Colorado Court Rules Insurance Carrier Not Entitled to Post-Verdict Setoff
Roy Franco
September 17, 2012

Baumann v. American Family Mutual Insurance Company- 2012- District Court for District of Colorado


Plaintiff was struck by an underinsured motorist on February 5, 2010 and incurred over $200,000 in medical expenses.  Medicare was billed $101,202.98 of that expense and paid $19,523.40 in benefits.  Plaintiff, an insured under two separate automobile policies, issued by Defendant, sought reimbursement for her entire medical expense (more than $200,000) under her uninsured/underinsured motorist benefits.  Each policy provided $100,000 in coverage, thus $200,000 in coverage was potentially available to her.   Defendant offered to pay $22,000, claiming it was entitled to set off for the payments made by Medicare.  Plaintiff filed this lawsuit to contest whether Defendant is entitled to claim set off for Medicare benefits paid based on the collateral source rule.  She also alleged bad faith.


Is Defendant insurance carrier entitled to a post-verdict setoff for Plaintiff’s medical expenses paid by Medicare?


No.   This case involves competing motions between the Parties to establish whether as a matter of law, there is a set off for benefits paid by Medicare in a claim for uninsured/underinsured motorist benefits.  The Court ruled for the Plaintiff and against Defendant insurance carrier.  Medicare benefits cannot be used as a set-off against an award of damages because of the collateral source rule.  Under Van Water & Rogers, Inc. v. Keelan, 840 P.2d 1070, 1074 (Colo. 1992), “compensation or indemnity received by an injured party from a collateral source, wholly independent of the wrongdoer and to which he has not contributed, will not diminish the damages otherwise recoverable from the wrongdoer.”  Defendants’ argument that the collateral source rule was inapplicable because of mandatory contributions to Medicare through payroll taxes was rejected.  The defendant insurance carrier is not the employer and therefore cannot claim that it made any contributions on behalf of the Plaintiff.   Medicare Part A benefits are a “contract entered into and paid by or on behalf of such person” and are therefore exempt from setoff.

Franco Signor Commentary:

This interesting case does not take into account the Defendant Insurance Carrier’s Mandatory Insurance Reporting responsibility.  Medicare is a secondary payer if another plan is responsible to make payment for an item or service.  Once a determination of responsibility is made, the Defendant Insurance Carrier is responsible to report its Ongoing Responsibility for Medical (ORM).  When Medicare is aware of the Defendant insurance carrier’s responsibility to pay medicals, it will suspend future Medicare benefits and redirect providers to bill the Defendant insurance carrier.  Medicare will also review its records and determine if it may have made any mistaken payments.  If it has, it will issue to the Defendant Insurance Carrier a Conditional Payment Letter as a start to the reimbursement process.   Thus, even in Defendant insurance carrier were successful in achieving a set-off it would not escape exposure to Medicare as once judgment is entered,  the Mandatory Insurance Reporting responsibility would require it be reported and any Conditional Payments owed Medicare would then have to be reimbursed.  If not, Medicare has the right to file a lawsuit for double damages against the insurance carrier.  Of course, this is all dependent on Medicare being aware of the Defendant insurance carrier’s responsibility to pay medicals and subsequent judgment.  In the past, Medicare had no way of identifying these situations.  However, with the implementation of Mandatory Insurance Reporting and penalties for failure to report these situations, Medicare is now better aware of these situations and will protect itself.  Recoveries are to be expected as well as Medicare denying future Medicare benefits.  State court Judgments that attempt to maintain Medicare as a primary payer, in situations where medical benefits are available to pay, don’t work.  Federal law will supersede and the Defendant insurance carrier should proactively address Medicare rather than pin responsibility on the Medicare beneficiary.    In this case, the legal decision has placed the Defendant Insurance Carrier in a worst position.  It now has to pay the entire funds to Plaintiff, but is still required to report the situation to Medicare that it has a responsibility to pay.  It is subject to a reimbursement claim by Medicare if Plaintiff does not immediately reimburse the conditional payments under 42 C.F.R. Section 411.24(i).  It could now pay twice for the same exposure.  Dealing with Medicare upfront saves money.

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