The Centers for Medicare & Medicaid Services (“CMS”) issued a Section 111 Non-Group Health Plan (“NGHP”) Alert on August 19, 2014.  The Alert revises the rules pertaining to Section 111 reporting for liability insurance (including self-insurance) in cases involving exposure, ingestion, and implantation.  Specifically, the Alert allows for the claims made in amended complaints or other comparable supplemental pleadings to govern Section 111 reporting obligations in the context of the December 5, 1980 cut-off.  

As background, the Medicare Secondary Payer (“MSP”) Act was enacted by Congress on December 5, 1980.  As such, CMS does not assert recovery claims against liability insurance settlements, judgments, awards, or other payments where the incident occurred before December 5, 1980.  CMS does not assert recovery claims where the incident occurred before December 5, 1980 because Medicare was the primary payer in these situations prior to the passage of the MSP Act.  The MSP Act has been revised several times since its initial passage on December 5, 1980.  One of the these revisions, referred to as Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (“MMSEA”), added mandatory reporting requirements with respect to Medicare beneficiaries who have Group Health Plan coverage or receive settlements, judgments, awards, or other payments from NGHPs.   

The Alert revises the Section 111 reporting requirements for liability insurance (including self-insurance) by providing that “the most recently amended operative complaint or comparable supplemental pleading” governs when determining whether the date of last exposure, ingestion or implantation claimed is before or after December 5, 1980.  The Alert responds to numerous inquiries regarding the effect of amended pleadings on Section 111 reporting obligations in the context of the December 5, 1980 cutoff for liability insurance payments.  See e.g., CMS-hosted Section 111 NGHP Town Hall Teleconference, pp. 46-47 (October 19, 2011); CMS-hosted Section 111 NGHP Town Hall Teleconference, p. 52 (February 23, 2012).

The Alert further provides:

Any operative amended complaint (or comparable supplemental pleading) must occur prior to the date of settlement, judgment, award, or other payment and must not have the effect of improperly shifting the burden to Medicare by amending the prior complaint(s) to remove any claim for medical damages, care, items and/or services, etc. 

Where a complaint is amended by Court Order and that Order limits Medicare’s recovery claim based on the criteria contained in this alert, CMS will defer to the Order. CMS will not defer to Orders that contradict governing MSP policy, law, or regulation.

Per the general rules governing Section 111 reporting, the revised language in the Alert controls over the applicable, current language in the MMSEA Section 111 Medicare Secondary Payer Mandatory Reporting, Liability Insurance (Including Self-Insurance), No-Fault Insurance, and Workers’ Compensation User Guide Version 4.2, Chapter III: Policy Guidance § 6.5.1, p. 6-23 through 6-25 (March 3, 2014).  The revised language in the Alert will be added to the next version of User Guide.

For complete details regarding Section 111 reporting obligations in the context of the December 5, 1980 cutoff, please see the full text of the Alert here.


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On June 3, 2014, the Centers for Medicare and Medicaid Services (“CMS”) released version 2.2 of its CMS WCMSA Reference Guide dated May 29, 2014 (the “Guide”).  While the Guide contains multiple updates and revisions (primarily with respect to medical payment records), the most critical update lies in Section 4.1.4 (Hearing on the Merits of the Case). CMS has identified that where parties identify which proceeds of the workers’ compensation (“WC”) award represent non-medical damages as compared to medical damages, and that allocation is approved by a court or other adjudicator (e.g. , a state WC board or commission) on the merits, then CMS will accept that allocation.  Sophisticated and diligent parties can now use this as a means to further limit related exposure on the MSA issue while the traditional WCMSA report (which only calculates medical expenses) no longer represents best practices in the Medicare Secondary Payer (“MSP”) compliance context.

Introduction

On June 3, 2014, the Centers for Medicare and Medicaid Services (“CMS”) released version 2.2 of its CMS WCMSA Reference Guide dated May 29, 2014 (the “Guide”).  Since its first release in March 2013, the Guide has become the one source of the truth in the Workers’ Compensation Medicare Set-Aside (“WCMSA”) world. The Guide consolidates all previous guidance from CMS about WCMSAs in one place, and then updates the Guide periodically as CMS guidance changes.  Version 2.2 represents the fourth published version of the Guide. Over the past fifteen months, the workers’ compensation (“WC”) community has learned that the Guide is the place to read not only what CMS expects from parties resolving WC claims involving Medicare interests but also what steps CMS directs parties to take to properly consider its interests in remaining a secondary payer post-settlement.

Hearings on the Merits of the Case

In Section 4.1.4, CMS discusses Hearings on the Merits of the Case.  There, it says:

“When a state WC judge approves a WC settlement after a hearing on the merits, Medicare generally will accept the terms of the settlement, unless the settlement does not adequately address Medicare’s interests. If Medicare’s interests were not reasonably considered, Medicare will refuse to pay for services related to the WC injury (and otherwise reimbursable by Medicare) until such expenses have exhausted the dollar amount of the entire WC settlement. Medicare also will assert a recovery claim if appropriate.

If a court or other adjudicator of the merits (e.g., a state WC board or commission) specifically designates funds to a portion of a settlement that is not related to medical services (e.g., lost wages), then Medicare will accept that designation.” (emphasis added)

Section 4.1.4, specifically the bullet portion of the statement, represents a significant development for all parties attempting to resolve a WC claim while trying to minimize its exposure on the WCMSA issue.

The allocation concept is not a new one, either for CMS or the judiciary. CMS’ own policy manual has addressed the concept of judicial allocations on the merits for years, though that has been limited to the conditional payment context.[1] The MSP body of case law that has developed over the past 20 years has also recognized the value, when determining the scope of CMS’ recovery rights, in identifying that portion of an award for non-medicals versus that portion for medicals.[2]  As CMS has moved forward in recent years to provide greater clarity around how to address its future interest, including the allocation concept as part of the discussion only makes sense.

The addition of Section 4.1.4 to the Guide may fundamentally change how parties resolve WC claims. Historically, when an employer or carrier received an MSA report from its trusted vendor containing an exceedingly high figure for the MSA, the parties were, most likely, stuck. Thinking that the entire amount of the MSA would need to be funded as part of any WC settlement and being advised that they must “consider and protect Medicare’s interest”, the parties would not close future medicals. Instead, they would close the indemnity portion of the WC claim and leave medicals open.

While that remains an option, CMS has now provided an available and compliant alternative for those interested in closing medicals and keeping the file closed. Instead of the MSA figure driving the potential amount needed to complete a settlement, parties can now agree on a settlement figure, then calculate that portion of the award for medicals versus non-medicals. When such analysis is conducted pre-settlement, one can understand with clarity how a potential settlement value affects the MSA obligation which results.

It is important to note that the Guide does not address nor does Section 4.1.4 change any currently existing reporting obligations linked to MMSEA Section 111 mandatory insurer reporting.[3]

Conclusion

In the Guide, CMS has now provided the WC community critical guidance about WCMSAs. Sophisticated and diligent parties will be sure to incorporate the allocation concept into every WC situation that needs to be resolved. Based on this new CMS guidance, a simple MSA report is no longer sufficient as that has the potential to lead to parties overfunding a WCMSA (increasing parties’ exposure on the issue in turn). Instead, to be compliant, any WCMSA guidance provided to parties attempting to resolve a WC claim should contain both an analysis of future cost of care needs going forward as well as an analysis of the non-medical component to the claim (using state specific WC statutes to identify factors such as disability rating, body part, number of weeks allowed and dollars per week).

DRI and its MSP Task Force will continue to monitor this rapidly developing area closely and provide updates as warranted. In the meantime, please reach out to John Cattie, our MSP Task Force Chair, with questions or concerns about this and other MSA issues by calling (704) 594-1778 or emailing him at jcattie@garretsongroup.com.


[1] See CMS MSP Manual, Chapter 7, Section 50.4.4 (Designations in Settlements).  There, CMS advises, “The only situation in which Medicare recognizes allocations … to nonmedical losses is when payment is based on a court order on the merits of the case.  If the court or other adjudicator of the merits specifically designate amounts that are for payment … not related to medical services, Medicare will accept the Court’s designation.”

[2] See, for example, Zinman v. Shalala, 67 F.3d 841, 846 (9th Cir. 1995) and Benson v. Sebelius, 2011 U.S. Dist. LEXIS 30438 (Decided March 24, 2011) (“…if a settlement covers both medical and nonmedical costs, CMS’s reimbursement may be apportioned so as to reach only the portion of the settlement allocated to cover medical costs.”).

[3] Pursuant to Section 6.5.1, Chapter III of the MMSEA Section 111 User Guide: ““No medicals”—If medicals are claimed and/or released, the settlement, judgment, award, or other payment must be reported regardless of any allocation made by the parties or a determination by the court.

• The CMS is not bound by any allocation made by the parties even where a court has approved such an allocation. The CMS does normally defer to an allocation made through a jury verdict or after a hearing on the merits. However, this issue is relevant to whether or not CMS has a recovery claim with respect to a particular settlement, judgment, award, or other payment and does not affect the RRE’s obligation to report.”

 

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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.

Conclusion

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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There’s now word that the Centers for Medicare & Medicaid Services (CMS) will issue a Notice of Proposed Rulemaking as soon as September 2013 on addressing future medical costs in liability cases. The U.S. Department of Health & Human Services (HHS) has issued an agenda item indicating that is the earliest that CMS could proceed with issuing parameters for funding Medicare beneficiaries’ future medical expenses in liability claims.

The Notice of Proposed Rulemaking is expected to outline how Medicare’s interest should be protected (per the Medicare Secondary Payer Act [42 U.S.C. §1395y(b)(2)]) in cases where future medical care is claimed or effectively released in the settlement, judgment, award, or other payment of damages. While CMS has guidelines in place for the handling of future medical expenses in workers’ compensation cases, until final rules are released in the liability context, there are no similar standards for claims involving self-insureds and automobile, liability, and no fault coverage.
 
CMS began the process of issuing those regulations last year, when it released an Advanced Notice of Proposed Rulemaking (ANPRM) for these claims in June 2012. This agenda item now reveals that CMS intends to take the next step.
 
The upcoming guidelines are expected to pinpoint the circumstances in which a special account needs to be established – or dollars set aside – for Medicare’s funding of future medical treatment stemming from an injury for which a Medicare beneficiary received a settlement or damage award. These accounts are known as Medicare Set Asides (MSAs).
 
The DRI Medicare Secondary Payer Task Force will continue to follow these developments and update the DRI community as the situation unfolds. For more information, please see http://www.dri.org/News/MSP

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Effective today, Medicare has three years to claim reimbursement for its subscribers  medical costs. This statute of limitations is mandated by The Strengthening Medicare and Repaying Taxpayers (or SMART) Act1 which became law early this year. Until now, there had been uncertainty on the timeframe in which Medicare could seek to recoup costs for which another party accepted responsibility (through settlement, judgment, award, or other payment). The United States now has a three year window to file suit in an action to seek repayment, measured from the date of reporting to the Centers for Medicare & Medicaid Services (CMS) as part of the Mandatory Insurer Reporting rules following Section 111 of the Medicare Medicaid SCHIP Extension Act of 2007.2
 
Overall, the SMART Act aims to shorten the Medicare reimbursement timeline and create further clarity concerning the process. But, the law's full impact won't be known until its provisions are implemented over the course of the next 18 months.
 
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Recently, the U.S. District Court for the Western District of Louisiana issued the Benoit v. Neustrom opinion. 2013 U.S. Dist. LEXIS 55971 (decided April 17, 2013). Here, the parties sought approval that CMS' future interest could be fully satisfied by funding an MSA for less than full value of the Claimant's future medicals. The parties agreed to resolve a liability claim for a gross amount of $100,000. Defendant had an MSA allocation prepared, which concluded that the Claimant would be expected to incur between $277,758.62 to $333,267.02 in future injury-related care otherwise covered by Medicare. Additionally, Medicare had made conditional payments on the Claimant’s behalf totaling $2,777.88. 

The Court, having previous experience addressing MSA related questions, looked to the 11th Circuit decision in Bradley v. Sebelius for guidance. 621 F.3d 1330 (11th Cir. 2010).  Bradley was an allocation case under the MSP with respect to conditional payments, holding that CMS must respect a judicial allocation based on the merits of the case. Applying the logic that CMS’ recovery can be fully satisfied by identifying that portion of an award which is intended to compensate a Claimant for medical expenses (past and future), the Court agreed with the parties in that an MSA did not need to be fully funded to satisfy Medicare’s interest.  It did, however, disagree with respect to the dollar amount of the MSA. 

Instead of following a strict pro rata approach advocated by the Claimant, the Court instead calculated a ratio of the net settlement proceeds (after costs of procurement and conditional payments by CMS had been subtracted from the gross award of $100,000) against the mean MSA figure. That ratio of 18.2% was then applied to the net proceeds, leading the Court to conclude that an MSA totaling $10,138 would be an appropriate amount with which to satisfy Medicare’s future interest.

This case is yet another example in 2013 (building on recent cases such as Early and Sterrett) depicting that MSA issues cannot be ignored simply because the claim being resolved is a liability claim instead of a workers’ compensation claim.  While the issue must be addressed, the opinions also display that a more sophisticated methodology must be applied which takes into account the inherent differences between liability and workers’ compensation claims.  As such, MSAs in the liability context should rarely be funded for the full value of a claimant’s overall future costs of care otherwise covered by Medicare (as the claimant did not recovery 100 cents on the dollar for such damages).  In applying the allocation logic previously utilized in Bradley for conditional payments, the Court has provided a reasonable and logical path for parties to follow in the short term, with CMS anticipated to provide guidance in 2013 in the form of a Notice of Proposed Rulemaking.  

The DRI MSP Task Force will continue to follow these developments and provide you with practical means for incorporating this guidance into your practice.
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A recent state court opinion from Connecticut highlights the critical importance of future medical allocation under the MSP Act. If settling parties are able to determine that no settlement proceeds are payable for a claimant’s Medicare-covered future medical expenses, then the parties do not need to fund an MSA in order to comply with the MSP Act.  The resulting opinion underscores the importance of addressing the future medical expense issue proactively, before mediation, while focusing on whether any dollars could be said to be payable or “allocated” to future medical expenses.  


On February 5, 2013, the Connecticut Superior Court, Judicial District of Litchfield, granted the settling parties’ motion to determine that the parties have reasonably considered Medicare’s interests as required by the Medicare Secondary Payer (“MSP”) Act1.   In Sterrett v. Klebart2,   the settling parties had concluded that they had reasonably considered Medicare’s future interest and that a liability Medicare Set-aside Arrangement (“LMSA”) was not needed as part of settling the liability claim. The Court, after reviewing the evidence presented, agreed that the parties had reasonably considered Medicare’s future interest in concluded that no settlement proceeds had been “allocated” for future medical expenses otherwise covered by Medicare within the gross award.

Facts.
Plaintiff Clifford Sterrett (the “Plaintiff”) was allegedly injured when he fell down the stairs at the home of the defendants.  Defendants denied responsibility, citing certain special defenses as well as asserting the Plaintiff was contributorily negligent as a result of alcohol consumption.  The parties settled the claim at mediation, and the mediator signed off on a letter containing the elements of the settlement agreement, including a review of the factors that led to the gross award of $550,000, on December 3, 2012.  The parties submitted a joint motion, filed on January 29, 2013, seeking the Court’s approval that the parties had reasonably considered Medicare’s interests as required by the MSP Act.

Analysis.
The Court begins by providing a succinct recitation of the statutory language of the MSP Act. Then, the Court describes how the parties determined that the settlement proceeds did not address future medical expenses otherwise covered by Medicare.  The Court noted that the gross award of $550,000 represented a significant compromise over any potential verdict range, if this matter had proceeding to trial.  
In reaching its conclusion, the Court specifically states that it (as well as the parties themselves) understands that the Plaintiff would incur future medical expenses payable by Medicare post-settlement.  However, the funds payable to the Plaintiff did not contain sufficient proceeds to pay for such future medical expenses.  Instead, the proceeds represented noneconomic damages sustained by the Plaintiff as well as some “modest allocation for future medical expenses arising out of the possible need for home health aides” though such costs are not typically covered by Medicare.  The Court concluded that an LMSA was not required under these case specific facts and that the parties had reasonably considered Medicare’s future interest.  

Takeaway.
This case strikes at the heart of MSA analysis: how many dollars out of one undifferentiated sum is really being paid for future medical expenses as compared to all other damage components pled and released?  Historically, this issue creates great difficulty for parties3  and has been a source of much discussion over the past 12 months or so.  This should become much less opaque after CMS issues guidance about liability settlements and future medical expenses under the MSP Act.  That guidance is expected to be released later this year.  Until then, the best approach is to proactively address the issue, and evidence exactly how you have arrived at your conclusion on the future medicals issue.  That approach, coupled with the Court’s conclusion in Guidry v. Chevron4, highlights the importance of utilizing a formalized approach to MSP compliance.  When addressing future medicals issues under the MSP Act, a formalized approach will yield complaint results every time.    

Having a formalized settlement process that integrates these core concepts will achieve efficiencies and enhance the effectiveness of settlement programs.  Such a formalized settlement process should take into account the timing and coordination issues which may hinder successful LMSA analysis.  Thus, screening a case up front to verify entitlement and identifying a claimant as an MSA candidate early on is the proper launching point for any LMSA analysis.  As parties move towards resolution and identify the prospective gross award, they can then determine (consistent with CMS’s basic rules issued in the workers’ compensation settling) if a future medical allocation exists within the gross award, either in the form of a specific carve out or implicitly contained within the one undifferentiated lump sum.  

The DRI MSP Task Force continues to track relevant judicial opinions and guidance from CMS in order to ensure compliance for you and your clients.  Members of the MSP Task Force have experience in addressing these nuanced issues, and would be happy to guide you through them should you need assistance.  For more information, please see our website at http://www.dri.org/News/MSP. 

We continue to stress the importance of utilizing a formalized approach in addressing the LMSA issue on every single claim, as that process will, in and of itself, ensuring compliance on the LMSA issue.  

[1] 42 U.S.C. §1395y(b)(2).

[2] Sterrett v. Klebart, 2013 Conn.Super. LEXIS 245 (filed February 5, 2013).

[3] Zinman v. Shalala, 67 F.3d 841, 846 (9th Cir. 1995) (where the Court foresaw this inherent problem in liability settlements under the MSP Act).

[4] Guidry, et al. v. Chevron USA, Inc., Civ. No. 6:10-cv-00868, 2011 U.S. Dist. LEXIS 148942 (W.D. La. December 28, 2011).  

 

 

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Plaintiff Susan Early was allegedly injured while a passenger on one of Carnival Corporation’s ships.  A claim was initiated, then (apparently) resolved.  The mediator in the matter filed his report on November 21, 2012.  That report stated that the parties had settled subject to the condition that the Court retain jurisdiction to enforce the terms of the settlement and determine the issue of a possible LMSA if one were needed.  Early motioned the Court for Determination of Whether a Medicare Set Aside is Required.  The terms of the settlement negotiations were:

1) Carnival will pay Early an undisclosed sum;
2) Each party will pay its own attorney’s fees and costs;
3) Early will execute a release for Carnival;
4) Carnival will be responsible for the mediator’s fees; and 
5) The parties DISAGREE on whether an LMSA was required, but agree to submit the issue to the Court and to abide by its determination.

Early’s motion argued that an LMSA was not required under the Medicare Secondary Payer (“MSP”) Act.   Carnival filed its response, urging the Court to conclude that an LMSA was required.

Analysis.
The Court begins by providing a succinct recitation of the MSP Act. Then, the Court describes how MSA analysis has emerged as means to address the future medicals issue.   After detailing what actually constitutes a settlement in Florida, the Court turns to the question of whether the parties have an agreement to settle the claim.  
The Court concludes that the parties agreed on four out of five essential terms.  The term the parties could not agree upon was the LMSA issue, and asked the Court to fill in the blank on their behalf.  The Court declined the opportunity to do so.  
The Court distinguished this fact pattern from two others which appear routinely in other opinions addressing LMSA issues: 1) cases where the parties have a settlement agreement and agree that an LMSA is required, but cannot obtain review and approval of the LMSA from the Centers for Medicare & Medicaid Services (“CMS”); and 2) cases where the parties have a settlement agreement but disagree as to whether those terms included the creation of an MSA.  Here, the parties did not ask the Court to enforce a settlement agreement; they asked the Court to assist with a critical term of a potential settlement agreement.  While the Court noted the “conscientious and diligent” efforts of counsel to uncover the issue, it was not within the Court’s dominion to gap fill with respect to this essential term of the potential settlement agreement.  

Takeaway.
This case is another example of the LMSA issue derailing what is (otherwise) a perfectly acceptable settlement agreement.  These issues should become much less obtrusive after CMS issues final guidance about liability settlements and future medical expenses under the MSP Act.  That guidance is expected to be released later this year.  Until then, the best approach is to proactively address the issue, and evidence exactly how you have arrived at your conclusion on the future medicals issue.  That approach, coupled with the Court’s conclusion in Guidry v. Chevron , highlights the importance of utilizing a formalized approach to MSP compliance.  When addressing future medicals issues under the MSP Act, a formalized approach will yield complaint results every time.    
Having a formalized settlement process that integrates these core concepts will achieve efficiencies and enhance the effectiveness of settlement programs while ensuring closure on the file.  Such a formalized settlement process should take into account the timing and coordination issues which may hinder successful LMSA analysis.  Thus, screening a case up front to verify entitlement and identifying a claimant as an MSA candidate early on is the proper launching point for any LMSA analysis.  As parties move towards resolution and identify the prospective gross award, they can then determine (consistent with CMS’s basic rules issued in the workers’ compensation settling) if a future medical allocation exists within the gross award, either in the form of a specific carve out or implicitly contained within the one undifferentiated lump sum.  

The DRI MSP Task Force continues to track relevant judicial opinions and guidance from CMS in order to ensure compliance for you and your clients.  We continue to stress the importance of utilizing a formalized approach in addressing the LMSA issue on every single claim, as that process will, in and of itself, ensuring compliance on the LMSA issue. 

[1] Early v. Carnival Corporation, No. 12-20478-CIV-Goodman (S.D. Fla. February 7, 2013).

[2] 42 U.S.C. §1395y(b)(2).

[3] The Court cites to a recent article published by the American Bar Association which was co-authored by John V. Cattie, Jr., DRI MSP Task Force Vice Chair.  See also Medicare Set-Aside Arrangements Under the Medicare Secondary Payer Act, 42 The Brief, n. 10, Fall 2012.

 

[4] Guidry, et al. v. Chevron USA, Inc., Civ. No. 6:10-cv-00868, 2011 U.S. Dist. LEXIS 148942 (W.D. La. December 28, 2011).  

 

 

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SCOTUS Update - Hadden v. United States

Posted on September 25, 2012 02:05 by Robert H. Wright

The Supreme Court of the United States is meeting today to decide which cert. petitions will be granted for the new term, which formally begins next Monday.  One of the petitions distributed for review at the conference will be that from Hadden v. United States, in which DRI – The Voice of the Defense Bar filed an amicus curiae brief in support of cert.  The issue in the case is whether, under the Medicare Secondary Payer Act, the government is entitled to full reimbursement of its Medicare payments when a beneficiary compromises a tort claim and recovers a reduced amount for medical expenses, or whether the government (like its beneficiary) is entitled to only a proportionate recovery from the settlement.  The petition is listed on the scotusblog.com (a blog devoted to coverage of the Supreme Court) as one of the “Petitions to Watch” at this conference.  Today, at about 9:30 a.m. eastern, the court is expected to release its list of the petitions granted in today’s conference.

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On June 28, 2012, the Third Circuit became the first Federal court of appeals to address the secondary payer rights of Medicare Advantage Organizations (also known as Medicare Part C plans).  In In re Avandia Marketing, Sales Practices and Products Liability Litigation, the court held that the Medicare Secondary Payer Act (“MSP”) provides Medicare Advantage Organizations (“MAOs”) with a private cause action to seek recovery against a primary payer (such as a liability insurer or self-insured defendant in a personal injury matter) in Federal court.  In coming to this conclusion the court relies on i) the broad language of the MSP Act as applied to private causes of action, ii) the policy and purpose behind the Federal Medicare Advantage (“MA”) program, and iii) the regulations promulgated by the Centers for Medicare and Medicaid Services (“CMS”). 

This case marks a departure from federal district court decisions[1] which have denied MAOs (and Medicare-substitute health maintenance organizations) a federal independent right to sue primary payers, and in some cases, indicated that MAOs should seek potential remedies in state court based on a contractual claim and/or conflict preemption principles.  While this case did not reach the issue of whether the defendant/primary payer was liable to the MAO nor did it address the level of disclosure (e.g., specificity of notice to defendants) required by the MAOs to identify a primary payer, the court’s decision will alter the framework by which parties settle cases involving Medicare-enrolled beneficiaries.  Specifically, as parties engage in settlement negotiations in nationwide litigations, the lien resolution process for participating claimants will likely evolve to include both conditional payments made by CMS as well as a private insurer acting as a provider of a MAO.   For those settling parties, however, who have in place for their settlements a proactive process to verify and resolve appropriate healthcare reimbursement claims, the court’s decision should not be disruptive. 

 
In re Avandia Marketing, Sales Practices and Products Liability Litigation, No. 11-2664, decided June 28, 2012, the Third Circuit Court of Appeals reversed a district court decision (Eastern District of Pennsylvania)[2], which dismissed the claim of Humana Insurance Company (“Humana”) and other similarly situated providers of MAOs against GlaxoSmithKline, LLC and GlaxoSmithKline plc (collectively, “GSK”) for reimbursement of medical expenses incurred as a result of ingestion of GSK’s drug, Avandia.  The Third Circuit also remanded the case for further proceedings consistent with its opinion.  This ruling is based on the reading of a statutory private cause of action for MAOs under 42 U.S.C. § 1395y(b)(3)(A), which is supported by both the analysis of the MA Program’s legislative purpose of and CMS’ interpretation evidenced in 42 C.F.R. § 422.108.  The court was able to distinguish Humana’s claim from prior, conflicting federal decisions and ultimately found that Congress did not intend to deny MAOs the same right as traditional, fee for service Medicare Parts A and B (“Medicare”) and therefore, the court concluded MAOs have a private cause of action under the MSP to assert claims against a primary payer.
 
The District Court Decision
Humana filed its complaint based on the claim that under the MSP it was granted secondary payer rights and thus it was entitled to reimbursement for covered expenses it paid related to Claimants in the Avandia MDL action.  Humana also sought equitable relief in the form of an order compelling GSK to identify settling Avandia claimants to MAOs who may have covered them.  In dismissing the complaint, the district court determined that:  (1) Medicare’s private right of action set forth in 42 U.S.C. § 1395y(b)(3)(A) does not apply to MA Plans; (2) the secondary payer provisions of the Medicare Advantage program, (found in 42 U.S.C. § 1395w-22(a)(4)), did not create a private cause of action (either express or implied); (3) the MA statute’s silence on the existence of a private cause of action for MAOs was not ambiguous, but rather indicative of Congressional intent to not create a private cause of action for MAOs; and (4) absent any such ambiguity there was no need to defer to a CMS regulation that granted MAOs parity with Medicare.  Finally, the district court denied Humana’s request for equitable relief to order GSK to disclose information about settlements that Humana’s enrollees entered into with GSK, holding that Humana, not GSK, had access to information about which Avandia claimants were enrolled in Humana plans and could act accordingly to remind its enrollees of their obligations to disclose any settlement they might reach with GSK.[3]
 
The Third Circuit’s Decision
The Third Circuit utilizes a three part analysis in reaching its conclusion that the plain text of the MSP is broad and unrestricted, and therefore, allows any private plaintiff with standing, including MAOs, to bring a cause of action against primary payers. 
 
The first and most pivotal part of this analysis focuses on the Medicare statute itself.  The court begins its discussion with the sections pertaining to MAOs[4] and gives particular emphasis to the secondary payer provision found at 42 U.S.C. § 1395w-22(a)(4).  Unlike the district court which declined to find any express or implied reference to Medicare’s rights, the Third Circuit states that § 1395w-22(a)(4) cross references § 1395y(b)(2)’s definition of primary payer and its positioning of Medicare as a secondary payer.  After making this connection the court turns its attention to Medicare’s rights under § 1395y(b)(3)(A)[5] and emphasizes that this section does not designate what entity may bring such an action, supporting Humana’s position that any private party may bring suit when that party is a secondary payer seeking recourse from a primary payer.  The court concludes that no viable arguments have been presented to sway its broad interpretation and it dismisses any narrow interpretations regarding reference to “subchapter”[6] or the permissive term “may”[7].  Before moving on to the second part of its analysis the court distinguishes this case from other recent federal cases[8] by stating that none of those cases had addressed the issue at hand - a claim brought under 42 U.S.C. § 1395y(b)(3)(A) (the MSP private cause of action).
 
The second part of the court’s analysis has a more practical thrust and examines the legislative history and policy goals of the MA program.  The court states that denying MA plans a private right of action is tantamount to putting MA plans at competitive disadvantage in their effort to provide an appealing alternative to traditional, fee for service Medicare (Parts A & B) for Medicare entitled individuals.  As such, the court posits this denial of a private cause of action would hinder MAOs from providing benefits to its enrollees and would run counter to Congress’ stated goal to utilize the private sector to create more efficient and less expensive healthcare options for Medicare entitled individuals.  The court closes this second part with an examination of the cost savings impact on the Medicare system as a whole and concludes that the Medicare Trust Fund will achieve cost savings if MAOs spend less on coverage as a result of their ability to recover from primary payers.  In a footnote that is sure to get some attention, the court notes that its decision will unquestionably result in cost savings for the Medicare Trust Fund because its holding on the meaning of the private cause of action under the MSP statute will apply equally to private entities that provide prescription drug benefits pursuant to Medicare Part D, citing Medicare Part D’s secondary payer provisions under 42 U.S.C. §1395w-115(e).
 
The final part of the court’s analysis addresses whether regulations that CMS has promulgated to interpret the MSP statute should be accorded deference if the private cause of action provisions are determined to be ambiguous when applied to MAOs.  The court frames this issue of deference owed to a federal administrative agency’s regulation by applying the Chevron standard.[9]  Chevron provides a two-step test in determining whether a federal agency’s statutory interpretation is granted a broad amount of deference.  Step one assesses whether Congress, in enacting legislation, has spoken unambiguously about an issue within the statute itself.  If Congress did not speak unambiguously, then step two asks whether the federal administrative agency’s statutory interpretation enacted in a regulation is reasonable.  The court cites to 42 C.F.R. § 422.108[10] and CMS’ memo of December 5, 2011,[11] in support of its conclusion that CMS’s interpretation of the MSP statute is reasonable, and thus finds deference is warranted should an ambiguity be found regarding the MSP’s private cause of action applying to MAOs.
 
In sum, the Third Circuit held that MAOs have an equal and parallel private right of action (as traditional fee for services Medicare) to sue primary payers where those payers fail to provide for payment or appropriate reimbursement to MAOs.  The Third Circuit was not asked to, and did not reach the question of whether GSK was liable to Humana, only that the private cause of action remedy applied to MAOs, including Humana.  Instead, the Third Circuit reversed the district court’s dismissal of Humana’s complaint and remanded the case back to the district court for further proceedings.  How the district court resolves the matter and whether any relief is afforded Humana is still an unknown.
 
The Take Aways
While the debate regarding the rights of MAOs may continue in other federal appellate jurisdictions (and perhaps even in the Third Circuit), the impact of this decision will likely be felt immediately and nationwide.  Over the past few years, the general issue of Medicare compliance has been a hotly debated topic.  Going forward, all parties who settle liability claims will likely implement procedures to identify which settling claimants are enrollees of Medicare Part C plans (MAOs) (and hence, the defendant is in those instances, in effect, would be a primary payer within the meaning of the MAO and MSP statutes).[12] 
 
The remaining issues focus on the mechanics of applying the In re Avandia decision.  CMS’ regulations (42 C.F.R. §422.108(b) mandate that MAOs, must for each MA plan, (a) identify payers that are primary to Medicare (b) identify the amounts payable by those payers and (c) coordinate benefits.  So the questions that remain include:

  1. Does “omnibus” notice given to the defendant (that lacks claimant level detail) “perfect” a MAO’s interest such that the primary payer (defendant) must then protect the MAO’s interests as part of the coordination of benefits paid by the MAO to its enrollees who settle claims with the defendant?
  2. What will come, if anything, of the Medicare Part D comment on remand?

The DRI MSP Task Force will continue to monitor this evolving situation, and provide updates to DRI members as warranted.  DRI members can always access our webpage at http://www.dri.org/News/MSP for additional information.

 


[1] Care Choices HMO v. Engstrom, 330 F.3d 786 (6th Cir. 2003); Nott v. Aetna U.S. Healthcare Inc., 303 F.Supp. 2d 565 (E.D. Pa. 2004); Parra v. PacfiCare of Arizona, Inc., 2011 WL 1119736, (D.Ariz. Mar 28, 2011).
[2] In Re Avandia Mktg., Sales Practices, and Prod. Liability Litig., 2011 WL 2413488 (E.D. Pa. June 13, 2011).

[3] Interestingly, the Third Circuit notes in its Footnote 5 that Humana did not appeal the District Court’s dismissal of its claim to obtain the claimant listings as part of its equitable relief. 

[4] 42 U.S.C. § 1395w-21 to -29.

[5] “There is established a private cause of action for damages (which shall be in an amount double the amount otherwise provided) in the case of a primary plan which fails to provide for primary payment (or appropriate reimbursement) in accordance with paragraphs (1) and (2)(A).”

[6] Some lawyers, including members of the DRI MSP Task Force, have maintained that this term as used in § 1395y(b)(2)(A) referred to payments made by Medicare and excluded payments made by MA plans.  The court rejects this narrow interpretation and states that the term refers to the Medicare Act as a whole.

[7] Some lawyers, including members of the DRI MSP Task Force, have  maintained that this term as used in § 1395w-22(a)(4) indicates that a MA plan’s right is permissive and based on a contractual theory of recovery (state based) rather than a federal right.  The court does not reject the contractual interpretation, but points out that Humana is proceeding under the MSP private cause of action, not a right based in § 1395w-22(a)(4).  The court does, however, reject the argument that the fact Congress uses permissive language to establish rules for private, market-driven entities and mandatory language when creating rules for the Secretary (of HHS), a federal official over which Congress exercises control, has any impact on the proper interpretation of the MSP private cause of action. 

[8] See footnote 1, supra

[9]Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984).

[10] “The MA organization will exercise the same rights to recover from a primary plan, entity, or individual that the Secretary exercises under the MSP regulations in subparts B through D of part 411 of this chapter.”

[11] Ctrs. For Medicare & Medicaid Svcs., Dep’t of Health and Human Svcs. Memorandum: Medicare Secondary Payment Subrogation Rights (Dec. 5, 2011).

[12] The “state of the art” for mass tort settlement programs includes the utilization of a Lien Resolution Administrator to identify, verify and resolve statutory liens and reimbursement claims of governmental health plans.  At the direction and agreement of the settling parties the role of Lien Resolution Administrator can be expanded to include the identification of participating claimants as MAO enrollees through a variety of proven procedures, including:  (1) participation in a voluntary MAO lien resolution program;(2) following the procedures and protocols established by a neutral third party (at the direction of the parties) as Lien Resolution Administrator; and/or (3) through the claimant on his or her own initiative.



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