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In Sterrett v. Klebart, 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.  A 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 (loss of enjoyment of life).  The non-economic damages are arguably substantial in a case where a client is rendered a paraplegic.  Furthermore, here in the injury victim’s wife had a recognized consortium claim which served to greatly reduce the recovery.  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.