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.

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On June 14, 2012, the Centers for Medicare & Medicaid Services (“CMS”) released an Advance Notice of Proposed Rulemaking (“ANPRM”).  This document solicits comments on standardized options that CMS is considering implementing to enable “beneficiaries and their representatives” to “meet their obligations to protect Medicare’s interest” with respect to future medicals in liability settlements (including self-insurance). Comments will be accepted for sixty (60) days from the date that the ANPRM is published in the Federal Register.

If you have a few moments, would you please read this DRI Medicare Secondary Payer (“MSP”) Task Force Advisory and respond to the address noted below with some comments?  We think it is worth your time.  We are working to influence and secure additional clarity from CMS about how any new obligation will impact resolution of liability claims (single event and mass tort) in the years to come.  Moreover, defendants and claimants are all “equally yoked” in efforts to ensure any new obligation is clearly defined and fact-specific as well as scalable and cost/time efficient to administer.


In the memo, CMS acknowledges that parties in the liability settlement context have been seeking definitive guidance on the issue of future medicals expenses in liability settlements.  CMS further acknowledges that while such guidance and a corresponding process has been available in workers’ compensation context, no such guidance or process has been established for meeting MSP obligations with respect to future medicals in the liability settlement context to date.  As such, the CMS memo specifically requests comment on “whether and how Medicare should implement such a similar process in liability insurance situations as well as comment on … proposed options” outlined in the memo.

The Proposed Options

CMS states that its interests should be considered in every settlement where the claimant, “reasonably anticipates receiving, or should have reasonably anticipated receiving Medicare covered…services after the date of “settlement…”.  To accomplish this purpose, CMS proposes options  ranging from absolute exemptions on one end of the spectrum (i.e., CMS defined a set of circumstances in which no further action would be necessary / no “set aside” required) to alternatives on the other end of the spectrum that involve a) the beneficiary paying for all future injury-related care out of his/her settlement proceeds until they are exhausted or b) submitting a proposed Medicare Set Aside arrangement (similar to the current process in workers’ compensation).With regard to the latter options, it is important to note that CMS acknowledges that perhaps thresholds could be established (i.e., a dollar amount below which no action is necessary even if one of the other exemptions do not apply).

Further, CMS appears to be considering a process whereby the beneficiary could pay the entire MSA amount “up front” as opposed to having to administer a set aside arrangement into the future.In addition, one can read the memo to suggest that CMS recognizes that efficiency will be gained by creating certain injury classifications for purposes of pre-screening cases as eligible for the various options (e.g., if claim involves injury classification with Injury Severity Score (“ISS”) below x, then no further action required).

Medicare has also recognized the importance of including procurement cost offsets in their calculations.

A link to the full CMS memo can be found at: http://www.gpo.gov/fdsys/pkg/FR-2012-06-15/html/2012-14678.htm.

What to Expect from the DRI MSP Task Force?

Without doubt, the options and related process that areultimately implemented must have scale and efficiency.Toward that end, the DRI MSP Task Force will be preparing commentary to submit to CMS and would be pleased to hear from you as we prepare our memo.  Our hope is to help assert a collective voice for clarity, efficiency and practicality. Please contact John Cattie, Vice Chair of the DRI MSP Task Force, at (704) 559-4300 or jcattie@garretsongroup.com to provide those comments and express your concerns.  If emailing, please put “DRI MSP Task Force: Future Medicals and Liability Claims” in the subject line.

The DRI MSP Task Force will be monitoring all guidance from CMS to continue to update our guidance and advice to DRI members.  All DRI members should begin to consider how such proposed rules may affect their clients.  The DRI MSP Task Force will continue to provide educational outlets (such as the DRI MSP Task Force website at: http://www.dri.org/News/MSP as well as our next MSP Task Force webcast on LMSAs [date to be announced]).  

As we read between the lines of the CMS memorandum, we are very pleased to see that CMS recognizes that a) there should not be a default rule under which an MSA is required in every liability settlement; b) screening should be done on a fact-specific, case-by-case basis; and c) such screening must be highly-scalable and time/cost effective.

We appreciate your feedback as we prepare our comments to CMS.  Further, we will continue to keep you up to date as additional information becomes available. All comments and feedback should be submitted to John Cattie at jcattie@garretsongroup.com with the subject line “DRI MSP Task Force: Future Medicals and Liability Claims.”

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