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Recently, a federal court in Louisiana, by consent of the settling parties, and in conjunction with a maritime claim under the Jones Act, was asked to rule on a motion to determine future medical expenses to allocate settlement proceeds and to assure the parties their settlement properly considers Medicare’s interests. That court’s January 5, 2011 decision has caused quite a stir among the settlement community, as the court found that a $52,500 set aside for a $150,000 liability settlement was reasonable. A careful review of the court’s decision, however, shows that the court did not create a Liability Medicare Set Aside. Instead, where the parties presented medical testimony identifying future medical expenses totaling $52,500 and had already agreed to let the court determine the allocation based on evidence presented, the court essentially ratified what the parties already determined, but put a number to it. Accordingly, this case serves as an excellent example of how far parties may go to achieve Medicare compliance, but does not serve as the practical model for doing so (nor is it advisable) in all events.
In Big R Towing v. Benoit, the court ruled on a joint motion to determine future medical expenses for purposes of allocating the settlement proceeds. The parties asked the court to determine whether their settlement properly considered and protected Medicare’s interests under the Medicare Secondary Payer Act, 42 U.S.C. §1395y(b)(2) (the “MSP Act”).
Benoit had been employed as a captain for a tugboat owned by Big R Towing. The parties disputed whether Benoit injured his back and hip while doing deck work on a tow, given restrictions placed on Benoit due to preexisting conditions in his spine for which he had undergone multiple surgeries. After the tow, Benoit did not return to work and was paid maintenance and cure benefits under general maritime law. But the parties could not agree whether Benoit needed further surgery on his back and a hip replacement. Big R Towing filed suit for declaratory relief on the issue as to whether maintenance and cure was owed to Benoit for those specific medical procedures. Benoit’s countersuit asserted claims for damages brought under the Jones Act and general maritime law. The parties settled for a gross settlement amount of $150,000 during a settlement conference on December 13, 2010. Since Benoit was receiving Social Security Disability Insurance (“SSDI”) benefits, part of the settlement’s consideration was that he agreed to be responsible for protecting Medicare’s past and future interests under the MSP Act. As to the issue of future medical expenses, the parties consented to the court making findings of fact and conclusions of law and issuing an order.
The court made certain findings based on the record, evidence presented, and stipulations of the parties, including the following findings. First, CMS did not currently have a policy or procedure for reviewing or providing an opinion regarding the adequacy/recovery of future medical expenses in liability cases. Second, Benoit qualified as a Jones Act seaman and earned approximately $50,000 per year at the time of the disputed accident (December 27, 2009). If the case were to proceed to trial and a plaintiff verdict were to be rendered, Benoit would be entitled to pecuniary and non-pecuniary damages, including past economic loss and future economic loss and medical expenses. Thus, under the circumstance, the parties’ settlement of $150,000 was a reasonable compromise. Third, the parties considered Benoit’s projected future loss of earnings and projected future medical expenses, which, based on evidence provided by his health care providers, equaled $32,000 for lower back surgery and $20,500 for a left hip replacement. The sum of these expenses, $52,500, was to be set aside by Benoit to fund those procedures. Fourth, there was no evidence that Benoit was attempting to maximize other aspects of the settlement to Medicare’s detriment.
The court made the following relevant conclusions of law: 1) the parties had reasonably considered Medicare’s interests in this settlement; 2) Medicare was a secondary payer for injury-related Medicare covered expenses in the past or would be a payer for such expenses in the future; 3) Benoit was required to reimburse Medicare for any conditional payments made by Medicare prior to the date of the order; and 4) it was reasonably expected that Benoit may become a Medicare beneficiary in the future, and $52,500 fairly takes Medicare’s interests into account for future injury-related care.
Following its conclusions, the court ordered Benoit 1) to promptly reimburse Medicare for any conditional payments made, and 2) to set aside $52,500 out of his $150,000 settlement and to use it to pay for future injury-related care otherwise covered by Medicare.
Medicare Secondary Payer & Benoit
Medicare’s priority right of recovery under the MSP Act encompasses payment for medical expenses. According to the MSP Act, Medicare does not pay when payment has been made or can reasonably be expected to be made by a workers’ compensation plan, a liability plan, or a no-fault plan. Therefore, when a primary plan accepts payment responsibility (i.e., settles a claim), Medicare’s recovery rights ripen under the MSP Act, and Medicare may recover for any conditional payments made, as well as for future injury-related care (assuming other qualifying criteria are met) where amounts for such care are allocated or otherwise comprise a significant part of damages and are reasonably considered by the parties as being paid as a part of the gross settlement proceeds.
In liability cases, we know that often the plaintiff is not recovering 100% value for damages sustained. Factors such as disputed liability and policy limits confound a plaintiff’s ability to settle a case for full value. Therefore, the gross settlement is some amount less than full value. When parties settle liability cases with a general release of all claims, without any allocations for specific line-item damages, it becomes challenging to determine how much of the gross settlement amount, if any, should be allocated for future medical damages. In contrast, workers’ compensation cases are based on no-fault principles, creating three measures of damages: indemnity, past medicals, and future medicals.
In Big R Towing, the parties secured a court-approved allocation of future medical damages based on the merits of the case, thereby removing the question of how the allocation in this liability case might differ from the allocation in workers’ compensation cases, where there is clearly defined guidance. The settling parties in Big R Towing did not settle using a broad, general release. Instead, they specifically included as a measure of good and valuable consideration Benoit’s obligation to properly protect and consider Medicare’s interests. This removed Benoit’s case from the realm of the tens of millions of cases that settle using broad, general releases. At this point, the settling parties had agreed affirmatively to take steps to consider and protect Medicare’s interests (past and future). Their selected means for considering and protecting Medicare’s future interest was to submit the agreement to the court and to let the court make the determination. Once the future cost of care was identified, by moving the court to decide the amount, and by showing the court that Medicare has not provided any forum with which to address these issues, the parties created a circumstance under which the result was practically pre-ordained. When these conditions exist, Medicare’s preferred means to protect its interests is to use Medicare Set Asides (“MSA”). In the case, it appears all the court had to do to complete the MSA puzzle was to agree that the medical testimony established the specific dollar amount that would be needed to cover the future surgeries.
At the same time, while the court did find that $52,500 represented the total future medical expenses and ordered them to be set aside, if funds are to be set aside in accordance with currently enacted laws and guidance (following traditional MSA application in the workers’ compensation context as a means of applying good faith standards of substantial compliance), only those future injury-related medical expenses otherwise covered by Medicare need to be set-aside. The court did not make any distinction between Medicare covered and non-Medicare covered expenses. It is unclear whether the $52,500 represents the actual amount Medicare would have otherwise paid, or the amount medical providers would charge a private payer. Similarly, the court did not identify whether the future medical expenses are going to be incurred within two years of the date of settlement (i.e., prior to Benoit’s actual Medicare entitlement date), or whether alternate funding options exist, such as purchasing annuities to cover some of the future costs of care. Accordingly, while the $52,500 may be the maximum amount that can be used to fund Benoit’s MSA, the funding and custodial issues (i.e., who will administer the account) remain untouched by the court’s order. Unless all of the future medical expenses will cost Medicare $52,500, the actual amount of the MSA remains to be determined.
Nevertheless, the court’s orders in Big R Towing are consistent with what the authors of this Practice Tip have been teaching the settlement community since 2006—namely, that 1) all settlements involving Medicare beneficiaries have to verify, resolve, and satisfy any past conditional payments made, whether arising in the workers’ compensation or liability context, and 2) Medicare’s interests in remaining a secondary payer after settlement needs to be evaluated in each case. But that is not the same as saying that Liability Medicare Set Asides are required in every case under the MSP Act. And that is not what the Big R Towing court is telling us. The evaluation stage of every case is critical for all parties, including the beneficiary and the agency.
Reasonable Belt & Suspenders or Self-Fulfilling Prophesy?
Is Big R Towing something that can be achieved in all cases as part of a standard settlement protocol, or is this a case of creating the Medicare Set Aside conditions in the settlement terms and steps they negotiated? Big R Towing can be viewed as the logical result of a self-fulfilling prophesy. Here, the parties went to the court with a settlement for which part of the consideration was that Benoit was responsible for protecting Medicare’s interests. The parties presented evidence that clearly showed that a measure of damages included future costs of care. Further, under the Jones Act, such damages are a part of the calculation for maintenance and cure. (At the very least, the issue of whether such damages were part of the calculation for measure and cure was the one on which the parties could not agree in negotiating the settlement’s terms.) The parties presented evidence that if they were to find future medical expenses as part of the maintenance and cure that Big R Towing owed Benoit, the future cost of care would equal $52,500. They then left it to the court to make sure they met the settlement term requiring Medicare’s interests to be protected and considered.
We submit that the result may have been the same if the parties had not taken the matter to federal court and instead had applied a future damages analysis based on identifying a future cost of care damage component to the settlement and on permanently shifting the responsibility for the payment and management of that care over to Medicare. In Big R Towing, the parties themselves found that there was a future cost of care. While they argued over the cost of that care, medical testimony showed that amount to be $52,500. And, Benoit was receiving SSDI benefits, which once received for twenty-four consecutive months, would result in Benoit’s enrollment in Medicare Parts A and B. So it is likely that but for the $52,500 set aside to pay for the surgeries, the settlement would have shifted the burden of paying for that care to Medicare.
Take-Aways & Impact on the Settlement Community
Settling parties continue to grapple with these questions concerning the use and propriety of MSAs in liability cases. Until Congress enacts legislation directly on point or CMS provides guidance in the form of regulations and/or policy memos, which would provide a uniform and standard means to consider Medicare’s future interests, parties should continue to document their efforts to address these issues and to memorialize for their files the steps taken to determine Medicare’s future interests as part of settling a liability case. The Big R Towing court shows us what steps can be taken to achieve Medicare compliance.
The remaining question is whether obtaining court approval is a practical solution to the MSA problem for settling parties. The authors of this Practice Tip do not dispute that under this fact pattern, future costs of care and a future permanent burden shift existed (assuming there would be future medical expenses still needed at the time Benoit becomes entitled to Medicare). Big R Towing is analogous to the case where the verdict identifies future medicals involving a Medicare beneficiary. In that case, the conditions are ripe for figuring out how to ensure Medicare does not become a primary payer, which, in turn, best protects the beneficiary’s Medicare card. In short, the parties in Big R Towing agreed there was a future medicals damage bucket that resulted in the court finding a future cost of care exists. And, by requiring as a material term of settlement that Benoit properly protect and consider Medicare’s interests, despite the fact that such a phrase does not currently exist in the MSP Act, the parties brought to the court conditions ripe to find that an MSA would do just that.
But before anyone starts pointing to this court as the creator of the Liability Medicare Set Aside, we urge the settlement community to take a deep breath and a detailed look at the case-specific facts in Big R Towing. The authors of this Practice Tip have repeatedly pointed out that the laws that could create Liability Medicare Set Asides are already in place. All it will take to make Liability Medicare Set Asides a legal requirement is Congress clarifying the MSP Act and regulations being put in place to provide rules for liability cases. The Big R Towing court asked and answered questions brought to it by the settling parties, who specifically negotiated future costs of care as part of the settlement. The parties did not settle this case for $150,000 using a general release of all claims. Instead, they set the table for the court to determine how much of the $150,000 should be allocated for future medical expenses. Once the parties stipulated that Benoit was going to become a Medicare beneficiary, all that remained was to answer the question of how much to set aside.
Were the settlement community to adopt the method used by the parties in Big R Towing in all future cases, the court system would likely grind to a halt. Every case is capable of going to court to allocate damages for future medical expenses, but should it? For those cases where the parties cannot go to court, there needs to be a practical solution, at least until Congress gives us the answer in the form of laws, or specific regulations are adopted. Any practical solution should be based on a good faith effort at substantial compliance with currently enacted laws and guidance, as opposed to arbitrarily carving out MSA allocations from gross settlements and creating obligations that may not otherwise exist. Until Congress provides guidance, we submit the answer is that every case requires an evaluation stage to identify if future cost of care is a component of the actual recovery, and if so, to ensure that the burden of paying for and managing that care is not shifted over to Medicare. As part of this process, the parties should document their file as to what steps were taken to ensure Medicare did not become a primary payer. This result can best be achieved through a formalized process that starts early; verifies, resolves, and satisfies past conditional payments made by Medicare; and asks the right questions to ensure future costs of care are not improperly shifted over to Medicare. And above all, that process has to educate the settling parties and has to be memorialized in the settlement documents.
Big R Towing makes the point crystal clear—settling parties should find a means of ensuring absolute Medicare compliance. Where the court is not an option, as will be the case in the majority of settlements, the parties need to agree on a formalized way to verify, resolve, and satisfy Medicare obligations. We have developed such a formal approach to verify, resolve, and satisfy Medicare obligations, as set forth in our MSA White Paper. We stand ready to assist the settlement community in doing so, and we will continue to update the settlement community as this area of the MSP Act continues to evolve, whether through legislation or court action.