Medicare Secondary Payer and Settlement Delay

• DOI: http://doi.org/10.1111/jels.12181
• Date: 01 June 2018
• Author: Eric Helland,Jonathan Klick
• Published date: 01 June 2018

Medicare Secondary Payer and

Settlement Delay

Eric Helland and Jonathan Klick*

The Medicare Secondary Payer Act of 1980 and its subsequent amendments require that

insurers and self-insured companies report settlements, awards, and judgments that involve

a Medicare beneficiary to the Centers for Medicare and Medicaid Services. The parties then

may be required to compensate CMS for its conditional payments. In a simple settlement

model, this makes settlement less likely. Also, the reporting delays and uncertainty

regarding the size of these conditional payments are likely to further frustrate the

settlement process. We provide results, using data from a large insurer, showing that, on

average, implementation of the MSP reporting amendments led to a delay in the resolution

of disputes involving auto accidents of about six months.

I. Introduction

Medicare is a federal program that covers medical services for qualified beneficiaries.

The program is typically open to those over 65 or those who are classified as disabled

prior to turning 65. The program was established in 1964 under Title XVIII of the

Social Security Act and currently consists of four parts (A–D) that cover hospitalizations,

physician services, prescription drugs, and other treatments.

In recent history, Medicare is perhaps best known for the fiscal problems of its

trust fund, particularly the hospital insurance known as Medicare Part A.

1

This has led

to a variety of proposed fixes, many of which are designed to slow the growth in Medi-

care expenditures. Less frequently discussed are efforts to improve Medicare’s finances

by moving some potential expenditures to other insurers or recovering payments from

other sources after Medicare has paid for treatment. In this article, we focus on the

*Address correspondence to Eric Helland, Claremont McKenna College, 500 East 9th St., Claremont CA 91711;

email: ehelland@cmc.edu. Helland is Economics Professor at Claremont McKenna College and Economist at

RAND; Klick is Professor at the University of Pennsylvania Law School and Erasmus Chair of Empirical Legal

Studies at the Erasmus University Rotterdam.

Many thanks to State Farm Insurance for providing us with the data used in this study. This research was sup-

ported by the Searle Civil Justice Institute of the Law and Economics Center at George Mason University.

1

Medicare’s trust fund is now projected to run a deficit in 2030 (four years later than the Medicare trustee’s 2026

predication in 2013). This improvement is largely driven by slower growth in health-care costs. See 2014 Trustees

Report (2007 annual report of the boards of trustees of the federal hospital insurance and federal supplementary

medical insurance trust funds, Centers for Medicare and Medicaid Services website http://www.cms.hhs.gov/

ReportsTrustFunds/downloads/tr2007.pdf).

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Journal of Empirical Legal Studies

Volume 15, Issue 2, 356–377, June 2018

consequences of the largest of these policies, the so-called Medicare Secondary Payer

(MSP) Act, for the civil justice system. Specifically, we examine the little discussed unin-

tended consequence MSP has had on the settlement dynamics in lawsuits involving

Medicare beneficiaries.

Originally, Medicare was the primary payer for anyone over 65. In the parlance of

the insurance industry this meant that Medicare paid any medical expenses first and any

remaining unpaid bills could be passed on to any additional insurance sources available

to the beneficiary. Medicare’s status as default primary insurer was modified by the

Medicare Secondary Payer Act of 1980, which altered the Social Security Act

2

to make

Medicare the secondary insurer and any other insurance covering a beneficiary the pri-

mary.

3

In particular, this modification allows the Center for Medicare Services (CMS) to

seek reimbursement from a variety of sources labeled the primary insurer by the Act.

The Act, as constructed, clearly envisioned other first-party health insurers, such

as a spouse’s private health plan, as the target of the cost-saving efforts.

4

However,

CMS’s subsequent interpretations have also labeled payments in litigation and workers’

compensation as primary insurers, and CMS regularly sought to recover from civil litiga-

tion proceeds and workers’ compensation payments. This interpretation was not well

received by the courts

5

and facing the prospect of the courts providing a far narrower

interpretation of the Act than CMS advanced, Congress passed the Medicare Moderniza-

tion Act of 2003 (MMA). Essentially, Congress amended the MSP Act to support CMS’s

position that the primary insurer was anyone making a payment related to a covered

injury.

This change had the potential for far-reaching effects on the civil litigation system.

As Swedloff points out, third-party insurers are very different from the health insurers

originally envisioned in the MSP Act.

6

Third-party insurers often have no idea whether a

plaintiff is a Medicare beneficiary and typically do not have the information required to

make such a determination. Moreover, in the case of class action litigation, the defen-

dant may not even know the client’s name. The possibility that Medicare could demand

payment without being part of the litigation via the subrogation process has the poten-

tial to seriously impede the settlement process. In particular, the courts suggested that

2

The MSP Act (42 U.S. Code (USC) 1395y(b)(2)) is one of the amendments to the Social Security Act that estab-

lished Social Security (Public Law (PL) 74--271, 49 Stat. 620), which was approved on Aug. 14, 1935.

3

More specifically, in insurance law the “primary insurer” is the party responsible for coverage and the

“secondary” insurer functions as an excess insurer paying for any expenses not covered by the primary. There are

apparently some exceptions for postretirement first-party insurance health plans but all third-party insurers either

in the tort system or workers’ compensation are primary insurers relative to Medicare.

4

Rick Swedloff, Can’t Settle, Can’t Sue: How Congress Stole Tort Remedies from Medicare Beneficiaries, 41

Akron L. Rev. 557 (2008).

5

See Thompson v. Goetzmann 337 F.3d 489, 493--94 (5th Cir. 2003) and Swedloff, supra note 4.

6

Swedloff, supra note 4.

357Medicare Secondary Payer and Settlement Delay