Posted on: 10/18/2012
J. Richard Moore, Bleeke Dillon Crandall
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I know what you are thinking. Another hot, dry summer, another MedLaw Update, another article about the Medicare Secondary Payer Act. The wealth of not-necessarily-solicited advice and commentary from lawyers and others regarding the Act and its somewhat vacuous extension of the Center for Medicare and Medicaid Studies (CMS)'s reimbursement rights for medical costs that CMS deems should be paid by liability insurers have been impressive and relentless. With good reason: The vast preponderance of our clients incorporate liability insurance in some form or fashion in managing risk, and those insurers are specifically and directly impacted by CMS's statutory reimbursement rights. And, to put it mildly, the Act creates difficulty for insurers.
The difficulty is not that liability insurers are unprepared or philosophically opposed to reimbursing collateral sources for a claimant's medical expenses. Dealing with private health insurance, workers compensation and hospital liens has historically been a core function of liability claim representatives. However, CMS's reimbursement right is not a mere "lien." A lien obligates the lienholder to do certain things to protect its rights. Further, a lienholder's rights against another liable party may be cut off where the claim is settled. CMS by contrast holds a statutory right of action to be reimbursed by "primary plans"---such as workers compensation or liability insurers---for amounts paid as "provisional payments" by Medicare. Further, CMS's reimbursement right is explicitly unaffected by resolution between the actual parties to the dispute.
These structural difficulties have been compounded by the absence heretofore of specific agency rules promulgated by CMS for how as a practical matter to deal with reimbursement issues, particularly where there is a substantive liability dispute and/or a likelihood of future medical costs. Further, there is wide jurisdictional inconsistency in the approach and responsiveness of CMS and its contractors in dealing with reimbursement. These difficulties place liability insurers in a box. If they fail to take adequate steps to accommodate satisfaction of CMS's reimbursement rights, they face the prospect of a direct claim brought by CMS, with penalties, in the future; but CMS has historically refused to commit or bind itself to any approach that will accomplish the ultimate goal of every liability claim representative, i.e., final file closure, with no further indemnity risk.
Where a claim only involves past medical costs on which Medicare has made conditional payment under the Act, those costs can be directly reimbursed from settlement funds. Where a claim involves the likelihood of substantial future medical costs, the question of whether CMS has reimbursement rights is more complicated. Medicare retains the right under the Act to deny payment for expenses which are "reasonably expected to be made" under a primary plan. If a liability claim is settled, conditional payments are reimbursed, and the claimant thereafter exhausts settlement funds, there will be no funds left from the primary plan to pay for future medical expenses related to the injury at issue. The claimant then presumably looks to Medicare for payment. Medicare may take the position that the primary plan remains responsible for the expenses, and decline to pay. Alternatively, Medicare could conceivably make conditional payments for future medical costs and then seek reimbursement from the primary plan, even though the claim is already settled from the insurer's perspective. Here again is the prospect that an insurer is deemed responsible for payment on a file it considers settled.
However attenuated, the risk articulated above has led some litigants to incorporate a "Medicare Set Aside" (MSA) into settlement of claims involving the likelihood of substantial future medical expenses. In an MSA, some settlement funds are placed in an account dedicated to the payment of medical expenses. CMS has notoriously declined in the past to approve MSAs in liability claims (as opposed to workers compensation claims, where they are widely used with CMS's explicit approval). However, on June 15, 2012, the Department of Health and Human Services issued a notice of advance rulemaking indicating that rules prescribing the use of MSAs in liability cases would be developed as well.
On one hand, this development suggests some predictability and certainty in settling claims involving future medical costs. Claimant attorneys are often resistant to dealing realistically with the issue of past and future Medicare reimbursement issues, on the basis that handling liens is the plaintiff's problem, not the defendants' problem. Unfortunately, the Medicare Secondary Payer Act. 42 U.S.C. §1395y(b)(2), is very explicit: CMS's reimbursement right is a problem for both plaintiffs and liability insurers. Liability insurers are "primary plans," their obligation to pay is demonstrated by judgment or payment under a release, and Medicare is entitled to bring an action against "all entities that are required or responsible…to make payment" if reimbursement for Medicare's provisional payments are not made---including "primary plans." The availability of CMS rules sanctioning the use of MSAs may provide a safeharbor that currently does not exist with respect to future medical expenses, and would provide a more concrete way to demonstrate to claimants' counsel that such steps are necessary for the protection of all parties.
On the other hand, overt approval of the use of MSAs seems likely to generate other uncertainties. MSAs work reasonably well in the workers compensation context, which does not involve determination of fault. By contrast, liability cases do---and American jurisdictions determine fault in diverse ways. Settlement decisions in liability cases are influenced just as much if not more by fault assessment as by extent or cost of injury. Fault assessment already complicates dealing with conditional payments. Explicitly importing a requirement that a portion of settlement also be set aside for uncertain future medical expenses will even further complicate the settlement negotiation process where serious questions of liability exist.
Another interesting question is whether a liability insurer's payment of policy limits shields it from any responsibility for future payments. The Medicare Secondary Payer Act deems primary payers to be those from whom medical expenses have been made or can reasonably be expected to be made under a workmen's compensation law, a "plan of the United States or a State," or under an automobile or other liability insurance policy. Certainly for liability insurers this definition incorporates the concept of the insured's liability; but it also necessarily encompasses the issue of coverage under the policy. If a primary plan pays the entirety of its available coverage to a claimant, there is by definition no coverage left to pay future claims. Arguably, then, the liability insurer is no longer a primary plan under the Secondary Payer Act, as there is no reasonable expectation that remaining funds are available under the policy. Payment of policy limits, as a practical matter, may well relieve a liability insurer of the prospect of liability on any claim for reimbursement for future medical costs---including any such claim by CMS.
While this analysis stands to reason, CMS's broad reimbursement right against primary plans under the Act gives pause to liability insurers even where they are considering an offer of policy limits. Some insurers are genuinely concerned that CMS may retrospectively view payment of policy limits to a catastrophically injured claimant who then fails to retain sufficient funds for future medical costs as failure to "satisfy Medicare's interest" with respect to future medical expenses. It is a testament to the coercive influence of the Secondary Payer Act that even exhaustion of a policy may not provide satisfactory assurance that an insurer has satisfied its responsibility as a primary payer. Approval of MSAs in liability claim settlements does seem likely to reduce Medicare payouts, thereby achieving, at a high cost for litigants, the Act's chief goal. However, approval of rules authorizing MSAs seems even more likely to lead insurers towards increasingly complicated and costly procedures in an attempt to buy peace.
J. Richard Moore
Bleeke Dillon Crandall