We previously thought Workers’ Compensation Medicare Set-aside Arrangements (WCMSA) funds were sacrosanct and not available for any other purpose, except to pay for medical care related to the settled workers’ compensation injury. This does not appear to be the case in Illinois. A recent Appellate Court decision from the Third District of Illinois has muddied the waters for what was thought to be an established process by which an employer obtained finality in settlement of a workers’ compensation case. See In re Marriage of Washkowiak, 2012 IL App (3d) 110174. The shockwaves of this ruling will cause primary plans (employers and their insurance companies that settle workers’ compensation losses) to reassess their approach to improve protection against liability under the Medicare Secondary Payer Act.
The decision arises as a result of a divorce settlement agreement which entitled the injured worker’s wife to receive 17.5% of the net proceeds of his pending workers’ compensation injury claim. The parties’ divorce settlement agreement defined “net proceeds” as “the agreed award amount less workers’ compensation attorneys’ fees and usual and customary litigation fees and expenses.” The agreement further stated that net proceeds included “any reimbursement for unemployment which he actually pays and medical payments he actually pays” (Emphasis added). In re Marriage of Washkowiak, 2012 IL App (3d) 110174.
Subsequent to this agreement, the petitioner settled his workers’ compensation injury claim for $365,000 plus a WCMSA for $70,000. The dispute arose when the petitioner disagreed with the respondent ex wife’s claim and refused to make a 17.5% distribution of WCMSA funds claiming it was protected under the Medicare Secondary Payer Act. The issue before the Court was whether these funds were protected or could be accessed by the respondent as part of the 17.5% of net proceeds from the workers’ compensation settlement under the pre-existing divorce agreement. The Illinois trial court held that the $70,000 set aside in the WCMSA was to be included in the net proceeds for the purpose of calculating the respondent’s 17.5% share.
Upon appeal, petitioner argued that the nature of the WCMSA precluded the funds in the set- aside arrangement from being part of the “net proceeds” of the settlement. The workers’ compensation settlement agreement defined the WCMSA as “an interest bearing bank account funded solely by the Medicare Allocation and used solely to pay for future Medicare-covered medical and/or prescription drug expenses.” In re Marriage of Washkowiak, 2012 IL App (3d) 110174. However, the Appellate Court looked to the marriage dissolution agreement entered into by the parties. According to the divorce agreement, the only category of funds excluded from the definition of “net proceeds” was attorney fees and litigation fees and expenses. The divorce agreement specifically included future medical payments as part of the net proceeds of the workers’ compensation settlement. The Appellate Court affirmed the ruling of the trial court, holding that held that the funds in the WCMSA, as funds to be used for petitioner’s medical payments, fit into the definition of “net proceeds” and the respondent was entitled to a 17.5% share of the WCMSA funds.
In arriving at its decision, the Appellate Court provided a brief overview of the Medicare Program and the intent of the Medicare Secondary Payer (MSP) statute. The MSP statute precludes Medicare from providing payment for services for which payment has been made or can reasonably be expected to be made under the applicable workers’ compensation statute. See 42 U.S.C. § 1395y(b)(2)(A); 42 C.F.R. § 411.20(a)(2). Furthermore, all parties have a duty to protect Medicare’s interests when resolving workers’ compensation cases that include future medical expenses. See C.F.R. § 411.46. In the present case, the $70,000 in the WCMSA was allocated for future medical expenses resulting from the work injury. The Appellate Court classified the WCMSA as more of a system to “earmark” funds that were intended, under the workers’ compensation settlement, to pay for future medical payments. The Appellate Court made the distinction that the funds in the WCMSA belonged to petitioner, not Medicare, the employer, or the insurance company. Out of the 82.5% of the net proceeds retained by petitioner after the respondent took her share, the petitioner could place (or leave) $70,000 in the WCMSA. See In re Marriage of Washkowiak, 2012 IL App (3d) 110174.
Dissenting Justice McDade argued that the WCMSA funds should not be considered part of the net proceeds of the settlement because the WCMSA funds were set aside for the sole purpose of satisfying Medicare’s interest. Unlike the majority, the dissent identified the intended beneficiary of the WCMSA as Medicare and the federal treasury, not petitioner or respondent. Although WCMSA funds do not directly go to Medicare, the WCMSA fund’s intent is to decrease the expenses drawn from Medicare in the event the petitioner incurs future medical expenses. Justice McDade further opined that it would “violate public policy” to allow respondent to take 17.5% from WCMSA funds, stating that “[s]uch a diversion of funds not only harasses logic, but it also cuts against the grain of the plethora of legislative authority that has been enacted since 1980 in an effort to curb skyrocketing health costs and preserve the fiscal integrity of the Medicare system.” In re Marriage of Washkowiak, 2012 IL App (3d) 110174.
The dissent also commented upon the majority’s assertion that if the petitioner did not incur any medical bills, he would get the money back. Justice McDade found the majority to be incorrect on this point. Citing to CMS policy memoranda, the dissent found that the only instance where a claimant may recoup funds set aside in a WCMSA that are unused is through his estate upon death. Even then, the estate is only entitled to the remaining WCMSA funds after all of Medicare’s interests have been satisfied.
The result has stunned most experts in this area, as the State Court’s ruling has the practical effect of increasing Medicare’s risk for future payment of medical expense. Since the fund has yet to be exhausted, the Medicare implications are yet to be felt; however, when it does, Medicare is not bound by the State Court ruling. It can under the regulations void the settlement (see 42 C.F.R. § 411.46(b)(2)); seek reimbursement from the primary plan for any conditional payments it made (see 42 C.F.R. § 411.24(i)); or suspend future Medicare benefits. If it should choose option two, the primary plan has no defense.
An interesting observation to make which distinguishes this case is the fact that a WCMSA was not required under the published guidelines of the Centers for Medicare & Medicaid Services (CMS). Given the value of the settlement, it is clear the injured worker involved is not a Medicare beneficiary or reasonably anticipated to be a Medicare beneficiary within 30 months. Thus it appears the action to establish a WCMSA can be characterized as voluntarily and even possibly a vehicle by the injured worker to avoid liability under his divorce decree settlement.
Notwithstanding, the analysis of the Appellate Court of MSP legislation and purpose is worrisome and would result in the same outcome if an approved WCMSA were involved. For that reason it is necessary for us to go through the analysis to better understand how this occurred, and what if anything can primary plans do to protect themselves. Keep in mind this decision is limited to Illinois, and more than likely to the Third District. It’s applicability beyond state borders is not controlling and only persuasive at best. Nonetheless, Illinios is a significant jurisdiction involving workers’ compensation matters and it is important to note this decision and learn from it in drafting release documents.