Section Review

Medicare set-asides and personal injury cases - what is the practitioner to do?

Medicare set-asides and personal injury cases - what is the practitioner to do?1

The Medicare Secondary Payer ("MSP") statute makes Medicare the secondary payer "in any case where care can be paid for under any liability insurance policy."2 The MSP statute affects personal injury and workers' compensation clients and attorneys in two ways.

The first has to do with any medical bills related to the client's personal injury or workers' compensation case that Medicare pays for prior to any settlement or judgment in that case. In such a situation, Medicare has a statutory lien on the client's file for the amount of its payments, and, if the client settles the case or receives a judgment in the case, the client must repay Medicare for all bills that Medicare paid.

The second has to do with settlements of most workers' compensation cases exceeding $25,000 where the settlement will close out medical expenses. In this type of settlement, if the client anticipates receiving medical treatment for the injury after the settlement and is either on Medicare or reasonably expects to become a Medicare beneficiary within 30 months of the settlement date, the client must allocate a specified portion of the settlement to what is called a Medicare set-aside account ("MSA").

An MSA is a separate account that the client will use to fund his/her reasonably expected post-settlement medical bills that are related to the injury in question. Medicare will not pay for future related medical expenses until the properly funded and approved MSA is exhausted.

The size of the MSA is usually determined by a financial consultant who is retained by either the client's lawyer or the insurer. The consultant will review the client's medical records and make a recommendation as to how much money should be placed in the MSA. The consultant's report will then be sent to the administrator of Medicare, the Centers for Medicare & Medicaid Services ("CMS"), formerly known as the Health Care Financing Administration ("HCFA"), for approval. Upon approval, the MSA will be funded from the settlement proceeds. After it is funded, the client must file yearly accountings with CMS until the account is exhausted. If an MSA is not set up in a case where CMS thinks that it should be, CMS may suspend or stop Medicare payments.

Recently, personal injury lawyers have been questioning whether MSAs must be funded in settlements of personal injury cases where the client anticipates incurring future related medical expenses and is either on Medicare or reasonably expects to be on Medicare within 30 months of settlement. A thorough review of the MSP statute, its legislative history, its related regulations, CMS's manuals and memoranda, the case law, and the federal government's pleadings in litigation involving MSAs shows that MSAs are not currently required in settlements of personal injury cases. The American Association for Justice ("AAJ") takes the same position. In a message dated Aug. 11, 2009, that was e-mailed to all AAJ members, AAJ President Anthony Tarricone wrote that "statements from CMS, and other federal entities, make clear that the agency does not require set-asides for liability claims."

As previously stated, the MSP statute makes Medicare the secondary payer "in any case where care can be paid for under any liability insurance policy." This language can be read to implicitly authorize, but not require MSAs. Neither the MSP statute, nor its legislative history,3 contains any language that addresses or describes MSAs or explains how the MSP statute is to be applied to medical bills incurred after a personal injury or workers compensation settlement or verdict.

Since the MSP statute and its legislative history do not explicitly require MSAs in tort cases, the regulations promulgated in support of the statute, 42 C.F.R. Part 411, Subparts C and D, should be reviewed. Subpart C addresses workers' compensation cases and subpart D addresses personal injury cases. However, subpart D contains no regulations that mention the settlement of tort cases. The only regulations in subparts C or D that address what must be done when a client expects to incur future medical bills after settling a case are §§411.46 and 47 in subpart C, but these regulations are specifically limited to settlement of workers' compensation cases.

A review of the original Notice of Proposed Rules in the Federal Register confirms this reading of the regulations. In outlining the proposed Subpart C, HCFA wrote, "The workers' compensation rules need revision to remove outdated content and to make them consistent with the rules pertaining to other types of insurance that are primary to Medicare."4

In summarizing the proposed subpart D, HCFA wrote nothing about settlement of tort lawsuits. One can thus reasonably conclude that the regulations indeed neither require MSAs in tort settlements, nor authorize CMS to demand an MSA in tort settlements.

Since the statute and its related regulations do not address MSAs in tort settlements, CMS's memoranda and manuals should be reviewed to determine if CMS ever put the public on notice that it contended that MSAs were required in tort settlements. Although Congress enacted the MSP statute in 1980, and the Department of Health and Human Services ("DHHS"), the parent agency of CMS, promulgated the regulations in 1989, CMS did not lay out a procedure for setting up and filing MSAs until July 2001, when it disseminated a memorandum by then CMS Deputy Director Parashar B. Patel titled "Workers' Compensation: Commutation of Future Benefits" ("the Patel Memo").5 The Patel Memo begins as follows:

Medicare's regulations (42 C.F.R. 411.46) and manuals (MIM 3407.7 & 3407.8 and MCM 2370.7 & 2370.8)6 make a distinction between lump sum settlements that are commutations of future benefits and those that are due to a compromise between the Workers' Compensation (WC) carrier and the injured individual. This Regional Office letter clarifies the Centers for Medicare & Medicaid Services (CMS) policy regarding a number of questions raised recently by several Regional Offices (RO) concerning how the RO should evaluate and approve WC lump sum settlements to help ensure that Medicare's interests are properly considered.

The Patel Memo continues, "It is important to note that set-aside arrangements are only used in WC cases that possess a commutation aspect: they are not used in WC cases that are strictly or solely compromised cases."7 Since the Patel Memo, CMS has issued a number of other formal Memoranda on MSAs. All can be found on CMS's Web site, and all repeatedly refer to "WC," "WC cases," "WC carriers" and "WC benefits," but not to personal injury cases. Only one memorandum refers to third-party liability cases or settlements in liability cases: the April 22, 2003 memorandum, which addressed liability cases only in the context of a work-related injury in which a third party case also exists. The relevant language is in FAQ #19, which states:

19) Does CMS require that a Medicare set-aside arrangement be established in situations that involve both a WC claim and a third party liability claim?
Answer: Third party liability insurance proceeds are also primary to Medicare. To the extent that a liability settlement is made that relieves a WC carrier from any future medical expenses, a CMS approved Medicare set-aside arrangement is appropriate. This set-aside would need sufficient funds to cover future medical expenses incurred once the total third party liability settlement is exhausted. The only exception to establishing a Medicare set-aside arrangement would be if it can be documented that the beneficiary does not require any further WC claim related medical services. A Medicare set-aside arrangement is also unnecessary if the medical portion of the WC claim remains open, and WC continues to be responsible for related services once the liability settlement is exhausted.8

CMS's manuals only address the application of MSAs in the context of workers' compensation cases. No manual refers to MSAs in the context of liability settlements. A brief example of CMS's position can be seen in its MSP manual, which addresses the procedure that CMS will follow in processing settlements in workers' compensation cases. The MSP manual has a subchapter titled "Recoveries from Liability Insurance Including No-Fault Insurance, Uninsured, or Under-Insured Motorist Insurance." This subchapter addresses Medicare's right to a payback from the settlement proceeds of a tort case, but only in the framework of Medicare's lien for payments previously made.9 This subchapter contains no language about MSAs.10

The review of CMS's regulations, memoranda and manuals has shown that the regulations requiring MSAs indeed apply only to workers' compensation cases, that CMS has only considered those regulations to apply to workers' compensation cases, and that CMS has never considered the regulations to apply to personal injury cases.

This was also the conclusion of a University of Pittsburgh law student who published a note in the University of Pittsburgh Law Review in 2006 that stated, inter alia, "The regulations dealing with Medicare as a secondary payer to post-settlement medical expenses are specific to worker's compensation, [which weakens] the argument that the MSP statute applies to future medical expenses in personal injury cases."11 The note continued, "Even if the MSP statute arguably applies to a specific allocation of future medical expenses in personal injury cases, Medicare's authority to disregard a settlement allocation that appears to shift costs onto Medicare refers only to the treatment of a 'work-related condition.'"12

The case law was reviewed next. However, there is no case law that addresses how MSAs should be applied. There are not even any recorded appeals from CMS's reviews of proposed MSAs in workers' compensation cases. Accordingly, the pleadings in the very few cases against DHHS with respect to the MSP statute were reviewed in order to determine if DHHS has ever taken a legal position on the purpose of MSAs. Such pleadings would of course constitute judicial admissions. At least two such cases exist and, in each of these cases, DHHS explained the need for MSAs only in the context of the settlement of workers' compensation cases, and even conceded that MSAs are not mandatory in workers' compensation cases.13 These judicial admissions by DHHS strengthen the points that the MSA process is for workers' compensation settlements only, that current Medicare regulations do not require MSAs in tort settlements, and that DHHS (and thus, CMS) does not take the position that MSAs are required in tort settlements.

Even though CMS does not currently take the position that MSAs are required in tort settlements, it could certainly begin to take such a position at any time. If, however, CMS were to take this position without promulgating regulations authorizing it to do so, its action would be unenforceable as a matter of administrative law for several reasons.

First, there are no regulations that require MSAs in tort settlements, so any attempt by CMS to require them would be invalid unless DHHS promulgated such regulations.14 Review of the MSP statute shows that Congress did not delegate the authority to DHHS to require MSAs in the settlement of tort cases without promulgating regulations that authorize CMS to do so. The MSP statute provides:

No rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits under this subchapter shall take effect unless it is promulgated by the Secretary by regulation under paragraph (1).15

The Supreme Court has held that a "substantive rule" is a legal standard "affecting individual rights and obligations,"16 or one that "implement[s]" a statute.17 Another well-known description of "substantive rule[]" is one that "effect[s] a change in existing law or policy."18 In contrast, an interpretive rule is a rule that is "issued by an agency to advise the public of the agency's construction of the statutes and rules which it administers."19

Accordingly, if CMS were to decide that its existing regulations and/or manuals require an MSA in a tort settlement, such an action would clearly effect a change in existing law or policy, and would thus create a new substantive legal standard which could not be implemented without being properly promulgated.20 For the same reason, CMS could not simply amend its manuals to require an MSA in a tort settlement without properly promulgating them.

Second, if CMS were to require an MSA in a tort settlement without promulgating new regulations authorizing it to do so, CMS would not be entitled to the deference that courts accord an administrative agency's construction of its own regulations under Chevron, U.S.A., Inc. v. Natural Resources Defense Council.21 Even the revision of the CMS manuals or the issuance of a new memorandum would be an insufficient basis for this new practice. In this regard, the Supreme Court has held, "Interpretations such as those in opinion letters - like interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law - do not warrant Chevron-style deference."22

Without specific regulations requiring MSAs in tort settlements, any demand by CMS that a Medicare recipient create an MSA in a tort settlement, or any threat by CMS to cease a Medicare recipient's Medicare benefits, should be deemed as nothing more than an agency litigating position. The Supreme Court has held that Chevron deference will not be applied to "agency litigating positions that are wholly unsupported by regulations, rulings, or administrative practice."23

Third, any demand by CMS that a Medicare recipient create an MSA upon settling a personal injury case or any threat by CMS to cease a Medicare recipient's Medicare benefits on the grounds that the recipient would violate the administrative law fair notice doctrine. This rule holds that the public is entitled to fair notice of an administrative agency's interpretation of the statutes that it administers and of the regulations that it has enacted. The District of Columbia Court of Appeals has summarized this doctrine as follows:

If, by reviewing the regulations and other public statements issued by the agency, a regulated party acting in good faith would be able to identify, with 'ascertainable certainty,' the standards with which the agency expects parties to conform, then the agency has fairly notified a petitioner of the agency's interpretation.24

The court continued by stating that when "the regulations and other policy statements are unclear, where the petitioner's interpretation is reasonable, and where the agency itself struggles to provide a definitive reading of the regulatory requirements, a regulated party is not 'on notice' of the agency's ultimate interpretation of the regulations, and may not be punished."25 Because neither the Medicare regulations, nor CMS's manuals, letters and memoranda, require MSAs in personal injury settlements, CMS has not to date provided the public with fair notice that MSAs are required in personal injury settlements.26

Of course, CMS may make this whole argument moot by promulgating regulations requiring MSAs in personal injury settlements, but, for now, personal injury lawyers should take the position that MSAs are not required in settlements of non-workers' compensation personal injury cases.

Notes

1.    This article is based on a brief filed in January 2009, in the case of Wilson v. Pacific Gulf Marine, et. al., Case No. 07-60879-CIV-ALTONAGA (USDC - Southern District of Florida, Miami Division). In that case, the defendants had filed a post-settlement motion to require the plaintiff to create an MSA and asked the court to decide whether an MSA was necessary. See generally Defendants and Third Party Defendants' Joint Motion to Require Plaintiff to Set Aside Funds for Medicare or in the Alternative Motion for Clarification, Wilson v. Pacific Gulf, No. 07-60879 (S.D. Fla. filed Jan. 20, 2009). Ralph Mellusi of New York represented the plaintiff, and intended to object on the grounds that an MSA was not required in a tort case. Prior to that time, I had researched this issue for a case in my own office, and had already begun drafting a memo for my office's use. Mellusi and I ended up in touch on this issue, and agreed that, because our firms viewed this issue similarly and because I had already done extensive research on the issue, we should use my research and work together to prepare an objection to the defendants' motion. See generally Plantiffs' Opposition to Defendants and Third Party Defendants' Joint Motion to Require Plaintiff to Set Aside Funds for Medicare or in the Alternative, Motion for Clarification, Wilson v. Pacific Gulf, No. 07-60879 (S.D. Fla. filed Feb. 6, 2009). However, the court refused to rule on the merits of the motion, stating that it "declines the parties' invitations to interpret the legal requirements of the Medicare Secondary Payer Act or the Medicare Recovery Act." Wilson v. Pacific Gulf, No. 07-60879, at 3 (S.D. Fla. Mar. 6, 2009) (Order denying Defendants and Third Party Defendants' Joint Motion to Require Plaintiff to Set Aside Funds for Medicare or in the Alternative, Motion for Clarification).

2.    42 U.S.C. §1395y(b)(2)(A) (2006).

3.    H.R. Rep. 96-1479, at 133 (1980) (Conf. Rep.), reprinted in 1980 U.S.C.C.A.N. 5903, 5924.

4.    Proposed Rules, Medicare as Secondary Payer and Medicare Recovery Against Third Parties, 53 Fed. Reg. 22,335-01, 22,339 (June 15, 1988).

5.    Parashar B. Patel, Workers' Compensation: Commutation of Future Benefits [hereinafter "the Patel Memo"] (2001). See also Frazer v. CNA Insurance Company, 374 F. Supp. 2d 1067, 1075 (N.D. Ala. 2005) (the Patel Memo "clarifies CMS's policy regarding Medicare and workers' compensation settlements").

6.    These documents are the Medicare Intermediary Manual and the Medicare Carriers Manual, which are both available on CMS's Web site. See Centers for Medicare and Medicaid Services, Paper-Based Manuals, www.cms.gov/Manuals/PBM/.

7.    The Patel Memo, supra note 5, at 2.

8.    Centers for Medicare & Medicaid Services, Medicare Secondary Payer - Workers' Compensation (WC) Frequently Asked Questions, 7 (Apr. 22, 2003) www.cms.gov/WorkersCompAgencyServices/Downloads/42203Memo.pdf.

9.    Medicare Secondary Payer Manual, Chapter 7, ¶50.4.4 available at www.cms.gov/manuals/downloads/msp105c07.pdf.

10.    Id. See also Medicare Secondary Payer Manual, Chapter 2, ¶40, 50 www.cms.gov/manuals/downloads/msp105c02.pdf.

11.    Norma S. Schmidt, Note: 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, 478-479 & n.58 (2006) (citing 42 C.F.R. §411.46).

12.    Id. at 479.

13.    Walters v. Leavitt, 376 F. Supp. 2d 746, 750 (E.D. Mich. 2005); Brief in Support of Defendant's Motion to Dismiss, *5, n.4, 2005 WL 3873326; Protocols, LLC v. Leavitt, 2007 WL 757644 (D. Colo. 2007), rev'd, 549 F.3d 1294 (10th Cir. 2008); Protocols, LLC v. Leavitt, No. 05-cv-01492-BNB-PAC, Defendant's Motion for Summary Judgment and Supporting Brief, *2-4 (D. Col. 2006).

14.    Vitarelli v. Seaton, 359 U.S. 535, 539-540 (1959) (executive agency must obey its own regulations).

15.     42 U.S.C. §1395hh(a)(1) and (2) (2006).

16.    Chrysler Corp. v. Brown, 441 U.S. 281, 301-02 (1979) (citations omitted).

17.    Id. at 302, n.31 (quoting the Attorney General's Manual on the Administrative Procedure Act (1947)).

18.    Powderly v. Schweiker, 704 F.2d 1092, 1098 (9th Cir. 1983); see also Linoz v. Heckler, 800 F.2d 871, 878-88 (9th Cir. 1986) (where a rule in a CMS manual is substantive and "neither required nor specifically authorized by the enabling legislation," the agency "was required to conform with the notice and comment procedure of section 553 of the APA").

19.    Chrysler Corp., 441 U.S. at 302 n.31. See also Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 99 (1995) (CMS's Provider Reimbursement Manual "is a prototypical example of an interpretive rule 'issued by an agency to advise the public of the agency's construction of the statutes and rules which it administers'").

20.    Cf. Chrysler Corp., 441 U.S. at 302 n.31. See Shalala 514 U.S. at 100 ("APA rulemaking would still be required if [the CMS manual] adopted a new position inconsistent with any of the Secretary's existing regulations.").

21.    467 U.S. 837, 843-44 (1984).

22.    Christensen v. Harris County, 529 U.S. 576, 587 (2000).

23.    Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988).

24.    Gen. Elec. Co. v. U.S. Envtl Prot. Agency, 53 F.3d 1324, 1329 (D.C. Cir. 1995).

25.    Id. at 1333-1334. See also United States v. S. Ind. Gas and Elec. Co., 245 F. Supp. 2d 994, 1011 (S.D. Ind. 2003) ("The inquiry is taken from the perspective of the regulated party (not the agency), and analyzes whether that party could have predicted the agency's interpretation of the regulation at the time of the conduct at issue.").

26.    Schmidt, supra note 11, at 480.

The Author

David J. Berg is an attorney with Latti & Anderson LLP, a Boston law firm specializing in the representation of injured fishermen, seamen, longshoremen, recreational boaters and cruise ship passengers nationwide.

©2014 Massachusetts Bar Association