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.