When to Use a Liability Medicare Set-aside Arrangement (LMSA)
Roy Franco
October 3, 2011

 

The Centers for Medicare & Medicaid Services (CMS) has put
the insurance industry on high alert.
Threat of penalties for failure to report liability claims involving a
Medicare beneficiary has raised concerns over properly meeting obligations owed
Medicare.  One particular question has
raised  great controversy – Does a
settlement, judgment, award, or other payment to a Medicare beneficiary need to
protect Medicare’s interest in the liability case?  Most experts opine “it depends,” which is an
unworkable solution for bringing closure to a liability case.   The best approach is to examine each case step
by step.

 

 

 

Step One:  Is the
plaintiff a Medicare beneficiary?

 

 

 

If yes, proceed to the next step.  If not, stop, as there is no statutory
requirement to protect Medicare’s interest.
A potential Medicare beneficiary is a red herring in this analysis.  The CMS Workers’ Compensation Medicare
Set-aside Arrangement (WCMSA) workload review thresholds have caused this
confusion but have no bearing on the liability claim. Unless CMS issues policy
as it had in the past with workers’ compensation claims, the Medicare Secondary
Payer Statute (MSP)
[1]
 can be reasonably interpreted to apply
only when a Medicare beneficiary is involved.

 

 

 

A signature piece of MSP legislation and regulation is claim
notification to Medicare.  This exists
for two purposes:  1) Coordination of
Benefits; and 2) Recovery of conditional payments.
[2]

 

 

 

Under the MSP, reporting any settlement, judgment, award or
other payment for a non-Medicare beneficiary case is not required.  The Medicare & Medicaid SCHIP Extension
Act of 2007, responsible for Section 111, only applies to Medicare
beneficiaries.
[3]  Regulation[4]
requiring reporting by insurance companies (primary plan as defined by MSP) only
occurs if CMS has made a Medicare primary payment.  CMS cannot make primary payments on behalf of
a potential Medicare beneficiary,  thus, there
is no legal requirement to notify Medicare of claim resolution with a
non-Medicare beneficiary.  Likewise,
there is no mechanism by which to notify Medicare of a loss involving a
non-Medicare beneficiary.   Such a
mandate applies only to limited workers’ compensation cases
[5]
because CMS has issued policy requesting information on non-Medicare
beneficiary claim resolutions.

 

 

 

Essentially, the insurance industry complies with these recommended
review thresholds for the workers’ compensation claims because, by regulation, non-compliance
will result in non-recognition of the settlement.  No similar provision currently exists that
would invalidate the liability settlement.

 

 

 

CMS cannot defend their ultimate interpretation of a statute
or regulation when there is no clearly defined policy statement. A regulated
party must be on notice of the intended consequences for non-compliance.   No regulation exists that will invalidate a
liability settlement, nor are there are any policy statements to deal with
situations involving the non-Medicare beneficiary.  In such situations a regulated party may not
be punished.
[6]  Therefore, unless CMS issues proper policy
(which it can only do if it has a supporting regulation), the present statutory
framework can be reasonably interpreted to not include a non-Medicare
beneficiary.

 

 

 

Step Two:  Does
the liability case arise from a related workers’ illness or injury
compensation?

 

 

 

If not, proceed to step three.  In all other cases, a WCMSA is required.  Only one MSA can arise from an event to form
the basis of a claim.  Although a single
claim may implicate different lines of business, it does not change the need
for a single Set-Aside Arrangement.  In
order to resolve the liability case without compromising the underlying
workers’ compensation claim, there can be no shift to the Medicare Trust Fund.  The workers’ compensation plan would remain
primary and presumably continue to report its Ongoing Responsibility for
Medical (ORM).

 

 

 

However, where a global settlement of both the liability and
the workers’ compensation claim occurs, a WCMSA has to be documented.  This is the precise situation discussed by
CMS Policy Memo:

 

Third
party liability insurance proceeds are also primary to Medicare. To the extent
that a liability settlement is made that relieves a Workers’ Compensation (WC)
carrier from any future medical expenses, a CMS approved Workers’ Compensation
Medicare Set-aside Arrangement (WCMSA) is appropriate. The WCMSA would need
sufficient funds to cover future medical expenses incurred once the total third
party liability settlement is exhausted.[7]

 

The
liability claim is partially exhausted in reimbursing the workers’ compensation
claim which will include, as part of that reimbursement obligation, the value
of the WCMSA.  The rate of reimbursement
depends on consensus regarding the legal responsibility for the liability party,
but, the WCMSA will always be for full value.[8]  Medicare may compromise a liability claim but,
because workers’ compensation claims are mostly commutations, the WCMSA is not
usually discounted. 

 

Step Three:  Is
the liability case a commutation or compromise?

 

 

 

The word commutation first appears in the Patel Memo[9]
asan attempt to distinguish itself from a compromise in the workers’
compensation context.  Most workers’
compensation settlements are commutations by definition because it purely is
meant as a replacement for the promised statutory workers’ compensation
benefits.  Because most jurisdictions
provide for lifetime medical benefits related to the injury or illness, any
attempt to settle must be a commutation of that amount. Therefore,  very few workers’ compensation cases can fall
into the compromise category.  The
liability claim is a mirror image, and very few situations involve a commutation
of future medical benefits.  Compromise occurs
for most liability settlements. 

 

 

 

Nonetheless, there are liability claim resolutions that
involve considerable provision for future medical care.  For these cases, there can be no reasonable
dispute concerning liability.  The issue
is one of damages only.  This case would
have to involve compelling medical testimony and include life care plans usually
for a catastrophically injured plaintiff.
If the liability claim involves damages only, proceed to step six.  Otherwise, continue on.

 

 

 

Step Four:  Is the
plaintiff released from future medical treatment?

 

 

 

If yes, then no LSMA is required.  Otherwise proceed to step five.

 

 

 

There is no cost shifting to the Medicare Trust Fund if the plaintiff
has recovered from their injuries.
[10]
The best evidence to support this position would be a letter from the treating
physician. If that is the state of the evidence, then there is no need for a
LMSA.  However, the file should be
properly documented as such.

 

 

 

Step Five:  Is
the future medical treatment identified covered by Medicare?

 

 

 

Assuming that there is future treatment, determine whether
the future treatment will be covered by Medicare.  The LMSA’s purpose is to pay for treatment for
which the Medicare Trust Fund would otherwise pay.  If it can be demonstrated that the future
treatment falls outside of Medicare coverage, then no LMSA is required.  Otherwise, proceed to the next step.  

 

 

 

Step Six:  How
to protect Medicare’s interest?

 

 

 

The entire resolution amount is subject to
recovery by Medicare and
[11]
it is irrelevant
how the parties have structured the terms.
Medicare will ignore a release document and seek recovery from the whole
amount.  How then can the parties know
what must be secured for Medicare and what is otherwise available from the
settlement, judgment, or award? There are only two possible methods.

 

 

 

Method 1: Allocation
by Hearing on Merits

 

 

 

Damages in a liability claim can fall
under different categories.  Medicare
will not distinguish between these damage types (such as pain and suffering,
wage loss, property damage, medical, and so forth) unless they are allocated by
court order on the merits. If this is done, Medicare will limit its claim to
the portion of the resolution amount identified as medical.  It will not go beyond that designated amount.

 

 

 


Absent a court order, the only number for Medicare to consider is the settlement,
award or judgment.  What this means is
that the Medicare beneficiary plaintiff cannot, with any confidence, use any
portion of the settlement amount for non-Medicare purposes.
[12]  If they do, Medicare will not recognize
it.  The allocation allows the Medicare
beneficiary plaintiff to know what they can or cannot spend from the settlement
amount.

 

 

 

Assuming that hurdle has been overcome, an
allocation by the court is not available for every liability claim as most claims
are not litigated.  It is also expensive,
and the value of the claim must justify the cost to have a merits hearing.  Thus, this solution has its disadvantages,
but it is a process gaining recognition by the courts.
[13]  For those claims where this process is not
feasible, consider the LMSA.

 

 

 

 Method 2: The Liability Medicare Set-aside
Arrangement (LMSA)

 

 

 

First, let us dispel some of the common issues that serve as
barriers to the use of the LMSA.

 

 

 

1)
 The American Association for Justice (AAJ)
Position

 

 

 

On August 11, 2009, the AAJ communicated to its members that
“Section 111 contains reporting requirements for responsible reporting entities
(RREs) only.  Section 111 does not impact
or change the requirement for plaintiff attorneys.”  Absolutely true!  The MMSEA reporting requirements do not
alter, amend or otherwise change what is already required by the MSP.  The reporting obligation is simply an addition
to those responsibilities.

 

 

 

Therefore, the AAJ message begs the question as to what is
presently required by the MSP.  In
answer, the message attempts to state definitively that the LMSA is not
appropriate because CMS made such statements on MMSEA Town Hall Conference
calls.
[14]  However, a close examination of MMSEA Town
Hall transcripts states otherwise.
[15]
  CMS asserts that the LMSA is indeed
appropriate. 

 

 

 

2)       No
Situation Exists Where CMS Requires LMSA.

 

 

 

Verily there are no legal decisions which require the
LMSA.  However, in March 2009 CMS  amended its Medicare Secondary Manuals to add
the definition for the LMSA.
[16]  Why was thisnecessary except to require its
use?  There is one pending district court
case that could answer that question.
[17]  However, the court is reconsidering its
ruling to dismiss the case based on the statute of limitations, potentially
sidestepping the issue.  Medicare is
seeking recovery of conditional payments beyond the settlement date.  If Medicare prevails, it could only do so if
the court recognized that a payment after the settlement date relates back to
the original settlement.  Does the MSP
law support this?  Yes!

 

 

 

MSP law stipulates that the Secretary (Medicare) does not
have to pay for any item or service for which the primary plan has or is
expected to pay.
[18]  It follows that if payment were made by the
primary plan the Secretary should not pay.
However, the Secretary is authorized to pay in certain situations when
the primary plan has not made or cannot reasonably be expected to make payment
with respect to such item or service promptly (defined as 180 days).
[19]  Thus, if a bill for an item or service is
presented to Medicare that should have been covered for by the primary plan,
then Medicare may pay for it, and this
becomes a conditional payment. 

 

 

 

In a liability case, Medicare can reasonably expect the
primary plan to pay for medical items and services related to the tort that is
released.  As most releases are both
prospective and retrospective, the medical aspect has a past and future
component to it.  Therefore, Medicare
would expect payment for items and services related to the tort that take place
after the date a claim is resolved.
Support for this can be found in Medicare’s authority to seek
reimbursement of conditional payments.
[20]

 

Medicare will better understand the situation where benefits
are to be conditional once Section 111 is enforced for liability cases.

 

 

 

So as long as the primary plan requires a general release,
it is obligated to make certain that Medicare’s interests are protected with
regard to future medical awards. 

 

 

 

3)
 Medicare Secondary Payer Manual – No Liability
beyond the Settlement Date

 

 

 

Medicare states there should
be no recovery of benefits paid for services rendered after the date of a
liability insurance settlement.
[21]  If the parties complete their obligations
owed Medicare properly then there should
be no reason for Medicare to pay after a settlement.  However, what happens if the parties do not
protect Medicare?  The language does not
expressly prohibit Medicare from paying given its authority under the MSP to
pay for items and services even after a liability settlement in the event of
delayed compliance by primary plan. 

 

 

 

The Manual offers no safe harbor for parties from the MSP
but simply reinforces that Medicare should
not have to pay after a liability settlement.
It does not mean that it is prohibited from doing so if the parties have
not carefully considered Medicare’s interests.

 

 

 

LMSA, in proper situations,
is an appropriate vehicle to protect Medicare’s Interests.

 

 

 

Now that we have dispelled some of the barriers for the use
of the LMSA in a liability settlement, what is the best approach?  The first step is to understand the different
motivations for each side. 

 

 

 

1)       Plaintiff

 

 

 

The key issue here is suspension of future Medicare
benefits.  Medicare is becoming aware of
more liability claims each day
[22]and
it uses this information to coordinate future benefits.  When Medicare is not properly informed of the
claim settlement amount and allotment for future medical payments it will examine
the entire settlement amount.
[23]

 

 

 

One way to limit CMS consideration of the entire amount is
to prepare the LMSA and to communicate the value to the CMS regional
office.  In June 2009 CMS modified its
database, known as the Common Working File, to accept information  for  the amount of the MSA.
[24] 

 

 

 

When benefits are suspended, the Medicare beneficiary can
reinstate benefits as plantiff, but only if they can show that the liability
settlement was exhausted.  Where the
allocation or LMSA was not performed, the Medicare beneficiary has an enormous
burden with regard to reinstating his or her Medicare benefits.  More than likely, the Medicare beneficiary
will react adversely to this situation and seek redress.  This circumstance can, and should, be avoided
by taking the necessary steps with Medicare to protect its interests.

 

 

 

2)       Plaintiff Attorney

 

 

 

Not all Medicare beneficiary plaintiffs retain counsel.  For those situations where the Medicare
beneficiary is represented, the plaintiff attorney is also subject to MSP
liability.
[25]  Under the Medicare Modernization Act of 2003,
the plaintiff attorney is considered an entity that receives payment from a
primary plan upon receipt of the settlement proceeds.  If Medicare should make the decision to pay
for medical items and services after the settlement date, the plaintiff
attorney is exposed to a reimbursement claim.
Where Medicare decides to suspend future Medicare benefits until a
liability fund is exhausted, the plaintiff attorney is subject to a potential
malpractice action if those interests were not adequately considered.  Thus, from the plaintiff attorney’s
perspective there should be ample incentive to agree on this point.

 

 

 

3)      Primary
Plan (Defendant)

 

 

 

It is clear the primary plan cannot independently decide to
require a LMSA.  It could, but it would
then be entirely responsible to pay and fund it over and above the settlement
amount, which makes that a highly unlikely occurrence.  Thus, to properly protect Medicare’s
interest, the primary plan must rely heavily on the cooperation of the Medicare
beneficiary and, where such cooperation does not occur, do everything it can to
properly place the Medicare beneficiary and his counsel on notice.

 

 

 

The primary plan is like an English police officer who has
all of the responsibilities of enforcement without any firearm to enforce
it.  As the LMSA process is not well
defined by CMS, it is left to the parties to determine when it is appropriate
to do so.  This may lead to difference of
opinion, and the primary plan must be able to take steps to best protect
itself.   The response of the primary
plan will be based on its tolerance for risk.

 

 

 

The incentive for the primary plan to secure cooperation is
high.  First, only the primary plan is
exposed to double damages in a claim by the U.S. for recovery of conditional
payments.  Second, the primary plan is
more likely to be subject to a debt collection action by the Department of
Treasury.  Third, it is the deep
pocket.  Therefore, the primary plan
should marshal considerable resources to seek cooperation, which can only start
at the commencement of the liability claim, not on the date of settlement.

 

 

 

Steps to Complete the
LMSA

 

 

 

The threshold question to be asked is whether the proposed
settlement amount will support a LMSA.
This answer is fairly easy to calculate.
Take the settlement amount and deduct from it attorney fees, costs,
liens and other damages that are subject to being liquidated, such as wage loss
and property damage.  If the amount is
zero or less, no LMSA is required.
[26] 

 

 

 

Where the calculated amount is a number greater than zero, a
LMSA should be put in place.  However,
for the liability case, consideration should be given to claim defenses in
proportion to the LMSA of the damages, a clear departure from CMS’s compromise
position on CMS regarding WCMSA.
[27]It
is a position, however, that is valid and reasonable for the liability case.  Is it in the best interests of Medicare where
the chances of successful litigation are questionable?  Unlike most workers’ compensation cases, the
liability case does not continue to pay benefits to the Medicare beneficiary if
there is no settlement.  No benefits are
paid, thus the burden to pay remains with Medicare.  Furthermore, because liability is at issue,
compromise makes sense where litigation is questionable.  Such consideration is authorized by statute.
[28]

 

 

 

The LMSA is a useful vehicle to bring finality to the
liability claim.  It is not required by
law, but is a reasonable approach that parties can adopt to protect themselves
from MSP liability.  It is cost
effective, compared to a court allocation, as well as easily accessible.

 

 

 

The most common argument against use of the LMSA is that it
increases the cost of the claim.  It
should not.  Short of a trial on the
merits, parties reach consensus on the settlement value.  The LMSA does not add to that amount but comprises
a portion of it.  The figure represents
damages for future medical cost related to the claim for which Medicare would
otherwise pay.  It simply protects this
allotment for payment for medical items and services, thereby protecting the
Medicare Trust Fund. 

 

 

 

Roy A. Franco, Esq. is the Chief Legal & Compliance
Officer for Franco Signor LLC, a Medicare Secondary Payer Compliance Services
Company.  He also the founder and
Co-Chair for the Medicare Advocacy Recovery Coalition (MARC). 

 


 

[1] 42 U.S.C. §1395y
et. seq.

 

 

 

[2] MMSEA Section 111 Medicare Secondary Payer Mandatory Reporting
User Guide, ver. 3.1, p.11.

 

 

 

[3] 42 U.S.C. §1395y(b)(8)(A).

 

 

 

[4] 42 C.F.R. §411.25(a).

 

 

 

[5] Total settlement value must be $250,000 and plaintiff within 30
months of becoming a Medicare beneficiary.
See https://146.123.140.205/WorkersCompAgencyServices/04_wcsetaside.asp.

 

 

 

[6] Gen. Elec. Co. v. U.S. Envtl
Prot. Agency, 53 F.3e 1324, at 1333 – 1334 (D.C. Cir. 1995).

 

 

 

[7] CMS Policy Memo, 4/21/2003, Q19.

 

 

 

[8] CMS Policy memo, 7/11/2005, Q11.
See also 42 C.F.R.
§411.47

 

 

 

[9] Parasher B. Patel, CMS Memorandum to All Regional Administrators, Workers’ Compensation Commutation of Future
Benefits,
July 23, 2001.

 

 

 

[10] CMS Policy Memo, 4/21/2001, Q20.

 

 

 

[11] Medicare Secondary Payer Manual, Chapter 7 §50.4.4

 

 

 

[12] The primary plan is exposed if the plaintiff does use the
settlement, judgment or award in a manner for purposes other than
Medicare.  If Medicare makes conditional
payments, it can seek reimbursement from the primary plan even if it has
already paid the plaintiff in resolving the claim.  See 42
C.F.R.
§411.24(i). 

 

 

 

[13]
Big R. Towing, Inc. v. David Wayne Benoit, et. al., 2011 U.S.
Dist. LEXIS 1392.

 

 

 

 

 

[14] See AAJ Message, dated August 11, 2009.

 

 

 

[15]
(Bill Tominga): Hi.
I’m with Global Aerospace in Short Hills, New Jersey. And we’re curious about the
applicability of Medicare set asides to liability claims?

 

 

 

Barbara Wright: If you’ve
read transcripts from prior calls, that is not a Section 111 issue. And we are
limiting these calls to Section 111 issues. There is not – the same formal
process for liability set asides that there is for Worker’s Compensation set
asides. However the underlying statutory obligation is the same. For liability
set asides if you – for Worker’s Comp the process is technically not required
to have a CMS blessed set aside.

 

 

 

For liability situations
as I said, the underlying obligation is the same if you wish to pursue CMS
approval of a liability set aside, your avenue approach is through the
applicable regional office.  Whether or
not they agree to review, it does not provide – if they decline to review it,
that doesn’t provide any type of safe harbor. And the regions are making their
determinations based on their workload.  If
their workload permits and they believe there are significant dollars at issue,
regional offices are reviewing proposed set aside amounts but certainly not typically
at the same small level that it’s being reviewed through our Worker’s Compensation
review contractor or Worker’s Comp set asides.

 

 

 

(Bill Tominga): Not sure,

so is that a yes or a no? I’m not sure?

 

 

 

Barbara Wright: Well I
don’t know what you mean by yes or no. There is not the same formal process.
You have the same legal obligations. This has nothing to do with Section 111.  111 did not change any pre-existing obligations.
It added a separate reporting requirement.

 

 

 

(Bill
Tominga): Okay. Thank you.

 

 

 

MMSEA Town Hall Transcript,
9/30/2009, pages 25 – 26.

 

 

 

[16] Medicare Secondary Payer Manual, Chapter 1, §20

 

 

 

[17] U.S. v. Stricker, CV 09-BE-2423-E, U.S. Dist. Court
for Northern District of Alabama, Eastern Division. 
Although preliminarily decided on other
grounds, Medicare sought recovery of conditional payments both pre and post
settlement against various defendants, including plaintiff attorneys and
primary plans.  The ultimate issue of
whether Medicare was entitled to recover was never reached as the case turned
on statute of limitations issues which are being presently under
reconsideration.

 

 

 

[18] 42 U.S.C. §1395y(b)(2)(A).

 

 

 

[19] 42 U.S.C. §1395y(b)(2)(B).

 

 

 

[20] 42 U.S.C. §1395y(b)(2)(B)(ii).  Primary plan shall reimburse Medicare with
respect to an item or service if it is demonstrated that such primary plan has or had a responsibility to make
payment.

 

 

 

[21] Medicare Secondary Payer Manual, Chapter 7, §50.5.

 

 

 

[22] The liability industry is contacting the Coordination of Benefits
Contractor (COBC) before settlement, judgment, award or other payment to start
the process to secure the Conditional Payment Letter.  When this information is received, the COBC populates
its database, the Common Working File, to assist in coordinating future
benefits.  The COBC’s primary mission is
to prevent Medicare from making payment that is the responsibility of another
plan.

 

 

 

[23] Medicare Secondary Payer Manual, §50.5.  “However, the entire amount of a settlement
is subject to recovery, whether the liability payment is made at the time of
settlement, or over a period of time agreed by parties in a structured
settlement.”

 

 

 

[24] NAMSAP’s 2009 Conference featured Tom Bosserman, from the CMS
Regional Office located in Northern California.  During his presentation, Mr. Bosserman made
mention of the addition of the MSA field to the Common Working File and the
importance for that field to be properly documented.  If not, the settlement amount would populate
that field.

 

 

 

[25] U.S. v. Harris 2009 WL 89191 (N.D.W. Va.). Held
plaintiff attorney for Medicare beneficiary legally responsible for conditional
payments owed Medicare as entity that received payment from primary plan.  Responsibility is not discharged when
settlement proceeds are distributed.

 

 

 

[26] CMS Policy Memo, 4/21/2003, Q20.

 

 

 

[27] CMSP Policy Memo, 7/11/2005, Q11.

 

 

 

[28] 31 U.S.C. §3711.