Serious Problems with Proposed Regs on Medicare Set-Asides

Saturday, July 15, 2006 | 0

By John J. Campbell, JD, CELA, MSCC

INTRODUCTION

On May 4, 2006, H.R. 5309 was introduced in the U.S. House of Representatives. This bill, entitled the "Medicare Secondary Payer and Workers' Compensation Settlement Agreements Act of 2006," proposes significant changes to the Medicare Secondary Payer (MSP) statute, specific to the use of Medicare Set-Aside Arrangements (MSAs) in Workers' Compensation (WC) settlements. The bill was immediately referred to the House Committees on Ways and Means and on Energy and Commerce for consideration for a period to be determined by the Speaker of the House. (The full text of H.R. 5309 may be viewed online at: www.jjcelderlaw.com/HR 5309.pdf )

The proposed legislation has many positive provisions that address important issues in the area of MSA practice. However, the new law also contains certain provisions that would clearly spell disaster for both Medicare and the MSA industry. It is the author's intent in this article to address both the positive and negative aspects of this new legislation; and to make a proposal for amending the proposed legislation accordingly.

POSITIVE ASPECTS OF H.R. 5309

Many of the provisions of H.R. 5309 appear to address legitimate problems and concerns regarding MSAs that have come to exist over the years. For example, H.R. 5309 solidifies the threshold amounts currently used by the Centers for Medicare and Medicaid Services (CMS) to determine review workloads. This removes the uncertainty that currently exists due to CMS' policy that the current review thresholds are subject to change at CMS' discretion.

H.R. 5309 also provides consistent standards for review of MSAs submitted to CMS for review. Further, the new law would generally require the usage of WC schedule rates to determine the proper amount with which to fund MSAs. This should eliminate inconsistencies among the various Regional Offices of CMS.

The proposed legislation would also exempt certain WC settlements from the requirement to reasonably consider Medicare's interests, where Medicare's interests are minimal or, at least arguably, non-existent. These exemptions would cover WC settlements involving claimants who are not eligible for Medicare and are not likely to become eligible within 30 months; small "nuisance" settlements; settlements that do not close out future medical expense liability; and settlements where the employer has no primary liability for future medical expenses under applicable WC laws.

The new legislation would require Medicare to shoulder many of the costs required to protect Medicare's interests; and would create consistency between CMS' treatment of settlement procurement costs with regard to Medicare overpayments, both before and after the date of settlement. CMS would also be required to employ definitions of "compromise settlements" and "commutation settlements" that are more in line with the common usage of those terms. Further, CMS would be required to recognize the fact that, in a compromise, it is appropriate to adjust the MSA amount to take the nature of the compromise into consideration.

Finally, H.R.5309 would require more timely responses from CMS, both to Medicare overpayment requests and to requests for approval of MSAs; and it would institute an appeal procedure to the MSA submission process that many deem vital in protecting the claimants', employers' and insurance carriers' constitutional rights to due process.

In general, these provisions are needed, although, some of the provisions of H.R. 5309 may need adjustments to more narrowly tailor the legislation to the problems and issues being addressed. However, certain other provisions of H.R. 5309 either create huge problems or fail to provide any meaningful benefit.

NEGATIVE ASPECTS OF H.R. 5309

Principally, there are four areas in which the provisions of H.R. 5309 will create a significant, negative impact on claimants, the Medicare program and the MSA industry. These areas include: exempting all WC settlements with a present value of less than $250,000 from the requirements of the MSP statute; creating a "safe harbor" that can be met in virtually every WC settlement by simple manipulation of the numbers; creating a "direct payment" option that provides no real benefit, but exposes claimants to significant losses from their settlement proceeds; and eliminating CMS' ability to recover massive amounts of Medicare overpayments and conditional payments under the MSP statute.

The $250,000 Exemption

Any WC settlement with a present value less than $250,000 (this amount will be increased annually, based upon the national average wage index) would be considered exempt from the provisions of the MSP statute under H.R. 5309. While the drafters of H.R. 5309 have claimed that the $250,000 figure is "Medicare's number," this is not strictly accurate.

CMS currently does not require submission and review of any WC settlement where the total value is less than $250,000. However, CMS does not calculate this threshold amount based on "present value," but rather on the full amount expected to be paid over the lifetime of the claimant. This difference in the method of calculating the threshold amount is significant.

For example, let us assume that a 60 year old male worker enters into a WC settlement, whereby he agrees to settle his WC claim, including future medical expenses, in return for an immediate annuity with a purchase price of $195,000 (which would be considered the present value under H.R. 5309). Due to his age, this worker has a remaining life expectancy of approximately 20 years, based upon the CDC Life Expectancy Tables for 2003. If the annuity has a 3% rate of return, it would pay out a total of approximately $254,506 over the claimant's life expectancy.

Under CMS' current review thresholds, if this worker were reasonably expected to become eligible for Medicare within 30 months of his settlement, he would be required to submit his settlement and an MSA proposal to CMS for its approval. Under H.R. 5309, this claimant would be permitted to disregard Medicare's interest as secondary payer altogether.

By creating an exemption for all settlements with a present value of less than $250,000, H.R. 5309 would expand the number of settlements that would meet the exemption, as opposed to CMS' current review threshold. Worse, by converting a review threshold to a complete exemption, H.R. 5309 would effectively shift all liability for future, work-injury related medical expenses in these cases onto Medicare. This exemption under H.R. 5309 is hardly directed at weeding out small settlements, where the cost of MSP compliance would outweigh the benefit to Medicare; nor is this exemption the best way to ensure finality in these settlements.

For example, if we were to assume, conservatively, that there are at least 750,000 WC settlements each year, nationwide (including both state and federal WC plans); and that at least 80% of those settlements would have a present value of less than $250,000, this would result in 600,000 exempt settlements under H.R. 5309. If the average projected future medical expenses of the type covered by Medicare were only $5,000 per claimant for life, this would result in a shifting of $3 Billion in WC liability onto Medicare every year.

At current spending and funding levels, the Medicare trust fund is expected to be completely exhausted in only 12 years. "Social Security, Medicare Trust Funds Sink", Washington Post, May 1, 2006. Medicare simply cannot withstand an additional $3 Billion in potential claim payments every year without collapsing.

The Safe Harbor

H.R. 5309 would provide a safe harbor for any WC settlement in which the MSA amount is no more than the greater of 10% of the present value of the entire settlement, or 15% of the portion of the settlement representing all medical expenses, including those not covered by Medicare. For WC settlements falling within the safe harbor provision, the MSA would be deemed to be a Qualified MSA, even if it is not approved by CMS.

Further, the safe harbor provision would eliminate CMS' ability to review the reasonableness of the very allocation that would qualify the settlement for the safe harbor in the first place. Therefore, this provision would permit the parties to a WC settlement to allocate to future medical expenses any arbitrary portion of the total settlement that would be small enough to ensure that the settlement would meet the H.R. 5309 safe harbor.

As a result, every settlement that would not be considered exempt from the MSP statute altogether under H.R. 5309 would be able to qualify for the H.R. 5309 safe harbor with some simple manipulation of the numbers; and CMS would be powerless to prevent the obvious abuse that the safe harbor provision would surely invite. This would mean billions of additional dollars in future liability exposure being shifted to Medicare. This would also mean the end of the MSA industry, since there would never again be a need to submit a WC settlement or MSA proposal to CMS.

The Direct Payment Option

H.R. 5309 contains a provision that would permit the parties to a WC settlement to agree that the MSA amount be paid directly to CMS. If the parties elect the direct payment option, all future liability under the MSP statute would be deemed satisfied; and CMS would have no further recourse.

When this author first reviewed the direct payment provisions of H.R. 5309, it appeared as though CMS would have to administer these payments as separate MSA accounts for the claimants who elected the direct payment option. This would have required CMS to go into the MSA administration business, which the agency is clearly not equipped to do. However, it now appears that this author was in error; and that the effects of the direct payment option provisions would be much worse, at least for claimants who might unwisely elect to use this option in lieu of funding an MSA account.

The direct pay provisions, according to the drafters and supporters of H.R. 5309, would allow a claimant, with the consent of the other parties to the settlement, to pay his or her MSA amount directly to Medicare. However, the payment would be final; and the MSA payment would somehow be deposited to the Medicare trust fund and not administered as a separate MSA account for the individual claimant. In return, Medicare would be required to cover all of the claimant's Medicare-covered expenses, regardless of whether these expenses were for treatment of work-related injuries or illnesses.

The rationale for this direct payment option seems to be that it would reduce the costs of settlement, since electing the option would result in an elimination of MSA administration costs. Presumably, it would also result in avoidance of any income tax liability on income that might be earned on funds in a conventional MSA account. The only problem with this rationale, is that it would no longer hold true, given the other provisions of H.R. 5309.

H.R. 5309's provisions regarding the computation of the MSA amount clearly state that MSA amount is to be reduced by the costs incurred in establishing, administering or securing CMS approval for any MSA; and by a proportional share of the costs to the claimant or payer in entering into the WC settlement agreement. Further, income taxes on MSA income are already payable out of the MSA account. In short, the MSA amount would be the same, whether the claimant elects to fund a professionally administered MSA account; or whether the claimant elects the direct payment option.

Thus, the direct payment option would not result in the reduction of settlement costs to the parties by even a single penny. On the other hand, the claimant would suffer serious disadvantages and increased exposure to depletion of his or her settlement proceeds by electing to pay the MSA amount directly to CMS.

When a claimant places his or her MSA amount into a separate MSA account, whether it be self-administered by the claimant or administered by a professional fiduciary, the claimant will usually have the option of directing the distribution of funds remaining in the MSA account when the claimant dies. Thus, the claimant could designate a spouse or children as death beneficiaries for any such funds.

However, if the claimant were to elect the direct payment option, the MSA funds would be paid to CMS irrevocably. That is, any portion of the MSA funds paid into the Medicare trust fund not used for the claimant during the claimant's life time would remain in the Medicare trust fund after the claimant's death. There would be no ability to direct any such unused funds to the claimant's surviving spouse or children.

Further, when providers bill an MSA account for items or services, they would be able to bill at WC schedule rates and be paid from the MSA at those rates, without the claimant being individually responsible for Medicare co-pays or deductibles. However, under the direct payment option, the claimant would be agreeing to have Medicare be the sole coverage for all medical expenses. Thus, in addition to having to pay the MSA amount to CMS to secure Medicare coverage of all covered items or services, whether or they are work-injury related, the claimant would also be liable for additional out-of-pocket costs to cover Medicare co-payments and deductible amounts, over and above the optional MSA direct payment to CMS.

It is difficult to see why any sane claimant would agree voluntarily to elect the direct payment option, given these facts. There is no benefit from the proposed direct payment option to the claimant, or to the other parties to the settlement. Further, there would be such a great deal of exposure of loss to the claimant, there is no cogent reason to have a direct payment option at all. It simply does not make sense.

Eliminating Overpayment Recoveries

H.R. 5309 would require CMS to provide complete documentation of any overpayments within 60 days after receiving a request for overpayment information. The information would have to be sufficient to allow the payer to determine which Medicare payments were for injury-related conditions. Payers would be permitted to rely upon this information and would be completely discharged of all MSP liability upon payment.

If CMS does not provide the required documentation within the 60-day deadline, it would lose all ability to collect any overpayments from the WC carrier, employer or claimant. However, since Medicare providers have as long as 27 months to bill Medicare, CMS would lose the ability to collect huge amounts of overpayments from WC settlements, even though the actual overpayments might not be made until after the expiration of the 60-day deadline.

MSA practitioners already know that the Medicare can take up to a year or more to identify and match past Medicare claim payments to arrive at an overpayment amount. This is especially true with older claims, where the information needed to develop a potential MSP claim has been purged from the contractors' computer systems and archived. Further, most Medicare overpayments are made because Medicare was unaware of the existence of a primary WC plan at the time the claimant's provider submitted a claim to Medicare for payment. Claimants, employers and WC carriers often wait until the eve of settlement to even notify CMS that a WC claim exists. This practice increases the risk of Medicare overpayments being made; and makes it more difficult for Medicare to completely develop its overpayment claim in a short period of time.

These restrictions on CMS' ability to collect conditional payments effectively negate a great deal of CMS' efforts over the past several years to recoup conditional payments from primary payers and claimants. The negative fiscal impact on Medicare would likely be in the billions of dollars over the next few years.

SOME RECOMMENDATIONS TO REPAIR H.R. 5309

It seldom does much good to point out problems without offering solutions. With some changes, H.R. 5309 could be made into a law that provides solutions to many of the more serious problems which inspired this proposed legislation in the first place; while avoiding the more serious problems and consequences that H.R. 5309 in its current form would create. In fact, an amended version of H.R. 5309, such as the one presented with this article, could easily accomplish this.

The idea of changing an existing work load threshold into a complete exemption from the requirements of the MSP statute is flawed. So is the idea of creating a safe harbor that essentially could be used in every non-exempt WC settlement. However, by combining the ideas of maintaining threshold criteria with a reasonable safe harbor provision, an amended H.R. 5309 could accomplish the goals of eliminating unnecessary settlement expenses while ensuring that CMS' interests would not be completely ignored and that an unsustainable shift of liability onto Medicare would be avoided.

The complete exemption for all settlements with a present value of less than $250,000 should be eliminated. Instead, the ability to qualify for any safe harbor should be limited to cases which meet defined threshold criteria. However, if the threshold criteria are to be based upon the present value of the settlement, rather than full dollar value over the claimant's lifetime, the threshold amount should be adjusted accordingly. Further, the qualification for the safe harbor should require that there be a meaningful amount allocated to the MSA amount.

Thus there could be a safe harbor available in WC settlements with a total present value of less than $150,000, where at the MSA amount is the greater of 15% of the entire settlement or 20% of the total medical portion of the settlement. Settlements totaling less than $150,000 in present value would not be reviewed by CMS anyway, so there would be no significant disadvantage to eliminating CMS' ability to determine the reasonableness of the MSA amount in these cases. Larger cases would not be susceptible to manipulation to qualify for the safe harbor, since these cases could not qualify for the safe harbor due to the total settlement amount.

The result would be a meaningful and consistent threshold amount; a fair safe harbor for cases that CMS would not review anyway under its current policies; and finality after settlement, in that true safe harbor cases could not be questioned or dishonored by CMS in the future.

The provisions in H.R. 5309 creating the direct payment option make no sense, if Medicare is going to be made to shoulder the costs of MSA creation, approval and administration. The direct pay option would only create potential problems for claimants, without providing a benefit to the parties or to Medicare. The direct payment provisions should simply be eliminated.

CMS should be required to produce timely responses to requests for overpayments. However, CMS should not be deprived of the ability to recover overpayments that may not even have been made as of the date of the request. Further, the parties should not be able to contribute to the causes for delayed responses, while benefiting from having done so. Therefore, H.R. 5309 should be amended to make it clear that a request for overpayment information should only require a response regarding overpayments already made prior to the date of the request. Further, H.R. 5309 should only provide a consequence to CMS for not responding to a request for overpayment information within 60 days if the claimant, employer or WC carrier was diligent initially in notifying CMS of the existence of the WC claim, so that CMS could take steps to prevent the overpayments.

There are other amendments to H.R. 5309, as well, which would reduce some of the negative impact on Medicare, while still dealing with the problems that this law was meant to address. For instance, an exemption for all compromise cases settling for 20% or less of the total claim goes beyond the goal of eliminating the need for compliance in small, nuisance settlements. Rather than base this exemption upon a percentage of the potential full value of the underlying claim, it should be based on a dollar threshold amount. CMS' current threshold amount of $25,000 for current Medicare beneficiaries would seem a reasonable threshold for such an exemption.

The revised version of H.R. 5309 offered with this article is an attempt to demonstrate that it is possible to throw out the bath water, while keeping the baby. This revised version is available online at: http://www.jjcelderlaw.com/HR5309ModifiedJJC.rtf. This author would encourage Congress to make free use of it, at least as a model.

CONCLUSION

The potential financial impact of H.R. 5309, in its current form, has not been determined with any precision, but it is sure to be huge. Medicare stands to lose billions of dollars in potential MSP claim recoveries and costs shifted from WC carriers onto the Medicare program. Given Medicare's current financial straights, substantially increasing the fiscal burdens of the program seems, at best, unwise. Further, the version of H.R. 5309 introduced to the U.S. House of Representatives on May 4, 2006 stands to increase the risk to claimants of significant losses from settlement proceeds; and to effectively wipe out a growing MSA industry that contributes to the health of the national economy.

Quite a few of H.R. 5309's provisions have merit. There should be time limits for CMS determinations and responses to overpayment requests, although these time limits must be ones that can reasonably be met by CMS. There should also be an appeal procedure for adverse MSA determination; and criteria for reasonably considering Medicare's interests in smaller settlements. There should also be a fair procedure to terminate or modify the funding in an MSA where the claimant's medical condition or other circumstances justify.

However, many of the sweeping changes proposed under H.R. 5309 seem ill-conceived and extreme. Most of these provisions go far beyond what is needed to address the problems created by the requirements of the MSP statute and by CMS policies. If H.R. 5309 is enacted into law in its present form, the result could be disastrous.

It has been stated by the drafters and supporters of H.R. 5309 that the purposes behind this proposed legislation are to bring uniformity, consistency, efficiency and predictability to the MSA process; while eliminating or minimizing the waste and delay that the current MSA process imposes upon the state and federal WC systems and reducing the costs of settlement. It is possible to keep the positive aspects of H.R. 5309 intact to achieve these goals, while eliminating the negative aspects of H.R. 5309 that threaten claimants, the MSA industry and Medicare, itself. It would require compromise in some areas, but the result would be beneficial to everyone concerned.

Professionals practicing in the MSA industry, especially those who are members of The National Alliance of Medicare Set-Aside Professionals (NAMSAP), are in a unique position to influence Congress' eventual treatment of H.R. 5309. NAMSAP is the only organization of its kind, made up of hundreds of professionals who deal with MSP issues in WC settlements daily. This author would encourage the leaders and members of NAMSAP to consider adopting an official position opposing H.R. 5309 in its present form; encouraging an amended version of H.R. 5309, such as has been recommended here; and to actively contact members of Congress, both as an organization and on an individual basis, to express the serious concerns and problems associated with this proposed legislation.

John J. Campbell, the founder and principal attorney of the Law Offices of John J. Campbell, P.C., has practiced law for 19 years and has practiced in the area of Medicare Set Asides since 1996. Mr. Campbell is certified as an Elder Law Attorney by the National Elder Law Foundation;* and is a Medicare Set-Aside Consultant Certified (national certification through the Commission on Health Care Certification).* Mr. Campbell is licensed to practice law in Colorado and is also licensed and on inactive status in Missouri. He is a member of the Colorado Bar Association (Trust & Estate Section and Elder Law Section), the Arapahoe County Bar Association, the Missouri Bar Association, the National Academy of Elder Law Attorneys, The National Structured Settlements Trade Association and the National Alliance of Medicare Set-Aside Professionals. His areas of concentration include elder law; estate, disability and long term care planning; probate; guardianship and conservatorship; Medicare, Medicaid, Medicare Set Aside Arrangements, and the preservation of public benefits in catastrophic third party liability and worker's compensation settlements. Mr. Campbell has published numerous articles and has presented numerous seminars on issues relating to Medicare Set Aside Arrangements across the country. He can be contacted at info@jjcelderlaw.com

*The State of Colorado does not certify attorneys as experts in any field.

Copyright 2006, John J. Campbell, CELA,* MSCC**. Article republished with permission of the author. -------------------

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