Medicare and Liability Settlements: How to Spot Issues and Consider Medicare’s Interests
When resolving a liability claim involving medical treatment, the parties are required by federal law, pursuant to the Medicare Secondary Payer Act (MSP), 42 U.S.C. 1395y(b)(2), to consider Medicare’s interests with regard to the settlement of the medical portion of the claim. The intent of the MSP is to prevent settling parties from shifting the responsibility for payment of medical expenses from a primary payer to Medicare.
This is a two-step analysis, requiring the parties to consider both (1) medical expenses already incurred and paid by Medicare, which are known as conditional payments, and (2) the possibility of future medical expenses yet to be incurred that may be payable by Medicare, which are sometimes referred to under the catch-all phrase “Medicare Set Asides.” It is extremely important to include language in the settlement agreement explaining how the parties have considered Medicare’s interests.
Why is it important? Although the MSP statute and supporting federal regulations can be difficult to interpret, it is very clear that CMS can (and often will) pursue recovery from anyone who receives payment, directly or indirectly, from a settlement resolving medical liability where the burden is improperly shifted to Medicare. Such recovery efforts may be directed not only towards the Medicare beneficiary and the insurance carrier, but also to self-insureds, attorneys who are paid fees from the settlement, medical providers, or anyone else who has received a portion of a third-party payment. Medicare may suspend a beneficiary’s Medicare coverage until an entire settlement has been exhausted. A carrier’s liability may not necessarily be limited to the amount of the settlement. Medicare has the unique ability to seek reimbursement for conditional payments pursuant to what has been described as a “super lien,” which takes priority over any other primary payers. See 42 U.S.C. 1395y(b)(2)(B)(iii). Importantly, the MSP gives Medicare the legal right to seek double damages for reimbursement of conditional payments. Medicare also has certain subrogation rights. See 42 U.S.C. 1395y(b)(2)(B)(iv). Because Medicare is not a party to the settlement, it does not consider itself bound by the terms of settlement. Therefore, Medicare may pursue recovery, regardless of the settlement, if it does not believe the parties adequately considered Medicare’s interests.
However, CMS has no legal right to seek reimbursement or pursue subrogation until one of two things happens: the medical portion of the claim settles or a final adjudication is reached establishing the liability of a primary payer. Thus, until the parties either reach a settlement agreement or the Court renders a final decision, there can technically be no overpayment by Medicare.
How are settlements tracked by Medicare? Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) added certain mandatory reporting requirements for settlements involving Medicare beneficiaries. These additional safeguards help Medicare protect against shifting the burden for ongoing medical care from primary payers to Medicare by requiring the mandatory reporting of certain claims involving Medicare beneficiaries and the subsequent settlement of those claims. Medical treatment related to such reported claims is tracked by CPT medical codes. If a reported claim is settled without resolving the Medicare conditional payment lien or adequately considering Medicare’s interests with regard to ongoing medical care, then Medicare will be able to quickly and easily track such medical care as the CPT codes are submitted by medical providers seeking Medicare payment.
The following discussion is provided as a general overview of some of the issues to be considered in resolving a claim involving medical expenses potentially covered by Medicare.
- Conditional Payments
A Medicare conditional payment involves a medical expense that has already been paid by Medicare. This situation necessarily involves an individual who is already a Medicare recipient and has submitted medical services for payment to Medicare instead of a primary payer. As such, with regard to conditional payments, the parties must consider whether Medicare has already made any payment, conditioned upon possible reimbursement, for medical services allegedly related to the underlying injury, for which the insurer may be deemed responsible by Medicare as a primary payer.
Once Medicare is notified of a potential conditional payment issue, a “Rights and Responsibilities” letter will be issued to the Medicare beneficiary, as well as to any carrier identified as a primary payer. Then, within 65 days, an initial “Conditional Payment Letter” will be automatically generated and sent to anyone attached to the claim. The 65-day period theoretically allows the Medicare contractor enough time to retrieve all available medical claims affiliated with the date of accident. The payments are searched using CPT medical codes (currently ICD-9, but transitioning to ICD-10).
The Conditional Payment Letter is sent to all authorized parties, including anyone identified by a valid Consent to Release Form executed by the Medicare beneficiary or a representative of the primary payer insurance carrier identified by a valid Proof of Representation. It contains the current conditional payment amount and a list of all expenses, including dates of services, provider, and CPT codes.
The Medicare beneficiary (or a beneficiary’s attorney with a valid Consent to Release) can retrieve up–to-date conditional payment amounts from three sources:
- MyMedicare.gov website.
- By telephone using the “MSPRC Self Service Information Feature” (1-866-677-7220). The following information is necessary in order to use this self-service feature:
- Case identification number (found on all MSPRC correspondence)
- Beneficiary’s date of birth
- First five letters of Beneficiary’s last name as it appears on Medicare card
- Last 4 digits of Beneficiary’s Social Security number (or full Medicare number)
- Medicare Secondary Payer Recovery Portal, which is a newer option. The MSPRP web portal is available for anyone to access, upon enrollment, by uploading a valid Consent to Release or Proof of Representation to the active claim file. The web portal allows access to the most recent conditional payment information and provides the ability to upload documents, request updates, dispute items based on relatedness, and submit settlement information.
The primary ground for disputing a demand for reimbursement of a conditional payment is based upon “relatedness,” which is the causal relationship of the medical treatment to the injury in the underlying claim. The demand letter from CMS/MSPRC will indicate the relevant dates of service and CPT codes. The parties should review both the dates of service and the CPT codes for relatedness to the claim.
In additional to a challenge based on relatedness, 42 C.F.R. 411.28 provides the authority for CMS to waive recovery, in whole or in part, if the probability of recovery, or the amount involved, does not warrant pursuit of the claim. This is rarely exercised by CMS. There is also a process to request a compromise based upon hardship, including the beneficiary’s present or future inability to pay, although these requests are also rarely granted. Appeal rights are specified in the final demand letter.
Medicare will typically demand reimbursement of any conditional medical payments made related to the alleged injury, regardless of liability. A best practice is to determine in the settlement agreement which party will be responsible for the payments. Unfortunately, CMS/MSPRC will not provide a “final demand” figure until after the settlement has been reached.
Medicare does allow for a reduction in the amount of its conditional payment lien if the amount of settlement is less than the lien. Under 42 C.F.R. § 411.37(d), Medicare will generally reduce its recovery by procurement costs, with the total recovery not to exceed the amount of settlement. Medicare essentially takes the attorney’s fees and costs off the top, and then demands the entire remaining amount of settlement, leaving no net recovery to the plaintiff. Under this reduction, only the plaintiff’s attorney gets paid. So, by way of example, assume the following:
A liability claim is settled for $10,000.00, with $3,333.34 payable to the plaintiff’s attorney in fees and $125.00 in legal costs. However, the Medicare conditional payment lien is $50,000.00. Under this scenario, the “total procurement costs” would be considered $3,458.34, which is the total of attorney’s fees and costs. Because the settlement is less than the conditional payment, Medicare’s recovery would be reduced by the total procurement costs. Thus, the net amount due to Medicare would be $6,541.66.
There are also the Fixed Percentage Payment option (available in liability settlements of $5,000.00 or less), as well as the Low Dollar Threshold (available for liability settlements of $300.00 or less), both of which are discussed below.
The Strengthening Medicare and Repaying Taxpayers (SMART) Act was signed into law on January 10, 2013. One of the major goals of the SMART Act was to allow parties to determine the exact amount of the conditional payment lien before settlement. On September 20, 2013, CMS issued an interim final rule addressing the conditional payment web portal. The interim final rule became effective as of November 19, 2013. All systems and process changes to the web portal are to be implemented no later than January 1, 2016. Once all of the security has been implemented, the fully operational web portal will then allow all users full access, including diagnosis codes, provider names, dates of services, etc. However, CMS’s position with regard to obtaining a final conditional payment demand prior to settlement is still otherwise unclear.
It is also important to determine whether any medical payments have been made by a Medicare Advantage Part C Plan. In Humana v. GlaxoSmithKline, the United Stated Court of Appeals, Third Circuit, held that Humana, a Medicare Advantage Part C Plan, had a private cause of action under 42 U.S.C. § 1395y(b)(3)(A) of the Medicare Secondary Payer Act, to sue tortfeasors for double damages based upon Medicare conditional payments. Significantly, such conditional payments made under Medicare Part C will not appear on any MSPRC conditional payment investigation or demand, but rather must be verified directly with the provider of the Part C plan. Additionally, the beneficiary’s Medicare coverage is subject to change on an annual basis, and the Part C component may alternate to different providers, making identification of potential Part C conditional payments extremely tricky to verify.
II. Future Medical Exposure
In certain situations, Medicare’s interests may also need to be considered when negotiating a final settlement of a claim involving anticipated future medical treatment. As discussed above, Medicare’s interests must always be considered with regard to conditional payments. Likewise, Medicare’s interests must also always be considered with regard to future anticipated medical expenses.
A Medicare Set-Aside Arrangement (MSA) is not required under the Medicare Secondary Payer Act. In workers’ compensation claims with settlements meeting certain clearly defined review thresholds, a Workers’ Compensation Medicare Set-Aside Arrangement (WCMSA) may be voluntarily submitted to the Centers for Medicare & Medicaid Services (CMS) for review and approval. With approval by CMS, Medicare’s interests are deemed to have been properly considered by the settling parties. Unfortunately, unlike workers’ compensation settlements, there is currently no formal procedure whatsoever recognized by CMS for the voluntary submission and/or approval of a proposed Medicare Set-Aside Arrangement in the context of liability claims. Despite there being no formal process for obtaining CMS approval of a proposed MSA, the settling parties must nonetheless still consider Medicare’s interests. In very limited situations, some CMS Regional offices have apparently allowed voluntary submission and review of proposed liability MSA’s. These cases typically involve an extremely substantial amount of settlement with a very high likelihood of future Medicare exposure. Again, whether CMS will review a liability MSA is determined on a case-by-case basis, but there is no formal or voluntary procedure for submission at this time.
Without the benefit of a formal CMS review, the next best option appears to be obtaining some level of educated opinion as to whether an allocation for future medical care and/or MSA is necessary to protect Medicare’s interests and, if so, in what amount and to what extent. It is advisable to confer with a consultant certified with expertise in the area of preparing MSA’s and projecting future medical expenses potentially covered by Medicare. Simply having a general life care plan prepared may not necessarily be sufficient because it may not take into account what expenses are specifically anticipated to be covered by Medicare. All of the defenses to a claim should also be communicated in formulating the MSA proposal because it may potentially alter the amount recommended for the MSA and/or future medical allocation.
If an MSA is determined to be necessary by the parties, then the MSA account can either be self-administered by the plaintiff or handled by a professional administrator. An annuity can be used to fund the MSA.
The settling parties may elect to allocate a portion of the settlement proceeds towards the possibility of future medical expenses being paid by Medicare. With regard to workers’ compensation settlements only, 42 C.F.R. 411.47 provides that if the settlement allocates a portion for medical expenses and gives reasonable recognition to income replacement method, that apportionment may be accepted as basis for determining Medicare payments. If the workers’ compensation settlement does not allocate any portion for medical expenses, then Medicare will apply a ratio based upon the total amount of settlement, less attorney’s fees and costs, compared to the total amount that would have been payable under workers’ compensation if the claim had not been compromised, multiplied by the total medical expenses incurred to the date of the settlement.
In certain situations, the parties to a disputed claim may agree to compromise and resolve all issues by full and final settlement/release, but the defendant carrier may maintain it is not responsible for any potential future medical care. In workers’ compensation claims, CMS is sometimes receptive to approval of a “zero allocation,” or zero-dollar ($0.00) allocation. The zero allocation is just that—no settlement money is allocated for future medicals. Because no formal MSA submission is allowed in liability settlements, no formal approval of a zero allocation is technically possible, either. However, language can be included in the settlement release discussing why a zero allocation would be appropriate. This is generally based upon a legal theory or argument that likely would have prevailed if the matter had gone to a hearing or trial. Examples of such legal arguments include statute of limitations, notice, subject matter jurisdiction, apportionment, third-party litigation/subrogation, etc. The underlying basis for a zero allocation is that the defendant carrier would not actually be considered a primary payer.
Sometimes an attorney may be asked to execute an agreement to personally indemnify an opposing party in the event Medicare should seek reimbursement. Advisory opinions have been issued by several states, including North Carolina, South Carolina, and Florida, which expressly prohibit such provisions or even requesting such provisions. Referencing advisory opinions from North Carolina and South Carolina Opinion, the Florida Bar advised that “a lawyer should not agree to personally indemnity an opposing party. Such an agreement violates Rules 4-1.8(e) and 4-1.7(a)(2). Furthermore, a lawyer should not ask or require that another attorney enter into an agreement to personally indemnity an opposing party. Such conduct would violate Rule 4-8(a).” SeeFlorida Bar Opinion 30310 (April 4, 2011); North Carolina State Bar Ethics Opinion RPC 228; and South Carolina Ethics Opinion 08-07.
On June 15, 2012, CMS published in the Federal Register formal “advance notice of proposed rulemaking,” requesting comments on various options under consideration for meeting obligations to protect Medicare’s interests with respect to future medicals in liability settlements. We anticipate there will be a formal submission process for liability MSA’s in the near future.
III. Options Specific to Liability Settlements
The following provisions apply only to liability settlements:
- Low Dollar Threshold ($1,000.00 Settlements)
On September 6, 2011, CMS took a first step in providing a “safe harbor” for liability settlements, announcing it had implemented a $300.00 “low dollar threshold” for exemption of certain liability insurance settlement. Specifically, as of September 6, 2011, if an individual has received a settlement of $300.00 or less, Medicare will not recover conditional payments it may have made from that settlement. The criteria to qualify included the following:
- The beneficiary’s settlement, judgment, award or other payment is related to an alleged physical trauma-based incident. The $300.00 threshold does not apply to cases involving alleged ingestion, implantation, or exposure;
- The liability insurance (including self-insurance) settlement, judgment, award, or other payment is $300.00 or less;
- The beneficiary has not received and does not expect to receive any other settlements, judgments, awards, or other payments related to the incident; and
- Medicare has not previously issued a recovery demand letter.
The $300.00 threshold would not apply to cases where an insurer was paying or had paid medical bills directly or on an ongoing basis. The $300.00 threshold would only apply to Medicare conditional payment issues.By CMS memorandum issued on February 28, 2014, the $300.00 minimum threshold was raised to $1,000.00. The annual calculation of this minimum threshold is mandated by Section 202 of the SMART Act.
- Certification from Treating Physician
On September 30, 2011, CMS issued a memorandum (the “Benson” Memo) related to liability settlements, including self-insurance. If a treating physician certifies no future medical care is necessary related to that liability claim, then CMS will consider its interests protected with regard to future medicals. However, CMS will not provide confirmation in writing and simply recommends the settling parties keep a copy of the physician’s letter “on file.”
- Fixed Percentage for Conditional Payments
CMS announced a new fixed percentage option available beginning November 7, 2011. This option only applies to liability settlements of $5,000.00 or less. In such cases, a beneficiary who elects this option will be able to resolve Medicare’s recovery claim by paying Medicare 25% of the total liability insurance settlement, as opposed to using the traditional recovery process. The following criteria must be met:
- The liability insurance (including self-insurance) settlement is for a physical trauma based injury;
- The total liability settlement, judgment, award, or other payment is $5,000.00 or less;
- The beneficiary elects the option within the required timeframe and Medicare has not issued a demand letter or other request for reimbursement related to the incident; and
- The beneficiary has not received and does not expect to receive any other settlements, judgments, awards, or other payments related to the incident.
Medicare has warned that if this option has been elected, there is no right to appeal the fixed payment amount or request a waiver of recovery for the fixed payment amount.
There is unfortunately no “black” or “white” when it comes to many of the issues which must be considered, under penalty of federal law, when resolving a liability claim involving Medicare issues. Much of this “grey area” is by design, whereas the government has placed the burden on the settling parties as an all-inclusive safety net against any shift of liability for medical expenses, whether actual or perceived, to Medicare from the settling parties. Yet, Medicare has not yet provided a formal method to then review and sign off on what the parties have proposed. This may actually give the parties some flexibility in negotiating the terms of settlement, so long as Medicare’s interests are actually and legitimately considered. Please let us know if we can put our experience to work for you in navigating these issues.
 This is currently handled by the Medicare Secondary Payer Recovery Contractor (MSPRC). Effective February 1, 2014, the responsibilities will be transitioned to the new Benefits Coordination & Recovery Center (BCRC)
 If the settlement had been greater than the amount of the conditional payment lien, then Medicare’s share of the proceeds would be reduced by Medicare’s percentage share of the total procurement costs.
 In re: Avandia Mktg., 685 F.3d 353 (3d Cir. 2012), cert. denied GlaxoSmithKline v. Humana Medical Plans, Inc., No. 12-690, 569 U.S. ___ (Apr. 15, 2013).
 The review thresholds for WCMSA submissions include settlements involving (1) a claimant who is already a Medicare recipient and the total amount of settlement is greater than $25,000.00 (commonly referred to as “Class I”) or (2) the total settlement amount exceeds $250,000.00 and there is a “reasonable expectation” that the claimant will be enrolled in Medicare within 30 months of the settlement date (commonly referred to as “Class II”). “Reasonable expectation” applies to the following situations: claimant has applied for Social Security Disability; claimant is appealing an adverse decision on an SSD application; or claimant is 62 years and 6 months old. The total settlement amount includes attorney’s fees, any prior awards, and conditional payment amounts.
 For more information on these options, see the “Attorney Tool Kit” provided on the Medicare Secondary Payer Recovery Contractor website, found at http://www.cms.gov/.