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MEDICARE SET‐ASIDES AND CONDITIONAL PAYMENTS UPDATE 

Presented and Prepared by: Bradford J. Peterson

bpeterson@heylroyster.com Urbana, Illinois • 217.344.0060

Prepared with the Assistance of: Joseph K. Guyette

jguyette@heylroyster.com Urbana, Illinois • 217.344.0060

Heyl, Royster, Voelker & Allen PEORIA • SPRINGFIELD • URBANA • ROCKFORD • EDWARDSVILLE • CHICAGO

© 2013 Heyl, Royster, Voelker & Allen

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MEDICARE SET-ASIDES AND CONDITIONAL PAYMENTS UPDATE I. MEDICARE SET-ASIDES ARE ON THE HORIZON IN PERSONAL INJURY LITIGATION ........ E-4

A. Option One ...................................................................................................................................... E-6 B. Option Two ...................................................................................................................................... E-6 C. Option Three ................................................................................................................................... E-7 D. Option Four ..................................................................................................................................... E-7 E. Option Five ...................................................................................................................................... E-7 F. Option Six......................................................................................................................................... E-8 G. Option Seven .................................................................................................................................. E-8

II. POTENTIAL CONFLICTS BETWEEN CMS LIABILITY REGULATIONS AND STATE TORT LAW PRINCIPLES: ............................................................................................................... E-9

III. MEDICARE SET-ASIDE ARRANGEMENTS, FUNDING AND ADMINISTRATION ..................... E-9

IV. CASE LAW UPDATE .................................................................................................................................. E-10

A. Medicare’s Refusal to Compromise Conditional Payments Runs Contrary to the Public Policy in Favor of Settlements.................................................. E-10

B. Conditional Payments Claim by CMS Attaches to Settlement of Wrongful Death Claim Where Medical Expenses are an Element of Damages ................................................................................................................. E-11

C. Where Medical Expense is Not an Element of Damage in Wrongful Death Action Conditional Payments Lien Does Not Attach ...................................... E-12

D. Sixth Circuit Fails to Apply Comparative Fault Principles to CMS’ Conditional Payments Claim .................................................................................................. E-12

E. Attorney’s Fees Allowed on Portion of Settlement Allocated for Liability Medicare Set-Aside Account ................................................................................. E-14

F. Court Approves Liability Medicare Set-Aside as Reasonably Protecting Medicare’s Interests ............................................................................................ E-14

G. Court Approves Medical Benefits Class Action Settlement Recognizing Obligation to Satisfy Conditional Payments and Protect Medicare as to Future Medical Expense ............................................................ E-14

H. Court Requires Plaintiff’s Disclosure of Information Necessary for SCHIP Reporting ......................................................................................................................... E-15

I. Court Refuses Attempt to Discount Conditional Payments Claim Based on Compromise Nature of Settlement ................................................................. E-15

J. Insurer Did Not Act in Bad Faith by Placing Medicare on Settlement Draft ....... E-15 K. Court Rejects Defendant’s Attempt to Require a Medicare Set-Aside

as an Element of Settlement. ................................................................................................. E-16

V. MMSEA SECTION 111 REPORTING .................................................................................................... E-16

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VI. MEDICARE OFFERS FIXED PERCENTAGE SETTLEMENT OPTION TO RESOLVE MEDICARE’S REIMBURSEMENT RIGHTS ........................................................................................... E-17

VII. THE SMART ACT ........................................................................................................................................ E-18

A. Medicare Reforms Become Law ........................................................................................... E-18 B. Determination of Conditional Payment Amount

(Effective 9 Months After Enactment) ................................................................................ E-18 C. Reconsideration of Conditional Payment Amount ........................................................ E-18 D. Appeal

(Effective Upon Enactment) .................................................................................................... E-19 E. Threshold Excluding Conditional Payment Reimbursement

(Effective January 1, 2014) ...................................................................................................... E-19 F. SCHIP Reporting Fines and Penalties

(Effective Upon Enactment) .................................................................................................... E-19 G. Three Year Statute of Limitations

(Effective 6 Months After Enactment) ................................................................................ E-19 H. Social Security and HIC Numbers

(Effective 18 Months After Enactment) .............................................................................. E-19 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.

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MEDICARE SET-ASIDES AND CONDITIONAL PAYMENTS UPDATE I. MEDICARE SET-ASIDES ARE ON THE HORIZON IN PERSONAL INJURY LITIGATION

The Medicare Secondary Payer Act was intended to insure that Medicare was not making payments for medical expenses when other insurance was available. In 1980 Congress also passed the Omnibus Reconciliation Act which expanded Medicare’s Secondary Payer status and right to reimbursement for conditional payments to include liability, auto liability and no fault insurance. Early efforts to apply the Medicare Secondary Payer Act to liability policies were rejected by the Courts, Thompson v. Goetzmann, 337 F.3d 489 (5th Cir. 2003), In re Orthopedic Bone Screw Products Liability Litigation, 202 F.R.D. 154 (E.D. Pa. 2001), Fanning v. United States, 346 F.3d 386 (3d Cir. 2003). In many instances the courts found that liability insurers were not required to “pay promptly” as required under the Act and, therefore, liability insurers were not subject to making reimbursement to Medicare. The issue of whether liability settlements must also protect Medicare’s interests with regard to future medical expense became a focus of attention when Congress enacted the Medicare and Medicaid SCHIP Extension Act of 2007, 42 U.S.C. 1395y(b)(7) & (8) (2008). The statute created mandatory reporting requirements for claims involving Medicare eligible individuals. Although implementation has been delayed for several years, liability insurers are now required to report to CMS those liability settlements involving Medicare eligible individuals. Beginning January 1, 2012, liability insurers were required to report settlements over $100,000. That threshold was reduced to $50,000 effective April 1, 2012, and was further reduced to $25,000 as of July 1, 2012. As of October 1, 2012, there was no longer a threshold and, therefore, all liability settlements involving Medicare eligible claimants will be reported. The relevance of SCHIP to the Medicare Secondary Payer Act is that Medicare will now have a mechanism in place with which to identify all liability settlements involving Medicare eligible individuals. Reporting requirements under SCHIP will specifically allow Medicare to not only identify the liability settlements and settlement amounts but also the nature of the injury for which compensation has been paid. With this information, Medicare will then be able to determine whether future medical expenses should be satisfied by Medicare or potentially deny future medical expense for the injury that was the subject matter of the liability settlement. The reporting requirements under SCHIP were implemented a year earlier in workers’ compensation claims than in liability claims. The Center for Medicare and Medicaid Services (CMS) is now using the SCHIP data to determine whether a beneficiary is submitting to Medicare medical expenses related to the previous workers’ compensation settlement. Where CMS determines that a medical bill relates to a previous workers’ compensation settlement they are denying Medicare coverage for those Medicare expenses. As Medicare continues to collect SCHIP reporting data on liability claims, it is plausible that they will take the same approach with regard to liability settlements. It is foreseeable that Medicare may deny medical treatment in the

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future for conditions/injuries that were the subject matter of a liability settlement or judgment as was identified and reported under SCHIP. The Medicare Secondary Payer Act does not specifically address future medical expenses in either a workers’ compensation or liability context. Ambiguity with regard to parties’ obligations under the Medicare Secondary Payer Act is clarified when one looks at various pronouncements by Medicare. Although they do not have the force of law, they certainly provide insight as to CMS’ interpretation of the Act. CMS Memoranda make it clear that CMS interprets the Medicare Secondary Payer Act to require parties to a liability settlement to protect Medicare’s interests with respect to future medical expense. Unlike workers’ compensation, CMS has not promulgated regulations specifically raising or identifying any such duty. CMS has, however, promulgated such regulations regarding workers’ compensation claims. 42 C.F.R. 411.40-411.47. Although similar regulations have not been enacted with respect to liability cases, the Medicare Secondary Payer Manual was amended to include a definition for liability Medicare Set-Asides, Medicare Secondary Payer Manual, Chapter 1, § 20. The manual defines Set-Aside arrangements to include “liability and no-fault cases.” The manual further provides that there “should be no recovery of benefits paid for services rendered after the date of a liability settlement.” Medicare Secondary Payer Manual Chapter 7, Contractor MSP Recovery Rules, § 50.5 (2009). Therefore, these provisions can be read to suggest that CMS believes there is a general obligation to protect Medicare’s interests with regard to future medical expenses and that such protection can be provided through the use of a liability MSA. On June 15, 2012, the Federal Register published proposed regulations from Medicare with regard to “future medicals” and the settlement of liability and auto liability claims. These proposed regulations have been anticipated for quite some time. In 1994 the Department of Healthcare & Human Services adopted regulations with regard to workers’ compensation claims. This lead to what is commonly known as Medicare Set-Aside accounts. Until June 15, Medicare had not attempted to promulgate any such regulations with regard to liability and auto liability claims. In fact, one of the arguments as to why we may not need to do Medicare Set-Asides in liability cases is the fact that regulations have never been promulgated. That, of course, is about to change. CMS has maintained for many years that we had a duty to protect Medicare’s interests with regard to future medical expense under the Medicare Secondary Payer Act. It is therefore clear that these proposed regulations do not create a new duty but rather provide standards and procedures to meet an existing duty under the Medicare Secondary Payer Act. Ultimately, it is anticipated that the scope of the Medicare Secondary Payer Act with regard to future medicals and liability claims will be litigated. The Medicare Secondary Payer Act does not specifically refer to any obligation as to protecting Medicare with regard to future medical expense. CMS, however, has interpreted the Medicare Secondary Payer Act as, in fact, requiring protection of Medicare as to future injury-related medical expenses. The CMS interpretation of the Medicare Secondary Payer Act is stated in the proposed rules.

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The proposed regulations as published in the Federal Register set forth seven options by which settling parties may protect Medicare’s interests with regard to future medical expenses. Which options are available in a particular claim will depend upon whether the claimant is a current Medicare beneficiary or an individual who is not yet Medicare eligible. Note that under the workers’ compensation standard the “future beneficiaries” are those persons with an expectation of Medicare enrollment within 30 months. An expectation of Medicare enrollment within 30 months exists where the claimant has applied for Social Security Disability, applied for Social Security Disability and been denied, is 62 ½ years of age or older, claimant has end stage renal disease or Lou Gehrig’s disease. Options one through four are available to both current beneficiaries as well as claimants who are not yet Medicare beneficiaries. Options five through seven are only available for current Medicare beneficiaries.

A. Option One

Beneficiary chooses to pay for all related future medical care until settlement is exhausted. Note that this is a position Medicare has maintained for several years. That if a Medicare Set-Aside is not used in a liability settlement the Medicare beneficiary should spend the entirety of their settlement on future medical care arising from the claim that would otherwise be covered by Medicare. Once settlement funds are exhausted Medicare will begin covering injury related expenses. Beneficiary may solicit from CMS a compromise or waiver of recovery. Comment: It is unclear whether this option is an attempt to accommodate cases in which there is a substantial compromise settlement of the liability claim. Traditionally, in workers’ compensation, we have had to fund the entire amount of future medical expense even where there is substantial compromise of the underlying workers’ compensation claim. This may be an attempt by Medicare to show a more reasonable approach to expedite disposition of settlements involving substantial compromise and account for issues of comparative fault. There will be substantial comment provided with regard to the proposed regulations. The period for public comment ended August 14, 2012. While these are only proposed regulations at this juncture, it can reasonably be anticipated that the final regulations will retain substantial elements of the proposal.

B. Option Two

Medicare will not pursue future medicals if all of the following conditions are met; a)

the accident, illness or injury occurred one year or more before the date of settlement; claim did not involve chronic illness nor major trauma;

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claimant does not receive additional settlements and there is no corresponding workers’ compensation or no fault insurance claim;

or, b)

settlement is less than a defined amount (to be determined); claimant is not a current beneficiary at the time of settlement; claimant does not expect to become a beneficiary within 30 months; claim does not involve chronic illness or major trauma; beneficiary does not receive additional settlements; claimant does not have a corresponding workers’ compensation or no fault insurance

claim. Comment: Note that this standard is broader than that used in workers’ compensation claims. In workers’ compensation claims, Medicare Set-Asides are only used when the claimant is either a beneficiary or has a reasonable expectation of Medicare enrollment within 30 months. Under Option 2(b), it is implied that there would be a duty to protect Medicare’s interests even if there is not an expectation of Medicare enrollment within 30 months in those cases involving chronic illness and major trauma.

C. Option Three

A) Before settlement; where physician attests that the claimant has completed treatment and that future medical care related to the settlement is not expected, then no duty to further protect Medicare’s interests regarding future medical expense; B) After settlement; where treating physician attests that treatment has been completed and future treatment is not anticipated then Medicare will limit its recovery to conditional payments prior to settlement and medical expenses incurred between the date of settlement and the date of completion of care.

D. Option Four

The individual/beneficiary submits a proposed Medicare Set-Aside arrangement (MSA) to CMS for their review and CMS approves the proposed Medicare Set-Aside arrangement.

E. Option Five

The beneficiary participates in one of Medicare’s “recovery options.” Those include:

Settlement of $300 or less and beneficiary does not expect to receive additional settlements;

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Fixed payment options; settlement of $5,000 or less and beneficiary does not expect to receive additional settlements related to the incident. Medicare will be protected by paying Medicare 25 percent of the gross settlement amount;

Self-calculated conditional payment option. If physical trauma based injury occurred six months prior to election of this option and settlement is $25,000 or less the claimant can select a self-calculation option to identify the amount necessary to protect Medicare’s interests as to future medical expense.

Comment: The self-calculation formula is not set forth in the proposed rules but has been previously identified by CMS in Memoranda.

F. Option Six

Upfront Payment: A) If ongoing responsibility for medicals exists and medicals are calculated through the life of the beneficiary or life of the injury, then Medicare may accept an upfront lump sum payment for the calculated cost of all future medical care. B) If the beneficiary obtains a settlement and an ongoing responsibility for medicals was not imposed or accepted by the defendant, then the beneficiary may elect to make an upfront payment to Medicare in the amount of a specified percentage of the beneficiary proceeds. Comment: The calculation would essentially be the total dollar amount of settlement minus attorney’s fees, procurement costs, conditional payments and out-of-pocket medical expense.

G. Option Seven

Compromise or Waiver of Recovery: Beneficiary may solicit from CMS a compromise or waiver of recovery. Comment: It is unclear whether this option is an attempt to accommodate cases in which there is a substantial compromise settlement of the liability claim. Traditionally in workers’ compensation we have had to fund the entire amount of future medical expense even where there is substantial compromise of the underlying workers’ compensation claim. This may be an attempt by Medicare to show a more reasonable approach to expedite disposition of settlements involving substantial compromise and account for issues of comparative fault.

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II. POTENTIAL CONFLICTS BETWEEN CMS LIABILITY REGULATIONS AND STATE TORT LAW PRINCIPLES:

One of the primary concerns with CMS requiring liability MSAs is the failure of the CMS proposed regulations to accommodate various issues of state tort law principles. State law regarding comparative fault often has a substantial impact on the settlement and verdict value of a personal injury case. The proposed regulations by CMS regarding liability MSAs fail to recognize and accommodate the compromise nature of most personal injury liability settlements. Cases are frequently settled for substantially less than full value. This includes compromise with regard to future medical expense. The current proposed rules would create a substantial impediment to settlement of personal injury claims where compromise is necessary based on issues of disputed negligence and comparative fault. Without such an accommodation by CMS the proposed regulations, if enacted, would have a chilling effect on personal injury settlements. The current proposed regulations would set forth standards that appear contrary to the public policy in favor of settlements. Due process concerns also arise under the proposed regulations. In workers’ compensation, CMS has not provided any procedural means by which parties may review or appeal the rejection of a proposed Medicare Set-Aside allocation. Workers’ compensation MSAs are often rejected by CMS and returned with a finding by CMS that a higher allocation is required. Parties are left with a “take it or leave it” approach by CMS and have no legal means through which to challenge CMS’ determination. Due process requires that CMS include administrative review rights as a part of any policy or procedure regarding personal injury MSAs. III. MEDICARE SET-ASIDE ARRANGEMENTS, FUNDING AND ADMINISTRATION

The amount of a Medicare Set-Aside should be an amount sufficient to pay for all reasonably anticipated and causally related medical bills for the life expectancy of the claimant, Patel Memorandum: http://www.cms.hhs.gov/WorkersCompAgencyServices/Downloads/72301Memo.pdf. Funding should be based upon Medicare covered amounts for such future medical expenses, Walters Memorandum: http://www.cms.hhs.gov/WorkersCompAgencyServices/Downloads/52008Memo.pdf Where an MSA is properly funded and expenses are properly paid out and accounted for then Medicare will cover injury-related medical expenses when the MSA is exhausted. This applies regardless of whether the MSA is funded entirely up front with a lump sum or is partially funded with future periodic payments.

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Where an MSA is funded with future payments through an annuity or structured settlement, the MSA will initially be funded with “seed money” representing the first two years of medical expense which would otherwise be covered by Medicare. Future annuity payments would then be paid into the MSA for the petitioner’s life expectancy. If the MSA funds are exhausted during a given year and prior to the next annuity payment, Medicare will pay injury-related expenses until the next annuity payment is made. MSAs can either be administered by the claimant or a professional administrator. Where self administered, it is important for the claimant to have an understanding of the accounting and reporting requirements for the MSA. If MSA proceeds are inappropriately spent, Medicare will deny coverage until such funds are replaced in the MSA and properly expended and accounted for. MSA funds must be placed in an interest-bearing account that is separate from any other personal or checking account. If the claimant has a reasonable expectation of Medicare enrollment within 30 months, but is not yet a Medicare beneficiary, they cannot use MSA funds for injury-related expenses until they become a Medicare beneficiary. In addition, MSA funds can only be used for those expenses that would otherwise be covered by Medicare. Claimants who have questions as to whether a medical item or service is covered under Medicare may consult with Medicare by contacting 1-800-Medicare. The administrator of the MSA account will be responsible for properly accounting for MSA funds. The administrator must annually account and attest that payment from the MSA account was only made for injury-related expenses that would otherwise be reimbursable by Medicare. The annual accounting is provided to the CMS lead Medicare contractor and shall continue until the MSA account is depleted. Very limited administrative expense items can be deducted from the MSA. Administrative fees that can be deducted from the MSA include photocopy charges, mailing and postage as well as bank fees. Where the MSA is administered by a professional administrator or a trustee or custodian, the professional fees associated with administration may not be deducted from the MSA. IV. CASE LAW UPDATE

A. Medicare’s Refusal to Compromise Conditional Payments Runs Contrary to the Public Policy in Favor of Settlements

Bradley v. Sebelius, 621 F.3d 1330 (11th Cir. 2010) represents a potentially important decision concerning Medicare conditional payments (liens). Medicare (CMS) occasionally takes the position that it will not compromise its conditional payments – even if the end result would be Medicare taking all of the settlement (minus attorney’s fees). In Bradley v. Sebelius, CMS took just such a position. The court of appeals, however, took exception and affirmed a substantial reduction in the conditional payments lien.

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In Bradley, the probate court was asked to apportion the settlement amount between Medicare and non-Medicare beneficiaries. The settlement amount was substantially less than the potential full value of the claim. The probate court effectively reduced the Medicare lien from $38,875.08 to $787.50. Medicare refused to accept the probate court’s ruling. After the estate exhausted administrative remedies, the decision was appealed to the federal district court. The district court reversed, relying, in part, upon arguments by Medicare that pursuant to the Medicare Field Manual, its conditional payment lien was not subject to compromise based on allocation of fault. On appeal, the Eleventh Circuit reversed the district court, noting “[h]istorically, there is a strong public interest in the expeditious resolution of lawsuits through settlement.” Bradley, 621 F.3d at 1339. The court stated: “The Secretary’s position would have a chilling effect on settlement. The Secretary’s position compels plaintiffs to force their tort claims to trial, burdening the court system. It is a financial disincentive to accept otherwise reasonable settlement offers. It would allow tortfeasors to escape responsibility.” Id. The court further found that Medicare’s reliance on its field manual was unpersuasive, pointing out that Medicare policies and manuals are not “law” and would not be given deference under the Chevron Doctrine. The Bradley case is particularly noteworthy because the Eleventh Circuit stated that Medicare cannot take an unreasonable position with regard to their liens that would thwart the public policy in favor of settlements. This case will likely be widely cited in future efforts seeking compromise of Medicare conditional payments. The public policy analysis used by the court in Bradley could also be extended to civil cases where the parties choose to use a Medicare Set-Aside for future medical care. If a defendant wants to use a Medicare Set-Aside to protect itself from further claims by Medicare under the Medicare Secondary Payer Act, this case could provide a basis upon which to formulate a compromise value of the MSA. If, for example, the plaintiff reasonably appears to be 30 percent at-fault and the case is settled for 70 cents on the dollar with an MSA for future medical expense, the MSA could reasonably be reduced by 30 percent under the analysis employed in Bradley. Under that scenario, a good faith hearing should be held requesting the court to enter an order apportioning/compromising the MSA to a reasonable amount given the facts and circumstances of the case. While we are in uncharted territory with regard to use of Medicare Set-Aside accounts in civil cases, the Bradley decision suggests that the judiciary will not hesitate to impose practical solutions to facilitate equitable settlements. In other words, this holding is a very positive development since it may result in more prompt resolution of compromised claims.

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B. Conditional Payments Claim by CMS Attaches to Settlement of Wrongful Death Claim Where Medical Expenses are an Element of Damages

In Benson v. Sebelius, 771 F. Supp. 2d 68 (D.C. Cir. 2011), the plaintiff in a wrongful death action sought a court declaration that CMS was not entitled to recovery of conditional payments from a wrongful death settlement. The wrongful death settlement included a claim for medical expenses under state law. The court held that Medicare was entitled to reimbursement of its conditional payments from the proceeds of settlement. The court noted that the settlement of the wrongful death action expressly included satisfaction of medical expenses of the decedent. The court distinguished Bradley v. Sebelius 621 F.3d 1330 (11th Cir. 2010) noting that in Bradley there was a specific allocation between medical and non-medical elements of the settlement and as such CMS’ recovery of conditional payments was limited to the amount of the settlement that was allocated to the estate as opposed to those settlement funds allocated to compensate beneficiaries. Accordingly, parties to a settlement where conditional payments exist should negotiate as an element of settlement an allocation between medical and non-medical elements of the settlement. In states such as Illinois, that would involve an allocation between the wrongful death elements of settlement (non-medical) and the survival action which contain claims for medical expense.

C. Where Medical Expense is Not an Element of Damage in Wrongful Death Action Conditional Payments Lien Does Not Attach

In Hall v. United Security, 2012 IL App (1st) 112158-U, an unpublished decision, the plaintiff brought an Illinois wrongful death action arising out of the death of his mother. The court addressed whether a Medicare conditional payments claim would attach to the wrongful death settlement. The court noted that under the Illinois Wrongful Death Act damages are limited to a survivor’s grief, sorrow and mental suffering. The plaintiff did not bring a survival action or seek damages relating to the decedent’s medical expenses. As such, the court held that Medicare’s lien did not attach to the settlement and Medicare need not be placed on the settlement draft as a payee.

D. Sixth Circuit Fails to Apply Comparative Fault Principles to CMS’ Conditional Payments Claim

In Hadden v. United States, 661 F.3d 298 (6th Cir. 2011), the plaintiff, Vernon Hadden, was struck by a utility vehicle belonging to Pennyrile Rural Electric Cooperative that swerved to avoid a vehicle that ran a stop sign. The driver of the vehicle that ran the stop sign was never identified. Hadden brought suit against Pennyrile for bodily injury. Ultimately, Hadden and Pennyrile settled the case for $125,000. Hadden’s counsel asserted that the settlement amount was approximately 10 percent of the total value of the claim and that the missing driver of the vehicle that ran the stop sign was 90 percent negligent.

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The Center for Medicare and Medicaid Services asserted a conditional payments claim for $62,338.07. Hadden’s counsel sought a compromise and waiver or reduction of the conditional payments amount from CMS. CMS refused to compromise the amount of its claim. Plaintiff’s counsel argued that Hadden’s recovery was reduced under applicable comparative fault principles and that CMS’ claim for conditional payments should be similarly reduced. CMS and the Department of Health and Human Services rejected the request for compromise and waiver. CMS pointed out that recoveries under the Medicare Secondary Payer Act did not account for state tort law. Hadden’s counsel exhausted administrative appeals and ultimately filed suit in the federal district court for the Western Division of Kentucky. The district court rejected Hadden’s arguments and noted that the underlying personal injury claim against Pennyrile Rural Electric had not proceeded to trial and accordingly the allocation of fault was purely speculative. On appeal, the Sixth Circuit Court of Appeals affirmed the district court and allowed Medicare to recover 100 percent of its claimed conditional payments demand relying upon what the court deemed to be the “plain language” of the Medicare Secondary Payer Act 42 U.S.C. 1395y(b)(2)(B)(ii). The Medicare Secondary Payer Act provides, in part:

[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 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 . . .

The Hadden court found that a settlement through a primary plan (liability policy) demonstrates “responsibility” under the Medicare Secondary Payer Act thereby entitling Medicare to recover its full conditional payment amount notwithstanding that a settlement is for a compromised or reduced amount. The court concluded that since Hadden received the full amount of his medical expenses from the defendant, he was therefore responsible to reimburse Medicare for the full amount of the conditional payments. The court further rejected Hadden’s argument that the conditional payment amount should be reduced based on equitable allocation principles. Hadden argued that principles of comparative fault resulted in a compromise settlement and those same principles should be equitably applied to the conditional payments amount. Such principles had previously been applied by the U.S. Supreme Court in Arkansas Dept. of Health and Human Svcs. v. Ahlborn, 126 S.Ct. 1752 (2006) in the context of a lien by Medicaid. The Hadden decision will potentially have a chilling effect on settlements. Settlement may be particularly problematic where Medicare pays a substantial sum in medical expense yet the settlement value of the claim is substantially compromised based upon issues of liability and comparative fault. Similar difficulties may be encountered where there are substantial medical bills and a $100,000 liability limit under the liability policy. In such instances, litigants should

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argue that the principles of Bradley v. Sebelius, 621 F.3d 1330 (11th Cir. 2010) justify a reduction and compromise in the conditional payments amount. The 11th Circuit’s decision in Bradley and the 6th Circuit’s decision in Hadden stand in partial conflict and undoubtedly additional circuits will be weighing in.

E. Attorney’s Fees Allowed on Portion of Settlement Allocated for Liability Medicare Set-Aside Account

In Hinsinger v. Showboat Atlantic City, 18 A.3d 229 (N.J. Super. 2011), a plaintiff’s attorney filed a motion for attorney’s fees from the amount allocated toward a liability Medicare Set-Aside trust after the trial and award in a civil action. The parties allocated the sum of $180,600 toward a Medicare Set-Aside trust. The plaintiff’s attorney sought attorney’s fees on that portion of the settlement. The court noted that the Code of Federal Regulations at 42 C.F.R. 411.37 allows for a reduction in conditional payment amounts for the cost of procurement (including attorney’s fees). Although 42 C.F.R. 411.37 does not specifically address future medical expenses and Medicare Set-Aside accounts, the court found that section instructive. The court, therefore, allowed the Medicare Set-Aside trust to be reduced by the claimed attorney’s fees.

F. Court Approves Liability Medicare Set-Aside as Reasonably Protecting Medicare’s Interests

In Cribb v. Sulzer Metco (US) Inc., No. 4:09-CV-141-FL, 2012 WL 4787462 (E.D. N.C. Sept. 5, 2012), the plaintiff brought an uncontested motion before the court to approve a settlement with an allocation for a Medicare Set-Aside in the amount of $4,330. Upon conducting an evidentiary hearing, the court found the allocation for future medical expense to be reasonable and approved the allocation for the Medicate Set-Aside account. The court pointed out that CMS provides no procedure through which parties can determine whether an allocation sufficiently protects Medicare’s interests as to future medical expense. The court noted that there is a strong public policy in favor of settlements and proceeded to approve the allocation.

G. Court Approves Medical Benefits Class Action Settlement Recognizing Obligation to Satisfy Conditional Payments and Protect Medicare as to Future Medical Expense

The Federal District Court for the Eastern Division of Louisiana recently approved a settlement involving medical benefits for class members arising out of the Deepwater Horizon drilling disaster, In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, No. MDL 2179, 2013 WL 144042 (E.D. La. 2013). Objections had been raised by class members with regard to the need to protect Medicare’s interests regarding conditional payments as well as future medical expense. In approving the settlement, the court noted that Medicare was entitled to reimbursement from the settlement fund for conditional payments pursuant to the Medicare Secondary Payer Act. More importantly, the court specifically addressed the issue of future medical expense and protecting Medicare by noting that the Center for Medicare and Medicaid Services has proposed regulations regarding “future medicals” in the settlement of

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liability claims. The court noted that Medicare must be protected with respect to future medical expenses citing Medicare’s advanced notice of proposed rulemaking as published in the Federal Register in June 2012. In addition, the court noted that the settlement agreement was also properly designed to protect beneficiaries and the proposed rights of insurers under the Medicare Advantage and Medicare Prescription Drug (Part D) Plan.

H. Court Requires Plaintiff’s Disclosure of Information Necessary for SCHIP Reporting

In Libby v. Lake, No. 2:11-CV-152-JAW, 2012 WL 2921836 (D. Me. July 13, 2012), defendants insisted, as a part of settlement, that the plaintiffs provide information necessary in order to perform a Medicare query to ascertain the plaintiff’s Medicare status. They pointed out that the query was necessary in order to determine whether the claim was reportable under the Section 111 SCHIP reporting requirements. Plaintiffs objected arguing that the plaintiff was not eligible for Medicare and was not a Medicare beneficiary. Notwithstanding, defendants required that the information be provided including the plaintiff’s Social Security number etc., so that they could verify the Medicare status through a Medicare query. The court agreed with the defendants and found that the requested information was both legitimate and appropriate. The court noted that the insurer was required by law to report payments to CMS or otherwise be subjected to potential penalties. The court specifically noted that CMS required the insurers to determine the plaintiff’s Medicare status and the plaintiff’s refusal to provide the requested information was unreasonable.

I. Court Refuses Attempt to Discount Conditional Payments Claim Based on Compromise Nature of Settlement

In Mason v. Sebelius, No. 11-2370 (JBS/KMW), 2012 WL 3133801 (D. N.J. Jul. 31, 2012), the plaintiff sought to recover, in part, disputed reimbursement for conditional payments that had been paid under protest in 2009. The plaintiff argued that reimbursement to Medicare was disproportionate to the total recovery received in the tort action. The plaintiff relied, in part, upon the United States Supreme Court’s decision in Arkansas Dept. of Human Svcs. v. Ahlborn, 126 S. Ct. 1752 (2006). The court refused to follow the Ahlborn precedent noting that the Ahlborn case was decided based upon construction of specific language under the Medicaid statute. The court found that although the plaintiff may have settled for less than his actual damages, Medicare was not required to accept a reduced amount in satisfaction of its conditional payments lien.

J. Insurer Did Not Act in Bad Faith by Placing Medicare on Settlement Draft

In Porter v. Farmer’s Ins. Co., Inc., No. 10-CV-116-GKF-PJC, 2012 WL 256014 (N.D. Okla. Jan. 27, 2012), Aff’d 2012 WL 6554760, an insured brought an uninsured motorist claim against its insurer, Farmer’s Insurance Company. When settled Farmer’s Insurance Company issued a three party check payable to the plaintiff, plaintiff’s counsel and Medicare. Ultimately, it was established that Medicare was not asserting a subrogation claim and did not have a conditional

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payments claim and, therefore, Farmer’s agreed to reissue the draft without being payable to Medicare. Plaintiff then brought a bad faith and breach of contract action against Farmer’s Insurance asserting that Farmer’s improperly issued the original draft with Medicare as a payee. The district court disagreed, finding that it was not bad faith and noting that the laws and regulations regarding reimbursement to Medicare have harsh consequences for insurers. They also noted that there was confusion with regard to communications with Medicare as to whether they had a subrogation claim or conditional payments lien. On appeal, the court of appeals affirmed noting that Farmer’s acted reasonably and had a legitimate concern with regard to protecting Medicare’s interests.

K. Court Rejects Defendant’s Attempt to Require a Medicare Set-Aside as an Element of Settlement

In Sipler v. Trans Am Trucking, Inc., 881 F. Supp. 2d 635 (D. N.J. 2012), a settlement was reached in a personal injury action and the defendant presented the plaintiff with a release that, in part, established a Medicare Set-Aside with a portion of the settlement proceeds. Plaintiff objected and brought an action to enforce the settlement. The federal district court found that there was no federal law requiring Medicare Set-Asides in personal injury settlements. Although the court noted that Medicare Set-Asides are prudent in the context of workers’ compensation claims they are unworkable in the personal injury context. The court noted that it would be unduly burdensome to require that parties apportion future medical expense in personal injury settlements. The court further found that requiring a Medicare Set-Aside would frustrate the public policy in favor of settlements. V. MMSEA SECTION 111 REPORTING

The Medicare/Medicaid and SCHIP Extension Act of 2007 imposed a duty on insurers to report to Medicare payments made to Medicare beneficiaries. Collectively, these are referred to as Non-Group Health Plans (NGHP). Such Non-Group Health Plan insurers are obligated to notify Medicare about “settlements, judgments, awards or other payment from liability insurers (including self insurers), no fault insurers and workers’ compensation” received by or on behalf of Medicare beneficiaries, MMSEA Section 111 Mandatory Insurer Reporting Quick Reference Guide Version 1, January 19, 2012. The reporting requirements became effective May 1, 2009. However, due to software difficulties, reporting of workers’ compensation claims did not commence until 2011 and the reporting of liability settlements began January 1, 2012. When a liability or workers’ compensation case is settled involving a Medicare beneficiary, the insurer is obligated to report that settlement to CMS. The insurers are identified as “Responsible Reporting Entities” (RREs) as are self-insureds. The RREs are to report information when the insurer assumes an ongoing responsibility for medicals (ORM) or after paying the total payment obligation to the claimant (TPOC) in the form of a settlement, judgment, award or other payment. Simply stated, the trigger for reporting is the issuance of payment to the claimant or satisfaction of medical expense.

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Numerous data elements must be submitted to CMS as a part of the Section 111 reporting. Data includes, but is not limited to, evidence of insurance coverage, applicable settlements, judgments, awards, or other payments regardless of whether there is an admission or determination of liability. Additional information to be submitted includes the Medicare health insurance claim number or Social Security number, claimant’s name, date of birth, gender, and other information including the International Classification of Diseases, 9th Version (ICD-9) diagnoses codes. As a result of Section 111 reporting, CMS will become aware of workers’ compensation and civil settlements involving Medicare beneficiaries. The purpose is, in part, to identify insurers and self insureds that may have “primary” responsibility for payment under the Medicare Secondary Payer Act. In the field of workers’ compensation, Medicare Set-Asides have been used for several years to provide funds to satisfy future medical expenses that are closed out under a workers’ compensation settlement. Those funds are to be used for future medical expense as opposed to submitting bills to Medicare. Now that CMS is aware of settlement details under Section 111 reporting they have begun denying Medicare coverage to beneficiaries where bills are submitted that relate to a workers’ compensation injury. It is plausible that CMS may take the same approach with regard to liability settlements and judgments. Whether they will limit such action to cases where there is a specific allocation for future medical expense in the settlement or judgment is to be determined. The insurance industry and litigants are watching closely for the next indication from CMS as to how they may respond once provided the Section 111 reporting data. VI. MEDICARE OFFERS FIXED PERCENTAGE SETTLEMENT OPTION TO RESOLVE

MEDICARE’S REIMBURSEMENT RIGHTS In a Memorandum of September 30, 2011, the Center for Medicare and Medicaid Services introduced a new payment option to resolve Medicare’s reimbursement rights (conditional payments). Liability settlements involving Medicare beneficiaries after November 7, 2011, can elect this option. The requirements for this option are:

The underlying injuries must be physical, trauma-based (rather than exposure or ingestion-based);

The total amount of settlement, judgment or other payment does not exceed $5,000; The option is elected within a specified time frame; Medicare has not issued a final demand letter or made any request for reimbursement

prior to the election being made; and The beneficiary has not received, and does not expect to receive any further payments or

judgment related to the trauma-based incident.

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VII. THE SMART ACT

A. Medicare Reforms Become Law

On Thursday, January 10, 2013, President Obama signed into law the SMART Act. The SMART Act provides for significant reforms to the Medicare conditional payment process. CMS will now be required to provide parties with binding conditional payment amounts prior to settlement and further allows for the review and appeal of conditional payment disputes. The Act also amends the SCHIP Reporting Act with regard to potential penalties. Key provisions to the Act include the following:

B. Determination of Conditional Payment Amount (Effective 9 Months After Enactment)

The claimant or applicable plan (insurers) will be allowed to notify the Secretary for HHS within 120 days before the reasonably expected date of settlement, judgment, award or other payment. Upon notification the parties will be able to obtain a statement of the conditional payment amount through a website to be created by HHS. Where notice is provided to HHS within 120 days of settlement, judgment, award or other payment, CMS will have 65 days to produce a conditional demand letter. CMS may seek a 30-day extension of that deadline. Once the conditional payment amount is downloaded during this period the conditional payment amount shall be deemed the final conditional payment amount.

C. Reconsideration of Conditional Payment Amount

If the claimant, representative or applicable plan disagrees with the conditional payment amount they may seek review by providing CMS with documentation identifying the discrepancies and further provide a proposal to resolve the discrepancy. In essence, the claimant, representative or applicable plan would submit documentation as to what they believe the proper conditional payment amount should be. The Secretary of HHS will have 11 business days upon receipt of such documentation and proposal to determine whether there is a reasonable basis to amend its conditional payments claim. If the Secretary of HHS does not make such a determination within 11 business days, then the proposal submitted by the claimant, representative or applicable plan shall be deemed accepted by HHS. If the Secretary of HHS determines within 11 business days that there is not a discrepancy, then the Secretary must respond by providing documentation and show good cause why they are not agreeing to the proposal. The Act also requires that the Secretary of HHS establish an alternative manner in which to resolve the discrepancy.

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D. Appeal (Effective Upon Enactment)

The Secretary of HHS is required under the SMART Act to promulgate regulations setting forth a right of appeal and an appeals process under which the claimant representative or applicable plan may appeal the conditional payments determination.

E. Threshold Excluding Conditional Payment Reimbursement (Effective January 1, 2014)

Conditional payment reimbursement and mandatory reporting will not apply to any settlement, judgment or award from liability insurance arising from an alleged physical trauma-based incident that falls below a single threshold amount to be calculated by the Secretary of HHS. The threshold will not apply to claims involving ingestion, implantation or exposure. The threshold amount will be calculated by the Secretary of HHS based upon the estimated cost of collection incurred by the United States for conditional payments arising from liability insurance.

F. SCHIP Reporting Fines and Penalties (Effective Upon Enactment)

The current $1,000 a day penalty for violations of Mandatory Insurance Reporting (Section 111) is amended to provide that insurers “may” be subject to a civil money penalty up to $1,000 for each day of non-compliance as opposed to “shall” be subject to such penalty. The SMART Act further provides for an exception to penalties where the plan is able to show that it made good faith efforts to identify the beneficiary for Section 111 reporting purposes but was unable to identify the claimant as a Medicare beneficiary.

G. Three Year Statute of Limitations (Effective 6 Months After Enactment)

Conditional payments recovery will be subject to a three year statute of limitation calculated from the date of receipt of notice of the settlement, judgment, award or other payment made, i.e., Section 111 reporting.

H. Social Security and HIC Numbers (Effective 18 Months After Enactment)

The SMART Act modifies requirements with regard to use of Social Security numbers and HIC numbers for purposes of mandatory insurance reporting. This provision takes effect 18 months after enactment. However, an extension may be sought by HHS as it explores alternatives to the use of Social Security and HIC numbers.

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Bradford J. Peterson

- Partner

Brad's practice is divided between workers' compensation, civil litigation and Medicare Secondary Payer Act compliance. He is experienced in the defense of construction and motor carrier liability, insurance coverage, workers' compensation, and Medicare Secondary Payer Act compliance. For over a decade Brad has had a special interest in Medicare Set-Aside Trusts and the Medicare Secondary Payer Act. He has written and spoken extensively on these issues. Brad 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). He has also closely followed developments regarding the need for Medicare Set-Aside accounts in liability cases. In 2010, his article entitled “Medicare's Interests in Future Medical Expense Under Liability Settlements and Judgments” was published in the Illinois Bar Journal (January 2010). Brad is a member of the Champaign County and Illinois State Bar Associations. He is a member of the National Association of Medicare Set-Aside Professionals. He served a number of terms in the Illinois State Bar Association Assembly. Brad has also been a member of the ISBA Bench and Bar Section Council and served as its Chair in 2000-2001. Currently, he serves as Chairman of the ISBA Workers' Compensation Council and is a past editor of the Workers' Compensation Section Newsletter. Brad currently serves as the contributing editor of the Workers' Compensation Report for the Illinois Defense Counsel Quarterly. Brad has spent his entire legal career with Heyl Royster beginning in 1987 in the Urbana office. Significant Cases Johnson v. Daimler Chrysler Corporation, Blane

Warren and Aladdin Electric - Obtained favorable settlement (structured settlement with cost in low seven figures) in negligent entrustment and product liability action involving death of an accountant with wife and two children.

Tracy Green v. Freitag-Weinhardt - Obtained favorable settlement of workers' compensation

claim and third-party liability claim against petitioner/plaintiff's employer. Plaintiff suffered from fractures to the T11-T12 vertebra with resulting paraplegia. Seven figure settlement reached with primary defendants and third-party liability claim as well as workers' compensation claim resolved through workers' compensation lien waiver and partial satisfaction of future medical expense.

Publications "Calculating the Credit for Prior Amputation

Payments," Illinois Defense Counsel Quarterly (2013)

"Employers Not Entitled to TTD Credit in 19(g) Proceedings," Illinois Defense Counsel Quarterly (2012)

Public Speaking “Medicare Set-Asides and Conditional Payments

Update” Heyl Royster 27th Annual Claims Handling Seminar (2012)

“Medicare Set-Aside Trusts” Heyl Royster 26th Annual Claims Handling Seminar (2011)

Professional Associations Champaign County Bar Association Illinois State Bar Association Illinois Association of Defense Trial Counsel The National Association of Medicare Set Aside

Professionals 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

Learn more about our speakers at www.heylroyster.com