When it comes to lawyers for injured parties, defense lawyers,and insurance claims professionals, Medicare is probably causingmore ulcers than it has ever paid to cure. Under the rubric that“all persons must protect Medicare’s interests,” insurers andlawyers on both sides are being told by people who have a vestedfinancial interest in doing so that when a liability personalinjury case is resolved by judgment or even settled, a Medicare Set-Aside (MSA) account should be established. This isa groundless position, and MSAs are not required as a means ofprotecting Medicare’s interest for future medical bills. In fact, Ibelieve that insurers who utilize MSAs in an attempt to “safeguardMedicare’s interests” for future medical costs are putting theircompanies at risk of increased litigation costs and possible extracontractual (bad faith) exposure.

RELATED: Read Part 2 Here

In the final part of this series, we will discuss insurers whoinsist on liability MSAs, the alternatives to using them, and ifthe possibility of congressional help is on the horizon.

Facing Dire Consequences

The use of an MSA in a liability insurance situation couldresult in the liability insurer’s potential breach of contract and“bad faith” exposure. For example, assume that there is a justified$1 million policy limit settlement demand by the plaintiff Medicarebeneficiary, but the liability insurer, “in order to protectMedicare’s interests” and try to avoid its own exposure to a futureMSP recovery action, wants to put $300,000 of the limit into aliability MSA to reflect future medical expenses. Upon hearing ofthe proposed MSA, the plaintiff and/or the insured and respectivecounsel are going to claim that the carrier is in “bad faith” asthere is no current statutory or regulatory requirement that aliability insurer must use an MSA. If the limits demand is rejectedand the carrier cannot point to a federal requirement justifyingits action, the carrier could be liable for a subsequent settlementor judgment in excess of the policy limits and other bad faith damages.

The insurer, which would otherwise pay the policy limit demand,is not going to have the benefit of the argument that it was actingproperly and in “good faith.” This is because it has to comply withthe requirements of the MSP provisions as there is no MSP provisionrequiring a liability MSA. Depending on the jurisdiction, theplaintiff, now a judgment creditor, could accrue a bad faith causeof action based on the carrier’s refusal to pay the judgment. (See,Hand v. Farmers Ins. Exchange (1998) 23 CalApp4^th 1847.) In essence, this is potential excessexposure, bad faith by the insured, and bad faith by theplaintiff.

Further, the use of an MSA could slow down and even preventresolution of the Medicare beneficiary’s personal injury suit.Settlements would take much longer to effectuate since settlementdiscussions would have to include negotiations over the value offuture medical expenses. If these negotiations providedunsuccessful, then the parties would have to go to court. Ifparties started litigating amounts to allocate to “liabilityset-asides” in every personal injury suit brought by a Medicarebeneficiary, then the civil process will take even longer than itcurrently does. Each such case would become as complicated as is acase involving a minor’s compromise. State court systems,especially now that they have to deal with reduced budgets, are notlikely to allow this process to go forward. Since many plaintiffs’counsel (justifiably) believe that liability MSAs are not required, they will fight attempts touse MSAs, and this will result in legal stalemates regardingresolution of cases with Medicare beneficiary plaintiffs.Settlements will stall or not happen; claims of delay will be made;litigation expenses will soar; and cases will stay open for muchlonger, directly opposite to the goals of most insurers.

Alternatives to Liability MSAs

There are ways to indicate that the insurer has attempted toprotect Medicare’s interests that can be utilized without theexpense and complications involved in the MSA process.

First, concerning Medicare’s payment of future medical expenses,the insurer or self-insured can assert that a liability MSA is notrequired because Medicare itself already has a remedy. As discussedby Roy Franco and Jeffrey Signor in their book titled “MedicareSecondary Payer Compliance: How to Mitigate Exposure in theMedicare Beneficiary Personal Injury Case,” supra,Medicare’s sole remedy under the MSP provisions regarding futuremedical expenses after settlement or payment in a liability case isto suspend the payment of benefits to the Medicare beneficiary. TheMSP provisions only authorize recovery or subrogation actions for conditional payments, for example,payments already made by Medicare. There is no such authorizationfor future payments. Medicare has the right to suspend payments tothe Medicare beneficiary if Medicare did not recover properpayments if paid costs.

However, if Medicare does assert its rights regarding any futurepayments and actually suspends further payment, the thwartedMedicare beneficiary can assert a claim against the defendant orthe insurer. Therefore, prudent defense counsel will add aprovision to the release agreement to any settlement whichspecifically waives any such right to sue the defendant of itsinsurer for any suspended payments.

Should defense lawyers or claims professionals make Medicare a payee on the settlement orsatisfaction of judgment check? Some believe that this must be donein order to comply with the MSP provisions. However, this is nottrue; there is no requirement in the MSP provisions that Medicarebe such a payee. Thus if the Medicare beneficiary objects to havingMedicare as one of the payees on the payment check, the insurer orself-insured has no MSP provision to rely on to refute thisobjection. In Tomlinson v. Landers (M.D. Fla. 2009) 2009WL 1117399, the Medicare beneficiary objected to defendant’sinsurer naming Medicare as a payee on the settlement check, and,while the court recognized that “an insurer may be liable toMedicare if the beneficiary/payee does not reimburse Medicare forany amounts owed to Medicare within sixty (60) days,” the courtfound that the MSP provisions do not require that Medicare be onthe check, stating that “federal law does not mandate that aprimary payer (or insurer) make payment directly to Medicare.” TheTomlinson court concluded that, as there was no agreementbetween the parties as to including Medicare on the payment check,the settlement could not be enforced.

What if all parties agree that Medicare can be one of thepayees, for example, in addition to the plaintiff Medicarebeneficiary and, as is common, the plaintiff’s counsel’s trustaccount? Is placing Medicare on the check a good idea? Thefirst problem in a case involving future medical expenses wouldobviously be how to estimate the amount of future Medicare covered expenses the beneficiary will potentially incur andinclude that amount in the check.

As discussed in an article titled “MMSEA & The MSP -Confusion Reigns Supreme” by Jason D. Lazarus, there are a varietyof problems resulting from naming Medicare as a payee. Technically, Medicare should not be on the check because it is nota party to the Medicare beneficiary’s lawsuit or to the settlementnegotiations regarding that suit. Medicare may not be entitled tothe full conditional payment amount (there is a formula forreduction of that amount), and in some cases, Medicare may elect tototally waive payment. Having Medicare on the check could prevent aplaintiff beneficiary from negotiating or obtaining a waiver of theconditional payment. To be negotiable by anyone, the check wouldfirst have to be signed by the plaintiff beneficiary and,typically, his or her counsel, before being sent to Medicare forsignature. However, there are concerns regarding who would sign onMedicare’s behalf. When and how would the amount due thebeneficiary and counsel be processed? How long would it take forthe beneficiary to receive the amount to which he or she isentitled and likely needs on a priority basis? Further, as shownabove, putting Medicare as a payee could be seen as not being aproper payment of a judgment.

The most typical and most efficient way for a liability insureror self-insured resolving a personal injury suit with a Medicarebeneficiary to proceed is to be sure to include appropriate holdharmless/indemnity provisions in the settlement agreement andrelease documents. For example, the documents should includestatements to the effect that the plaintiff beneficiary and his orher counsel acknowledge and agree upon the following:

1. The beneficiary is or was Medicare eligible.
2. The parties have taken reasonable steps from the beginning ofthe personal injury suit to comply with the MSP provisions.
3. The beneficiary and his or her counsel are aware of Medicare’sinterest in the settlement to the extent Medicare has made or willmake any conditional payments for medical services or itemsreceived by the beneficiary.
4. The beneficiary and his or her counsel have provided theinformation to the released parties and their counsel andinsurer(s) necessary to comply with the Section 111 mandatoryreporting program.
5. The beneficiary and his or her counsel have notified Medicareof the accident, injury, or illness giving rise to the suit andresultant settlement.
6. The beneficiary and his or her counsel will, within 60 days ofreceipt of a final demand letter from Medicare, reimburse Medicarefor any conditional payments related to the accident, injury, orillness as required by the MSP provisions.
7. It is the responsibility of the beneficiary and his or hercounsel to reimburse Medicare for any conditional payments made byMedicare on behalf of the beneficiary.
8. Any and all conditional payments, liens, claims, and subrogated interests asserted by or on behalf ofMedicare have been or will be resolved and satisfied prior todistribution of any of the settlement funds to thebeneficiary.
9. The settlement funds will be held without distribution to thebeneficiary or anyone else until Medicare’s claims have beensatisfied or waived.

10. The beneficiary and his or her counsel will obtain afull satisfaction and release or waiver from Medicare regarding allof its claims.

11. If any of the above representations are not correct orif any specified action is not performed, the beneficiary and hisor her counsel will be in material breach of their duties under thesettlement agreement/release and will fully repay the settlementfunds and indemnify and hold harmless the released parties andtheir counsel and insurer(s) for any and all damages, legal fees,and costs or expenses arising out of the beneficiary and/orcounsel’s breach of duties.

These steps are evidence that the defendants and the insurerwere seeking to protect Medicare’s interests and should be avaluable protection against any claim to the contrary.

Is There Congressional Help on the Horizon?

On Feb. 14, 2011, at the 72nd Midyear Meeting of the AmericanBar Association (ABA), the ABA’s House of Delegates adoptedResolution 108A. The resolution concerns reform of the MSP Act anddefinitive clarification of any remaining confusion regardingwhether an MSA is required in third party liability settlements,judgments or awards under the MSP provisions. The resolution “urgesCongress to acknowledge that there is no regulatory or statutorybasis for Medical Set Asides for third party liability settlements,judgments, or awards under the Medicare Secondary Payer Act andprovide clear, predictable, and consistent procedures for thesubmission, uniform determination, and timely approval of anythird-party medical set-aside settlement proposals (MSASP)voluntarily submitted to the Centers for Medicare & MedicaidServices (CMS) in response to the non-binding recommendations ofCMS.” The stated goals of Resolution 108A are very similar to thoseof the proposed Strengthening Medicare and Repaying Taxpayers(SMART) Act, a bill introduced to Congress in March of 2011.

On March 14, 2011, HR 1063, the proposed SMART Act wasintroduced by Rep. Tim Murphy (R-Penn.) and Rep. Ron Kind (D-Wis.)before the U.S. House of Representatives. As of this writing, thebill is in the first phase of the legislative process; it has beenreferred to both the House Committee on Ways and Means and Energyand Commerce Committee.A principal goal of theproposed SMART Act is to provide a procedure that will enableeveryone (the parties and their counsel and the “liability plan,”whether insurer or self-insured) know the amount owed to Medicareduring settlement negotiations and thus facilitate settlement of aMedicare beneficiary’s personal injury suit without the loomingspecter of a future, post-settlement Medicare recovery action. Asdiscussed, this recovery action could be directed not only againstplaintiff beneficiary and his or her counsel, but also against theliability plan, whether liability insurer or self-insured businessentity.

The proposed SMART Act would, in part, amend the existing MSPAct to include provisions setting forth a clear, required processto obtain a “final demand” letter from Medicare within a reasonabletime before a settlement, judgment, or award is expected. Duringthis reasonable pre-settlement time period (120 days), the Medicarebeneficiary, the liability insurer, or the self-insured could makea written request to Medicare for a demand letter which is to beproduced in 65 days. If Medicare does not timely provide this finaldemand letter, the beneficiary or insurer would need to send asecond request. If this request does not receive a response fromMedicare within 30 days, absent exceptional circumstancesjustifying the failure to respond, Medicare would be barred fromcollecting any of the conditional payments it makes from theparties, counsel and insurer(s) involved. The SMART Act would alsoprovide that CMS must draft regulations that would provide a rightof appeal if the settling parties disagree with Medicare’s “finaldemand” or if they believe that Medicare has made a mistake incalculating that demand.

HR 1063 is supported by the Medicare Advocacy Recovery Coalition(MARC), which was formed in September of 2008 to advocate for theimprovement of the MAP program for both beneficiaries and affectedcompanies. MARC’s members include entities representing all typesof people and entities impacted by the current MAP provisions,including attorneys, brokers, insureds, insurers, insurance andtrade associations, self-insureds, and third-party administrators.MARC is, in my opinion, correctly asserting that the proposedamendment is essential because, as CMS does not provide a repaymentamount until after parties have settled, cases involvingbeneficiaries often prove difficult, and sometimes impossible, tosettle, and settlements are delayed.

The National Association of Mutual Insurance Companies (NAMIC)is also supporting passage of HR 1063. The senior vice president offederal and political affairs for NAMIC has stated that, “(b)ystreamlining the MSP system, this legislation will help insurerssettle claims and disputes faster, ensuring that claimants and theMedicare Trust Fund are paid as quickly and efficiently aspossible.”

If enacted, the proposed SMART Act would put a final end to anydebate over whether liability MSAs are or should be requiredwhen resolving a Medicare beneficiary’s personal injury suit. Sinceeveryone will be able to know the amount of the payment to be madeto Medicare during the course of settlement negotiations, Medicarecould be paid at the time of and as part of the final resolution ofthe Medicare beneficiary’s lawsuit.

The Never-Ending Issue

Medicare has become a part of America’s culture, and does notappear to be going away. Yet, the system is financially stressedand CMS is driven to seek recoveries when possible. But theinsurance industry and self-insureds should not be improperlycoerced into a process that will stall litigation, stopsettlements, and cost amounts deemed huge, even by Medicarestandards. MSAs are not required in liability cases and anyoneasserting otherwise should be pressed to explain the basis of heror her belief beyond the business opportunity that would be created.

Neil Selman is a partner at Selman Breitman LLP, where hehas represented insurers in a consulting capacity and litigatedmatters in all areas relating to insurance.