WHAT YOU NEED TO KNOW ABOUT MEDICARE LIENS, CONDITIONAL PAYMENTS, AND SET ASIDE TRUSTS

WHAT YOU NEED TO KNOW ABOUT MEDICARE LIENS, CONDITIONAL PAYMENTS, AND SET ASIDE TRUSTS Presented and Prepared by: Bradford J. Peterson bpeterson@heylroyster.com Urbana, Illinois 217.344.0060 The cases and materials presented here are in summary and outline form. To be certain of their applicability and use for specific claims, we recommend the entire opinions and statutes be read and counsel consulted. Heyl, Royster, Voelker & Allen PEORIA SPRINGFIELD URBANA ROCKFORD EDWARDSVILLE 2009 Heyl, Royster, Voelker & Allen E-1

WHAT YOU NEED TO KNOW ABOUT MEDICARE LIENS, CONDITIONAL PAYMENTS, AND SET-ASIDE TRUSTS I. INTRODUCTION... E-3 II. HISTORY... E-3 III. MEDICARE LIENS AND THE SECONDARY PAYER ACT... E-3 A. Medicare Liens... E-3 B. Conditional Payments Search... E-4 C. Future Medical Expenses... E-4 IV. MANDATORY MEDICARE REPORTING REQUIREMENTS... E-9 A. SCHIP Extension Act... E-9 B. Responsible Reporting Entities... E-9 C. Registration... E-10 D. Triggers to Reporting... E-10 E. Reporting Thresholds... E-10 1. Medical Expenses... E-10 2. Total Settlement... E-11 3. Closed Cases... E-11 F. Medicare Resources... E-12 E-2

WHAT YOU NEED TO KNOW ABOUT MEDICARE LIENS, CONDITIONAL PAYMENTS, AND SET-ASIDE TRUSTS I. INTRODUCTION Medicare s lien for conditional payments was created under the Medicare Secondary Payer Act, 42 USC. 1395y(b) (2). This article will address the significance of Medicare super liens as well as issues that have arisen with regard to insurer obligations with regard to future medical expenses under the Medicare Secondary Payer Act. In addition, the enactment of the SCHIP Extension Act in 2007 signals further efforts by Medicare to identify and track civil and workers compensation claims where lien rights may exist or arise. The reporting requirements for the SCHIP Extension Act are summarized below and applicable deadlines are also identified. II. HISTORY In 1965 the Social Security Act, 42 USC 670 et seq., established both Medicare and Medicaid. Medicare was the responsibility of the Social Security Administration (SSA). As originally enacted, Medicare acted as a primary payer for medical services to Medicare beneficiaries. An exception existed where Medicare expected a workers compensation plan to cover a beneficiary s claims, in which case Medicare would only make payment on the condition that the workers compensation plan would reimburse Medicare. 42 USC 1395y(b)(2)(B)(iii)(2006). Due to rapidly increasing Medicare expenses, Congress expanded Medicare s right to recovery for conditional payments in the 1980 Omnibus Reconciliation Act of 1980, P.L. 96-499, 900, et seq., 94 Stat. 2599, 2609 (1980). The Omnibus Reconciliation Act expanded Medicare Secondary Payer status and right to reimbursement for conditional payments to include liability, auto liability and no fault insurance. III. MEDICARE LIENS AND THE SECONDARY PAYER ACT A. Medicare Liens The conditional payments made by Medicare for which it seeks reimbursement are now commonly known as super liens. The term super lien is used because they take priority over all other liens. Under the Medicare Secondary Payer Act, Medicare is subrogated to any right of an individual or entity to recover payments from an insurer for medical bills. 42 USC 1395y(b)(2)(B)(iv). In such instances, Medicare may also seek double damages. 42 USC 1395y(b)(2)(B)(iii). Since Medicare is a secondary payer under the Medicare Secondary Payer Act, Medicare can recoup from the rightful primary payer or from the recipient of such payment if Medicare paid for a service that should have been covered by the primary insurer. U.S. v. Baxter Intern., Inc., 345 F.3d 866 (11th Circuit, 2003). 42 CFR 411.24(i)(1-2) of the federal regulations, governing Medicare s right of reimbursement for conditional payments, states: E-3

(1) In the case of liability insurance settlements and disputed claims under employer group health plans, workers compensation insurance or plan, and no fault insurance, the following rule applies: If Medicare is not reimbursed as required by paragraph (h) of this section, the primary payer must reimburse Medicare even though it has already reimbursed the beneficiary or other party. (2) The provisions of paragraph (i)(1) of this section also apply if a primary payer makes its payment to an entity other than Medicare when it is, or should be, aware that Medicare has made a conditional primary payment. B. Conditional Payments Search Upon written request, the Center for Medicare Services will undertake a conditional payments search to identify any payments made by Medicare of medical bills related to the claimant s alleged injury. The claimant will be required to cooperate and provide signed releases and additional information for Medicare to initiate this search. In approximately 60 to 90 days, Medicare will respond with correspondence identifying the amount of Medicare conditional payments that constitute their Medicare lien. Due to the inherent delay in the conditional payment search process, insurers and litigants should initiate the search very early in the settlement stage of a case. Where Medicare has not made any conditional payments, that information will also be conveyed by correspondence from the Center for Medicare Services. C. Future Medical Expenses The Medicare Secondary Payer Act, 42 USC 1395y(b)(2), applies to primary plans, which are defined as follows: In this subsection, the term primary plan means a group health plan or large group health plan, to the extent that clause (i) applies, and a workmen s compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan) or no fault insurance, to the extent that clause (ii) applies. An entity that engages in a business, trade, or profession shall be deemed to have a self-insured plan if it carries its own risk (whether by a failure to obtain insurance, or otherwise), in whole or in part. 42 USC 1395y(b)(2)(A)(ii). The primary plan s obligation to reimburse Medicare for any conditional payments by Medicare provides: A primary plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made by the secretary E-4

under this subchapter with respect to an item or service if it is demonstrated that such primary plan has or had a responsibility to make payment with respect to such item or service. 42 USC 1395y(b)(2)(A)(ii). With regard to the federal government s subrogation rights under the Medicare Secondary Payer Act, the statute provides: In order to recover payment made under this subchapter for an item or service, the United States may bring an action against any or all entities that are or were required or responsible (directly, as an insurer or self-insurer, as a third-party administrator, as an employer that sponsors or contributes to a group health plan, or large group health plan, or otherwise) to make payment with respect to the same item or service (or any portion thereof) under the primary plan. The United States may, in accordance with paragraph (3)(A) collect double damages against any such entity. In addition, the United States may recover under this clause from any entity that has received payment from a primary plan or from the proceeds of a primary plan s payment to any entity... 42 USC 1395y(b)(2)(A)(iii). The Medicare Secondary Payer Act does not clearly set forth any obligation for a primary plan to protect Medicare s interests for future medical expenses where the primary plan is an auto liability or liability carrier. To date, Medicare has not brought suit pursuant to the Medicare Secondary Payer Act in an attempt to allege a violation for an insurer s failure to fund future medical expenses in a civil settlement. Early litigation as to application of the Medicare Secondary Payer Act to tort claims focused on Medicare s ability to recover their liens (conditional payments) on tort settlements. These actions focused on liens that had arisen from previous conditional payments. No case law exists with regard to any purported obligation to protect Medicare s interests with regard to future medical expenses related to an underlying tort claim. As to the Medicare lien (conditional payments), arguments focused on whether the statutory requirement that the insurer be required to pay promptly under the Act would necessarily exclude tort defendants, as there is no such requirement for prompt payment in a tort context. See U.S. v. Baxter Intern. Inc., 345 F.3d 866 (11th Cir. 2003; In Re: Zyprexa Products Liability Litigation, 451 F.Supp.2d 458 (E.D. NY 2006). Conflicting federal court decisions led to amendments to the Medicare Secondary Payer Act. In 2003, for example, Congress approved the Medicare Modernization Act, P.L. 108-173, 117 Stat. 2066 (2003). Such amendments were intended, in part, to clarify the application of the Medicare Secondary Payer Act to tort liability claims. Surprisingly, however, the issue of whether the Medicare Secondary Payer Act may be properly applied to liability claims (particularly for future medical expenses) has not been litigated since the 2003 amendment. E-5

Several individuals and entities have authored articles with regard to application of the Medicare Secondary Payer Act to personal injury settlements. Some have commented as to whether parties to a liability claim are required to protect Medicare s interest with regard to future medical expenses. The Center for Medicare Services has failed to set forth any official written policy or procedure outlining their position on the issue. Unofficially, CMS has been more forthcoming. This author has personally conferred with representatives of the CMS Chicago Regional Office and has been advised that CMS s position is that the Medicare Secondary Payer Act does require liability insurers and auto liability insurers to protect Medicare s interests with regard to future medical expenses where there is an allocation for future medical as a part of the settlement. Two CMS Regional Offices have stated the following: CMS position is that we expect any funds that are allocated for future medicals to be spent before any claims are submitted to Medicare for payment and the beneficiary will probably be asked about it on the initial enrollment questionnaire that is systems-generated, but, we are not asking that MSA s be established in these cases, nor are we reviewing/approving/denying them. One author has stated: CMS has no current plans or formal process for reviewing and approving liability Medicare Set-Aside arrangements. However, even though no formal process exists, there is an obligation to inform CMS when future medicals are a consideration in reaching a liability settlement, judgment or award as well as any instances where settlement, judgment or award specifically provides for medicals in general or future medicals. John J. Campbell, Preserving Public Benefits in Physical Injury Settlements: Special Needs Trusts and Beyond, at FN 26, Medicare Set-Aside Bulletin, Issue No. 32 (July 10, 2006). In addition, vendors who prepare Medicare Set-Asides and handle submissions to CMS have also taken a position that the Secondary Payer Act applies to future medical expenses in tort claims. Gould and Lamb, LLC, has advised clients of CMS s intention to require Medicare Set- Asides in liability claims and has advertised that it has already done so on numerous occasions and obtained CMS approval in some situations. See http://www.gouldandlamb.com/ liability_primer.html, Williamson v. Thales Geosolutions, Inc., G-03-990, 2007 WL 737475 (S.D. Tex, March 2, 2007). In addition, the Center for Lien Resolution has advised in a June 2004, Medicare Set-Aside Conference that a representative of the Office of General Counsel for the United States confirmed the intention of Medicare to begin enforcing the MSP in liability cases. http://www.thecenterforlienresolution.com/medicaresetaside.html. Prior to 2001, insurers and practitioners were, for the most part, unaware of Medicare s position with regard to protecting Medicare as to future medical expenses through a Medicare Set Aside E-6

Trust. In July 2001, CMS published the Patel Memo setting forth the first written policy with regard to the need to protect Medicare s interests as to future medical expenses in workers compensation settlements. Memo, July 23, 2001, from the Deputy Director of the Purchasing Policy Group (available at: http://www.cms.hss.gov/workerscompagencyservices/ Downloads /72301 Memo.pdf). Since 2001, no less than a dozen additional Memoranda have been issued by Medicare further clarifying and at times changing policies and procedures with regard to future medical expenses in workers compensation claims. Most practitioners expect that CMS will publish Memoranda in the event they begin attempts to actively enforce the Medicare Secondary Payer Act with regard to liability and auto liability claims. As has been seen in the field of workers compensation, it is anticipated that these Memoranda would be generated over time as policy and procedure evolve. As recently as April 2009, this author has been advised by CMS that a Memoranda is are anticipated from CMS addressing future medical expenses on auto liability and liability claims. Frankly, however, such a Memorandum has been anticipated for several years. Does the failure to publish any policy or procedure with regard to future medical expenses in liability claims simply signal a lack of staff to enforce the Act with regard to liability claims? Another issue is whether the Medicare Secondary Payer Act vests the Department of Health and Human Services with recovery rights relative to future medical expenses paid to the plaintiff as a part of a civil settlement. As stated above, the Medicare Secondary Payer Act specifically identifies and addresses previous conditional payments by Medicare but does not specifically set forth rights or obligations with regard to future medical expenses in either workers compensation, auto liability or liability plans. 42 USC 1395y(b)(2). Nevertheless, the Department of Health and Human Services promulgated regulations in the Code of Federal Regulations setting forth the obligations to protect Medicare s interests under the Secondary Payer Act. What stands out is the clear distinction between how workers compensation claims are handled as compared to liability and auto liability claims on the issue of future medical expenses. The Code of Federal Regulations enacted pursuant to the Medicare Secondary Payer Act contains specific provisions with regard to the primary plans obligations to Medicare with regard to settlements involving future medical expenses. 42 CFR 411.46. In addition, as to the beneficiaries responsibilities, the code of federal regulations specifically provides: (b) Except as specified in 411.45(a) Medicare does not pay until the beneficiary has exhausted his or her remedies under workers compensation. (c) Except as specified in 411.45(b), Medicare does not pay for services that would have been covered under workers compensation if the beneficiary had filed a proper claim. USC 42 CFR 411.43. Accordingly, an insurer need not have actual knowledge of the Medicare lien pursuant to the applicable code of federal regulations. Medicare s subrogation rights include the right to sue an E-7

insurer to recover benefits paid out by Medicare that should have been covered by the primary insurer. The Code of Regulations contains no such similar provisions with regard to liability and auto liability claims, 42 CFR 411.40; 411.50. Assuming, arguendo, that CMS has statutory authority to require insurers to protect its interest in future medical expenses, then one must attempt to determine the applicable scope of the CMS policy. As set forth above, CMS s unwritten policy has been to communicate that Medicare must be protected where there is an allocation for future medical expenses in the settlement of a tort claim. It is, in fact, extremely rare that litigants would specifically allocate settlement funds to a plaintiff s particular element of damages. The overwhelming majority of cases are resolved with a lump sum payment for all damages in exchange for a comprehensive release from the plaintiff releasing the tortfeaser from all claims arising out of the alleged occurrence. What constitutes an allocation under such a policy? Black s Law Dictionary simply defines allocation as an assignment or allotment. Jacobsen v. Bowles, D.C. Tex., 53 F.Supp. 532, 534. The term allocate is commonly defined as to apportion for a specific purpose or to particular persons or things; to set apart or earmark. http://www.merriam-webster.com/dictionary /allocate. Applying a plain meaning to CMS s apparent policy suggests that CMS is not asserting that its interests be protected with regard to future medical expenses in the overwhelming majority of tort cases. Simply stated, such tort cases only rarely allocate a specific sum for future medical expenses (specific purpose) or otherwise set apart or earmark such damages. When may such an allocation arise in the settlement of a tort liability claim? The most common examples of settlements involving specific allocations for future medical expenses arise with settlements involving mentally disabled adults or minors. In each such instance, courts will scrutinize the terms of the settlement reached between the insurer and the guardian for the mentally disabled or minor plaintiff. This often requires that elements of damages be itemized for the court. In conclusion, many more questions than answers exist with regard to this issue. Does the Department of Health and Human Services have the authority under the Medicare Secondary Payer Act to require protection from insurers with regard to future medical expenses that otherwise might be covered under Medicare? Will the Department promulgate regulations as to tort and liability settlements as have previously been promulgated with regard to workers compensation settlements? When will the Center for Medicare Services release a formal policy statement as to its position? What is clear is that CMS believes it has the authority to require that auto liability and liability insurers protect Medicare s interests with regard to future medical expenses under the Medicare Secondary Payer Act. E-8

IV. MANDATORY MEDICARE REPORTING REQUIREMENTS A. SCHIP Extension Act The Medicare/Medicaid and SCHIP Extension Act, P.L. 110-173, 121 Stat. 2492, became effective in December 2007. The new statute created mandatory reporting requirements for claims involving Medicare eligible individuals. The statute places specific obligations on group health plans, liability insurers (including self insurance), no fault insurers and workers compensation insurers. These reporting requirements constitute a further effort by Medicare to enforce the Medicare Secondary Payer Act, 42 USC 1395y(b)(2). The reporting requirements will assist Medicare in the enforcement of their liens and further protect Medicare s interests with respect to future medical expenses. Section 111 of the Act contains the new mandatory reporting requirements. Proposed guidelines were first published in the Federal Register, Volume 73 at 45013, on August 1, 2008. CMS then published through their website a supporting statement for the Medicare Secondary Payer (MSP) Mandatory Insurer Reporting requirements... http://www.cms.hhs.gov/mandatory InsRep. It must be noted that the supporting statement is only a proposed guideline and amendments to this proposal continue to appear. These include the March 16, 2009, Medicare Secondary Payer Mandatory Reporting User Guide version 1.0. The entities responsible for complying with the reporting requirements for 111 are referred to as responsible reporting entities (RREs). Responsible reporting entities include, but are not limited to, workers compensation, auto liability and liability insurers. The information provided through the notice will allow CMS to identify primary payers that Medicare s payments would be secondary to. In addition to Medicare claims processing, the information is also acquired for possible MSP recovery actions and identifying claims where Medicare may, in fact, hold a lien for prior conditional payments. Notification to Medicare will be undertaken by the responsible reporting entity and provided to the CMS coordination of benefits contractor (COBC). Technical aspects of the data submission process will be managed by the COBC. B. Responsible Reporting Entities Responsible reporting entities are defined as follows: (F) Applicable plan. In this paragraph, the term applicable plan means the following laws, plans or other arrangements, including the fiduciary or administrator for such law, plan or arrangement: i. Liability insurance (including self insurance). ii. No fault insurance. iii. Workers compensation laws or plans. 42 USC 1395y(b)(8) E-9

Third-party administrators may be contractually assigned to meet the reporting requirements on behalf of insurers or self insureds. Any contractual assignment by the RRE to a third-party administrator does not, however, limit the overall responsibility of the RRE for compliance with the Act. C. Registration RREs are required to register with CMS and begin testing prior to June 30, 2009. Testing will be undertaken through December 31, 2009, and compliance through the production of data will begin in January 2010. D. Triggers to Reporting The responsible reporting entities are to report only with respect to Medicare beneficiaries. If a reported individual is not a Medicare beneficiary or CMS is unable to validate a particular SSN or HICN, then the report will be rejected by CMS. Triggers to the reporting requirement also vary depending upon the type of primary plan (insurance). For liability cases, the trigger will be the settlement, judgment, award or other payment to a Medicare beneficiary. Claims will need to be reported regardless of whether or not there is an admission or determination of liability. Once again, the obligation to report does not exist if the claimant is not a Medicare beneficiary as of the assigned reporting date. Claims involving workers compensation claimants will have an obligation to report when there is an ongoing payment responsibility for medical expenses. Where the RRE has an ongoing responsibility for medical bills, they must report two events: when that responsibility has been assumed and when it has been terminated. The RRE may submit a termination date for ongoing responsibility for medical (ORM) if they acquire a signed statement from the injured individual s treating physician that they will require no further medical services associated with the claimed injuries. MMSEA Section 111 Medicare Secondary Payer Mandatory Reporting User Guide version 1.0, March 16, 2009. E. Reporting Thresholds 1. Medical Expenses Medicare publications refer to the insurer s ongoing responsibility for medicals (ORM). For liability insurance there is no diminumus dollar threshold for reporting the assumption /establishment of ORM. All such claims need to be reported. E-10

For workers compensation claims the ongoing responsibility for medicals are excluded from reporting through December 31, 2010, when all of these criteria are met: a) Medicals only b) Lost time of no more than seven calendar days c) All payment(s) has/have been made directly to the medical provider d) Total payment does not exceed $600. For Illinois workers compensation claims please note that TTD would be paid after the three-day waiting period. 820 ILCS 305/8(b). If payment of TTD is commenced on the fourth day, the claim would not qualify for the exception under subsection (b) above. 2. Total Settlement Medicare publications do not refer specifically to the total amount of settlement but rather to the total payments obligations to the claimant (TPOC). See MMSEA Section 111 Medicare Secondary Payer Mandatory Reporting User Guide version 1.0, March 16, 2009. Reporting thresholds for liability and workers compensation with regard to the total payment obligations to the claimant are as follows: a) For TPOCs dates July 1, 2009 through December 31, 2010, TPOC amounts of $0.00-$5,000.00 are exempt from reporting except as specified in d below. b) For TPOCs dates of January 1, 2011, through December 31, 2011, TPOC amounts of $0.00-$2,000.00 are exempt from reporting except as specified in d below. c) For TPOCs dates of January 1, 2012 through December 31, 2012, TPOC amounts of $0.00-$600.00 are exempt from reporting except as specified in d below. d) Where there are multiple TPOCs reported by the same RRE on the same record, the combined TPOC amounts must be considered in determining whether or not the reporting exception threshold is met. For TPOCs involving a deductible, where the RRE is responsible for reporting both any deductible and any amount above the deductible, the threshold applies to the total of these two figures. CMS Alert for Liability Insurance (including self insurance), no fault, and workers compensation, March 20, 2009. 3. Closed Cases If an insurer has an ongoing responsibility for medical (ORM) that was assumed prior to July 1, 2009 and continued as of that date then the RRE must report this individual. Medicare recognizes, however, that RREs may not have collected necessary data for individuals where responsibility was assumed prior to July 1, 2009. For these individuals an extension allows reporting until October 2010. This extension only applies where the RRE has accepted ongoing E-11

responsibility for medical after July 1, 2009, but the original claim resolution or partial resolution was prior to July 1, 2009. If a claim was actively closed or removed from current claims records prior to January 1, 2009, the RRE is not required to identify and report that ORM under the requirement for reporting ORM assumed prior to July 1, 2009. If, however, this claim is later reopened, it must then be reported. CMS MMSEA Section 111 Medicare Secondary Payer Mandatory Reporting User Guide version 1.0, March 16, 2009. F. Medicare Resources Resources are available through the CMS website with regard to the SCHIP Extension Act and reporting requirements. These resources include links to the MMSEA 111 User Guide as well as Memoranda regarding implementation of 111. http://www.cms.hhs.gov/mandatoryinsrep/downloads/nghpuserguide031609.pdf http://www.cms.hhs.gov/mandatoryinsrep/downloads/nghpinterim120508.pdf http://www.cms.hhs.gov/mandatoryinsrep/03_liability_self_no_fault_insurance_and_workers_c ompensation.asp#topofpage The website contains downloads of the User Guide and Interim Record Layout of December 5, 2008. Additional information can be found at http://www.medicareapproval.com. E-12

Bradford J. Peterson - Partner Brad has spent his entire career with Heyl Royster beginning in 1987, in the Urbana office. He became a partner with the firm in 1997. Brad concentrates his practice in the defense of workers' compensation, construction litigation, auto liability, premises liability and insurance coverage issues. In recent years, Brad has become a leader in the field on issues of Medicare Set-Aside trusts and workers' compensation claims. He has written and spoken frequently on the issue. He was one of the first attorneys in the State of Illinois to publish an article regarding the application of the Medicare Secondary Payer Act to workers' compensation claims: "Medicare, Workers' Compensation and Set-Aside Trusts," Southern Illinois Law Journal (2002). Brad is a member of the Champaign County, Illinois State, and American Bar Associations. He currently serves on the Illinois State Bar Association Assembly and has also served several previous terms. He has also been a member of the ISBA Bench and Bar Section Council and served as its chairman 2000-2001. Currently, he serves as a member of the ISBA Workers' Compensation Council and is past editor of the Workers' Compensation Section Newsletter. Significant Cases West v. Kirkham, 207 Ill. App. 3d 954 (4th Dist. 1991) Recognized that trial court may find plaintiff contributorily negligent as a matter of law. Propst v. Weir, 937 F. 2d 338 (7th Cir. 1991) Application of qualified immunity for university officials in First Amendment Retaliatory Transfer claim. Public Speaking Medicare Set-Asides and the SCHIP Extension Act Illinois State Bar Association Advanced Workers' Compensation Seminar 2008 Medicare Set Aside Issues and Update 22nd Annual HRVA Claims Handling Seminar 2007 Workers Compensation and Medicare Set Aside Proposals Illinois State Bar Association Hot Topics and Workers Compensation 2005 Aggressive and Successful Workers Compensation Defense Strategies for Today s Industrial Commission 19th Annual HRVA Claims Handling Seminar 2004 Professional Associations Champaign County Bar Association Illinois State Bar Association American Bar Association Illinois Association of Defense Trial Counsel Court Admissions State Courts of Illinois United States District Court, Central District of Illinois United States Court of Appeals, Seventh Circuit United States Supreme Court Education Juris Doctor, Southern Illinois University, 1987 Bachelor of Science (with honors), Illinois State University, 1984 Selected Publications "Medicare, Workers' Compensation and Set Aside Trusts," Southern Illinois Law Journal (2002) "Survey of Illinois Law-Workers' Compensation," Southern Illinois Law Journal (1991) E-13 Learn more about our speakers at www.heylroyster.com