The Medicare Secondary Payer Act (MSP), enacted on December 5, 1980, established that Medicare would always be a secondary payer where another entity is obliged to pay medical expenses. Since that date, Medicare has had the right to seek reimbursement from the proceeds of settlements that include recovery for the expense of medical treatment, but for many years, this right was not enforced. In 2007, Congress enacted new rules to enhance enforcement of the repayment obligation with the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA).
There are two separate obligations that arise from MMSEA and the MSP: the MMSEA establishes the obligation of settling defendants to report any settlement that meets certain criteria to the Centers for Medicare & Medicaid Services (CMS), and the MSP created the separate obligation of plaintiffs having to repay benefits paid out by Medicare or Medicaid for treatment of the injury that is the subject of the litigation and settlement. While the duty to repay Medicare has existed for many years, the duty to report the settlement of tort lawsuits is new.
Although the deadline for reporting has been delayed several times, insurers and self-insured entities will be required to report lump sum settlements of tort claims made by Medicare-eligible claimants/plaintiffs that are settled on or after October 1, 2011. Substantial penalties will be imposed for failing to properly report. Failure to report and ensure that repayment has taken place could leave Responsible Reporting Entities (RRE) (defendants) in the position of having to repay Medicare themselves, even if they have already paid the plaintiff/claimant for those expenses in settlement or satisfaction of a judgment or award. Furthermore, it could lead defendants to be subject to a $1,000 per day plus interest penalty for any late reporting. In seeking reimbursement, Medicare will follow the Taxpayer Recovery Offset Program (TROP). Under this program, Medicare will first look to Social Security payments (claimant), then tax refunds (claimant), and then it will look to plaintiff’s attorneys. Only after failing to recover would they look to insurers or defense counsel (if they held the funds at some time).
Thresholds for Reporting.
There are certain thresholds relating to the obligation to report.
1) There is no reporting obligation for settlements agreed upon prior to October 1, 2011
. The applicable date is the date the agreement to settle is put into writing, or the date of court approval of a settlement, if required.
2) There is no reporting obligation for exposures that pre-date December 5, 1980
. The CMS User Guide has also very clearly set forth that the applicable dates of exposure are to be evaluated on a defendant by defendant basis:
Additionally, please note that application of the December 5, 1980, is specific to a particular claim/defendant. For example, if an individual is pursuing a liability insurance (including self-insurance) claim against “X”, “Y” and “Z” for asbestos exposure and exposure for “X” ended prior to December 5, 1980, but exposure for “Y” and “Z” did not; a settlement, judgment, award or other payment with respect to “X” would not be reported.
User Guide 3.0, at pp. 86-87. This level of clarity is rare, however, as there remain many unanswered questions as to proper compliance. Another User Guide has been expected for quite some time, but has not yet issued.
Questions remain as to what constitutes “uncontroverted evidence” that the last date of exposure pre-dates December 5, 1980. Generalized allegations of exposure during a plaintiff’s entire work history, continuing beyond that date, could be problematic. Neither a Stipulation between the parties nor a state court determination that all exposure pre-dates 1980 is likely to be sufficient. Affidavits executed at or near the time of settlement, declaring no exposure post-1980 will be considered suspect. So far, deposition testimony seems to be key. Additionally, any Release that does not exclude post-1980 exposures would create a reporting obligation, even where one does not already exist.
3) At present, there is no reporting obligation for settlements or payments totaling $5,000 or less
. This threshold drops in the future: on or after January 1, 2013, settlements or payments totaling $2,000 or less need not be reported; on or after January 1, 2014, settlements or payments totaling $600 or less need not be reported. All settlements or payments in satisfaction of a claim that includes the cost of medical expenses (and meets the other thresholds) must be reported after December 31, 2015.
4) There is no reporting obligation where the claimant/plaintiff is not Medicare-eligible
. It is estimated that 50-80 percent of mass tort claimants are Medicare-eligible (as compared to the approximately 15 percent of the general population that is Medicare-eligible). Note that one need not be of a certain age to be Medicare-eligible. Those on Social Security Disability become Medicare-eligible after 24 months. Railroad employees subject to FELA also become Medicare-eligible after 24 months. The recently-passed health care bill also decrees that persons afflicted with mesothelioma or asbestosis, or who live in a “federal disaster zone” are automatically eligible for Medicare. Some believe that a “no action” letter from CMS indicating that Medicare will not be asserting any liens should be enough to satisfy defendants that the payee is not Medicare-eligible. Others feel that reporting should still take place, since it is not yet completely clear that this is sufficient. For instance, the reporting of Worker’s Compensation payments to CMS would re-open a case, even after such a letter has issued. It has become imperative that those involved in third-party liability claims be fully aware of Worker’s Compensation claims that may also exist.
A Change In Focus.
Until this reporting obligation became law, it was standard practice to leave compliance issues to the plaintiffs. There has been a shift away from reliance on simple indemnification clauses in Releases, to an affirmative obligation on the part of defendants to ensure that Medicare is repaid for payments for medical expenses that result from the injury or illness that is the basis for the lawsuit or claim (Indemnification Plus).
Defendants are considering a number of strategies in order to avoid the double recovery penalty should plaintiffs fail to comply with the repayment obligation. It is a difficult situation, since defendants are held responsible, yet have no power to effectuate the required repayment. RREs have begun to establish procedures to deal with this reporting obligation. Where some defendants have coverage from a number of insurance carriers, there are multiple sets of procedures, some conflicting, relating to the same defendant. Some jurisdictions, notably Madison County, Illinois and a Michigan jurisdiction, have attempted to deal with this issue via Case Management Order (CMO).
Protections for Defendants.
The proposed CMOs reflect the change of focus away from indemnification clauses and toward proof of resolution. Some of the proposed clauses of these CMOs require that plaintiffs’ counsel hold in trust sufficient funds to satisfy any amount due to Medicare. Some provisions also require that if plaintiff fails to satisfy Medicare’s final demand, and further, if defendant is sued for these Medicare funds, that plaintiff will also be responsible for all attorney’s fees and expenses for defending the suit. However, plaintiffs’ attorneys are refusing to personally guarantee repayment, and many plaintiffs’ firms are refusing to even include language that plaintiffs themselves will indemnify. One local plaintiffs’ attorney is even refusing to provide ICD9 (treatment) Codes required by Form B, used for reporting, since he is not a medical doctor, and cannot know what treatment was related to the disease at issue.
Release language has again become the focus of much debate. Defendants must ensure that it is clear that it is plaintiff’s obligation to repay amounts paid for medical bills by Medicare, and that repayment is a condition precedent to settlement. Most plaintiffs’ counsel will agree to language that requires settlement funds to be held in escrow until a final demand from CMS is received and paid in full (minus the allowed “costs of procurement” that include plaintiff’s counsel’s fees and costs). Many plaintiffs’ counsel will agree to language that their clients will indemnify for any failure to properly repay Medicare. While many RREs also seek to include language that requires plaintiff’s counsel to personally indemnify settling defendants and their insurers, such requirements raise ethical issues. The New York City Bar has determined that such a personal guarantee is unethical, since it puts plaintiffs’ attorneys in conflict with their clients. This requirement has also been found not to be permissible in New York, Florida, Illinois, Missouri and Michigan. It was noted that the ethics rules in those states are nearly identical to those in Pennsylvania and New Jersey. Further, it is considered a violation of ethical rules for defense counsel to even attempt to induce plaintiffs’ counsel to violate ethical rules by being in conflict with their own clients. Accordingly, this approach is likely to be rejected.
It is hoped that a future User Guide will specifically address issues on which there is as yet no clear guidance, including methods for reporting partial payments and possibly clarification of procedures relating to mass tort claims, bankruptcy and insolvency. On March 14, 2011, the Strengthening Medicare and Repaying Taxpayers Act of 2011 (SMART Act) (H.R. 1063) was introduced in the U.S. House of Representatives. The SMART Act proposes amendments to the Medicare Secondary Payer Statute (MSP), relating to obtaining CMSs conditional payment amount, MSP appeal rights, the $1,000 a day penalty provision, threshold exemptions and a Statute of Limitations relating to MSP claims, and other provisions.
Negotiating With Medicare.
These issues should be clearly on the table during settlement negotiations. Without information as to the amount of the repayment obligation, neither party will know how much money the plaintiff will be able to keep from a settlement. It is common that a case will be settled for less than full value, or for less than the amount of the medical bills that have been paid by Medicare and must be reimbursed, due to contested liability and damages or limited insurance coverage. It is possible to negotiate with Medicare to have the amount of the final demand reduced. One case that does lend precedent to a reduced demand is Arkansas v. Ahlborn
, 547 U.S. 268 (2006), in which Medicaid settled for a pro-rata share of the medical bills paid. Plaintiffs only recovered 1/6th of the damages alleged, and it was held that Medicaid should likewise only be reimbursed for 1/6th of the medical payments. Medicare has accepted lower amounts or has waived reimbursement altogether if full repayment would leave no money for the injured plaintiff.
Plaintiffs can argue financial hardship if the plaintiff lives below poverty level or if there are unforeseen severe financial circumstances. Plaintiffs can also seek Allocation Orders, apportioning damages between Wrongful Death (which does not include medical bills) and Survival damages (which do cover medical expenses). Apportionment can also be requested, either as a percentage or in a dollar amount, between medical bills and other damages, such as pain and suffering. The amount allocated for medical bills would represent the total amount of recovery that is subject to the repayment obligation. This is supported by the Ahlborn
case referenced above.
The primary effect of the new reporting requirement is that the parties must deal with these issues very early in the litigation, long before settlement negotiations begin. It is clearly to the benefit of both plaintiffs and defendants to work together to resolve these issues, since variations in reporting can lead to a myriad of difficulties.
Miriam Dole is a partner in the firm’s Media office.