An Introduction to Workers' Compensation and Medicare Set-aside Arrangements (MSA)

One of the challenges that modern law school teachers of workers’ compensation law face is how (and whether) to teach beginning students about some of the complicated interactions between state and federal law. Workers’ compensation opt-out laws—which will be discussed in coming posts—are one example of this kind of interaction (in that case between workers’ compensation and ERISA). Another such interaction is between workers’ compensation and Medicare when cases are being “lump sum” settled in lieu of a claimant receiving ongoing benefit payments out into the future.   

A Medicare Set-aside is a mechanism which “sets aside” a portion of gross settlement proceeds for future work related or accident related medical services and prescription drug costs which are “covered and otherwise reimbursable by Medicare”. The intent is to maintain Medicare as a “secondary” payer where an otherwise “primary” payer such as a workers’ compensation or liability insurance carrier would be responsible. These agreements or “arrangements” may also provide that Medicare be reimbursed for any payments it made during the period before an employer or insurance company’s liability for a work-related injury had been established. Set- asides are a hot topic of discussion because of their broad impact on the workers’ compensation settlement process.  

Medicare Set-asides were first utilized in 1995 and after the “Patel” memorandum in 2001, which initially described the legal necessity for set-asides, became incorporated on a widespread basis within workers’ compensation settlements, judgments and awards. Medicare Set-asides may take different forms including workers’ compensation set asides (WCMSA), liability set asides (LMSA) or group health set asides (GHSA).

The Centers for Medicare & Medicaid Services (CMS) is the federal agency that administers Medicare. CMS approved $1.8 billion worth of WCMSA’s in fiscal year 2013 (latest available statistics see p. 22 here).  According to one researcher WCMSAs make up about 49% of workers’ compensation total gross settlement proceeds and of that 40% arises due to prescription drug pricing. These are staggering sums in the context of settling workers’ compensation claims and can often lead to cases not being resolved or being resolved with the medical component of the case left open. 

Medicare will defer payment for work or accident covered and otherwise reimbursable medical services and prescription costs until the amount placed in the Medicare Set-aside “account” has been properly depleted.  Proper depletion means the administrator of the Medicare Set-aside has used Medicare Set-aside funds only for future work or accident related expenses.

The mechanism which houses the funds set-aside are normally placed in an interest bearing or credit union checking account which is established in the injured party’s name (and tax ID#).  While permissible, actual “trusts” are rarely utilized as the mechanism of choice for the Medicare Set-aside. The only requirement established by CMS is that the mechanism be an interest bearing account in an FDIC insured bank or NCUAIF insured credit union.

CMS has established voluntary threshold review standards for workers’ compensation settlements, awards, or judgments but has yet to establish review thresholds for liability cases due to the difficulty in reconciling such areas as statutory caps, comparative negligence and policy limits not seen in workers’ compensation. LMSA guidelines are expected to be established in 2016 or 2017. CMS has established comprehensive guidelines and reference manuals outlining the WCMSA referral process which is best done using the CMS established web portal.

While the referral of a WCMSA to CMS is voluntary an “approved” Medicare set-aside is the preferred and best method to document the settlement has given Medicare “due consideration” and assure the injured party that Medicare coverage will be available to the injured party to pay for work or accident related expenses covered and otherwise reimbursable by Medicare.

An entire new cottage industry has developed to service the needs of those parties that decide to utilize either the LMSA or WCMSA.  There are in-house departments within the insurance industry, private commercial vendors and certified Medicare Set-aside consultants who determine if a WCMSA is appropriate, the amount necessary to fund the set-aside and, if requested, refer the set-aside to CMS.

Medicare Set-asides can be self-administered or administered for a fee by a third party. Self-administered set-asides can pose the greatest risk to the injured party since CMS will impose the same administrative responsibilities regardless of the type of administration selected.  Failure to properly administer the Medicare Set-aside can place the injured party’s future Medicare coverage at risk. Medicare Set-asides can only be terminated by the death of the injured party or the proper depletion of Medicare Set-aside funds.

Further information is available by referencing my  text “Practitioner’s Reference Manual to Settlements, Offsets & Set-asides - Second Edition” published by Atlantic Law Book Company http://sevarinolaw.com  and clicking “Publications”.

Because many law school workers’ compensation courses are offered for two credits, it will continue to be a challenge to properly introduce our students to the complex and evolving interplay between state workers’ compensation laws and various areas of federal law.

Angelo Sevarino