A serious issue currently facing most insurers is learning how to comply with the Medicare Secondary Payer Act without triggering a bad faith claim under a particular state’s Fair Claims Practices Act. The problem arises when the insurer is unaware of the reimbursement claim due to Medicare until after a settlement, judgment, or award. Only an estimate is available to the parties, an amount which Medicare does not want to be paid until it can calculate its Final Demand. This process can take several months for Medicare to complete. As most state’s bad faith laws require payment within 30 days of a settlement, insurers are faced with a challenge. They are torn between compliance with the state’s 30 day requirement and having the funds available from the settlement to reimburse Medicare several months later, when its Final Demand is ready.
When this issue first arose, most insurance carriers responded by adding Medicare as a payee on the settlement check. Medicare was protected because the plaintiff/Medicare beneficiary would endorse and then mail the check to Medicare for determination of the Final Demand amount. Once completed, many months later, Medicare would issue a check less than its reimbursement amount. This method was not well received by Medicare beneficiary/plaintiffs, nor the Federal District and State Courts which held in such situations that there was no meeting of the minds and, ultimately, no settlement. Absent a prior agreement before settlement between the parties, unilaterally adding Medicare to a settlement check was quickly dismissed as a solution to this problem.
Unable to protect itself in this fashion, the next step was to require attorneys that represented Medicare beneficiaries to personally execute indemnification and hold harmless agreements as a pre-condition to receiving the settlement proceeds. This method worked for a short period of time until state bar ethics boards began to issue opinions that this practice was unethical for a plaintiff attorney to undertake, as well as a defense attorney to request. This process was quickly stifled.
The only method that proved effective for all parties was to work cooperatively before a settlement, judgment, or award. However, if a plaintiff/Medicare beneficiary or his counsel chose to be uncooperative there were very few options outside of paying the plaintiff the settlement, hoping they complete the Medicare obligations owed, and taking the chance that Medicare will not seek a reimbursement claim several months or years after the claim is resolved.
Making matters even more difficult for insurance carriers was a recent Medicare Secondary Payer class action claim in Arizona that was recently decided. In that case, the Court felt the plaintiff attorney had no Medicare Secondary Payer exposure under the law, after there was a settlement, judgment, or award. Further, if there were any disputes as to what was owed Medicare the plaintiff attorney could pay over to Medicare what was not disputed, as satisfaction of its obligation to resolve liens. With regard to the disputed amount, the plaintiff attorney could distribute the same to his or her client without any fear of being held accountable by Medicare at a later time. The decision reinforced, many times over, that it was ultimately the insurance companies responsibility to pay Medicare.
Losing the plaintiff attorney as a possible ally to manage compliance with the Medicare Secondary Payer Act dramatically increased the burden on insurance companies as to complying with this law. The situation was difficult, but a recent decision out of U.S. District Court for the Western District of Kentucky provides a beacon of light that brings more order to the process.
The case was Steven Wilson vs. State Farm Mutual Automobile Insurance Company 2011 U.S. Dist. LEXIS 63430. The plaintiff alleged that State Farm delayed payment of his claim because it wanted to properly identify what was owed to Medicare under the law. The plaintiff refused to cooperate with State Farm who had offered to help identify the value of Medicare’s lien and instead asked State Farm to deposit the full policy limits in an escrow account from which the Medicare lien would be paid. The plaintiff offered to hold State Farm harmless from Medicare. State Farm refused and held onto the funds until the Medicare amount was identified by the plaintiff. This happened two months later and State Farm paid one check to Medicare and the balance to the plaintiff a day after it was given the amount. Because the payment was not made within the 30 day state law requirement, the plaintiff then filed a bad faith lawsuit.
The court rejected the plaintiff’s bad faith claim under Kentucky law because delay in payment alone is not bad faith under previously decided cases. To have acted in bad faith an insurance company must (1) have an obligation to pay the claim at issue; (2) not have a reasonable basis for failing to pay the claim; and (3) know that it lacked a reasonable basis to delay payment or act in reckless disregard to the existence of that basis. The Court concluded that to comply with federal law and to protect its own legitimate interest against overpayment is reasonable and certainly is not in bad faith. There was no delay in payment, intent to pay less, or harassment of the plaintiff. In actuality, State Farm wanted to help expedite the process, but the plaintiff refused to cooperate. The court cites to 42 C.F.R. 411.24(i), the “pay again” regulation, to support the reasoning that defendants and their insurers are exposed if Medicare is not reimbursed. The court found that the the defendant in Wilson had a “reasonable foundation” to delay settlement by seeking assurances concerning the amount and payment of the lien.
Whether this case will be applicable beyond the jurisdictional limits of Kentucky remains to be seen. Notwithstanding, it is refreshing to see the Court utilize practices that are reasonable and actually promote Medicare being paid back in a timely fashion. Parties that work together to identify and resolve the Medicare issues will result in the distribution being expedited. Because the insurance company is at risk with Medicare, and responsible to pay again if the Medicare reimbursement amount is not properly paid by the plaintiff, there will be a chilling effect on settlements. Settlements are favored public rationale and having a method to hold back the proceeds will encourage that process.
Franco Signor LLC has as one of its core philosophies the need to bridge cooperation in an otherwise adversarial situation. This federal court decision articulates the need for the parties to cooperate on the topic of Medicare compliance. Call us to assist your claims operation or law firm when you are managing personal injury cases involving Medicare beneficiaries.