Does Medicare’s Reimbursement Claim Take Priority over Non-Medicare Beneficiaries Damages in a Common Fund Situation?
Jeff Signor
October 20, 2010

Does Medicare’s Reimbursement Claim Take Priority over Non-Medicare Beneficiaries Damages in a Common Fund Situation? 

No.  In a recent decision by the 11th Circuit, an allocation order by a state court of a common settlement fund between Medicare beneficiaries and non-Medicare beneficiaries is appropriate.  Once completed, Medicare cannot require reimbursement from funds that are allocated to non-Medicare beneficiaries.   The ruling is an about face to longstanding Centers for Medicare & Medicaid Services (CMS) policy  giving  Medicare’s reimbursement priority over all parties to a common fund unless the allocation came by a court of competent jurisdiction, after a full hearing on the merits.  It remains to be seen whether CMS will appeal this decision as it has invalidated the legal effectiveness of its Medicare Secondary Payer Manual (MSP) which prior to this decision was given significant weight under the “Chevron deference”.

The Court’s decision in Bradley v. Sebelius, 2010 U.S.App.LEXIS 20091, (September 29, 2010, 11th Cir. Crt. of Appeals), appears to take a sledge hammer to this long-held point of law.  In Bradley, the 11th Circuit was asked to determine the interplay between the Florida Wrongful Death Act (FWDA) and the federal Medicare Secondary Payer Statute (MSP).

Brief Facts & Lengthy Procedural History:

Medicare paid $38,875.08 for medical care rendered prior to the death of Charles Burke, a plaintiff in the case who ultimately died.  The estate and surviving children of Charles Burke sued a nursing home where Burke resided prior to passing and reached a settlement for $52,500.  The nursing home’s policy that responded had a limit of $60,000, but was subject to a provision that deducted the costs for defense.  Consequently, protracted litigation was not in the best interests of the plaintiffs.

Notification to the Secretary:

Consistent with Medicare’s reimbursement policy, the estate notified the Secretary of the settlement, including its costs to procure and attorney’s fees.   The estate also raised to the Secretary that the settlement fund was for both the claims of the Estate and the decedent’s children, none of who were Medicare beneficiaries.    There was no dispute that the total value of the loss was far greater than the insurance policy limits that remained available to the parties.

Secretary’s Response:

The Secretary cited to the Government’s authority from its Medicare Secondary Payer Manual to be reimbursed the total amount of the medical expenses paid by Medicare from the common fund, less the costs to procure, for a net total of $22,480.89.  This amount was demanded to be paid to Medicare within 60 days.

Estate’s Filing with Florida Probate Court:

The estate filed for an adjudication of the right of the children to the compromised sum of the settlement.  Medicare was given notice of this probate action, but the Secretary declined to appear.  The Florida probate court took testimony and determined the potential value of each surviving child’s claim was at least $250,000.  The probate court added to this sum the full amount of Medicare’s expenses ($38,875.08) and found that the total value of the case, had it been collectible, to be $2,538,875.08.  The Florida probate court then used principles of equity to determine that Medicare’s expenses recovery was to be $787.50.  An order to that effect was entered into by the State probate court.

Secretary’s Response:

The Secretary did not accept the probate court’s determination and relied upon the MSP Manual, Chapter 7 Section 50.4.4 — “[t]he only situation in which Medicare recognizes allocations of liability payments to non-medical losses is when payment is based on a court of competent jurisdiction’s order on the merits of the case”.  The Secretary further contended that the probate court’s decision was advisory in nature and superseded by federal law.

Estate Appeals to District Court.

Under protest the estate paid Medicare’s demand, and the case proceeded as an appeal to the district court from the final decision of the Secretary. The district court adopted the report and recommendation of the magistrate judge holding that the Secretary’s interpretation of the MSP, 42 USC 1395y(b)(2)(B)(ii)(2006) and parallel regulations, 42 CFR 411.37(c)(i),(c)(2),(c)(3)(2004), was reasonable.  The district court also relied on the MSP Manual, holding that Medicare was entitled to $22,480.89 and not $787.50.  The estate appealed to the 11th Circuit Court of Appeals.

11th Circuit Court of Appeals Reverses.

The majority reversed the district court ruling and held that the Secretary was only entitled to the sum of $787.50, as determined by the allocations of the state probate court.  The decision was authored by Hon. James C. Hill.  Judge Hill sets forth the procedural history of the case, including the mechanics of the probate court’s involvement, its decision, and the various levels of appeal thereafter.

The court framed the issue as: “Whose property is the settlement?”  The court then states the settlement involved:  “[T]he medical expenses and costs recovered by the estate (and subject to the MSP statute), along with the non-medical, tort property claims of the surviving Burke children for lost parental companionship, etc., under state law, (and not subject to the MSP statute).”  (See id., at page 18, emphasis contained in the original).  The majority of the 11th Circuit, then, already took as fact that parts of the settlement were not subject to the MSP Statute, something extremely rare in these types of cases.  In fact, most federal court opinions on hits topic takes every caution to state just the opposite: Any non-Medical claim in MSP cases have historically been discounted and not relevant.

The paragraph immediately following the above-cited issue takes on an almost sarcastic tone, concluding that the people who incurred the loss were the children, and “not the Secretary of HHS.”  This is an important distinction because all federal courts to analyze this very issue have come down exactly opposite: If federal, Medicare, money (taxpayer dollars) were spent on the claimant’s medical expenses related to the tort then Medicare demands to be paid back, without allocation issues.

The court was not impressed with the Medicare Secondary Payer Manual (MSP Manual).   The court calls the Manual a “field manual” more than once and states that the Manual does not have Chevron deference.  Our office cites to the MSP Manual with regularity, because it contains insight into CMS policy that does not exist in any other manual or CMS policy directive.  Candidly, the MSP Manual provides a good deal of insight into CMS policy in an area where there is no definitive answer to several of the issues.  So the fact that the court distances CMS policy from the Manual keeps the issues in a perpetual state of flux.

The Dissent.

The only judge to disagree was Hon. Beverly B. Martin, who authored the Dissent.  Judge Martin would have affirmed the District Court’s decision and abide by, and remain deferential to, the Secretary’s determination.  The dissent also points out a fact that was not explored by the majority, namely, that the estate had the ability to administratively appeal the agency’s initial determination.  The route chosen by the estate, and one that is not recognized by the MSP Manual, was the Probate Court within a county in the state of Florida.

The dissent does not get into the slippery slope effect of accepting one court’s determination over another, but that is one of the several takeaways from the majority’s decision.

Effect of the decision:

1.  The liability policy was a “depleting policy” that was down to $52,500.  Requiring a trial would reduce it ZERO.

2.  The public policy of favoring settlements is championed in this decision.  We oftentimes speak and write about this very issue.  Courts across the country are being paralyzed by the Medicare process.  However, accepting an allocation from a probate court could lead to accepting a state court judge’s signature on an Order following a pretrial conference.  Where is the line in the sand on this issue?  The MSP Manual lays out the need for a decision on the merits of the case.  CMS or legislative action will need to make clearer what is required in such situations.

3.  Property rights cases involving rights to a settlement to be shared by Medicare and non-Medicare beneficiaries.

  • The FWDA contemplates damages allowed an estate are separate and distinct from damages recoverable by the deceased’s survivors.

4.  Nowhere in the definition of primary plan are listed “surviving children with tort property beneficiary rights”.

5.  Issue of first impression – whose property is the settlement?

6.  Distinguishing fact is only the estate’s allocated share of the proceeds is the subject to the province of the Secretary – – Which leaves an opening for CMS to pursue similar situations but only distinction being a Medicare beneficiary

7.  The court found “troubling” the fact that the Secretary did not even appear.  The defense of sovereign immunity is still alive.  Now that matter is in Federal court, no question of jurisdiction, it’s the fact that the Secretary cannot rely on its field manuals as a basis to defend its position.  No Chevron deference.  No force of law.  The Secretary needs something else and the property rights issue is the big concern here.  Can the Secretary just take away non-Medicare beneficiary property rights because its field manual says it can?  Not according to the majority of the 11th Circuit.

8. Now there is also a second reason why the Secretary is wrong…this one is the broader public policy favors settlement over trial.

9.  Footnote 23 says a great deal.  “Under both the statute and the regulations, the Secretary could have sought recovery from the liability carrier for the nursing home. See 42 U.S.C. § 1395y(b)(2)(B)(ii).  The Secretary could also have tried to obtain a recovery from the nursing home as tortfeasor. Id. Additionally, the Secretary has a right of subrogation which she chose not to exercise. See 42 U.S.C. § 1395y(b)(2)(B)(iv). However, what course the Secretary must take in the absence of a right of recovery against the Burke children for loss of companionship is a matter that this court need not decide, and we offer no opinion as to the Secretary’s business.”

  • If this is not a chill on settlements for a primary payer then what is?

10.  Majority uses Arbitrary and Capricious standard, but does not apply it when rendering the decision.  Stating that the Secretary was in error, so the lower court got it wrong, is not a high standard.  It is certainly not as high as the arbitrary and capricious standard.  In order to reverse and remand, the court needed to find that the lower court was arbitrary and capricious in its review of the Secretary’s handling of the matter, but the Eleventh Circuit majority opinion never comes out and states that the lower court was arbitrary and capricious.

11.  The dissent gives deference to the manual and notes that the court has in other matters given deference to fish and wild game manuals.  What is the difference between the two?  Judge Martin wants to know, and so do we.  Interesting the 405g bar was never raised, but a hint of it is contained in the defense.

Conclusion

There is a possibility that the Secretary will attempt an appeal of this case to the U.S. Supreme Court.  Until then, practitioners in the 11th Circuit will likely seek to obtain court allocations of the loss reasonably expecting Medicare to honor such allocations.  It would be wise to limit such court allocations to common fund situations involving Wrongful Death claims wherein the estate’s interests involve tort property rights of non-Medicare beneficiaries.  Of course, the MSP Manual sets forth an acceptable process whereby allocations are acceptable so long as the case is tried “on the merits”, so a judge or jury’s allocation will be acceptable to Medicare.  The question we are all left to ponder is the extent to which the hearing must be undertaken in order to satisfy the allocation requirement.

The liability industry is getting mixed-signals when it comes to achieving finality to a personal injury claim involving a Medicare beneficiary.  The Bradley decision may make practical sense, but it is limited in its application: it does not apply to allocation between damage elements of a settlement fund involving a Medicare beneficiary.  That issue will be determined in the case of Hadden v. U.S., recently argued in the 6th Circuit Court of Appeals.  A broad extension of Bradley to all Medicare beneficiary cases goes against dozens of cases across the country.  However, it may have applicability to any common fund settlement.  These would include cases with derivative causes of action like loss of consortium or any mass tort situation.  Bradley at least for the 11th Circuit could be used to allocate damages between Medicare and non-Medicare beneficiaries to remove some of the dead lock in settlement distributions.

Franco Signor LLC continues to assist its clients with navigation of the MSP maze.  Section 111 reporting goes live on January 1, 2011 retroactive to October 1, 2010 — All Responsible Reporting Entities (primary plans, defendants, insurers, self-insureds) must now capture the data required to report settlements, judgments or awards exceeding $5,000.  As our blog demonstrates, we are carefully following all court decisions and CMS guidance in order to provide timely and informed advice to our growing client base.  Allow us to assist you on this important topic!