Property Casualty 360: Medicare Set-Asides and Third-Party Liability Cases: Part Three
When it comes to lawyers for injured parties, defense lawyers, and insurance claims professionals, Medicare is probably causing more ulcers than it has ever paid to cure. Under the rubric that "all persons must protect Medicare's interests," insurers and lawyers on both sides are being told by people who have a vested financial interest in doing so that when a liability personal injury case is resolved by judgment or even settled, a Medicare Set-Aside (MSA) account should be established. This is a groundless position, and MSAs are not required as a means of protecting Medicare's interest for future medical bills. In fact, I believe that insurers who utilize MSAs in an attempt to "safeguard Medicare's interests" for future medical costs are putting their companies at risk of increased litigation costs and possible extra contractual (bad faith) exposure.
In the final part of this series, we will discuss insurers who insist on liability MSAs, the alternatives to using them, and if the possibility of congressional help is on the horizon.
Facing Dire Consequences
The use of an MSA in a liability insurance situation could result in the liability insurer's potential breach of contract and "bad faith" exposure. For example, assume that there is a justified $1 million policy limit settlement demand by the plaintiff Medicare beneficiary, but the liability insurer, "in order to protect Medicare's interests" and try to avoid its own exposure to a future MSP recovery action, wants to put $300,000 of the limit into a liability MSA to reflect future medical expenses. Upon hearing of the proposed MSA, the plaintiff and/or the insured and respective counsel are going to claim that the carrier is in "bad faith" as there is no current statutory or regulatory requirement that a liability insurer must use an MSA. If the limits demand is rejected and the carrier cannot point to a federal requirement justifying its action, the carrier could be liable for a subsequent settlement or judgment in excess of the policy limits and other bad faith damages.
The insurer, which would otherwise pay the policy limit demand, is not going to have the benefit of the argument that it was acting properly and in "good faith." This is because it has to comply with the requirements of the MSP provisions as there is no MSP provision requiring a liability MSA. Depending on the jurisdiction, the plaintiff, now a judgment creditor, could accrue a bad faith cause of action based on the carrier's refusal to pay the judgment. (See, Hand v. Farmers Ins. Exchange (1998) 23 CalApp 4th 1847.) In essence, this is potential excess exposure, bad faith by the insured, and bad faith by the plaintiff.
Further, the use of an MSA could slow down and even prevent resolution of the Medicare beneficiary's personal injury suit. Settlements would take much longer to effectuate since settlement discussions would have to include negotiations over the value of future medical expenses. If these negotiations provided unsuccessful, then the parties would have to go to court. If parties started litigating amounts to allocate to "liability set-asides" in every personal injury suit brought by a Medicare beneficiary, then the civil process will take even longer than it currently does. Each such case would become as complicated as is a case involving a minor's compromise. State court systems, especially now that they have to deal with reduced budgets, are not likely to allow this process to go forward. Since many plaintiffs' counsel (justifiably) believe that liability MSAs are not required, they will fight attempts to use MSAs, and this will result in legal stalemates regarding resolution of cases with Medicare beneficiary plaintiffs. Settlements will stall or not happen; claims of delay will be made; litigation expenses will soar; and cases will stay open for much longer, directly opposite to the goals of most insurers.
Alternatives to Liability MSAs
There are ways to indicate that the insurer has attempted to protect Medicare's interests that can be utilized without the expense and complications involved in the MSA process.
First, concerning Medicare's payment of future medical expenses, the insurer or self-insured can assert that a liability MSA is not required because Medicare itself already has a remedy. As discussed by Roy Franco and Jeffrey Signor in their book titled "Medicare Secondary Payer Compliance: How to Mitigate Exposure in the Medicare Beneficiary Personal Injury Case," supra, Medicare's sole remedy under the MSP provisions regarding future medical expenses after settlement or payment in a liability case is to suspend the payment of benefits to the Medicare beneficiary. The MSP provisions only authorize recovery or subrogation actions for conditional payments, for example, payments already made by Medicare. There is no such authorization for future payments. Medicare has the right to suspend payments to the Medicare beneficiary if Medicare did not recover proper payments if paid costs.
However, if Medicare does assert its rights regarding any future payments and actually suspends further payment, the thwarted Medicare beneficiary can assert a claim against the defendant or the insurer. Therefore, prudent defense counsel will add a provision to the release agreement to any settlement which specifically waives any such right to sue the defendant of its insurer for any suspended payments.
Should defense lawyers or claims professionals make Medicare a payee on the settlement or satisfaction of judgment check? Some believe that this must be done in order to comply with the MSP provisions. However, this is not true; there is no requirement in the MSP provisions that Medicare be such a payee. Thus if the Medicare beneficiary objects to having Medicare as one of the payees on the payment check, the insurer or self-insured has no MSP provision to rely on to refute this objection. In Tomlinson v. Landers (M.D. Fla. 2009) 2009 WL 1117399, the Medicare beneficiary objected to defendant's insurer naming Medicare as a payee on the settlement check, and, while the court recognized that "an insurer may be liable to Medicare if the beneficiary/payee does not reimburse Medicare for any amounts owed to Medicare within sixty (60) days," the court found that the MSP provisions do not require that Medicare be on the check, stating that "federal law does not mandate that a primary payer (or insurer) make payment directly to Medicare." The Tomlinson court concluded that, as there was no agreement between the parties as to including Medicare on the payment check, the settlement could not be enforced.
What if all parties agree that Medicare can be one of the payees, for example, in addition to the plaintiff Medicare beneficiary and, as is common, the plaintiff's counsel's trust account? Is placing Medicare on the check a good idea? The first problem in a case involving future medical expenses would obviously be how to estimate the amount of future Medicare covered expenses the beneficiary will potentially incur and include that amount in the check.
As discussed in an article titled "MMSEA & The MSP - Confusion Reigns Supreme" by Jason D. Lazarus, there are a variety of problems resulting from naming Medicare as a payee. Technically, Medicare should not be on the check because it is not a party to the Medicare beneficiary's lawsuit or to the settlement negotiations regarding that suit. Medicare may not be entitled to the full conditional payment amount (there is a formula for reduction of that amount), and in some cases, Medicare may elect to totally waive payment. Having Medicare on the check could prevent a plaintiff beneficiary from negotiating or obtaining a waiver of the conditional payment. To be negotiable by anyone, the check would first have to be signed by the plaintiff beneficiary and, typically, his or her counsel, before being sent to Medicare for signature. However, there are concerns regarding who would sign on Medicare's behalf. When and how would the amount due the beneficiary and counsel be processed? How long would it take for the beneficiary to receive the amount to which he or she is entitled and likely needs on a priority basis? Further, as shown above, putting Medicare as a payee could be seen as not being a proper payment of a judgment.
The most typical and most efficient way for a liability insurer or self-insured resolving a personal injury suit with a Medicare beneficiary to proceed is to be sure to include appropriate hold harmless/indemnity provisions in the settlement agreement and release documents. For example, the documents should include statements to the effect that the plaintiff beneficiary and
his or her counsel acknowledge and agree upon the following:
- The beneficiary is or was Medicare eligible.
- The parties have taken reasonable steps from the beginning of the personal injury suit to comply with the MSP provisions.
- The beneficiary and his or her counsel are aware of Medicare's interest in the settlement to the extent Medicare has made or will make any conditional payments for medical services or items received by the beneficiary.
- The beneficiary and his or her counsel have provided the information to the released parties and their counsel and insurer(s) necessary to comply with the Section 111 mandatory reporting program.
- The beneficiary and his or her counsel have notified Medicare of the accident, injury, or illness giving rise to the suit and resultant settlement.
- The beneficiary and his or her counsel will, within 60 days of receipt of a final demand letter from Medicare, reimburse Medicare for any conditional payments related to the accident, injury, or illness as required by the MSP provisions.
- It is the responsibility of the beneficiary and his or her counsel to reimburse Medicare for any conditional payments made by Medicare on behalf of the beneficiary.
- Any and all conditional payments, liens, claims, and subrogated interests asserted by or on behalf of Medicare have been or will be resolved and satisfied prior to distribution of any of the settlement funds to the beneficiary.
- The settlement funds will be held without distribution to the beneficiary or anyone else until Medicare's claims have been satisfied or waived.
- The beneficiary and his or her counsel will obtain a full satisfaction and release or waiver from Medicare regarding all of its claims.
- If any of the above representations are not correct or if any specified action is not performed, the beneficiary and his or her counsel will be in material breach of their duties under the settlement agreement/release and will fully repay the settlement funds and indemnify and hold harmless the released parties and their counsel and insurer(s) for any and all damages, legal fees, and costs or expenses arising out of the beneficiary and/or counsel's breach of duties.
These steps are evidence that the defendants and the insurer were seeking to protect Medicare's interests and should be a valuable protection against any claim to the contrary.
Is There Congressional Help on the Horizon?
On Feb. 14, 2011, at the 72nd Midyear Meeting of the American Bar Association (ABA), the ABA's House of Delegates adopted Resolution 108A. The resolution concerns reform of the MSP Act and definitive clarification of any remaining confusion regarding whether an MSA is required in third party liability settlements, judgments or awards under the MSP provisions. The resolution "urges Congress to acknowledge that there is no regulatory or statutory basis for Medical Set Asides for third party liability settlements, judgments, or awards under the Medicare Secondary Payer Act and provide clear, predictable, and consistent procedures for the submission, uniform determination, and timely approval of any third-party medical set-aside settlement proposals (MSASP) voluntarily submitted to the Centers for Medicare & Medicaid Services (CMS) in response to the non-binding recommendations of CMS." The stated goals of Resolution 108A are very similar to those of the proposed Strengthening Medicare and Repaying Taxpayers (SMART) Act, a bill introduced to Congress in March of 2011.
On March 14, 2011, HR 1063, the proposed SMART Act was introduced by Rep. Tim Murphy (RPenn.) and Rep. Ron Kind (D-Wis.) before the U.S. House of Representatives. As of this writing, the bill is in the first phase of the legislative process; it has been referred to both the House Committee on Ways and Means and Energy and Commerce Committee.
A principal goal of the proposed SMART Act is to provide a procedure that will enable everyone (the parties and their counsel and the "liability plan," whether insurer or self-insured) know the amount owed to Medicare during settlement negotiations and thus facilitate settlement of a Medicare beneficiary's personal injury suit without the looming specter of a future, post-settlement Medicare recovery action. As discussed, this recovery action could be directed not only against plaintiff beneficiary and his or her counsel, but also against the liability plan, whether liability insurer or self-insured business entity.
The proposed SMART Act would, in part, amend the existing MSP Act to include provisions setting forth a clear, required process to obtain a "final demand" letter from Medicare within a reasonable time before a settlement, judgment, or award is expected. During this reasonable presettlement time period (120 days), the Medicare beneficiary, the liability insurer, or the selfinsured could make a written request to Medicare for a demand letter which is to be produced in 65 days. If Medicare does not timely provide this final demand letter, the beneficiary or insurer would need to send a second request. If this request does not receive a response from Medicare within 30 days, absent exceptional circumstances justifying the failure to respond, Medicare would be barred from collecting any of the conditional payments it makes from the parties, counsel and insurer(s) involved. The SMART Act would also provide that CMS must draft regulations that would provide a right of appeal if the settling parties disagree with Medicare's "final demand" or if they believe that Medicare has made a mistake in calculating that demand.
HR 1063 is supported by the Medicare Advocacy Recovery Coalition (MARC), which was formed in September of 2008 to advocate for the improvement of the MAP program for both beneficiaries and affected companies. MARC's members include entities representing all types of people and entities impacted by the current MAP provisions, including attorneys, brokers, insureds, insurers, insurance and trade associations, self-insureds, and third-party administrators. MARC is, in my opinion, correctly asserting that the proposed amendment is essential because, as CMS does not provide a repayment amount until after parties have settled, cases involving beneficiaries often prove difficult, and sometimes impossible, to settle, and settlements are delayed.
The National Association of Mutual Insurance Companies (NAMIC) is also supporting passage of HR 1063. The senior vice president of federal and political affairs for NAMIC has stated that, "by streamlining the MSP system, this legislation will help insurers settle claims and disputes faster, ensuring that claimants and the Medicare Trust Fund are paid as quickly and efficiently as possible."
If enacted, the proposed SMART Act would put a final end to any debate over whether liability MSAs are or should be required when resolving a Medicare beneficiary's personal injury suit. Since everyone will be able to know the amount of the payment to be made to Medicare during the course of settlement negotiations, Medicare could be paid at the time of and as part of the final resolution of the Medicare beneficiary's lawsuit.
The Never-Ending Issue
Medicare has become a part of America's culture, and does not appear to be going away. Yet, the system is financially stressed and CMS is driven to seek recoveries when possible. But the insurance industry and self-insureds should not be improperly coerced into a process that will stall litigation, stop settlements, and cost amounts deemed huge, even by Medicare standards. MSAs are not required in liability cases and anyone asserting otherwise should be pressed to explain the basis of her or her belief beyond the business opportunity that would be created.
Neil Selman is a partner at Selman Breitman LLP, where he has represented insurers in a consulting capacity and litigated matters in all areas relating to insurance.
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