Court Lets Ex-Wife to Take Part of MSA Account in Divorce Action

Thursday, April 12, 2012 | 0

In the case of In re Marriage of Washkowiak, 2012 Ill. App. Lexis 151 (Ill. App. 3 Dist., March 7, 2012) the Illinois Appellate Court ruled that a claimant’s former wife was entitled to receive 17.5% of the funds from his Medicare set-aside (MSA) account per the terms of the parties’ divorce agreement.

In an interesting 2-1 decision, the court (Daniel L. Schmidt, J.) found that the MSA was includable as part of the “net proceeds” of the claimant’s workers’ compensation settlement as that term was defined under the divorce agreement thereby entitling his former wife to 17.5% of those funds as required under that agreement. 

A dissenting opinion was filed (Mary W. McDade, J.) which argued that the MSA was excludable from the recoverable “net proceeds” under the terms of the workers’ compensation settlement, and on grounds that the majority’s opinion failed to properly protect Medicare’s interests per the Medicare Secondary Payer Statute (MSP).

This article dissects the Washkowiak case and examines possible practical implications of this decision in terms of general MSP compliance and claims handling considerations as follows:   

Background

In 2008, the claimant was injured in a work accident for which he filed a workers’ compensation claim under the Illinois workers’ compensation system.  He was married at the time of the accident.

In 2009, the claimant filed for divorce.  The trial court in that action entered a judgment of dissolution of marriage on August 31, 2010 which incorporated the parties’ divorce settlement agreement (hereinafter “divorce agreement”).   Under the terms of the divorce agreement, the claimant’s former wife (hereinafter “Ex-Wife”) was entitled to 17.5% of the “net proceeds” from his workers’ compensation settlement. 

In December 2010, the claimant settled his workers’ compensation claim. This agreement released the employer from all liability for future medical benefits and included an MSA in the amount of $70,000 which was to be used by claimant “solely to pay for future Medicare-covered medical and/or prescription drug expenses.”   The parties agreed that approval of the MSA by the Centers for Medicare and Medicaid Services (CMS) was not necessary.

The settlement agreement contained two different descriptions of the monetary terms. In one area, the terms were stated as follows:  Total amount of settlement - $365,000 (does not include $70,000 MSA); Deduction: Attorney’s fees - $67,903.35; Deduction: Medical reports, x-rays - $766.60; Amount employee will receive - $296,330.  While in another section the “total settlement amount” was referenced as $435,000 with an accompanying notation stating “the amount that is allocated to the MSA is $70,000.”

The parties agreed that Ex-Wife was entitled to 17.5% of the $296,330 sum that the claimant received.  However, the parties disagreed regarding whether she was also entitled to 17.5% of the MSA funds.

Arguments

At the core of this dispute was paragraph 10 of the divorce agreement which, in pertinent part, stated as follows:

10.  [Ex-Wife] is awarded 17.5% of the net proceeds from [the claimant’s] workers’ compensation settlement  … Net proceeds are defined as the agreed award amount less workers’ compensation attorneys’ fees and usual and customary litigation fees and expenses. … Net shall include any reimbursement for unemployment which [the claimant] actually pays and medical payments he actually pays.” (Emphasis by the court.)

The claimant argued that the MSA funds were not includable as “net proceeds.”  While he did not argue that the MSA was necessarily excludable per the terms of paragraph 10, he contended that the nature of the MSA precluded these funds from being considered as “net proceeds.”  Furthermore, the claimant asserted that the MSA funds could only be used to pay for his future medical expenses per the terms of the workers’ compensation settlement.

Ex-Wife countered that the MSA funds were part of the “net proceeds” since the MSA did not fall under the excluded categories in paragraph 10.  In addition, she contended that since the establishment of the MSA was not “mandatory,” the claimant’s inclusion of same amounted to a “sham created … in hopes of taking more than his share of the workers’ compensation settlement.”

The trial court ruled in Ex-Wife’s favor finding that the MSA funds were includable as part of the net proceeds for purposes of calculating her 17.5% share under the divorce agreement.  The claimant appealed this ruling.

How Did the Court Rule?

The Illinois Appellate Court (Third District) ruled that Ex-Wife was entitled to 17.5% of the MSA funds (or $12,250) under the terms of the divorce agreement.

The court commenced its analysis by stating that under Illinois law the terms of a divorce decree are interpreted as any other contract and that “[w]hen the terms [of an agreement] are unambiguous, the court determines the parties’ intent solely from the language of the instrument.”

In reviewing the divorce agreement, the court noted that “net proceeds” included “reimbursement for medical payments actually paid by the petitioner.” Accordingly, the court stated that “[u]nless there is something about an MSA that removes the MSA funds from the definition of ‘net proceeds,’ the funds fall squarely within the dissolution decree’s definition of ‘net proceeds.’”

The court then examined certain sections of the Medicare Secondary Payer (MSP) statute and acknowledged the MSP’s general objective of ensuring Medicare’s secondary payer status. As part of this review, the court referenced 42 C.F.R. § 411.46 noting that this regulation “establishes that all parties in a workers’ compensation case have a duty to protect Medicare’s interests when resolving workers’ compensation cases that include future medical expenses.” Per 42 C.F.R. § 411.46 (d)(2), the court noted that a claimant who received a lump-sum settlement that included a future medical component was obligated to exhaust those funds before Medicare would be responsible for accident related medical expenses.  Thus, the court concluded that Medicare would pay for the claimant’s covered medical services “only after the exhaustion of the $70,000 [MSA fund].” 

From this analysis, the court concluded that the MSA was part of the net proceeds finding that “the settlement is reimbursing [the claimant] for his medical costs … [a]ccordingly, the funds in the MSA fall squarely under the definition of ‘net proceeds’ contained in the dissolution agreement.”   The court stated:

[The claimant] presents no evidence that the funds in the MSA are not ‘net proceeds.’ There is no question the money is his. The settlement was between [the claimant] and [the employer]; [The claimant] was given the money. It is not Medicare’s or [the employer’s] money.  The MSA clarifies how much of the settlement is intended to pay for future medical costs associated with the injury and places that amount in a separate account so that it can be shown that those funds were used to pay [the claimant’s] medical costs caused by the injury. Since the dissolution decree defines ‘net proceeds’ to include payment for future medical costs, the funds in the MSA are net proceeds.  The trial court correctly determined that [Ex-Wife] is entitled to 17.5% of the entire settlement.

The court rejected the claimant’s argument that the MSA funds were not “net proceeds” since they were specifically designated to pay for his future medical costs.   The court found that this argument ignored “the key fact … that [the claimant] agreed to include funds received for medical payments as part of the ‘net proceeds’ subject to [Ex-Wife’s] 17.5% claim.”  The court also dismissed the dissent’s related public policy concerns that its ruling was at odds with the MSP’s objectives.  On these points, the court stated:

The dissolution decree requires that [Ex-Wife] receives 17.5% of the net proceeds. [The claimant] can provide that 17.5% from the settlement funds and still leave $70,000 in the MSA. This is in no way inequitable. [Ex-Wife] receives 17.5% of the net proceeds; [The claimant] gets the rest. From his remaining 82.5%, he places (or leaves) $70,000 in MSA. The dissent’s public policy argument is without merit. The trial court simply enforced the contract [the claimant] made.

In addition, the court viewed the claimant (and not Medicare) as the beneficiary of the MSA account, finding that the MSA funds were set aside for the claimant to pay the first $70,000 of any future medical incurred related to his work injury.   In reaching this conclusion, the court further reasoned that the MSA funds “[do] not go to Medicare” and that the claimant “gets the money back” during his lifetime if the MSA account was not exhausted.

As part of its ruling, the court did not address Ex-Wife’s contention that the MSA was a “sham” purposely designed to reduce her share of the settlement proceeds on the assumption (as the trial court found) that the MSA was established in good faith.

Dissenting Opinion

Justice McDade dissented from the majority’s ruling on several grounds.  

From Justice McDade’s perspective, the MSA was not includable as “net proceeds” since the MSA funds were set aside for the sole purpose of satisfying Medicare’s interests.   On this point, she argued that the actual terms of the workers’ compensation settlement agreement recognized this fact. 

Specifically, Justice McDade pointed to that section of the agreement which indicated that the MSA was “not included” as part of the “total amount of settlement.”  Based thereon, she found that the agreement itself “expressly provides that the MSA funds are not included in the total amount of the settlement.” Accordingly, Justice McDade believed that Ex-Wife was only entitled to 17.5% of the net proceeds excluding the MSA amount (or 17.5% of $296,330).

Furthermore, Justice McDade disagreed with the majority’s finding that the divorce agreement was unambiguous based on that part of paragraph 10 stating that net proceeds included “reimbursement” for medical payments the claimant actually pays.  From her view, “the MSA funds do not constitute a ‘reimbursement for … medical payments’ …  [i]nstead, the MSA funds are funds set aside to protect Medicare’s interests in case [the claimant] is required to seek medical treatment or care in the future.”
 
Justice McDade stated that even if paragraph 10 was not ambiguous, and the MSA funds were in fact intended to be part of the “net proceeds,” she would find that the provision violated public policy since Medicare was the sole beneficiary of the MSA, noting that MSA accounts are created “solely to protect Medicare’s interests.”  Accordingly, from her perspective, permitting Ex-Wife to take 17.5% of the MSA funds would violate public policy and that “[s]uch diversion of funds not only harasses logic, but it also cuts against the grain of the plethora of legislative authority that has been enacted since 1980 in an effort to curb skyrocketing health care costs and preserve the fiscal integrity of the Medicare system.”

In addition, Justice McDade viewed Medicare as the sole and proper beneficiary of the MSA under 42 C.F.R. § 411.46.  In this regard, she rejected the majority’s conclusion that the claimant was the beneficiary of the MSA because the funds did not go directly to Medicare on grounds that:

Although the MSA funds do not increase the amount of revenue being brought into Medicare’s coffers, the funds will decrease the expenses drawn from Medicare’s coffers in the event that [the claimant] requires further treatment. The majority’s position that Medicare only qualifies as a beneficiary if the MSA funds go directly to Medicare overlooks the fact that the entire purpose of an MSA is to protect Medicare’s interests, not the interests of the claimant or the claimant’s ex-spouse.

Along these lines, Justice McDade also harshly criticized the majority’s conclusion that the claimant was the beneficiary of the MSA since he could (allegedly) get the money back during his lifetime if the account was not exhausted.  Justice McDade noted that the majority was “simply incorrect” based on a CMS policy memo released in August 2008 through which the agency actually rescinded a prior policy allowing claimants to petition Medicare for release of unused MSA monies during his/her lifetime.  Justice McDade viewed this policy reversal as manifesting Medicare’s intent to deny a claimant any opportunity to get MSA funds back during his or her lifetime.  Accordingly, she found the majority’s position to be “not only unsupported, [but also] superficial and misleading.”
 
Practical Considerations

When the dust settles, the Washkowiak decision raises important considerations on a number of different fronts. 

On one level, the court’s decision has already renewed debate in certain circles regarding the MSA process in terms of underlying statutory obligation, and issues pertaining to CMS’ overall MSA policy and administrative framework (or lack thereof).  For some in this camp, Washkowiak takes on added significance given the fact that this case involved a settlement that apparently did not meet CMS’ MSA review thresholds, thereby calling into question the nature and extent of MSP compliance obligations in non-threshold cases.  In this regard, Washkowiak injects yet another layer of complication into an MSA process and “future interests” discussion already fraught with questions and uncertainty on many levels.

While the court’s decision has certainly fanned these flames, Washkowiak in that sense becomes just the latest log tossed into that general fire and debate that has brewed for the past decade, and which will burn beyond Washkowiak absent fundamental change or clarification.  Thus, while not discounting the legitimacy of that larger debate regarding obligation or necessity, assessing the potential practical impact of Washkowiak in terms of what it may and may not mean in the context of MSA compliance and claim settlement is arguably of a more immediate concern. 

Viewing Washkowiak from this perspective, an important issue raised relates to the potential for collateral attack on the MSA. While the court in Washkowiak acknowledged the MSP’s objective of protecting Medicare’s secondary payer status, in the end it did not hold the MSA as sacrosanct and allowed monies to be taken from the allocation and given to a third party in an unrelated action.  This then raises the question as to whether the MSA could be reachable by third parties in other actions outside of, and unrelated to, the workers’ compensation claim.   For instance, could a creditor be entitled to MSA funds?  Absent the potential applicability of statutes or other authority barring creditor claims in this situation, the Washkowiak decision illustrates that the MSA may not necessarily be off limits.

As part of this analysis, another important question relates to whether CMS would honor judicial declarations (such as Washkowiak) allowing a third party access to MSA funds.  A legitimate argument could be made that CMS would in fact be (or should be) bound by such court rulings.  On the other hand, it is unclear whether the agency would take the position that such orders are contrary and subservient to applicable MSP provisions based upon the type of arguments advanced by Justice McDade in her dissent.  

This all would then appear to lead to the question of whether potential measures should be considered to safeguard the MSA from potential collateral attack in light of Washkowiak.  On this point, the author envisions two schools of thought emerging. 

From one view, such consideration will be deemed unnecessary from the perspective that CMS would be bound by Washkowiak type court orders, the existence of legal authority in the jurisdiction barring such claims in the first instance, or, likely from the perspective of some primary payers, that these concerns are the claimant’s responsibility. 

From another view, some may be inclined to approach the issue more from Justice McDade’s viewpoint believing that consideration should be given (at least in certain situations) to ensuring that the monies allocated for future medical are in fact available for their intended purpose in relation to protecting Medicare’s interests under the MSP.  Whether based on pure legal conclusion, or more pragmatic grounds, once this decision is made focus would then turn to identifying which cases should be afforded such consideration, exploring available options to best accomplish this objective, and which party should bear responsibility to formulate or secure the necessary arrangements. 

In closing, moving forward it will be interesting to see what actual impact Washkowiak may or may not have in relation to addressing Medicare’s interests as part of claim settlement, and with respect to how future courts may view this decision when faced with similar issues.

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Mark Popolizio is Section 111 Senior Legal Counsel for Crowe Paradis Services Corp.