Benoit v. Neustrom: A Landmark Decision for Reduction of Liability Medicare Set Asides

By Jason D. Lazarus, J.D., LL.M., MSCC, CSSC

On April 17, 2013, the United States District Court for the Western District of Louisiana rendered an unprecedented decision.  In a case where a limited recovery was achieved due to complicated liability issues with the case, the Court reduced a liability Medicare Set Aside allocation by applying a reduction methodology.  This case validates the argument I have made since the passage of the MMSEA brought liability Medicare Set Asides to the forefront.  Because of the fundamental differences between the Workers’ Compensation system and the liability system, you can’t have MSAs in general liability settlements without apportionment.  The court in Benoit v. Neustrom agreed with me.

Benoit filed suit against the Sheriff of Lafayette Parish (Neustrom) and the Warden of the Lafayette Parish Correction center alleging injuries suffered while incarcerated.  The plaintiff alleged he wa allowed to remain in his jail cell without pre-medical evaluation when he was clearly suffering from the effects of alcohol detoxification.  Benoit was found unresponsive his cell and was transported the hospital where he was diagnosed with a hypoxic brain injury secondary to a seizure, followed by cardiac arrest, secondary to alcohol withdrawal and hypoxic encephalopathy.  The resulting injuries included an anoxic brain injury with bladder incontinence, ansomia, short term memory deficit, tremors and behavioral issues.  After in patient care in a nursing home, Mr. Benoit was released to the care of his wife.  Mr. Benoit had his care paid for partially by Medicare and Medicaid.

In October of 2012, the case was settled conditioned upon a full release by Mr. Benoit and his assumption of sole responsibility for “protecting and satisfying the interests of Medicare and Medicaid.”  To that end, a Medicare Set Aside allocation was prepared by an MSA vendor.  The MSA cost projections gave a range of future Medicare covered injury related care of $277,758 to $333,267.  The gross settlement amount was $100,000.00.  Medicaid agreed to waive its lien.  Medicare asserted a reimbursement right for its conditional payments of $2,777.88.  After payment of fees, costs and the Medicare conditional payment, Mr. Benoit was left with net proceeds of $55,707.98.  Mr. Benoit filed a motion for Declaratory Judgment confirming the terms of the settlement agreement, calculating the future potential medical expenses for treatment of his injuries in compliance with the Medicare Secondary Payor Act and representing to the court that the settlement amount was insufficient to provide a set aside totaling 100% of the MSA.

The matter was set for hearing and Medicare was put on notice of the hearing.  Medicare responded with a written letter asserting its demand for repayment of the conditional payment in the amount of $2,777.88 but didn’t address the set aside.  The Medicaid lien was waived prior to the hearing with conditions for creation of a Special Needs Trust to preserve Medicaid eligibility.  At the hearing, the sum of $2,777.88 was established without objection as the amount to be reimbursed to Medicare for the conditional payments made by Medicare.  This left the only issue for the court to address was the question of the future Medicare covered services for Mr. Benoit and the “extent to which the Medicare set-aside trust can or should be reduced to account for the financial hardship to the beneficiary, Michael Benoit.”  During the hearing, MSA allocation was submitted into evidence with a cost considerably larger than the net settlement figure.  A Social Security financial statement was also offered into evidence to demonstrate the financial hardship of Mr. Benoit.  Mrs. Benoit testified about Mr. Benoit’s extensive needs for things the MSA would not pay for and the limited income they received from Social Security.  The defendants provided testimony regarding the liability issues with the case which could have resulted in summary judgment had the case not settled.

Having heard testimony, the court rendered its opinion in April of 2013.  The court began its discussion with a citation and quotation of Sally Stalcup’s Region VI handout regarding set asides.  The quote language addresses the idea of an allocation of the damages.  CMS’s official position is that the only allocation they will respect is when it is by a court after their review on the merits of the case.  The court pointed out that CMS took that same position in the Bradley v. Sebelius case regarding conditional payments and lost.  Language from the Bradley decision was cited which stated that Medicare’s field manual was not entitled to administrative law based deference (under Chevron) and that the requirement of a decision on the merits of a case before respecting an allocation frustrated the long standing public interest in the resolution of lawsuits through settlement.  After discussing those points, the court went on to make its findings of fact and conclusions of law.

The first significant finding of fact was that Benoit’s claims were highly contested on liability and damages with a very real possibility of summary judgment being granted or an adverse liability verdict.  The second significant finding was that given the significant past and future losses suffered by Mr. Benoit offset by the difficult liability issues in the case, the settlement of $100,000 was a reasonable compromise to avoid the uncertainty and expense of a trial.   The fourth significant finding was that the estimate of future medical costs in the MSA allocation was both reasonable and reliable.  The bombshell finding was that the net settlement was 18.2% of the mid-point range of the MSA projection and using that percentage as applied to the net settlement, the sum to be set aside was $10,138 and not $305,512.  The court found that $10,138 adequately protected Medicare’s interests.

In its conclusions of law, the court first found it had jurisdiction to decide the motion because there was “an actual controversy and the parties seek a declaration as to their rights an obligations in order to comply with the MSP and its attendant regulations in the context of a third party settlement for which there is no procedure in place by CMS.”  The court then found that the sum of $10,138 “reasonably and fairly takes Medicare’s interests into account.”  Lastly, the court found that since CMS provides no procedure to determine the adequacy of protecting Medicare’s interests for future medical needs in third party claims and since there is a strong public policy interest in resolving lawsuits through settlement, Medicare’s interests were “adequately protected in this settlement within the meaning of the MSP.”  The court ordered that the MSA be funded out of the settlement proceeds and be deposited into an interest bearing account to be self-administered by Mr. Benoit’s wife.

This opinion is so important because it hits the nail on the head regarding an argument I have been making since the advent of liability MSAs.  As the AAJ pointed out in its commentary to the ANPRM, a liability insurer is not legally obligated to provide medical care in the future whereas Workers’ Compensation carriers are obligated to pay for future medical as long as the injury related conditions persist.  Furthermore, Liability settlements are fundamentally different from Workers’ Compensation settlements in that liability cases are settled for a variety of reasons which do not necessarily include contemplation of future medical treatment.  Even when future medical care is contemplated as part of a settlement, the amount can be very limited when compared to what the ultimate costs may end up being.  So accordingly, if set asides are done in liability settlements without recognition of these differences and with no apportionment of damages, you can conceivably have a situation where a party is setting aside their entire net settlement even though it is made up of non-medical damages.  In effect it can eliminate the recovery of the non-medical portion of the damages by requiring the Medicare beneficiary to set aside all of their net proceeds.  There is nothing in the MSP regulations or statute that requires Medicare to seek one hundred percent reimbursement of future medicals when the injury victim recovers substantially less than his or her full measure of damages.

Prior to the Benoit v. Neustrom opinion, I argued based upon Ahlborn that an MSA should be reduced by using a formula identical to that decision because the situations were analogous.  The argument goes something like as follows.  It does not work to have one hundred percent of a settlement consumed by a Medicare Set Aside that the client can’t touch except to pay for future Medicare covered services. Similarly, a set aside shouldn’t encompass non-medical portions of the recovery. I would argue that this gets to the very root of the issue dealt with in the Ahlborn US Supreme Court decision. The Ahlborn decision forbids recovery by Medicaid state agencies against the non-medical portion of the settlement or judgment. Ahlborn was recently affirmed by the US Supreme Court in WOS v. EMA. While admittedly both the Ahlborn and WOS decisions dealt with Medicaid lien issues and the Medicaid anti-lien statute, the arguments by analogy can be applied in the Medicare set aside context. The Ahlborn holding gets at the fundamental issue of whether a lien can be asserted against the non-medical portion of a personal injury recovery. Justice Stevens, in stating the majority opinion, said “a rule of absolute priority might preclude settlement in a large number of cases, and be unfair to the recipient in others.” Isn’t this so in the Medicare set aside context (which is really a future lien)? How do you settle a case for an injury victim when all of the proceeds would have to go into a set aside? Wouldn’t that force cases to trial where damages could be allocated to different aspects of the claim and a larger recovery might be possible?

In the Benoit case, the plaintiff took the position he was only recovering 10% of his total damages.  Therefore, based upon my Ahlborn analysis, the figures would look like:

The Benoit opinion was even more aggressive in its analysis.  Instead of looking at a ratio of the total case value versus the net, it looked at the ratio of the MSA amount to the net.  The analysis looks like:

Both methodologies get to the correct end result in my opinion.  While the Benoit v. Neustrom case is incredibly important because it is the first recognition of the fundamental problem involved with cases where there is a limited recovery but large future Medicare component, it is only a United States District Court opinion.  It is a trial court’s order on a motion for declaratory judgment.  Unless Medicare somehow intervenes and appeals, we will not see a Circuit Court of Appeals decision that would have precedential value.  Despite the foregoing, the court’s rationale supports applying a reduction methodology where before the Benoit v. Neustrom opinion there was no direct authority for this.  If Medicare ultimately creates regulations related to liability Medicare Set Asides, one can hope they will look very carefully at a workable solution to this type of situation.  The Benoit v. Neustrom decision provides one possible way to address the issue created by limited settlements with big future medicals.

To view the opinion click HERE