responsibility to the injured worker is that the worker was injured in the course and scope of his or her employment. In liability, the defendant must actually be at fault and must somehow have caused the plaintiff’s injuries before the defendant can be held liable. In WC, the employer’s responsibility includes the obligation to provide ongoing medical benefits for the employee’s work-related injuries for the remainder of the employee’s lifetime. There is no such obligation in liability, thus settlement of future medicals in a liability case cannot possibly be considered a commutation of a “future benefit.” On the other hand, liability claims may be subject to defenses such as comparative fault, which are not available in WC. Also, liability settlements are often subject to caps on damages imposed by state law; or to limits on how much a defendant’s insurance policy is required to pay. These limitations do not typically exist in the area of WC.

As a result, while it may make some sense to presume that a WC settlement of future medical expenses represents a full “commutation” of future WC medical benefits, there is no logical basis for similar treatment of the settlement of future medical expenses in liability settlements. Rather, the nature of liability law is such that any category of damages in a liability settlement will represent a true compromise between what the plaintiff believes he or she may be awarded by a jury and what the defendant believes a jury may require him or her to pay. Clearly, what constitutes a “reasonable” consideration of Medicare’s interest in a WC settlement is necessarily different from what should be considered “reasonable” in a liability settlement.

The current position of CMS appears to recognize that the agency's powers are more limited in liability settlements than in WC settlements. However, what little has been said by agency representatives at this point indicates that CMS has not altogether foreclosed the possibility of recommending submission and review of MSA's in liability settlements in the future.

The passage of the Medicare, Medicaid and SCHIP Extension Act of 2007, which imposes significant requirements on WC, auto, liability and no-fault carriers to report information on settlements involving Medicare beneficiaries, is a sign of what is to come. The information CMS is suggesting may be required is eerily similar to the information CMS requires for submission and review of an MSA in a WC settlement. The fact that CMS is now going to require this information in all WC, liability, auto and no-fault settlements involving Medicare beneficiaries indicates that CMS will be stepping up enforcement of its post-settlement rights as secondary payer is all of these areas. Failure to take some precautions to ensure compliance with CMS's current policy in this area could result in a denial of Medicare benefits for future injury-related medical expenses for the settling plaintiff.

Until CMS publishes policy regarding future medical benefits in liability settlements as it has done regarding WC settlements, each plaintiff settling a liability claim will have to determine a safe means to ensure that his or her future injury related medical expenses will be covered by Medicare. Thus, it is currently advisable in liability settlements to create and fund some type of arrangement (e.g. a liability MSA) to ensure payment of future medical expenses as part of the terms of settlement. This will be extremely important in the event the plaintiff later receives a denial of benefits from Medicare for future injury related care.

The amount with which to fund such an arrangement and the type of arrangement used will depend on the facts of each individual case. However, in every liability settlement, the final settlement amount will represent a discount (i.e. a compromise) from the perceived “full” value of the settlement (i.e. a full commutation representing what a jury would award if it found fully in the plaintiff’s favor on every issue pertinent to an award of damages). Remember, there is no obligation in liability to provide future medical benefits for the plaintiff’s lifetime, as there is in WC. Thus if a liability case with a potential for a jury verdict of $1,000,000 settles for $300,000, the settlement amount represents a discount to 30% of the full potential value of the claim. Arguably, it is therefore reasonable that a reasonable amount for funding of a liability MSA in such a case could be calculated by determining what would constitute a full commutation of future medical and prescription drug expenses of the type covered by Medicare and discounting that amount to 30%.

The United States Supreme Court has accepted this

method of discounting to account for the compromise nature of a liability settlement as a reasonable means of calculating an allocation to medical expenses in the context of Medicaid law. Arkansas Dept. of Health & Human Services v. Ahlborn. 547 U.S. 268 (05/01/2006). Since the issue in any Medicare beneficiary's settlement in this context is merely the reasonableness of the allocation to future medical expenses, the Ahlborn case is very persuasive. Neither Medicaid nor Medicare law specifically defines how the relevant allocation should be calculated. The Court in Ahlborn accepted the parties' application of a standard of reasonableness, which is the same standard CMS requires under the Medicare Secondary Payer Statute. Therefore, what was a reasonable method of allocation in Ms. Ahlborn's liability settlement should be reasonable in virtually any liability settlement, regardless of whether the allocation will be used to protect Medicaid or Medicare.

It is important to note here that, like the vast difference between WC and liability, there is also a vast logical difference in determining the amount of a reimbursement to Medicare for Medicare payments made prior to settlement and the amount of the settlement attributable to future Medicare-type payments. The former is defined by the amount Medicare has actually paid and the amount is determined by historical data. The latter is defined by what the parties have agreed is a reasonable projection in the context of the entire settlement and is by its nature somewhat speculative. The determination of the former does not lend itself to compromise absent some mitigating factor that would justify CMS in agreeing to a compromise or waiver of its claim (as is evidenced by the regulations); whereas the latter must be treated as having been compromised in the same manner and by the same percentage as the overall settlement amount. Otherwise, the resulting inconsistency, lacking as it would be in logical or factual basis, would necessarily be unreasonable.

It will also be very important for the plaintiff's attorney to ensure that language is included in the settlement documents allocating a specific amount to future medical expenses; and to properly document the plaintiff's file with a life care plan or some similar expert projection of future medical expenses. Further, the calculation of the “compromise discount” should be based upon documentation of damages as compare to the final settlement amount. This should allow the plaintiff to later demonstrate that Medicare's interests were reasonably considered.

Applicability of CMS' Procurement Cost Reduction to LMSAs

CMS' stated position on considering procurement costs for purposes of reducing the calculated amount for funding of an LMSA is CMS' claim that 42 C.F.R. §411.37 “applies to recovery of payments for medical claims that Medicare has already made. ” However, there is a strong argument in support of the position that payment of procurement costs from an LMSA is authorized and permissible under the MSP regulations.

The regulation governing CMS’s sharing the burden of procurement costs is 42 C.F.R. §411.37. That regulation states, in relevant part:

Amount of Medicare recovery when a third party payment is made as a result of a judgment or settlement.

(a) Recovery against the party that received payment.—

(1) General rule. Medicare reduces its recovery to take account of the cost of procuring the judgment or settlement, as provided in this section, if—

( i) Procurement costs are incurred because the claim is disputed; and

(ii) Those costs are borne by the party against which HCFA seeks to recover.

(c) Medicare payments are less than the judgment or settlement amount. If Medicare payments are less than the judgment or settlement amount, the recovery is computed as follows:

(1) Determine the ratio of the procurement costs to the total judgment or settlement payment.

(2) Apply the ratio to the Medicare payment. The product is the Medicare share of procurement costs.

(3) Subtract the Medicare share of procurement costs from the Medicare payments. The remainder is the Medicare recovery amount.

(d) Medicare payments equal or exceed the judgment or settlement amount. If Medicare payments equal or exceed the judgment or settlement amount, the recovery amount is the total judgment or settlement payment minus the total procurement costs.

42 C.F.R. §411.37.

Section 411.37 appears in Subpart B of the regulations which contains general provisions that apply to all third party situations. The language of §411.37 does not limit procurement cost recovery to situations where Medicare has made an overpayment prior to a third party payment. Rather, the regulation applies to any situation where "a third party payment is made as a result of a judgment or settlement." Section 411.21 defines "third party payment" as a "payment by a third party payer for services that are also covered under Medicare." That same section defines "third party payer" as "an insurance policy, plan, or program that is primary to Medicare." Those policies include third party liability.

The monies to fund the proposed LMSA in this case were unquestionably obtained as a result of the settlement of the plaintiff's liability claim. These funds were paid or will be paid by the defendant or its liability carrier, definitely a "third party payer" under the above definition. Therefore, the payment of the portion of the settlement earmarked for future medical expenses that Medicare would otherwise have to pay is a "third party payment" under the applicable regulations. The regulations do not specify that the payment must be in reimbursement for conditional payments already made by Medicare.

In fact, it is this very theory that forms the basis for CMS’s stated position regarding future medical expenses in liability settlements. Medicare remains secondary in a liability case, even after the case has settled because of the language in the Medicare Secondary Payer Statute, which states:

P ayment under this subchapter may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that—.

(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.

42 U.S.C. §1395y(b)(2)(A) (emphasis added). Since the payment of a liability settlement constitutes as "payment" under the statute, at least to the extent of the portion of the settlement allocated to future injury-related medical expenses of the type normally covered by Medicare, Medicare remains secondary until that payment has been expended on Medicare-type expenses. Thus, CMS' consistent insistence that "Medicare's interests must be reasonably considered" in liability settlements, as well as in WC, automobile or no-fault settlements. Further, it is only if Medicare’s interests have been considered, if an amount allotted for future medical expenses has been set aside and provisions made for tracking that apportioned money, that Medicare shifts from secondary payer to primary payer once that apportioned money has been spent on appropriate future medical expenses.

Therefore, the set-aside is an offer to allocate a third party payment to a potential Medicare overpayment that must be estimated because its exact value is unknown. Since Medicare remains secondary following settlement, ostensibly the claimant’s future medical bills up to the amount of the applicable third party payment are an overpayment if the plaintiff both receives a settlement and accesses Medicare. Just because the funds are offered in a set-aside arrangement, as opposed to the government outright in the form of a conditional payment reimbursement, makes no difference. The funds are being offered to protect Medicare's interests and release the third party payer.

Under the MSP statue and regulations, Medicare's rights and interests vis а vis all third party payers (WC, liability insurers, automobile and no-fault insurers) is that Medicare's status as Secondary Payer extends into the future beyond the date that the settlement is finalized. The Medicare Set-Aside Arrangement was originally designed and created in order to provide a guaranteed set-aside fund to ensure that Medicare's future secondary payer status in WC cases would be protected. Currently, MSAs are widely used for the same purpose in liability settlements. By setting aside an amount to pay for the plaintiff’s future injury-related medical expenses, the plaintiff guarantees that Medicare will not have to make any further conditional payments. In addition, the funds will be tracked, there will be an accounting, and there are records and receipts—there is, in short, accountability.

The provisions of 42 C.F.R. §411.37(a)(1) apply to all third party payer situations where monies are being recovered from a judgment or settlement. Section 411.37(a)(1) applies to: 1) retrospective recoveries of monies from third party payers for medical expenses already paid conditionally by Medicare; and 2) prospective recoveries of monies from third party payers which Medicare might otherwise be asked to pay conditionally in the future.

In this case, there is no doubt that at least the amount of the liability claim was disputed; that the attorneys’ fees involved were incurred as a result of the disputes; and that the monies to be set aside to protect Medicare’s future secondary payer status are to be set aside from the settlement. Further, the expenses that the set-aside amounts are meant to cover in this case would be of the type for which CMS would normally seek recovery from the plaintiff under Subpart C; and the plaintiff has borne the procurement costs requested. Thus, the requirements of 42 C.F.R. §411.37(a)(1) seem to be satisfied, justifying a reduction in Medicare's recovery (i.e. the set-aside amount) in order to share in procurement costs.

At least one state Court has agreed with this analysis. In the case of Hinsinger v. Showboat Atlantic City. a New Jersey Court allowed a reduction on a proposed LMSA for procurement costs in the context of a liability settlement for a plaintiff on Medicare. Hinsinger v. Showboat Atlantic City. L-3460-07, 2011 WL 1885980 (NJ Super Law Division 2011), decided May 19, 2011. Whether this ruling will be followed by other courts, especially at the federal level, remains to be seen. There is always a risk that another court faced with the same issue may rule differently. However, the Hinsinger case certainly adds credibility to the position that consideration of the procurement cost reduction in calculating an appropriate LMSA amount at least represents a reasonable consideration of Medicare's interests.


At this point, there is still an almost complete lack of direction from CMS as to what constitutes “reasonable consideration of Medicare’s interests” in liability settlements. Some Regional Offices seem to have simply assumed that LMSA proposals should be treated exactly the same as WCMSA proposals. Thus, there is a risk upon submission of an LMSA to a Regional Office of CMS that the result will require a full commutation of future benefits to fund the LMSA, as would be the case in a WC settlement. However, like WCMSAs, there is no official procedure for appeal.

Unless and until CMS can produce clear and reasonable guidelines for LMSAs, it is recommended that LMSA proposals not be submitted for review unless there is some compelling reason for doing so. It should be sufficient at this point to thoroughly document the file to demonstrate the steps taken by the parties to ensure a reasonable allocation to an LMSA; include specific language in the settlement documents setting forth the terms of a proposed LMSA for future injury-related medical expenses of the type normally covered by Medicare; and the actual funding and creation of a reasonable and appropriate LMSA arrangement under proper administration.

The Law Offices of John J. Campbell, P.C. is pleased to introduce THE COMPLETE MSA TRAINING COURSE. This comprehensive study course provides thorough core training on Medicare Set-Asides and related issues. "The Complete MSA Training Course Book" is also available separately in hard copy or on CD Rom. For more information, CLICK HERE.

The National Alliance of Medicare Set-Aside Professionals (NAMSAP) is dedicated to ensuring the highest quality of services and standards of practice for the Medicare Set-Aside industry. NAMSAP is the first non-profit organization in the country serving professionals in Medicare Set-Aside practice. For complete information about NAMSAP, visit their web site:

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