Medicare set-asides and future damages considerations in civil liability matters, lessons learned through the workers' compensation set-aside process.

• Author: White, Tamela J.

THE MEDICARE SECONDARY PAYER ACT (MSP) (1) requires that Medicare not pay for any health care item or service that has been paid or should be paid by a primary source. When an illness or injury occurs, Medicare is the secondary payer to other available payment sources for healthcare related costs arising out of a particular triggering (qualifying) event. Since the passage of Section 111 of the Medicare, Medicaid, and SCHIP Extension Act (MMSEA), (2) much chatter has occurred about the consequences of MSP compliance and Section 111 reporting, particularly when future medical expenses are included as a part of a covered claim settlement. Beneficiaries, primary payers and attorneys all have certain compliance obligations under the MSP/MMSEA statutory mandates. The MMSEA and applicable regulations obligate all primary payers to notify the Centers for Medicare & Medicaid Services (CMS) of primary payment events. (3) CMS has developed a robust process through which Medicare's past and future interests arising out of workers' compensation (WC) (4) compensable events are anticipated, evaluated and protected. (5) The vehicle through which proof of Medicare's future interests are protected in this venue is a "Medicare Set-Aside" trust or "MSA." Regulation and policy memoranda operationalize CMS's exercise of statutory authority over a WC settlement and over any MSA for its life, from creation through exhaustion. There are workload approval thresholds that mandate settlement proposal approval by CMS. An MSA is warranted for any settlement that constitutes a commutation and involves a WC claimant who is a Medicare beneficiary at the time of settlement or who is reasonably anticipated to become a Medicare beneficiary within thirty (30) months thereof. (6)

As of the date of this publication no formal mechanism governs CMS management of third party civil tort liability claims and MSAs. (7) Notwithstanding, the MSP's mandate that all parties to the litigation, all primary payers and all counsel protect Medicare's interests must be followed regardless of the absence of specific regulations like those promulgated in the WC context. (8) An appreciation of the need for collaborative protocols to be used by courts and counsel in the tort arena is evolving. The United States District Court for the Western District of New York has adopted a Medicare Secondary Payer Protocol as of May, 2011 that is applicable to tort claims. Integral components of that protocol include confirmation of any future MSA commutation obligation, fund establishment, approval by CMS and differentiation of future medical expenses from other components of a settlement. (9) A member of the United States' Attorney Office in Northern West Virginia has also stated that education of personal injury lawyers of the fundamentals of future damages set-aside allocations is warranted. (10) The Superior Court of New Jersey recently applied CMS's WC policy in calculating plaintiff's counsel's procurement fee vis-a-vis a future set-aside fund arising out of a judgment in a tort claim. (11) Several courts have cited and applied MSA policy considerations in tort settlement approvals. (12) The likelihood that all lawyers working in the civil tort arena will confront and must follow the precedent established and perfected over the last decade in the WC process is a near certainty unless and until the constitutionality of the Secretary of Health and Human Service's policies and regulations are challenged, if at all. From a professional responsibility perspective, prudence dictates caution for all working with Medicare beneficiaries or anticipated beneficiaries and with primary payers in any litigated proceeding.

Because many non-workers' compensation litigation attorneys are unfamiliar with the historical precedence established in the WC specialty, this article provides an overview of the WC MSA regulations and compliance process. This article also refers to published opinions specifically relating to attorney professional liability exposure and omissions jeopardizing settlements. This article does not provide an exhaustive review of all published opinions, given that more than four (4) dozen legal opinions and commentaries have been published within the past five (5) years. Instead, this article presents salient common themes and perennial pitfalls for practitioners. (13) The article ends with presentation of two (2) sample judgment orders where detailed findings of fact and conclusions of law were published in tort claims, including findings specific to future medical need funding and MSA considerations.

1. MSA Policy Issues and the Necessity for MSA Evaluation Prior to Settlement and Entry of Judgment Orders

   Each MSA claim must be analyzed on a case-by-case basis. The facts, circumstances and WC substantive law of the governing jurisdiction provide the contextual framework for this analysis. The triggering (qualifying) event giving rise to the need for health care is the event or circumstance(s) proximately causing the work-related injury or illness. CMS (Medicare) relies upon the WC permanency and/or duration classification of the work-related injury or illness such as permanent total, permanent partial, temporary total or temporary partial disability as defined by governing state law. (14) In addition to other items discussed in this article, CMS analyzes current documentation of the claimant's physical condition along with the historical medical services and prescription use pattern in ascertaining whether or not Medicare's future interests are protected and funding is accomplished for reasonably predictable future health care needs arising out of the qualifying event. (15) Threshold questions prior to establishment of a MSA and seeking approval thereof include: what is the present and future medical condition of the claimant as opined by a qualified physician to a reasonable degree of medical certainty; and what has been the claimant's health care usage history associated with the compensable event which will, to medical certainty, continue for a specified time in the future or, if no time is specified, his/her lifetime? (16)

   WC set-aside regulations are found in 42 C.F.R. [section] 411 Part C. (17) Parties may comply with established regulatory review and MSA approval process and minimize settlement approval delay by ensuring timely submission of all necessary documentation to CMS supporting the integrity of the proposed settlement. Adequate documentation includes, inter alia, documentation in support of the proposed qualifying trust or annuity funding with administration plan; life expectancy documentation based upon the Centers for Disease Control and Prevention (CDC) Table 1, the All American Table: Life Table for the Total Population; (18) a life care plan with medical expenses inclusive of prescription drug costs specific to the documented medical needs of the claimant and differentiation of those covered by Medicare as well as those not; past medical services and prescription use for the compensable claim (distinguished from co-existing, co-morbid conditions); the rationale for the proposed set-aside fund amount segregating any future income fund from any future medical fund total; and funding sources. (19)

   WC settlements that only include past medical expenses, whether or not liability is contested, constitute compromises. (20) WC settlements that provide for payment of future health care expenses are commutations. (21) A settlement may be a hybrid arrangement, constituting both a compromise and a commutation. (22) Like any situation in which a primary payer and claimant/plaintiff enter into a settlement and that claimant is or is reasonably likely to become a Medicare beneficiary within thirty (30) months, a private WC settlement does not bind the United States and cannot be used in an attempt to circumvent government recovery rights. (23) In the WC situation, the Secretary has established review thresholds and proposed settlements in excess of those thresholds must be approved.

   Just as in any other settlement involving an injury or illness for which Medicare has made or will make conditional payments, any attempted apportionment of WC indemnity and medical expense percentages by private agreement favoring the claimant such that it "appears to represent an attempt to shift to Medicare the responsibility for payment of medical expenses for the treatment of a work-related condition" will not be recognized by CMS as reasonably protecting Medicare's interests. (24) For example, an agreement in which the parties try to release a WC payer from liability for work-related injury or illness medical expenses notwithstanding it being uncontested that related medical expenses have been incurred and/or will be incurred after the date of the settlement would constitute an attempt to improperly obligate Medicare. (25)

   In the event a component of a settlement is a commutation, in general and depending upon the manner in which the payouts are structured through the MSA trust, Medicare will not pay for WC injury or illness health expenses otherwise reimbursable by Medicare until the MSA is exhausted. (26) The WC claimant must be properly advised that MSA funds may only be used for qualified medical expenses and not for personal consumption given the prohibition against use for non-related injury or illness purposes. (27) A beneficiary may jeopardize his/her future Medicare payments by failure to abide by the terms of the MSA. CMS provides the following example of this situation. CMS approved a total sum of $90,000 for future medical expenses relating to a work related injury. The claimant was a Medicare beneficiary at the time of the settlement. The claimant misappropriated money from the fund, using some or all of it on a home improvement project that the claimant believed was necessary because of his disability. (28) Home improvement is not a medical expense...