March 14, 2022
Rasa Fumagalli JD, MSCC, CMSP-F & Samantha Webster
Many Medicare Set-Aside (MSA) arrangements today are funded with structured settlements. There are some very good reasons for doing so, which are discussed below. However, it is critical to understand the different ways a set aside can be funded so your client can make the best decision possible of how to fund it if a structured settlement will be utilized. According to CMS, an MSA may be funded by either a lump sum payment or by a structured settlement. Although a lump sum MSA may be simpler to administer, there are several benefits to funding an MSA with a structured settlement annuity. One primary benefit is cost savings: it is not uncommon to see a 20-30% cost savings by using a structured settlement to fund an MSA as opposed to a lump sum. Another benefit is that rated ages, used for structured settlements, also reduce funding cost as well as the total amount needed to be set aside as rated ages are accepted as evidence of reduced life expectancy by CMS. Lastly, and probably most importantly, a structured settlement typically funds the set-aside on an annual basis which acts as a yearly deductible that once temporarily exhausted triggers Medicare to pay in that calendar year (assuming seed is exhausted as well). Contrast this with lump sum funding which requires total exhaustion of the entire set-aside amount before Medicare ever pays for any injury related care.
CMS Guidance on MSA Funding
The Workers’ Compensation Medicare Set-Aside Arrangement (WCMSA) Reference Guide, Version 3.5 (1/10/2022) discusses structured WCMSAs in several areas. Section 5.0 of the Reference Guide explains that in a structured WCMSA, the initial seed deposit should cover the first surgery or procedure for each body part and /or replacement along with the first two years of annual payments. This means that if the WCMSA includes projections for surgeries to three different body parts, the seed must cover the cost of these three surgeries along with the first two years of annual payments. The greater the initial seed deposit, the smaller the cost savings to be gained through annuity funding although they may still be significant.
It is important for practitioners to review the type of funding that is being proposed in the WCMSA submission to the Centers for Medicare & Medicaid Services (CMS). This information will appear on the CMS submission cover letter. Since Section 10.2 of the Reference Guide requires the claimant/beneficiary to confirm their review and understanding of the submission package, practitioners should be provided with these documents by the defense. If the WCMSA proposal cover letter seeks CMS approval of a lump sum, when the intention was to fund through a structure, the submitter will have to seek a revised CMS determination letter that changes the funding to a structure. This may result in an unnecessary delay.
CMS determinations that provide for funding of the WCMSA via a structure, will list the initial seed deposit and the annual payments. If the seed deposit that is recommended by CMS is within 5% of the seed that was proposed in the WCMSA submission, CMS will approve the seed in the submission. CMS determinations will also use the claimant’s life expectancy from the submission, if properly calculated, to identify the number of years that will require an annual payout. If a person lives longer than the number of years that are identified in the CMS determination, the annual payments will cease after the specific number of years has expired.
Funding a WCMSA with an annuity is like having an account for the claimant’s insurance deductible. Each year a payment is made from the structured settlement annuity into WCMSA; that payment, plus any carryover from prior years, must be spent down before Medicare will pay for accident-related services in any given year.[1] Section 19.3 of the Reference Guide addresses the administration of the WMSA when it is funded through a structure. When a WCMSA proposal is funded through a structure, the deposited funds if not properly exhausted, are carried forward in the WCMSA account. The entire amount of the funds available in the WCMSA must be properly spent before Medicare is presented with any injury related Medicare covered bills. If the WCMSA funds temporarily deplete before the next annual payment, Medicare will pay as the primary payer for additional injury related medical expenses until the account is funded again. This concept is called “temporary exhaustion.” The claimant does not need to postpone care, as a temporary exhaustion of the WCMSA account obligates Medicare to potentially pay something towards injury related care each year.
Structured Settlement Funding Considerations for MSAs
Because structured settlement annuities are tax-free and reduce the amount needed to fund the set-aside substantially, they should be considered as the funding mechanism for nearly every set aside arrangement. Once the parties to a settlement agree to fund a WCMSA with a structured settlement, they must agree on the type of structured settlement annuity to use. There are several structured settlement annuity options available for funding a WCMSA, and the option chosen will depend on several factors including agreement by defense, the cost, and the preference of the claimant.
Traditionally, the defense will propose a specific type of structured settlement to fund the WCMSA known as a temporary life annuity. A temporary life annuity provides payments only if the claimant is living and only for a certain number of years. The number of years required is tied to the claimant’s life expectancy and expressed in the MSA allocation report or the CMS determination. The rationale for using a temporary life annuity stream is two-fold. First is the cost. Using a temporary life annuity is the least expensive annuity option for funding a WCMSA. Second, the annual payments to the WCMSA are intended to cover the injury related care that normally would be covered by Medicare which would end upon the death of the claimant. When a claimant dies there is no reason to replenish the WCMSA so no additional payments should be made. With the temporary life annuity, payments cease upon the death of the claimant.
The cost of the structured settlement annuity can also be a factor when choosing an option for funding the WCMSA. The cost consideration may depend on whether defense has agreed to fund the WCMSA in addition to or inclusive of the settlement offer. If the WCMSA is in addition to the settlement, defense will focus on the least expensive option which would be the temporary life annuity. If the WCMSA is inclusive of the settlement offer, the claimant may have an opportunity for other options, but would need to consider whether there are enough proceeds to cover any additional annuity funding expenses for guarantees.
While the temporary life annuity option may be preferred by defense or by a claimant looking for the most cost-effective way to fund the WCMSA, there are other options that can benefit the claimant’s family in the event of a premature death. An option that satisfies the funding requirement for the WCMSA and provides the claimant’s family with some additional security is a period certain annuity. The terms are very similar to a temporary life annuity with the added benefit of all payments being guaranteed. A guarantee provides the claimant with an opportunity for their death beneficiaries to receive any remaining payments upon death. This can be an important feature for a claimant concerned about using settlement proceeds to fund a structured settlement annuity that does not benefit their family if they die before all the scheduled payments are made. With a settlement inclusive of the WCMSA funding, using a structured settlement can create cost savings that benefits the claimant. The savings can be used for non-Medicare expenses or replacement of indemnity benefits.[2]
Post Settlement Administration of the MSA
Since the administration of an MSA is complicated, CMS “highly recommends” the use of a professional administrator for their funds. Consideration should be given at the time of settlement to the benefit of professional administration for both sides and who shall be responsible for the cost. At the claimant’s election, professional administration may be chosen and paid for from settlement proceeds. Like funding the set-aside itself, there is also a benefit to funding the professional administration annual expense using a structured settlement. Professional administration benefits the claimant in that the funds in the account are property spent, record keeping and attestations (“annual reporting”) are done correctly and timely, bills paid from the WCMSA are in line with the appropriate workers’ compensation fee schedules or lower, and temporary exhaustion or final depletion of the WCMSA is properly reported. In certain cases, insurance carriers may insist on professional administration and bear the cost on behalf of the claimant. The primary benefit to the insurance carrier is control over any remaining balances in the WCMSA account upon the death of the claimant. Practitioners should be aware that insurance carriers may seek to have any funds that remain in the professionally administered account revert back to the carrier upon death of the claimant. In light of this, it is important to make sure “reversion” is discussed in the settlement negotiations. It should be clearly spelled out in the settlement documents and in the professional administration agreement to avoid any confusion.
Conclusion
Settlements that involve a WCMSA do not have to be complicated. Making the decision to fund the WCMSA with a lump sum or a structured settlement annuity is the first step. If the decision is made to fund with a structured settlement annuity, understanding the different funding options is the next critical step. The defense and the claimant each have priorities, and the parties need to agree on an option for the settlement to proceed. The final consideration is whether the claimant will self-administer the WCMSA or opt for professional administration. While the professional administration may benefit the claimant, the insurance company may insist on it as a means to control the funds remaining in the WCMSA after the death of the claimant. Each of the items mentioned should be considered by the parties to the settlement and be outlined in the settlement documents. For practitioners, it is important to find a strategic partner to help guide you through the process and provide guidance on each of these critical steps for a WCMSA.
[1] and [2] Lazarus, Jason D. and Pettingill, B. Joshua, “WCMSA Funding Mechanisms: Maximizing Recovery & Cost Savings,” Legal News by Jason D. Lazarus, Esq. A legal examiner Affiliate, 6 July 2020.
