New M&A insurance risk for buyers Medicare-related settlement clawback

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1 January 2011 A publication from the Transaction Services practice New M&A insurance risk for buyers Medicare-related settlement clawback At a glance Companies across a wide range of industries must consider the potential liability for Medicarerelated settlement costs. Deal executives should conduct careful due diligence around exposure to the Medicare-related settlement clawback and appropriately assess the liability. While this type of exposure could significantly impact the economics of a transaction, deal executives can ensure the right adjustments are made at the deal table.

2 Introduction The US government has begun to exercise its long-dormant power to recover Medicare spending, known as conditional payment, for healthcare provided to people who suffered harm through the liability of a third party. This new government emphasis on recovering Medicare expenditures opens a new source of target company risk, particularly for sectors with large labor forces or labor forces performing potentially dangerous work, such as retail and consumer products, agribusiness, pharmaceuticals, mining, and industrial manufacturing. Potential buyers should include an assessment of Medicare liability in their due diligence efforts. The federal government is now using its power to recoup conditional Medicare payments from liable parties In December 2009, the US Department of Justice (DoJ) filed a landmark lawsuit to recover payments made to about 900 Medicare beneficiaries who were party to a settlement in a class action liability suit settled in These beneficiaries worked for companies in the agribusiness, pharmaceuticals, and mining industries. The government is seeking reimbursement of $67 million made in conditional Medicare payments, as well as double damages and interest. The government has long had the statutory power to pursue reimbursement, but has generally chosen not to use it. The DoJ s move signals that the US government now intends to aggressively protect its interests in any type of injury settlement. To reduce exposure to this new type of risk, prospective buyers should incorporate Medicare risk into their diligence focus, paying particular attention to: Existing litigation concerning risk areas such as self-insured workers compensation, asbestos, medical malpractice, and public liability Previous settlements with possible Medicare liens Recent Medicare registration requirements and potential liabilities What is a conditional Medicare payment? The Medicare Secondary Payer (MSP) law, enacted in 1980 to improve Medicare s fiscal condition, states that in the case of injury or illness caused by a third party, many payments Medicare makes for health care related to the injury or illness are conditional. The Center for Medicare and Medicaid Services (CMS) is entitled to pursue reimbursement for conditional spending when those beneficiaries are paid as part of a settlement or judgment. Liability and workers compensation claims often involve genuine disputes over liability, causal relationships, and extent of necessary treatment. Cases can be further complicated by pre-existing conditions, degenerative changes, or unrelated exposure. As such, it is not always clear who is legally responsible for paying for treatment and fairly common for a Medicare payment claim to arise during or after litigation. For example, suppose a class of plaintiffs sued over long-term asbestos exposure, and Medicare paid conditionally for necessary care while the liability remained unsettled. If the plaintiffs won compensation from the liable party, Medicare expects to recoup its conditional spending from the Liability Primary Payer, which can be the company or its insurer. The following types of claims often include conditional payments: Work-related accidents Asbestos exposure and other toxic tort claims Public liability (such as slips and falls) and automobile accidents Medical malpractice Nursing home injuries 2 PwC New M&A insurance risk for buyers

3 In settling a claim with a Medicare beneficiary, a Liability Primary Payer cannot extinguish its obligations to Medicare by paying the beneficiary or the medical provider rather than Medicare. The principle of US vs. Stricker: Recovering conditional payments The court case US vs. Stricker heralded the government s decision to pursue conditional payments on a larger scale. The case relates to an earlier case in which agribusiness, pharmaceutical, and chemical giants Monsanto, Pharmacia, and Solutia were defendants in a class action liability lawsuit. The parties settled in 2003, with the defendants paying the plaintiffs $300 million and the insurance carriers indemnifying the defendants. According to the DoJ s Stricker complaint, it does not matter that the defendants paid the settlement proceeds to the plaintiffs. Under the Medicare Secondary Payer statute, 42 CFR, section (i), Medicare has the right to seek payment from the Liability Primary Payer regardless of whether payment has already been made to the Medicare beneficiary as part of a settlement. The suit alleges that the parties failed to fulfill their obligations to notify Medicare of the settlement and to reimburse Medicare for the conditional payments. CMS has a direct right of action to recover from any entity responsible for making the primary payment to the beneficiaries, whether employer, insurer, plan or program, or third-party administrator. CMS can pursue recovery as soon as it learns that a payment has been made or could be made by a primary payer. By law, primary payers must try to determine if a claimant has received any benefits from Medicare related to the claim beneficiary and provide that information to CMS. In settling a claim with a Medicare beneficiary, a Liability Primary Payer cannot extinguish its obligations to Medicare by paying the beneficiary or the medical provider rather than Medicare. New Medicare reporting requirements and penalties The risks of failing to account for possible Medicare conditional spending in settlements extend beyond reimbursement costs. The Extension Act of 2007 (MMSEA) established new reporting requirements for liability insurers, workers compensation insurers, self-insured parties, and other parties that pay reportable claims to Medicare beneficiaries. Beginning January 1, 2012, these parties must register with the CMS as required reporting entities (RREs) and are required to report virtually all settlements, judgments, awards, and other resolutions of claims establishing responsibility for payments to Medicare beneficiaries. Section 111 of the Extension Act imposes substantial civil penalties on RREs that do not report payments to Medicare beneficiaries up to $1,000 per day for each claim that an RRE does not report. However, implementation of these substantial penalties has been postponed until 2012 to allow time for resolution of certain ambiguities in the law. Medicare-related settlement clawback 3

4 Conclusion The future extent of this Medicare risk depends on the government s long-term commitment to pursuing reimbursement. It is too early to know if the overall cost of settlements will increase because of requirements that companies or insurers compensate both the claimants and the government. In the short term, businesses in the deal market can address this risk by asking and answering several key questions, such as: Accounting for this potential Medicare clawback in target companies even for long-closed settlements should become a standard feature of due diligence for any deal executive. Companies should determine whether their diligence providers have specialized knowledge in insurance risks such as Medicare liability. Potential insurance liabilities left uncovered can significantly impact the economics of a transaction, a risk that can be avoided. Is there an exposure to cases in which Medicare made conditional payments? Have previous settlements accounted for the Medicare liens? Is the target company required to register as an RRE? If so, where does the process stand and what are the costs (i.e., penalties) associated with noncompliance? 4 PwC New M&A insurance risk for buyers

5 Acknowledgments Authors John Merrigan Managing Director, Insurance Risk Management Solutions Leader, Transaction Services Nieves Serrano Director, Transaction Services For a deeper discussion on deal considerations, please contact one of our regional leaders or your local PwC partner: Martyn Curragh US Practice Leader, Transaction Services Gary Tillet New York Metro Region Leader, Transaction Services Scott Snyder East Region Leader, Transaction Services Mel Niemeyer Central Region Leader, Transaction Services Mike Dillon West Region Leader, Transaction Services For a deeper discussion about how Medicare liability or other insurancerelated risks may affect your deal, please contact: John Merrigan, Managing Director Insurance Risk Management Solutions Leader, Transaction Services Medicare-related settlement clawback 5

6 About our deals publications: PwC provides tactical and strategic thinking on a wide range of issues that affect the deal community. Visit us at to download our most current publications PwC. All rights reserved. PwC and PwC US refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY

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