The Preservation of Medicare Benefits

in a Workers' Compensation Settlement

 

Bradley J. Frigon

Law Offices of Bradley J. Frigon

6500 South Quebec St., Suite 300

Englewood, Colorado 80111

(720) 200-4025

(720) 200-4026 - Facsimile

www.bjflaw.com

 

            Medicare has two interests in a workers’ compensation settlement.  First, Medicare wants to recover any monies paid for medical services related to the injuries sustained by the injured worker.  Second, Medicare wants the workers’ compensation settlement to provide for money to pay for future medical treatment for the worker’s job related injuries.  Any attorney assisting with the settlement of a workers’ compensation claim must be familiar with both of these issues.

A.                 Medicare

            Medicare is a federal health insurance program that provides major medical and hospital coverage for the following eligible classes of individuals:

 

1.                                          Individuals 65 years of age or older that are entitled to Social Security or Railroad Retirement benefits;

2.                                          A disabled individual of any age who has been receiving Social Security Disability (SSD) or Railroad Retirement benefits for 24 months;

3.                                          An individual with end-stage renal disease who requires dialysis or a kidney transplant; and

4.                                          An individual over the age of 65 who is not eligible under (1) through (3) above, but who privately purchases Medicare insurance and pays the premiums.

            Generally, in a workers’ compensation case, the injured worker will access Medicare under the second classification.  If an injured worker is unable to engage in substantial gainful employment, the disabled worker will qualify for SSD.  If the injured worker’s application is approved, the SSD payments will commence five months after the filing of the application.  Once the disabled worker has received SSD for 24 months, he or she will qualify for Medicare.

 

B.                 Fiscal Intermediaries and Carriers

            Along with the Code of Federal Regulations, the rules relating to Medicare’s interest in workers’ compensation cases can be found in the Medicare Fiscal Intermediary Manual, Part 2 and the Medicare Carrier’s Manual. 

            Fiscal intermediaries are insurance companies that have contracted with Medicare to administer Part A benefits for a specific region.  Carriers are the doctors, clinics, hospitals, and labs that have contracted with Medicare through an insurance company to provide Part B Medicare benefits for a particular region. 

 

C.                 Medicare Secondary Payer Statute

            The Medicare Secondary Payer (MSP) statute was created by the Omnibus Reconciliation Act of 1980.  The purpose of the statute was to ensure that Medicare was only secondarily responsible for paying for medical expenses for individuals covered by Medicare who were also covered by another type of private insurance.

 

D.                 Primary and Secondary Payers

            The MSP statute provides that Medicare may not pay for medical services for an injured worker’s if payment can “reasonably be expected to be made promptly” under a worker’s compensation law or under an automobile or liability insurance policy or plan.¹  In those cases, Medicare is the “secondary payer” while the insurance company or other responsible party remains the “primary payer.”  “Secondary” means that those benefits are payable only to the extent that payment has not been made and cannot reasonably be expected to be made under other coverage that is primary to Medicare.”² That is the rule even if state law provides otherwise.  The Code of Federal Regulations, (“C.F.R.”), provides additional guidance for MSP claims as follows:

Medicare benefits are secondary to benefits payable by a third party payer even if State law or the third party payer³ states that its benefits are secondary to Medicare benefits or otherwise limits its payments to Medicare beneficiaries.⁴

 

            The MSP statute provides, in pertinent part, as follows:

(A)        Medicare secondary payer.

payment under this sub-chapter may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that-payment has been made, or can be reasonably be expected to be made promptly (as determined in accordance with regulations) under a workmen’s compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insuredplan) or under no fault insurance.

(B)       conditional payment

repayment required.  Any payment under this sub-chapter with respect to any item or service to which subparagraph (A) applies shall be conditioned on reimbursement to the appropriate Trust Fund established by this sub-chapter when notice or other information is received that payment for such item or service has been or could be made under such subparagraph.  If reimbursement is not made to the appropriate Trust Fund before the expiration of the 60-day period that begins on the date such notice or other information is received, the Secretary may charge interest (beginning with the date on which the notice or other information is received) on the amount of the reimbursement until reimbursement is made (at a rate determined by the Secretary in accordance with regulations of the Secretary of the Treasury applicable to charges for late payments).⁵

 

            A conditional Medicare payment is a payment made by Medicare when another party is responsible and may be made in either of the following circumstances:

(a)        The beneficiary has filed a proper claim for workers’ compensation benefits, but the intermediary or carrier determines that the workers’ compensation carrier will not pay promptly.  This includes cases in which a workers’ compensation carrier has denied a claim.

(b)        The beneficiary, because of physical or mental incapacity, failed to file a proper claim.⁶

            The MSP statute specifically provides that, in the event Medicare does pay for an individual’s medical expenses in secondary payer circumstances, those expenses shall be paid subject to reimbursement.  If such reimbursement is not made within the established time period, interest may be charged on the amount of reimbursement until Medicare receives the same from the primary payer.

            The legal duty of a primary payer to reimburse Medicare arises from the MSP statute that provides that Medicare “shall be surrogated to any right . . . of an individual or any other entity” for any payment made by Medicare which should have been made by a primary payer.⁷ In addition, Medicare may intervene (but not commence) in any lawsuit related to workers’ compensation claim if Medicare has paid any medical expenses for the injured worker.  The pertinent regulation provide as follows:

Subrogation and right to intervene.

(a)        Subrogation.  With respect to services for which Medicare paid, HCFA is surrogated to any individual, provider, supplier, physician, private insurer, State agency, attorney, or any other entity entitled to payment by a third party payer.

(b)        Right to intervene.  HCFA may join or intervene in any action related to the events that give rise to the need for services for which Medicare paid.⁸

 

E.                  The Duty to Ascertain the Payment of Past Medical Expenses Paid by Medicare

            The regulations require a third party payer to notify Medicare if the third party payer learns that Medicare has made a payment for an injured worker’s medical expenses.  The applicable regulations provide as follows:

Third party payer’s notice of mistaken Medicare primary payment

(a)        If a third party payer learns that HCFA has made a Medicare primary payment for services for which the third party payer has made or should have made primary payment, it must give notice to that effect to the Medicare intermediary or carrier that paid the claim.

(b)        The notice must describe the specific situation and the circumstances . . . and, if appropriate, the time period during which the insurer is primary to Medicare.

(c)                If a plan is self-insured and self-administered, the employer must give the notice to HCFA.  Otherwise, the insurer, underwriter, or third party administrator must give the notice.⁹

 

            If a third party payer fails to ascertain the existence of a Medicare claim, CMS “has a direct right of action to recover from any entity responsible for making primary payment.”¹⁰ The third party payer’s obligation to reimburse Medicare for such claim continues even if the third party payer has already reimbursed the beneficiary or other party.”¹¹ In short, CMS can make the third-party payor pay twice.

 

F.                  Compromise and Waiver of Past Medical Expense Paid by Medicare

            Any medial expenses paid on behalf of an injured worker by Medicare may be either compromised or waived under 1) the Federal Claims Collection Act (FCCA), 2) the MSP Statute or 3) 42 U.S.C. §1395gg(c). 

            Under FCCA, the basis for compromising a claim are as follows:

1.         The worker does not have sufficient money to repay Medicare’s claim within a reasonable period of time;

2.         CMS believes it would be difficult for it to prevail on its claim in court; or

3.         The costs CMS would incur to collect the claim exceed the value of the claim.

            Under the MSP statute, claims may be waived if CMS determines such waiver is in the best interest of the MSP program.  Pursuant to 42 U.S.C. §1395gg, a claim may be compromised for economic hardship, for equitable reasons, and for reasons that are beyond the fault/control of the worker, such that the worker was not responsible for Medicare’s overpayment.  Specifically, the regulations provide for compromise and waiver of a MSP claim as follows:

                        Waiver of recovery and compromise of claims.

(a)        HCFA may waive recovery, in whole or in part, if the probability of recovery, or the amount involved, does not warrant pursuit of the claim.

 

            The MSP statute imposes penalties if Medicare’s interests are not considered when a workers’ compensation case is settled for a Medicare beneficiary.  The MSP statute provide as follows:

(ii)        Action by the United States.  In order to recover payment under this sub-chapter for such an item or service, the United States may bring an action against any entity which is required or responsible (directly, as a third-party administrator, or otherwise) to make payment with respect to such item or service (or any portion thereof) under a primary plan (and may, in accordance with paragraph (3)(a) collect double damages against that entity), or against any other entity (including any physician or provider) that has received payment from that entity with respect to the time or service, and they join or intervene in any action related to the events which gave rise to the need for the item or service.  The United States may not recover from a third-party administrator under this clause in cases where the third-party administrator would not be able to recover the amount at issue from the employer or group health plan and is not employed  by or under contract with the employer or group health plan at the time the action for recovery is initiated by the United States or for whom it provides administrative services due to the insolvency or bankruptcy of the employer or plan.

 

(3)        Enforcement:

 

(A)       Private cause of action.  There is established a private cause of action for damages (which shall be in an amount double the amount otherwise provided) in the case of a primary plan which fails to provide for primary payment (or appropriate reimbursement) in accordance with such paragraphs (1) and (2)(A).¹²                    

 

            The fiscal intermediary is responsible for determining the MSP claim.  Any claim for reimbursement of conditional payments by Medicare must be brought within three years from the date that the item of service was provided (bills were paid).¹³

 

H.                 Liability for Everyone

            Anyone involved in the settlement of a workers’ compensation award must understand that they are potentially liable to Medicare if Medicare’s claim is not paid.  The regulations provide that Medicare is “surrogated to any individual, provider, supplier, physician, private insurer, State agency, attorney, or any other entity entitled to payment by a third party payer.”¹⁴  In addition, Section 411.24(g) of the regulations state that Medicare “has a right of action to recover its payments from any entity, including a beneficiary, provider, supplier, physician, attorney, State agency or private insurer that has received a third party payment.”¹⁵

I.                   Shifting the Payment of Medical Expenses.

            The workers’ compensation carrier is responsible for paying lifetime medical expenses for the worker who is totally and permanently disabled.  Even if the workers’ compensation carrier settles the case with the injured worker, the carrier cannot shift its primary responsibility for the payment of medical bills for the life of the injured worker to Medicare.¹⁶Despite the regulatory prohibition of shifting the payment of medical expenses from the insurance carrier, the standard of practice in the industry was to simply ignore the problem.  The problem was easily ignored since CMS had not implemented any procedures for the parties to submit their settlement to CMS for approval and CMS had never attempted any enforcement action in this area.

 

J.                   Why everyone is confused

            Under §411.46(b)(2), Medicare will not recognize any settlement that attempts to shift to Medicare the responsibility of payment for treatment of work related conditions.  However, §411.46(d), states that “if a lump sum compromise settlement forecloses the possibility of future payment of workers compensation benefits, medical expenses incurred after the date of the settlement are payable under Medicare.”  An exception to §411.46(d) provides that if the settlement agreement allocates some portion of the settlement to medical expenses, Medicare does not pay for any services regarding the work related injury until the medical expenses related to the injury equals the amount of the lump sum settlement allocated to future medical expenses.

            In addition, §411.47(a)(1) provides that if a compromise settlement allocates a portion of the payment for medical expenses and also gives reasonable recognition to the income replacement element, the apportionment may be accepted as a basis for determining Medicare payments.  If no apportionment is made in the settlement, §411.47(a)(2) provides a mathematical formula to determine the amount of the medical offset.

 

K.                Types of Settlements

            The Medicare regulations distinguish between a commutation and compromise settlement.

            Compromise Settlement Agreements.  A compromise settlement is a settlement that occurs when the insurance carrier is contesting compensability.  Typically, the injured worker accepts less than what the individual would have received if he or she had received full reimbursement for lost wages and life long medical treatment for the injury.  CMS may scrutinize the settlement agreement for any indication that the settlement was intended for future medical and, conversely, whether the facts reveal any attempt to manipulate the settlement process so as to shift future medical liability to Medicare.  If a settlement appears to represent an attempt to shift the responsibility for payment of medical expenses for a work related injury, Medicare will not pay for the treatment of that condition. 

            Commutation Settlement.  If a lump sum compensation stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of the work-related injury or disease, Medicare payments for such services are excluded until medical-expenses related to the injury or disease equal the amount of the lump-sum payment.¹⁷  Medicare will not pay  injury related benefits until the claimant presents injury related medical bills that total an amount equal to the total amount of the settlement allocated to future medial care and treatment.

 

L.                  The CMS Solution

            On July 23, 2001, the Central Office of CMS issued a transmittal in an attempt to provide some form of uniform guidance on the application of the MSP regulations.  A copy of the transmittal is attached to this article.  The new guidelines provide the following criteria for when third-party payers must consider Medicare’s interest when settling a worker compensation case.

            An injured worker who is not yet a Medicare beneficiary need only consider Medicare’s interests when the “injured individual has a reasonable expectation of Medicare enrollment within 30 months of the settlement date, and the anticipated total settlement for future medical expenses and disability lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000.”  The $250,000 threshold is determined by the total amount of the settlement attributable to future medical expenses and “lost wages” and is not merely the amount attributed to future medical expenses.  An issue exists as to whether Medicare deems permanent partial disability settlements as “lost wages.”  CMS currently appears to interpret “lost wages” as all indemnity payments including permanent partial disability.  Furthermore, the $250,000 threshold does not include prior payments for medical and indemnity

            In any case in which the claimant is already a Medicare beneficiary, CMS will consider the entire amount of the settlement to be allocated for the payment of future medical bills unless Medicare approves the allocation.  If Medicare does not approve the settlement, it will consider the entire settlement to be allocated to future medical expenses and will not pay future Medicare benefits until there is proof that the entire settlement has been spent on Medicare-eligible medical expenses.  In a worst-case scenario, should Medicare find, on the facts of the particular case, that the settlement agreement was designed to improperly shift liability to Medicare, all future Medicare coverage for that condition may be denied.

            In commutation cases, any allocation of future causally related medical costs must account for the realistic value of causally related medical for the remainder of the claimant’s life.  In compromise cases any allocation must bear a reasonable relationship to the value of the settlement.  That is, if the indemnity settlement is for 60% of the value of the case, the medical settlement should be 60% of the value of the anticipated future medical.

            If a compromise settlement includes a disallowance of the workers’ compensation case, Medicare will recognize that disallowance only if the evidence indicates there was a real possibility the case would not be established.

 

M.               Set Aside-Amount

            When it is determined that the claimant is reasonably expected to be eligible for Medicare benefits within 30 months and the settlement exceeds $250,000 or the claimant is already eligible for Medicare, then CMS must be contacted to approve the amount that must be set aside for future medical benefits associated with the settlement.  The allocation of future medical expenses must be reasonable.  CMS will use the following criteria to determine if the proposed set-aside amount is reasonable:

 

•                                                         Date of Medicare entitlement

•                                                         Basis of Medicare entitlement

•                                                         Type and severity of injury or illness

•                                                         The Beneficiary’s rated age and life expectancy

•                                                         Permanent partial or permanent total disability

•                                                         Prior medical expenses

•                                                         Amount of settlement allocated to indemnity and future medical expenses

•                                                         Whether commutation is for claimant’s full life expectancy

•                                                         The beneficiary’s ability to live independently

            CMS will require additional documentation in support of the proposed medical trust.  Documentation will include settlement agreements, life care plan, rated age, and medical records.  The plan will be submitted to the CMS Regional office for review and approval.  Once approved, Medicare will not make any payments for medical expenses associated with the claimant’s work-related injury until the trust proceeds are exhausted.

 

N.                Set-Aside Arrangements

            In the transmittal, CMS has required the use of a set-aside arrangement.  A set-aside arrangement can be a custodial account, trust or even a self-administered account.  Every set-aside arrangement must follow strict accounting and investment policy rules.

            In any set aside arrangement, the fiduciary must pay the medical bills according to either the applicable state workers’ compensation fee schedule or the Medicare fee schedule, depending upon which fee schedule the allocation was based.

            The fiduciary of the set aside arrangement may not pay for any treatment that Medicare does not cover.  In addition, the money deposited into the account must not be used to pay bills that are not connected with the work-related injury.  Furthermore, no bills may be paid from the Medicare Set-aside fund until the worker is actually eligible for Medicare.

            At least on an annual basis, the fiduciary must send reports to the appropriate regional office.  The reports must account for all expenditures and deposits made by the fund for that period of time.  Once the fund is exhausted, the fiduciary must then forward a report to the appropriate regional office detailing all expenses paid from the fund and all deposits made thereto for the life of the Fund.  Provided the report is approved, the claimant is then eligible to receive Medicare benefits.

            If the claimant dies before the fund is exhausted, the remaining money will pass pursuant to the terms of the trust account or custodial account.

 

O.                Regional Offices

            Each of the ten CMS Regional Offices will be assigned the task of approving the set-aside amount and administering the set-aside arrangement.  Each Regional Office will have the authority to determine if Medicare’s interests are being adequately considered and issue a written opinion that can be relied upon by the parties.  Attached to this article is a list of the contact persons for each Regional Office.

 

P.                  Enforcement

            To recover payments described in the MSP statute, the United States is authorized to bring an action against the primary payer “directly, as a third-party administrator, or otherwise.”¹⁸ In addition, the statute provides that double damages plus interest may be collected from the primary payer.¹⁹  It is important to remember that regulations specifically provide that, “[i]f a settlement appears to represent an attempt to shift to Medicare the responsibility for payment of medical expenses for treatment of a work-related condition, the settlement will not be recognized.”²⁰

            In addition, Medicare has the option, under the MSP statute, to simply refuse to pay the injured worker’s medical expenses.²¹ This could occur if the injured employee has previously reached a lump sum settlement with the primary payer regarding future medical benefits.

            Recent reports indicate that CMS does not intend to assert claims against insurance carriers for settlements completed before July 23, 2001 (date of their original guidance memorandum).  Some insurers, however, have reported receipt of audit letters seeking information as to settlement of prior claims involving Medicare beneficiaries.  It is anticipated that CMS will issue a more formal statement or guideline in the future as to their intent in these regards.

 

Conclusion

            CMS has set new guidelines for the settlement of workers’ compensation cases.  Although the new guidelines will, in many cases, make the process more difficult, they must be followed if the injured worker is ever to receive Medicare benefits.  Expect CMS to issue additional guidelines in this area.