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Category Three – Discrete Issues

Is an MSA a Marital Asset?

In re Marriage of Christopher Washkowiak[i]involved an Illinois appellate court having to consider whether an MSA was a marital asset subject to division in dissolution of marriage. Christopher Washkowiak was injured on the job in 2008.  In December of 2010, an arbitrator for the Illinois Workers’ Compensation Commission approved Washkowiak’s workers’ compensation settlement.  The settlement was for $365,000 plus a $70,000 Workers’ Compensation Medicare set aside (WCMSA).  In August of 2010, prior to the settlement being approved, a family law court issued an order dissolving Mr. Washkowiak’s marriage and awarding (per Mr. and Mrs. Washkowiak’s divorce settlement agreement) 17.5% of his net settlement proceeds to his former spouse.  This amounted to $12,250 of the funds set aside in the WCMSA.  A dispute arose as to whether Mrs. Washkowiak was entitled to that portion of the MSA.  Mr. Washkowiak argued that the MSA was not part of his net settlement proceeds.  Mrs. Washkowiak argued she was entitled to 17.5% of the MSA since the funds didn’t fall under the excluded category of “attorneys’ fees and usual and customary litigation fees and expenses” as provided in the judgment of dissolution.  The trial court agreed with Mrs. Washkowiak and Mr. Washkowiak appealed.

The appellate court analyzed the situation based upon the definition of net settlement proceeds as the dissolution decree defined that term.  The decree provided that “ ‘net proceeds’ include reimbursement for medical payments actually paid by” Washkowiak.  The court then stated that unless there was something that removed the MSA funds from the definition of “net proceeds”, then the MSA funds would fall within the definition of “net proceeds”.  The opinion proceeded to go through an explanation about the underpinnings of Medicare set aside from a CMS regulatory standpoint.  The court concludes that the money placed in the WCMSA were for the “sole purpose of paying . . . [Washkowiak]'s medical bills” and thus “the settlement is reimbursing him for his future medical costs.”  Therefore, according to the court, the money in the “MSA fall[s] squarely under the definition of ‘net proceeds’ contained in the dissolution agreement.”

According to the opinion, there was no evidence presented by Mr. Washkowiak that the funds in the MSA were not “net proceeds” and without question the money was his.  Therefore, since the dissolution decree defined “net proceeds” to include payments for future medical costs, the funds held in the MSA were “net proceeds”.  Accordingly, the trial court correctly determined that Mrs. Washkowiak was entitled to 17.5% of the entire settlement including the MSA.  Mr. Washkowiak unsuccessfully argued that the MSA funds could only be used to pay for future medical costs related to his injuries.  The opinion points out that Mr. Waskowiak could provide 17.5% of the “net settlement” proceeds from the non-MSA funds he received and still leave the $70,000 in the MSA.  The court found the result would not be inequitable because Mr. Washkowiak could fully fund the $70,000 MSA from the 82.5% of the settlement proceeds he had left over after paying Mrs. Washkowiak.

Procurement Cost Reduction of an MSA

The facts of Hinsinger v. Showboat Atlantic City[ii], are quite interesting.  The case was tried and the plaintiff prevailed in 2010.  Prior to trial, in 2008, the plaintiff became eligible for SSDI benefits after being declared totally disabled by the Social Security Administration.  Since SSDI gives you early Medicare coverage (after 24 months), the plaintiff became Medicare eligible in late 2009.  After trial, the parties settled the case for $600,000.  In an effort to comply with the requirements of the Medicare Secondary Payer Act (42 USC 1395y), plaintiff and defendant agreed to allocate $180,600 to a Medicare Set Aside trust (“MSAT”) to pay for Medicare covered future services related to the injury. This amount reflected the jury’s award for projected future medical needs related to the injuries.  A set aside is typically calculated by a third party vendor who creates an “allocation” that is done prior to a trial on the merits.  Once a trial fixes the amount of dollars for future medical, that is the figure that CMS would be bound by according to its own field manual, in my opinion.

After agreeing to the set aside, plaintiff counsel sought permission from the court to withdraw a portion of his fees from the money allocated to the MSAT.  In arriving at its decision whether this was appropriate or not, the court discussed Medicare set asides.  The court seemed to take as a given that an injury victim must take Medicare’s future interests into account under the secondary payer act when settling/resolving an injury claim.  While the court did note that there is no statutory or regulatory requirements mandating Medicare Set Asides, it did recognize that CMS recommends their use and it has become a “standard practice, particularly in workers’ compensation cases, to create a set aside to protect the future interests of the injured individual and Medicare.”

The court then launched into a discussion of the appropriateness of reducing the set aside by procurement costs.  While plaintiff counsel argued that the guidelines created by CMS for workers’ compensation cases didn’t apply to liability settlements, the court disagreed.  After concluding that the same regulations and directives that apply to set asides created in workers’ compensation cases apply to set asides in third party liability settlements, the court addressed whether those regulations allow for an attorney to recover fees for a judgment or settlement obtained on behalf of a client in a civil suit from the set aside itself.  The court answered in the affirmative.  The court’s holding rested on its interpretation of 42 CFR 411.37 which provides a reduction formula Medicare uses when a conditional payment is made prior to settlement or judgment.  Section 411.37 provides that Medicare reduces its recovery by the costs expended in procuring the judgment or settlement if “[p]rocurement costs are incurred because the claim is disputed” and “[t]hose costs are borne by the party against which CMS seeks to recover.”  While the court acknowledged that is unclear whether 42 CFR 411.37 only applies to recovery of funds expended by Medicare in the conditional payment context, it concluded it applied to funds recovered for future medical which are set aside.

Applying the reduction for procurement costs to liability set asides was “in line with general principles of equity” according to the Hinsinger court.  It stated, that “[w]here a plaintiff is, or will within a short time become, a Medicare recipient, the plaintiff's attorney also works on behalf of Medicare to secure funds to pay future medical expenses Medicare would otherwise pay.”  Allowing Medicare to avoid paying its fair share of the procurement fees/costs would be unfair to injury victims.  The court did identify a large problem associated with Medicare set asides in liability settlements.   “In some situations, a plaintiff may end up getting nothing after creating the set aside and paying attorneys' fees or may even have to pay money out of pocket to his attorney after a lengthy trial.  Such a result would not only be inequitable, it would deter persons on Medicare who are injured by the tortious acts of others from bringing claims.”  The court’s statement addresses a fundamental problem in liability settlements involving Medicare beneficiaries who are faced with setting aside funds for future medical when there is a limited recovery.

Unfunded Future Medicals

In Sterrett v. Klebart[iii], a Connecticut court was asked to decide whether Medicare’s interests were reasonably considered pursuant to the Medicare Secondary Payer Act.  In Sterrett, the plaintiff brought suit against the homeowner of a home he visited as an invitee and subsequently fell down a set of stairs rendering him a paraplegic.  The negligence claim was based on the lack of a handrail on the staircase.  The defendant raised contributory negligence claims asserting specifically that the plaintiff was under the influence of alcohol to a degree that made it impossible to walk down the stairs.  The parties settled the case at mediation for $550,000.  Of the $550,000 settlement, $183,333 was allocated to resolve Ms. Sterrett’s loss of consortium claim.

The Connecticut court agreed with the parties and found that future medicals were not funded.  Specifically, the court stated that “the settlement payment to Sterrett does not address any future medical expenses that may be covered by Medicare and the facts of this case mandate the conclusion that the defendants and their carriers lack liability with regard to any such expenses.”  The court found that the settlement represented a “substantial compromise” considering the potential verdict range.  The settlement was a compromise due to the nature of the injuries and defenses according to the court.  Further, the court understood that even though Sterrett would incur medical bills payable by Medicare, the settlement didn’t compensate for such future medical benefits.  Instead, the limited settlement funds it found were payable for the plaintiff’s non-economic damages with a small portion to be used for non-Medicare covered economic damages.  For those reasons, the court held that no set aside was required and found that the parties had reasonably considered the interests of Medicare in the settlement of the case. 

This case is a perfect example of the problems associated with Medicare set asides in liability settlements with no method for apportionment.  Without a formula to reduce a set aside where damages are great but the recovery is limited, this kind of result can occur.  If however a formula similar to equitable distribution was used in this case, it might yield a result such as follows:

Reasonable value of claim:               $2,000,000

Actual settlement:                              $550,000

Fees & Costs:                                     $255,000

Liens:                                                  $14,448

Consortium Claim:                           $183,333

Net to Client:                                     $97,219

Set Aside:                                           $100,000

Reduced Set Aside (4.86%):             $4,860

This presumes a set aside amount of $100,000 and a formula that yields 4.86% as the reduction.  So since the client is only recovering 4.86% of his total damages, the $100,000 set aside is reduced to $4,860.  Instead of nothing being set aside, a minimal amount is set aside and there is a justifiable basis for the amount being set aside. 

Unfortunately, CMS has refused to address this problem in the context of liability settlements.  The reality of liability cases is that many times there is a limited recovery in relation to the significant damages suffered.  It is impossible to have a set aside in a case such as Sterrett where there is a limited recovery and insufficient funds to pay for future medicals.  If Sterett were forced to set aside monies it likely would eat into his economic damages that aren’t for future medical, such as lost wages, or for non-economic damages.  The non-economic damages are arguably substantial in a case where a client is rendered a paraplegic.  Furthermore, here the injury victim’s wife had a recognized consortium claim which served to greatly reduce the recovery to the injury victim.  The end result is that the court reached an outcome similar to what I have suggested but without engaging in the right analysis.  Until CMS addresses this issue, parties are left to figure out how to deal with this particular situation.

Reduction of Liability MSA due to Liability Issues

In Benoit v. Neustrom[iv], the United States District Court for the Western District of Louisiana rendered an unprecedented decision.  In a case where a limited recovery was achieved due to complicated liability issues with the case, the Court reduced a liability Medicare Set Aside allocation by applying a reduction methodology.  This case validates the argument I have made since the passage of the MMSEA brought liability Medicare Set Asides to the forefront.  Because of the fundamental differences between the Workers’ Compensation system and the liability system, you can’t have MSAs in general liability settlements without apportionment.  The court in Benoit agreed with me.

Benoit filed suit against the Sheriff of Lafayette Parish (Neustrom) and the Warden of the Lafayette Parish Correction center alleging injuries suffered while incarcerated.  The plaintiff alleged he was allowed to remain in his jail cell without pre-medical evaluation when he was clearly suffering from the effects of alcohol detoxification.  Benoit was found unresponsive his cell and was transported the hospital where he was diagnosed with a hypoxic brain injury secondary to a seizure, followed by cardiac arrest, secondary to alcohol withdrawal and hypoxic encephalopathy.  The resulting injuries included an anoxic brain injury with bladder incontinence, ansomia, short term memory deficit, tremors and behavioral issues.  After in-patient care in a nursing home, Mr. Benoit was released to the care of his wife.  Mr. Benoit had his care paid for partially by Medicare and Medicaid. 

In October of 2012, the case was settled conditioned upon a full release by Mr. Benoit and his assumption of sole responsibility for “protecting and satisfying the interests of Medicare and Medicaid.”  To that end, a Medicare Set Aside allocation was prepared by an MSA vendor.  The MSA cost projections gave a range of future Medicare covered injury related care of $277,758 to $333,267.  The gross settlement amount was $100,000.00.  Medicaid agreed to waive its lien.  Medicare asserted a reimbursement right for its conditional payments of $2,777.88.  After payment of fees, costs and the Medicare conditional payment, Mr. Benoit was left with net proceeds of $55,707.98.  Mr. Benoit filed a motion for Declaratory Judgment confirming the terms of the settlement agreement, calculating the future potential medical expenses for treatment of his injuries in compliance with the Medicare Secondary Payor Act and representing to the court that the settlement amount was insufficient to provide a set aside totaling 100% of the MSA. 

The matter was set for hearing and Medicare was put on notice of the hearing.  Medicare responded with a written letter asserting its demand for repayment of the conditional payment in the amount of $2,777.88 but didn’t address the set aside.  The Medicaid lien was waived prior to the hearing with conditions for creation of a Special Needs Trust to preserve Medicaid eligibility.  At the hearing, the sum of $2,777.88 was established without objection as the amount to be reimbursed to Medicare for the conditional payments made by Medicare.  This left the only issue for the court to address was the question of the future Medicare covered services for Mr. Benoit and the “extent to which the Medicare set-aside trust can or should be reduced to account for the financial hardship to the beneficiary, Michael Benoit.”  During the hearing, the MSA allocation was submitted into evidence with a cost considerably larger than the net settlement figure.  A Social Security financial statement was also offered into evidence to demonstrate the financial hardship of Mr. Benoit.  Mrs. Benoit testified about Mr. Benoit’s extensive needs for things the MSA would not pay for and the limited income they received from Social Security.  The defendants provided testimony regarding the liability issues with the case which could have resulted in summary judgment had the case not settled.

Having heard testimony, the court rendered its opinion in April of 2013.  The court began its discussion with a citation and quotation of Sally Stalcup’s Region VI handout regarding set asides.  The quoted language addresses the idea of an allocation of the damages.  CMS’s official position is that the only allocation they will respect is when it is by a court after their review on the merits of the case.  The court pointed out that CMS took that same position in the Bradley v. Sebelius case regarding conditional payments and lost.  Language from the Bradley decision was cited which stated that Medicare’s field manual was not entitled to administrative law based deference (under Chevron) and that the requirement of a decision on the merits of a case before respecting an allocation frustrated the long standing public interest in the resolution of lawsuits through settlement.  After discussing those points, the court went on to make its findings of fact and conclusions of law.

The first significant finding of fact was that Benoit’s claims were highly contested on liability and damages with a very real possibility of summary judgment being granted or an adverse liability verdict.  The second significant finding was that given the significant past and future losses suffered by Mr. Benoit offset by the difficult liability issues in the case, the settlement of $100,000 was a reasonable compromise to avoid the uncertainty and expense of a trial.   The fourth significant finding was that the estimate of future medical costs in the MSA allocation was both reasonable and reliable.  The bombshell finding was that the net settlement was 18.2% of the mid-point range of the MSA projection and using that percentage as applied to the net settlement, the sum to be set aside was $10,138 and not $305,512.  The court found that $10,138 adequately protected Medicare’s interests.

In its conclusions of law, the court first found it had jurisdiction to decide the motion because there was “an actual controversy and the parties seek a declaration as to their rights and obligations in order to comply with the MSP and its attendant regulations in the context of a third party settlement for which there is no procedure in place by CMS.”  The court then found that the sum of $10,138 “reasonably and fairly takes Medicare’s interests into account.”  Lastly, the court found that since CMS provides no procedure to determine the adequacy of protecting Medicare’s interests for future medical needs in third party claims and since there is a strong public policy interest in resolving lawsuits through settlement, Medicare’s interests were “adequately protected in this settlement within the meaning of the MSP.”  The court ordered that the MSA be funded out of the settlement proceeds and be deposited into an interest bearing account to be self-administered by Mr. Benoit’s wife. 

This opinion is so important because it hits the nail on the head regarding an argument I have been making since the advent of liability MSAs.  As the American Association for Justice pointed out in its commentary[v] to the ANPRM, a liability insurer is not legally obligated to provide medical care in the future whereas Workers’ Compensation carriers are obligated to pay for future medical as long as the injury related conditions persist.  Furthermore, liability settlements are fundamentally different from Workers’ Compensation settlements in that liability cases are settled for a variety of reasons which do not necessarily include contemplation of future medical treatment.  Even when future medical care is contemplated as part of a settlement, the amount can be very limited when compared to what the ultimate costs may end up being.  So accordingly, if set asides are done in liability settlements without recognition of these differences and with no apportionment of damages, you can conceivably have a situation where a party is setting aside their entire net settlement even though it is made up of non-medical damages.  In effect it can eliminate the recovery of the non-medical portion of the damages by requiring the Medicare beneficiary to set aside all of their net proceeds.  There is nothing in the MSP regulations or statute that requires Medicare to seek one hundred percent reimbursement of future medicals when the injury victim recovers substantially less than his or her full measure of damages.

Prior to the Benoit opinion, I argued based upon the United States Supreme Court Decision in Arkansas Department of Human Services v. Ahlborn[vi]that an MSA should be reduced by using a formula similar to that decision because the situations were analogous.  The argument goes something like as follows.  It does not work to have one hundred percent of a settlement consumed by a Medicare Set Aside that the client can’t touch except to pay for future Medicare covered services. Similarly, a set aside shouldn’t encompass non-medical portions of the recovery. I would argue that this gets to the very root of the issue dealt with in the Ahlborn US Supreme Court decision. The Ahlborn decision forbids recovery by Medicaid state agencies against the non-medical portion of the settlement or judgment. Ahlborn was recently affirmed by the US Supreme Court in WOS v. EMA. While admittedly both the Ahlborn and WOS decisions dealt with Medicaid lien issues and the Medicaid anti-lien statute, the arguments by analogy can be applied in the Medicare set aside context. The Ahlborn holding gets at the fundamental issue of whether a lien can be asserted against the non-medical portion of a personal injury recovery. Justice Stevens, in stating the majority opinion, said “a rule of absolute priority might preclude settlement in a large number of cases, and be unfair to the recipient in others.” Isn’t this so in the Medicare set aside context (which is really a future lien)? How do you settle a case for an injury victim when all of the proceeds would have to go into a set aside? Wouldn’t that force cases to trial where damages could be allocated to different aspects of the claim and a larger recovery might be possible?

In the Benoit case, the plaintiff took the position he was only recovering 10% of his total damages.  Therefore, based upon my Ahlborn analysis, the figures would look like:

The Benoit court was even more aggressive in its analysis.  Instead of looking at a ratio of the total case value versus the net, it looked at the ratio of the MSA amount to the net.  The analysis looks like:

Both methodologies get to the correct end result in my opinion.  While the Benoit case is incredibly important because it is the first recognition by a federal court of the fundamental problem involved with cases where there is a limited recovery but a large future Medicare component, it is only a United States District Court opinion.  It is a trial court’s order on a motion for declaratory judgment.  Unless Medicare somehow intervenes and appeals, we will not see a Circuit Court of Appeals decision that would have precedential value.  Despite the foregoing, the court’s rationale supports applying a reduction methodology where before the Benoit opinion there was no direct authority for this.  If Medicare ultimately creates regulations related to liability Medicare Set Asides, one can hope they will look very carefully at a workable solution to this type of situation.  The Benoit decision provides one possible way to address the issue created by limited settlements with big future medicals.