A hot button concern of DRI members and clients today is how to minimize exposure to the federal government under the Medicare Secondary Payer Act (the “MSP”) for reimbursement obligations. 42 U.S.C. § 1395y(b)(2). MSP reimbursement obligations may include conditional payment reimbursement and/or funding for a claimant’s injury-related future medicals. Internal protocols for addressing MSP reimbursement likely vary from client to client as everyone’s tolerance for risk differs to a certain extent. Recently, an innovative funding protocol has gained traction and is being utilized by those who seek absolute means to extinguish all MSP reimbursement exposure under the MSP. By combining Medicare Set-Aside (“MSA”) analysis with funding settlement proceeds into an Internal Revenue Code §468B Qualified Settlement Fund (“QSF”), all MSP reimbursement exposure can be extinguished in full.
The MSA analysis concept is well-documented. Under the MSP, parties have an obligation to determine if the federal government has a right to not pay certain future medical expenses and then ensure that it does not pay a claimant’s medical expenses prematurely. 42 U.S.C. § 1395y(b)(2)(A)(ii). As the Centers for Medicare & Medicaid Services (“CMS”) continues with the official rulemaking process, many seek shelter by addressing the MSA issue proactively prior to resolving a workers’ compensation, automobile, liability insurance (including self-insurance) or no-fault claim. Conducting MSA analysis and adding documentation to the file evidences your MSA compliance efforts. This alone, however, might not be enough, depending on your statutory interpretation with respect to future medicals under the MSP. 42 U.S.C. § 1395y(b)(2)(B)(ii).
To completely shield your client from MSP reimbursement exposure (past and future medicals), you may consider funding a QSF as part of the settlement disbursement process. The benefits of a 468B Settlement Fund to the client are: (1) to disengage from the litigation; and (2) qualify for economic performance to obtain a current income tax deduction. When utilized, payment is made by the client in exchange for a release from the present claimant(s) and possible future claimants. Once payment has been made to the 468B, the litigation process ceases for the client, thereby reducing legal costs and freeing up the resources being used in such litigation.
Further, it allows the client to deduct their payment (to the 468B) to the same extent as if the client paid the plaintiffs directly or paid into some other irrevocable and unconditional fund established to receive payments for the benefit of the claimants, thereby permitting a current income tax deduction if available.
The client is completely released from present and future claimants despite the cause of action remaining alive to permit the Court to maintain its jurisdiction over the case. This is accomplished by transferring tort liability to the 468B through a novation, which has the added effect of adding a new party as substitute obligor who was not a party to the action (such as the administrator), and discharging the original defendants by agreement of all the parties, completely extinguishing any alleged liability of the defendants. See Restatement (Second) of Contracts, Section 280 (1981).
Creation of Qualified Settlement Funds
Congress created 468B Settlement Funds under IRC §468B. The Treasury Department further defined these settlement funds by promulgating regulations that created the qualified settlement fund relating to Treas. Reg. §1.468B, which became effective on January 1, 1993. The relevant Treasury regulation, Treas. Reg. §1.468B-1(c), only lists three requirements to create 468Bs:
“A fund, account, or trust satisfies the requirements of this paragraph (c) if --
1. It is established pursuant to an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
2. It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability –
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law, or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
3. The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related parties).”
A Safe Harbor From the Storm
MSP reimbursement concerns often delay the settlement continuum today. Clients who wish to close a file and ensure it remains closed never really procure that level of comfort given current regulatory uncertainties. Until CMS promulgates final, binding regulations in this area, utilizing tools which, by operation of law, extinguish MSP reimbursement exposure makes sense. To that end, a QSF offers the following benefits when utilized:
1) Ensures compliance with all settlement terms while protecting proceeds in the interim;
2) Provides a current income tax deduction, as available, to the client in exchange for the release of the settlement monies to the QSF and its fund administrator; and
3) Allows the client to disengage from the litigation, thereby transferring all tort liability (including that arising under the MSP) to the QSF through a novation. This also has the added benefit of adding a new party as substitute obligor who was not a party to the action (i.e., the administrator), and discharging the original defendants by agreement of all the parties, completely extinguishing any alleged liability of the defendants.
MSP reimbursement concerns cost our clients time and money. Regulatory uncertainty in the MSP context creates unnecessary anxiety. Solutions currently exist which, when utilized properly, can save our clients time, money and anxiety. By combining MSA analysis with QSF funding as part of resolving a claim, the client gets the best of everything and you (likely) will get a repeat client seeking the same solution on future claims.