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In a non-ground breaking decision, a Federal District Court determines the need for an MSA and the amount of the set aside.  What is very interesting is that the court does its own calculations for the amount to be set aside coming up with a figure higher than what was recommended to the court in testimony to approve.  The case is one which involves both a workers’ compensation claim and liability.  However, future medicals will be paid out of the liability settlement instead of the workers’ compensation settlement which is an unusual factual scenario.

The case involved a workplace injury to Welch’s left elbow.  A workers’ compensation claim was filed against the employer.  The employer denied compensability for the elbow injury based upon a physician’s note saying Mr. Welch had a pre-existing elbow injury.  Welch prevailed in his workers’ compensation hearing and the employer/carrier began to pay benefits.  Subsequently, Welch filed suit against the employer/carrier for alleged improprieties and bad faith in the denial of his claim.  He claimed his elbow condition worsened as a result of the delay in treatment causing Complex Regional Pain Syndrome.  The liability case settled after a settlement conference was held before the presiding federal district court judge.  A condition of the settlement was that the federal district court “determine a Medicare Set Aside (MSA) such that the parties may comply with the provisions of the Medicare Secondary Payer Act, 22 U.S.C. §1395y(b)(2) and related federal regulations”.  The defendant filed a motion requesting the federal district court to determine the necessity of an MSA and the amount of an MSA.  The court held an evidentiary hearing and made certain findings of fact and conclusions of law.

During the hearing, a Medicare Set Aside expert testified that based upon the projected future medical estimated by the treating physician amounted to $174,762.85.  However, the federal district court judge determined based upon his calculations that the actual amount should be $278,019.08.  In addition, the judge determined that Welch even though he was not a current Medicare beneficiary did have a reasonable expectation of becoming one within 30 months since he made application for Social Security Disability benefits.  Given the foregoing facts, the Welch Court went on to its conclusions of law.  The court decided that it did have jurisdiction over the matter since there was an actual controversy and the parties were seeking a declaration of rights and obligations to comply with the MSP for which there was no procedure in place by CMS.  The court cited to other opinions such as Frank v. Gateway and Schexnayder v. Scottsdale for the proposition that other courts had decided the rights and obligations of settling parties under the MSP with respect to MSAs.  The court goes on to point out since there is no procedure in place by CMS to determine how to adequately protect Medicare’s future interests and there is a strong public policy interest in resolving cases through settlement, it is necessary to decide the necessity as well as amount of any set aside.

In its conclusions of law, the court finds that Welch is a “primary payer” by virtue of receiving payment from a primary plan and thus Medicare should not be billed for those items or services until the funds received from the primary plan for that purpose are exhausted.  It concluded that the sum of $278,019.08 adequately protected Medicare’s future interests and in fact exceeded what Medicare would require.  The court ordered that the sum of $278,019.08 be placed in an interest bearing account to be self-administered as a Medicare Set Aside by Mr. Welch. 

The end result is rather strange because the court ultimately determines that the set aside amount should be more than what CMS would have accepted had it been submitted and reviewed under their own guidelines.  This is noted by the court in footnote four of the opinion.  The court stated that “[a]lthough $174,762.85 may be accepted by CMS as an appropriate and sufficient MSA if submitted to CMS for approval, the Court is unwilling to use that amount in a Court-determined MSA.”  I really don’t understand what the court is talking about in reference to a “Court-determined MSA” but shouldn’t the court apply what CMS would have applied had it been reviewed?  Herein lies the problem with a system that has no regulations or statutes that codify these guidelines.  Instead, you have CMS “memos” which set forth policies and they are forever shifting and changing.  If we had regulations/statutes then this sort of crazy outcome doesn’t occur.  I think the parties are probably sorry in this instance that they didn’t submit it to CMS for review/approval.  Although it might not have been reviewed anyway if it was determined that it was a Liability Medicare Set Aside rather than workers’ compensation since many regional offices for CMS will not review a Liability MSA.  Again, it is a crazy mixed up system. 

In addition, it is curious that the court is ordering a self administered MSA.  For most lay people, it is nearly impossible to figure out to properly administer an MSA.  To properly administer, the injury victim must know what is Medicare covered, understand ICD codes and pay providers the proper amount.  They have to document every penny that is spent.  How many people can do that?  If the MSA is annuity funded, which many are, then you have to determine when it is exhausted on a yearly basis and then have Medicare billed.  Can anyone handle that?  It seems to me that it invites misuse of the funds which runs counter to the whole premise of what the court is ordering in the first place which is compliance with the MSP.  A professional administration agreement would make much more sense despite the fact that Mr. Welch is competent.  Professional administration isn’t just for the incompetent. 

The lesson to take away from this case and the rest of the cases that have come out regarding Medicare Set Asides is not to wind up in federal court over these issues.  Instead, deal with these issues pre-settlement strategically.  If a client is a Medicare beneficiary, then evaluate with the client the possibility of a set aside.  Discuss with competent experts.  Potentially use the set aside as an element of damages to help improve settlement value.  Properly document in the settlement documents if a set aside is being used to make sure the client doesn’t get saddled with inappropriate language or lose itemized deductions.  Proper planning will avoid this kind of outcome or unnecessary trips to federal court.