Synergy’s Workers’ Compensation Medicare Secondary Payer Advice

February 14, 2023

Oftentimes an attorney representing an injured worker may simply scan the defense’s Medicare Set-Aside and assume all the future medical issues have been addressed in the MSA. This month’s “Since You Asked” column addresses the need to understand the projections in a Medicare Set-Aside report and the importance of considering the non-Medicare covered injury-related expenses the injured worker may incur post settlement.

Question:

My client has been receiving workers’ compensation benefits for years. He is now on Medicare and the carrier wants to settle out future medical rights by funding a Workers’ Compensation Medicare Set-Aside (WCMSA). I haven’t seen many WCMSA proposals and am wondering what I should be looking for in the WCMSA. Can you help?

Answer:

In order to evaluate a WCMSA proposal, you first need to identify all of the medical conditions that are related to the industrial accident. Since your file may not necessarily have all the current medical and pharmacy information, it is important to have a discussion with your client about the nature of his ongoing injury-related treatment. A decision may then be made as to the need for obtaining updated medical and pharmacy records.

Once you have identified the injury-related conditions and are aware of the current medical and drug treatment, you should make sure that the WCMSA report correctly identifies the injury-related conditions as accepted conditions. The conditions will also have corresponding ICD-10 diagnosis codes associated with them. It may be beneficial to confirm their accuracy since these codes will likely be used for the Section 111 reporting of the settlement. If a condition was initially accepted, but was then subsequently disputed, the WCMSA report may also reflect this.

The WCMSA medical treatment projections should be reviewed to ensure that they include projections for the recommended future procedures or treatments that are reflected by the last two years of injury-related medical records. If a procedure is missing because it is not covered by Medicare, it may be funded outside of the WCMSA proposal for non-Medicare covered expenses. The drug projections should be scrutinized in the same way. If a drug is missing because it is not covered by Medicare, it should be funded outside of the WCMSA proposal for non-Medicare covered expenses. Since a workers’ compensation carrier’s responsibility for future medical costs in a workers’ compensation case is not limited to treatment that is covered by Medicare, the injury-related non-Medicare treatments should be accounted for in the settlement as well and you should obtain a non-Medicare expense report to detail the expenses that will not be covered for the injured worker as part of the WCMSA. Treatment projections are priced based on the state’s workers’ compensation medical fee schedule. Drugs are priced based on the Average Wholesale Price (AWP) listed in the current Red Book Drug Reference, with generic drugs priced at the lowest non-repackaged AWP.

When parties are discussing a settlement figure that is inclusive of the WCMSA, the injured worker may want to take steps to mitigate the WCMSA projections. For example, a physician’s switch from a brand name drug to a generic version of the drug may result in significant cost savings, thereby leaving more of the settlement funds as unrestricted.

It is also important to consider whether the WCMSA proposal will be submitted to CMS for review. Although CMS review is voluntary, CMS recommends this review in order for Medicare to become the primary payer after proper exhaustion of the CMS-determined WCMSA. The most recent version of the WCMSA Reference Guide (Guide) (Version 3.8, November 14, 2022) includes Section 4.3 that again cautions parties of the risks associated with a non-submitted WCMSA. It states as follows:

“As a matter of policy and practice, CMS may at its sole discretion deny payment for medical services related to the WC injuries or illness, requiring attestation of appropriate exhaustion equal to the total settlement as defined in Section 10.5.3 of this reference guide, less procurement costs and paid conditional payments, before CMS will resume primary payment obligation for settled injuries or illnesses, unless it is shown, at the time of exhaustion of the MSA funds, that both the initial funding of the MSA was sufficient and utilization of MSA funds was appropriate. This will result in the claimant needing to demonstrate complete exhaustion of the net settlement amount, rather than a CMS approved WCMSA amount.”

A note was added to this section as well. It states:

“Notes: This official policy shall apply to all notifications of settlement that include the use of a non-CMS-approved product received on, or after, January 11, 2022; however, flags in the Common Working File for notifications received prior to that date will be set to ensure Medicare does not make payment during the spend-down period.

CMS does not intend for this policy to affect any settlement that would not otherwise meet review thresholds. This comment does not relieve the settling parties of an obligation to consider Medicare’s interests as part of the settlement; however, CMS does not expect notification or submission where thresholds are not met.”

The review of a WCMSA proposal should be more than cursory since it will impact the injured worker’s post settlement medical issues. A detailed analysis of the WCMSA and non-Medicare covered expenses is the gold standard to protect your practice and the injured worker.

Synergy Settlement Services team of MSP compliance attorneys can assist you with this type of analysis and guide you through the MSP compliance process. Don’t ever rely upon the carrier to do the necessary work to protect your client, engage your own MSP compliance experts like Synergy here!

How Does Medicare Decide Which Payments Are Conditional?

February 9, 2023

Rasa Fumagalli, JD, MSCC, CMSP-F

Settlements involving Medicare beneficiaries require additional scrutiny to ensure compliance with the MSP Act. While the Act generally prohibits Medicare from making payment when payment is expected from a primary payer (workers’ compensation plan, liability insurance plan or no-fault insurance), an exception is made when payment is not expected to be made promptly or within 120 days of receipt of the claim. In such cases, Medicare will make payment, but it is conditioned upon the reimbursement of the payment to the Medicare Trust Fund. Compliance with the MSP Act is essential to ensure that Medicare is not making payments for which it is not responsible for.

Primary payers have an obligation to reimburse the Medicare Trust Fund for any payments made on behalf of a Medicare beneficiary. This obligation is demonstrated by a judgment, payment conditioned upon release of liability, or other means, as enumerated in 42 C.F.R. §411.22. Failure to reimburse may result in Medicare filing suit directly for double damages according to 42 U.S.C. §1395y(b)(2)(B)(iii) and 42 U.S.C. §1395y(b)(3). The Centers for Medicare & Medicaid Services (CMS) Memo from December 5, 2011, further notes that Medicare Advantage Organizations (MAOs) and Prescription Drug Plans (PDPs) have the same rights of recovery as Medicare under the MSP Act. This article will discuss the interplay between annual reporting and recovery thresholds, Section 111 Mandatory Insurer Reporting, and conditional payment recovery. A subsequent article will address Medicare’s interest when it comes to post-settlement injury-related treatment.

Annual Reporting and Recovery Thresholds

Prior to 2014, CMS often spent more money pursuing a conditional payment recovery claim than the claim was worth. To address this issue, the Strengthening Medicare and Repaying Taxpayers Act of 2012 (“SMART Act”) was signed into law in January of 2013. The SMART Act requires CMS to publish annual “settlement threshold” figures as of November of 2014. If a settlement falls below the annual threshold, the settling parties are exempt from MSP compliance obligations. This amendment has helped to streamline the conditional payment recovery process and save CMS resources.

On December of 2022, CMS published the 2023 recovery thresholds for liability, no-fault insurance, and workers’ compensation settlements, judgments, award, or other payments. Effective January 1, 2023, CMS’s threshold for physical trauma-based liability insurance settlements is $750.00, meaning settlements of $750 or less do not need to be reported and Medicare’s conditional payments related to the cases do not need to be repaid. The same threshold applies to no-fault insurance and workers’ compensation settlements, provided the insurers do not have an ongoing responsibility for medicals.

Section 111 Mandatory Insurer Reporting

To effectively implement the Medicare Secondary Payer (MSP) framework, Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) was enacted, establishing the Mandatory Insurer Reporting requirement. This enforcement mechanism notifies Medicare of settlements involving Medicare beneficiaries and began in January of 2011. According to CMS, the Section 111 MSP reporting process is designed to ensure Medicare is properly reimbursed for items and services provided to beneficiaries.

Section 111 reporting is the responsibility of a Responsible Reporting Entity (RRE) to Medicare for liability, no-fault, and workers’ compensation plans and insurers. The RRE must report to Medicare if the plan has an Ongoing Responsibility for Medical (ORM) or if the Total Payment Obligation to the Claimant (TPOC) is greater than the threshold of $750.00. Additionally, the RRE must query the Medicare system regularly to identify when a claimant becomes eligible for benefits while the claim is still open.

Under the Section 111 reporting requirements, the RRE must provide the injury victim’s first name, last name, date of birth, gender, Medicare Beneficiary Identifier (MBI), and Social Security Number (or the last five digits). Additionally, the RRE must report International Classification of Diseases (“ICD”)-10 diagnosis codes for the illnesses/injuries alleged, claimed or released in the Total Payment Obligation to Claimant (TPOC) settlement, judgment, award, or other payment. CMS encourages RREs to supply as many valid ICD-9/ICD-10 Diagnosis Codes as possible for the most accurate coordination of benefits. However, in CMS’s recent webinar on Section 111 reporting, it was cautioned against submitting diagnosis codes for pre-existing or unrelated conditions, even if included in the initial medical records. The TPOC report must also include the date and amount of the settlement.

If the RRE fails to comply with Section 111 reporting obligations, they may face a penalty of up to $1,000 per day per claim. As of January 2023, this penalty has yet to be enforced although the imminent arrival of final regulations on Civil Monetary Penalties for Section 111 violations will likely change this. A scenario where CMS may impose penalties is when the RRE submits information that conflicts with their later position when CMS attempts to recover conditional payments.

The Role of ICD-10 Diagnosis Codes in Conditional Payment Recovery

ICD codes are maintained by the World Health Organization (“WHO”) and are designed as an international health care classification system used to collect morbidity and mortality statistics, develop claim reimbursement systems, and conduct disease-related surveillance. To ensure greater accuracy, the Centers for Medicare and Medicaid Services (CMS) adopted ICD-10 codes for Section 111 Mandatory Insurer Reporting for all claim reports with an accident date on or after April 1, 2015. This switch offered five times more diagnosis codes than those found in the ICD-9 system.

The conditional payment recovery process may begin either with the Medicare beneficiary self-reporting the accident or the RRE fulfilling its Section 111 Mandatory Insurer Reporting obligation. When reporting the accident to Medicare, the beneficiary or their representative must provide diagnosis codes for the injured body part. If the beneficiary or representative self-reports through the Medicare Secondary Payer Recovery portal, they can select a specific code, a range of codes, a list of codes, or enter a text description of the diagnosis. The RRE’s Section 111 Mandatory Insurer report will also include ICD-10 diagnosis codes claimed or released in the Total Payment Obligation to Claimant (TPOC) settlement, judgment, award, or other payment. Medicare will use these codes to determine the amount of conditional payment recovery.

Medicare uses the ICD-10 code information to search their database and identify related payments. However, at times, their conditional payment letters will seek reimbursement for services unrelated to the injuries suffered by the beneficiary. This could be due to an algorithmic error or improper bundling of treatments for both unrelated and related conditions. Therefore, it is essential to review the payment summary form carefully to identify and dispute any erroneous payments. When enrolled in a Medicare Advantage plan (Part C or Part D), the plan must be contacted directly to resolve any reimbursement claims, and the itemized Explanation of Benefits should be carefully examined to dispute any inappropriate recovery attempts.

Conclusion

The MSP Act provides a comprehensive framework for Medicare to protect itself from overpayments and ensure that applicable settlements are reported. With the help of Section 111 Mandatory Insurer Reporting and ICD-10 codes, Medicare has the tools to identify and recover funds when a primary payer is available. Considering the significant role that ICD-10 codes play in the conditional recovery process, parties should be aligned in their selection of codes as well as the accident dates.

The Synergy Settlement Services team of MSP compliance attorneys and lien resolution specialists have the expertise to advise you on these matters, so that you are compliant with the intricacies of the Medicare Secondary Payer Act. Contact us for more information.

John Blumberg on TLV Podcast

Welcome to Trial Lawyer View a podcast designed to bring you insights on the latest legal trends and strategies from some of the best trial attorneys in the country. In this episode, Host Jason D. Lazarus, J.D., LL.M., MSCC, CSSC sits down with John Blumberg of Blumberg Law Offices and the author of Persuasion Science for Trial Lawyers. John is a master of the courtroom, and he will provide us an in-depth look at how persuasion science can help trial lawyers get successful jury verdicts. He shares how his study of the psychology of decision science has helped him understand decision making and opinion formation. Plus, he explains the importance of the Rule of Threes and how his book can help other trial lawyers. Join us for an engaging and informative conversation that you won’t want to miss!

Learn more here.

What Gives Health Care Plans The Right To Recover?

January 12, 2023

Teresa Kenyon, Esq.

Dealing with medical liens is the dreaded case after the case for most personal injury attorneys. As a personal injury attorney, you’ve worked hard to prove the tortfeasor has liability for the damages incurred by your injured client and secure a recovery.

When settlement is reached and the funds are received, ERISA plans, FEHBA plans, hospitals, and providers as well as government benefit programs like Medicaid, Medicare and Military agencies are standing in wait with their greedy eyes on the prize –your client’s settlement money. What gives these plans the right to seek repayment from an injured party’s settlement?

This article focuses on ERISA, FEHBA, Medicare, and Medicare Advantage plan recovery rights. A future article will focus on Military, Hospital/Provider, and Medicaid recovery rights.

ERISA

When an injured party receives their health insurance through an employer provider health insurance, it is more often than not an ERISA plan. The primary exceptions are for government and religious employers. ERISA plans come in two forms: Self-funded and fully insured. These ERISA plans’ recovery rights are subject to different laws based on their funding status. So, when dealing with these plans, understanding and confirming the funding status is the first step to knowing whether the injured party needs to reimburse and for how much.

The seminal case for ERISA plans was the McCutchen[1] decision by the US Supreme Court. This case provides that the ERISA plan policy language is supremely important to the ERISA plan’s recovery right. Because of this, it is vital to obtain the right documents and obtain them from the right place – this starts with the Master Plan Document and a request directly to the employer group.

FEHBA

FEHBA plans are for federal employees. The seminal decision by the US Supreme Court in Nevils[2] occurred in 2017 where it was held that insurance carriers operating under FEHBA can assert subrogation and reimbursement rights despite any state laws stating otherwise. The decision primarily focused on federal preemption. Otherwise, there has not been much litigation on FEHBA plans and their right to recover. As such, subrogation vendors for these plans stand firm until challenged.

Medicare (Parts A and B)

For traditional Medicare, there isn’t a pivotal case to look to. Instead, Medicare relies upon strong statutory rights for the government to collect. The Medicare Secondary Payer Act prohibits traditional Medicare from making payment when a primary plan should make the payment.[3] This is the case when the Medicare beneficiary is injured, has medical treatment that is paid for by Medicare, and is entitled to compensation by another “plan” or entity like no-fault, Workers’ Compensation, or liability insurance. However, there is one exception to this rule where Medicare is allowed to make payment on the condition that it be paid back. The exception authorizes Medicare to make a conditional payment if the primary plan “has not made or cannot reasonably be expected to make payment with respect to such item or service promptly.”[4]

To resolve conditional payments, a beneficiary must notify Medicare through the Benefits Coordination & Recovery Center (BCRC). The BCRC begins identifying claims that Medicare has paid conditionally that are related to the case based on information reported regarding the type of incident, illness, or injury alleged. Medicare’s recovery rights run from the “date of incident” through the date of settlement/judgment/award. A beneficiary or their representative may dispute claims added to Medicare’s Conditional Payment ledger. Once the case settles, Medicare is to be notified and a Final Demand is issued.

Once a Final Demand is issued, the beneficiary may request a Waiver[5] or Compromise[6]. If the Final Demand has already been paid, the beneficiary will receive a refund from Medicare if the request is granted. To obtain a Waiver of Medicare’s interest, there must be financial hardship. An SSA-632 form must be completed which provides financial information about the beneficiary. Medicare can also grant a Waiver if Medicare’s reimbursement would be against “equity and good conscience.” Lastly, a Compromise can be requested where the beneficiary offers a reduced reimbursement to Medicare. Medicare may choose to accept the compromise based on an assessment of three factors: 1) whether the cost of collection justifies the enforced collection of the full amount of the claim; 2) an understanding on whether the beneficiary is able to pay within a reasonable time; and 3) whether the chances of successful litigation are questionable, making it desirable to seek a compromised settlement.

Medicare Advantage (Part C)

The Medicare Act permits a Medicare beneficiary to choose a private insurance carrier as their Medicare administrator versus receiving benefits from traditional Medicare. This is known as a Medicare Advantage Plan. Medicare Advantage Plans are governed by the Medicare Act and funded by CMS.[7] Medicare Advantage Plans are administered by insurance carriers like Aetna, Humana, Blue Shield, and United.

The seminal Medicare Advantage case was decided in 2012.[8] The Third Circuit found under the Medicare Act that a Medicare Advantage Plan has the same rights as traditional Medicare. Specifically, that the Advantage Plan has a private cause of action against primary payers and can collect for double damages if not reimbursed.

The ongoing issue s is that subrogation vendors representing the Medicare Advantage plans claim the same rights as Medicare but do not accept that they have the same responsibilities. Through a variety of misinterpretations and bad law, these Medicare Advantage recovery vendors often feel they have more rights than traditional Medicare. They believe they can collect as Medicare but do not have to reduce for procurement costs as is required under the Act. Medicare Advantage plans also do not have appropriate appeal systems set up and appear to be completely clueless about the fact that traditional Medicare often grants waivers and compromises including refunds post payment of the Final Demand.

Summary

Assessing the reimbursement rights of health insurance companies and medical benefit programs is a required part of representing an injury party. However, full reimbursement of their demand is not always required. There are many avenues to explore whether the Plan has right to claim what they are demanding and a variety of reasons that they may not have the right to receive as much as they are asking for from the injury victim.

Synergy is your lien resolution partner. Our team of experts have hundreds of years of combined experience in handling liens, dealing with insurance carrier recovery departments and subrogation vendors. By partnering with Synergy’s deep team of lien resolution experts today, you can put their decades of subrogation experience to work for you and your client accelerating the resolution of liens. Now is the time to leverage our subrogation-busting team to resolve troublesome and time-consuming liens.

Learn more about partnering with Synergy for all your lien resolution needs.

[1] US Airways v McCutchen, 569 U.S. 88 (2013)

[2] Coventry Health Care of Missouri v Nevils, 581 U.S. 87 (2017)

[3] 42 U.S.C. § 1395y(b)(2)(A)

[4] 42 U.S.C. § 1395y(b)(2)(B)(i)

[5] § 1870(c) of the Social Security Act (42 CFR § 405.355 and 20 CFR 404.506-512)

[6] See Federal Claims Collection Act of 1966 (31 USC § 3711) §§ 1870(c) and 1862(b) of the Social Security Act

[7] 42 U.S.C. § 1395w-21

[8] Avandia Marketing etc. adv. Humana Medical Plan, 685 F.3d 353(3rd Cir. 2012)

Keith Mitnik on TLV Podcast

Welcome to Episode 33 of Trial Lawyer View, where we continue our captivating discussion with Keith Mitnik, one of the legal industry’s brightest minds and a key figure at Morgan & Morgan, America’s largest personal injury law firm. In this second episode of our two-part series, host Jason D. Lazarus, J.D., LL.M., CSSC, MSCC, the CEO of Synergy, explores further into Keith’s “art of outsmarting from the defense’s worst nightmare.”

As we delve deeper into this insightful conversation, we pick up where we left off, unraveling Keith’s incredible top 5 strategies for trial lawyers to effectively thwart the defense and shift the momentum in their favor. These invaluable insights are not only game-changing but are also applicable in real-world trial scenarios. Keith’s extensive experience and remarkable success in the legal arena make this episode a must-listen for trial lawyers seeking to enhance their advocacy skills.

Additionally, we explore the key takeaways from Keith’s books, offering a sneak peek into the wisdom and expertise he imparts in his written works. These takeaways provide actionable insights that can empower trial lawyers to excel in their practice and secure favorable outcomes for their clients.

This episode encapsulates the essence of Trial Lawyer View, offering a platform where legal professionals can access the knowledge, strategies, and experiences of industry leaders like Keith Mitnik. Whether you’re a seasoned trial lawyer or a legal enthusiast eager to expand your understanding of trial advocacy, this episode promises to deliver valuable insights that can elevate your practice.

Don’t miss the end of this enlightening conversation between Jason Lazarus and Keith Mitnik. Tune in now to gain access to a wealth of knowledge and strategies that can sharpen your trial advocacy skills and help you achieve success in the courtroom. Your journey toward becoming a more proficient and effective trial lawyer continues here.

Learn more here.

11th Circuit Brings Clarity to the Statute of Limitations for Medicare Advantage Plans

November 14, 2022

By: Kevin James, Esq.

The Medicare Secondary Payer Act (MSP) has often been described by many courts as notoriously “complex”. This complexity has only increased as Medicare Advantage Organizations (MAO) have increasingly become more litigious in attempts to make law and validate their recovery rights under the MSP.

From exhausting administrative appeals, to applying the correct statute of limitations, to the correct application of the procurement cost reduction under 42 CFR 411.37, to even what the lien amount should be has vexed many personal injury attorneys when aggressive Medicare Advantage Organizations (MAOs) attempt recovery from a members tort settlement.

The 11^th Circuit Court of Appeals has attempted to bring some clarity to the statute of limitations in a recent case.

Procedural History

An individual was attacked by a dog, pursued a tort claim against the tortfeasor and obtained a settlement in 2012 for $25,000. The defendant insurance carrier reported this settlement to CMS as required under the MSP, but the MAO plan was never notified.

The Medicare beneficiary was covered under an MAO plan, that since had gone defunct, and paid approximately $8,000 to cover medical bills incurred by the patient. The defunct plan had assigned it its rights to a subsidiary of MSP Recovery or MSPA Claims 1, a Miami based-group that pursues recovery actions.

At some point in 2015, MSPA Claims 1, the assignee for the MAO plan, became aware of the claim and sent a demand letter to the tortfeasor’s carrier, Tower Hill. For reasons unknown, MSPA Claims 1 did not file suit until August of 2018.

At the district court level, MPSA Claims 1 filed suit under the private cause of action provision, 42 U.S.C. § 1395y(b)(3)(A). Both parties then filed summary judgment motions arguing that the 3-year statute of limitations contained in the governmental cause of action was applicable to the case. The essential argument was whether the 3-year statue began to run when the case settled or when MSPA Claims 1 became aware of their potential interest.

The private cause of action that MSPA Claims 1 made in its claim does not actually contain a statute of limitations, the Court requested further arguments on if the governmental statute was the applicable one.

Tower Hill filed a motion for reconsideration and argued that the Court should borrow Florida’s statute of limitations which has a four-year statute of limitations for causes of “actions other than recovery for real property”. The District Court ruled in favor of Tower Hill ruling MSPA Claims 1 claim untimely.

Holding

The question before the circuit court, as briefed by the parties, was whether the governmental statute of limitations began to run when the payments and settlement occurred in 2012 or when MSP claims became aware of the settlement. Both parties agreed that the district court had erred by borrowing from Florida’s four-year statute of limitation. Essentially the parties were seeking a determination on if the statute was notice-based or one of occurrence.

Addressing the first question of which statute of limitations is the correct one, the Court ultimately decided that none of the statutes that henceforth been proffered was the correct one.

The Court agreeing that there existed no statute of limitation in the private cause of action that MSPA Claims 1 brought its claim under, the Court ultimately ruled that the appropriate statute of limitation to apply was found in 26 U.S.C. § 1658(a), a catch all statute of limitations found in the federal code. This statute contained a four-year statute of limitations. Thus, the Court held there was no need to borrow from Florida state law and the three-year statute of limitations applied to the government only.

The question left to be answered was when did MSPA 1 Claim’s claim accrue. Thus, the court had come full circle and returned to the essential disagreement between the parties.

The Court found that Section 1658(a) is one of occurrence and that since the MSPA Claims 1 became entitled to reimbursement, through the Medicare Secondary Payer Act, when it paid the claims and the case had been settled in 2012, the claim had accrued in 2012. As stated previously, this was more than six years after the claim had been settled, with the court ultimately ruling that MSPA Claims 1 suit was untimely.

Conclusion

While this case was a defeat for the MAO plan in this instance, it did clarify within the 11^th Circuit what the appropriate statute of limitations are for an MAO plan to avail itself of the private cause of action. It also arguably extends the rights of MAO plans as the government would only have a three-year window to enforce its claims while MAO plans now have four.

This case also illustrates why Medicare Advantage liens are often referred to as “hidden liens”. This makes it doubly important that plaintiff’s attorneys are doing their due diligence in ensuring they have located any potential lien holders in a case, particularly when dealing with Medicare eligible individuals. Developing a process to identify and then monitor which “Part” of Medicare a personal injury victim has coverage under is critical to proper resolution as well as compliance with the MSP at settlement.

A Unique Opportunity for Contingent Fee Lawyers to Tax Plan for Tomorrow

November 10, 2022

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

An often-overlooked issue for plaintiff attorneys is the management of taxation of their own contingent legal fees. As part of the normal rhythm of their practices, many attorneys experience peaks, and valleys with their own personal income. This leads to concerns for trial attorneys about the unpredictability of their own income. However, attorneys have a unique opportunity, not available to others who earn professional fees, to take their contingent legal fees and invest them on a pre-tax and tax-deferred basis to smooth out income. Attorney fee structures and deferred compensation arrangements allow lawyers to avoid taking income all in one taxable year when they earn a large fee. However, these solutions must be explored and decided upon prior to signing a release. While these financial products may seem complex, they are quite simple. Having an expert advisor who can provide you with different options is critical. The remainder of this chapter answers some frequently asked questions about deferral of contingent legal fees.

The legal foundation for this comes from a 1994 tax court decision Childs v. Commissioner.^[1] This decision was the last time the Internal Revenue Service challenged an attorney’s ability to enter into an agreement to defer their contingent legal fees. In Childs, U.S. Court of Appeals for the 11^th Circuit affirmed the tax court’s ruling that attorneys may structure their fees, holding that taxes are payable on structured attorney fees at the time the amounts are received.^[2] The IRS has now cited the Childs decision favorably and recognized it as binding precedent in a Private Letter Ruling.^[3] In that PLR, the IRS described that the “Tax Court held that the fair market value of taxpayer’s right to receive payments under the settlement agreement was not includable income in the year in which the settlement agreement was effected because the promise to pay was neither fixed nor secured.” It went on to state that the “court further held that the doctrine of constructive receipt was not applicable because the taxpayer did not have a right to receive payment before the time fixed in the settlement agreement.”

Since these are “tax-advantaged” plans there are rules and formalities which can be a bit inflexible. It is a well-accepted tax construction that works. A lawyer, who earns a contingent fee, must decide before settlement to have his/her fee paid over time instead of taking it in a lump sum. The fee that is being deferred is paid to a life insurance company which will agree to make future periodic payments. The decision to defer can be made at any point before the settlement agreement is signed, even right up to the moment before the agreement is signed. Even though a fee has been technically earned over the course of representation of the client, the lawyer (according to tax authorities) hasn’t earned the fee for tax purposes until the settlement documents are executed. An attorney has the autonomy to decide whether to defer all or part of their fee in this way.

Attorney Fee Structures

Attorney fee “structures” are annuities and work very much like a non-qualified deferred compensation plan. The taxes that would be otherwise paid on the fee earned at the time the case is settled are deferred, and that money grows without tax on the growth. When distributions are made, the entire amount distributed during a year is taxable for that year. Based upon a taxpayer’s tax bracket, there may be some distinct tax advantages to entering into this type of arrangement as opposed to being taxed on the entire fee in the year it was earned and investing it after tax. Depending on how much the fees are, current tax bracket rates and any other sources of income, stretching out payment of fees can result in potentially a smaller tax burden. This is a challenge in most professions; timing of income but controlling the realization of income is possible for attorneys. Using attorney fee structures, plaintiff attorneys can defer their fees and income taxes on those fees for personal injury cases as well as many other types of cases. An attorney fee structure allows an attorney to set up a personally tailored retirement plan without the monetary and age restrictions or other drawbacks of a qualified plan. The attorney can defer taxes on his or her fees as well as the interest that those fees earn until the year in which a distribution is received from the fee structure.

The fee structure can help a lawyer avoid the highest tax brackets by leveling off income spikes due to large fees and spreading the income out over several years. An attorney who otherwise would have an unusually high income in one taxable year, but elects to spread the income over several years, avoids paying taxes in the highest bracket. Couple the tax savings with guaranteed earnings on the deferred funds, and the benefits of an attorney fee structure become obvious. Fee structures can be done by one attorney in a firm, without the requirement that other attorneys and employees participate, as would be the case in a qualified retirement plan. Also, there is no limit as to the amount of income deferred. By comparison, there are statutory limits to the amount one can defer in a qualified retirement plan. Even if the attorney participates in a qualified retirement plan or individual retirement account (IRA), he or she may still defer additional income through an attorney fee structure. Unlike traditional retirement plans, there is no requirement of annual deferments. A bonus is that the attorney fee structure is exempt from creditor’s claims in most jurisdictions.

When an attorney fee is earned in a personal physical injury case, including mass torts, with all payments to the claimant being eligible for exclusion from taxable income under I.R.C. § 104(a)(2), or workers’ compensation case under section 104(a)(1), the same structured settlement annuities that the personal injury victim obtains can be used and the payment options are greatly expanded. A qualified assignment is done just as in the case of the personal injury victim. Attorney fee structures can also be done on fees from cases that are not personal physical injuries under section 104 (a)(2). These include fees from cases based on claims of discrimination, sexual harassment, employment litigation, defamation, wrongful imprisonment, wrongful termination, other non-physical personal injuries including emotional distress, punitive damages, bad faith, breach of contract and construction defects, to name several.

Since fee structures are pre-tax and tax-deferred investment vehicles, a major benefit is the compounding effect of deferring payments out over longer periods of time. The longer an attorney waits for payments or the longer the duration of the distribution term, the better the financial result and possibly the tax result as well. Payments can start right away, but don’t have to. They can be deferred for any length of time and then can be paid out over a duration of years or for life. There are almost infinite possibilities in terms of the different types of arrangements that can be set up.

While structuring one hundred percent of every contingent fee earned probably doesn’t make sense or even a percentage of every fee, there are some unique benefits to doing so that shouldn’t be ignored. A systematic approach to structuring a portion of every fee can lead to a very attractive end result when an attorney wishes to retire. For example, if an attorney took fifteen to twenty five percent of every contingent fee earned and deferred it out to retirement, then they would have taken advantage of the benefits of a stable retirement income, estate planning advantages and tax benefits that most people in the workforce can’t achieve. With the unpredictability of the contingent fee law practice and life in general, you don’t want to rely on any one solution for retirement and so exploring fee structures is one way to hedge against the uncertainties.

There are some key reasons to do an attorney fee structure:

It is a pretax investment in a guaranteed high yielding tax deferred annuity.
Deferring compensation over time results in less being lost to taxes.
Application of AMT can potentially be avoided.
Gives you custom cash flow management and allows you to tailor your own income stream.
Structured fees have enhanced protection from creditors, judgments, and divorce decrees.

There are some frequently asked questions related to structured attorney fees.

Does the personal injury victim have to structure a portion of their settlement before the attorney fee can be structured? No. The claimant can take one hundred percent cash and the attorney fee can still be structured.
How does fee structuring work? Structuring an attorney fee works very similarly to structuring the victim’s settlement. The most important thing to remember is you can’t take receipt of the fees.
Why structure an attorney fee in a fixed interest rate annuity? Every portfolio should have some portion of the investments in fixed income. An attorney fee structure is a fixed income investment but unlike all others an attorney can make, the fee structure is a pre-tax investment. Whether a fee structure is appropriate for you will depend on a variety of factors, including your age, health, risk tolerance, retirement goals, tax bracket as well as your current and long-term needs. However, structuring your attorney fees could provide beneficial tax relief as well as secure and stable tax deferred income up to, and including, your lifetime.
Can I receive the same types of income streams the victim can with their settlement proceeds? Yes, you can have lifetime benefits. You can have a “period certain” for a defined amount of time or a future lump sum payment as well as a series of lump sum payments. You can select immediate or deferred payments. You can have multiple income streams such as lifetime payments coupled with lump sum payments.
Can I only structure contingent fees from a personal physical injury or wrongful death settlement? No. You can structure contingent fees from nearly any type of settlement. Companies have developed innovative products to expand the availability of attorney fee structures.
What do I need to do to prepare for structuring my attorney fees? You should negotiate the inclusion of the fee structure when settling the case since the creation of a tax-deferred fee structure does require the cooperation of the defendant like when the victim’s settlement is structured.

While the foregoing discussion focused on “fixed” attorney fee structure annuities, there are two other potential options that are available. First, there is an equity indexed attorney fee structure product. The equity indexed attorney fee structure ties return to the S&P 500 index. If the index is up, your payments increase. If the index is flat or negative, there is no decrease. So, no downside risk, only upside. The upside though is limited to a maximum ceiling of 5%. As the payments increase, they lock and you can only go up, never down. This type of product provides more upside potential than the traditional “fixed” fee structure while remaining conservative. Second, there is a “non-qualified” attorney fee structure. These products in this type of structure involve an “off-shore” assignment to achieve tax-deferral based on international tax treaties. Instead of using an annuity as the funding vehicle, these are open architecture allowing the attorney to use his own financial advisor to select appropriate investments which typically include stocks, mutual funds, ETFs, bonds and other investments. These types of products are like the deferred compensation plans described immediately below since there are more available investment options but inherently have some additional risk due to the “off-shore” assignment. As with all the decisions associated with fee deferral, you should consult with your own tax advisors to determine what is most suitable.

Deferred Compensation Plans for Attorneys

A non-annuity deferred compensation arrangement is another mechanism that trial lawyers can use to invest the contingent legal fees they earn on a pre-tax and tax-deferred basis. Like Fortune 500 executives who defer their compensation, you can defer all or a portion of your fees until you are ready to start receiving them. Using this kind of solution, you have flexibility with investments as well as more control over timing of income. For example, if you wanted to defer a five hundred-thousand-dollar fee in the current taxable year by splitting the fee plus the investment gains into twenty quarterly payment buckets you could do so. Thirteen months prior to any scheduled quarterly payment, you can elect to withdraw it. However, if you don’t need the payment, the payment bucket will automatically roll forward to the end of the line. By laddering payments in this way, you can effectively manage your cash flow and better control the timing of taxation.

From a legal-tax perspective, fee deferrals are subject to the same body of tax rules that govern Nonqualified Tax-Deferred Compensation (NQDC). So, this means that the deferrals must avoid the application of the constructive receipt and economic benefit doctrines. NQDC has been used for decades by Fortune 500 companies to attract, retain, and further compensate their top-level executives. These deferred compensation plans rely upon the same decision as attorney fee structures, Childs. Since the legal underpinnings are the same and are well established, the risk is relatively like attorney fee structure annuities.

Conclusion

In summary, attorney fee deferral solutions allow a plaintiff lawyer to not only defer receipt of (and tax on) fees until received, he or she can have the deferred fees invested, and have the income produced from it also taxable over time rather than immediately. A lawyer may want to consider deferring fees as part of his or her own income tax planning, financial planning, and estate planning. Tax deferral mechanisms for lawyers are a great way to smooth out those income spikes caused by larger fees or just take better control over timing of income. Due to the variety of options, there is likely something that will best suit an attorney’s needs and investment preferences. Attorneys should explore these options to take back control of timing of income.

[1] Childs v. Commissioner, 103 T.C. 634 (1994) affirmed without opinion 89 F. 3d 56 (11^th Cir. 1996).

[2] Id.

[3] PLR-150850-07

Keith Mitnik on TLV Podcast

In the 32nd episode of Trial Lawyer View, your trusted source for cutting-edge legal insights, our esteemed host, Jason D. Lazarus, J.D., LL.M., CSSC, MSCC, CEO of Synergy, engages in an illuminating conversation with none other than Keith Mitnik of Morgan & Morgan, renowned as America’s largest personal injury law firm. This episode delves into Keith’s exceptional expertise in what he eloquently describes as the “art of outsmarting the defense’s worst nightmare.”

This captivating conversation is the first installment of a two-part series that promises to be an invaluable resource for trial lawyers seeking to fortify their skills in the courtroom. Keith’s wealth of experience and strategic brilliance shines through as he imparts his top five game-changing techniques, designed to empower fellow trial lawyers in their quest to outmaneuver the defense and tip the scales of justice in their client’s favor.

In this episode, we embark on an eye-opening journey through Keith’s profound insights, gaining a glimpse into the strategic brilliance that has made him a trailblazer in the field of personal injury law. With decades of experience, Keith has honed his craft to perfection, and he generously shares his hard-earned wisdom with our listeners.

Stay tuned for the second part of this exceptional series, where Keith will continue to unravel his secrets for trial lawyers. If you’re a legal professional looking to elevate your courtroom prowess and enhance your ability to secure favorable outcomes for your clients, this two-part series is an unmissable resource.

Join us on this transformative journey of legal expertise and strategic brilliance, and get ready to unlock the secrets of outsmarting the defense’s worst nightmares. Your journey to becoming a more effective and successful trial lawyer starts here.

Learn more here.

Withdrawal of Long-Awaited Proposed MSP Rules for Liability Cases

October 18, 2022

By: Rasa Fumagalli, JD, MSCC, CMSP-F

Medicare has struggled over the years to provide rules clarifying existing Medicare Secondary Payer (MSP) compliance obligations when it comes to post-settlement injury-related care that is released in a liability settlement. Their first attempt at proposed rulemaking took place in 2012 and resulted in the notice of proposed rule being withdrawn in 2014. Their most recent attempt, which began in December of 2018, sought to provide a proposed rule that “would clarify existing Medicare Secondary Payer (MSP) obligations associated with future medical items related to liability insurance (including self-insurance), no fault insurance, and workers’ compensation settlements, judgments, awards, or other payments.”[1] Although this notice of proposed rule had been delayed many times over the years, it was finally withdrawn on October 13, 2022.

Medicare’s withdrawal of the notice of proposed rule does not give settling parties a free pass when it comes to Medicare Secondary Payer compliance issues. So where does this leave parties settling liability cases involving Medicare beneficiaries? The answer, as always, lies in the Medicare Secondary Payer Act. The Act states that Medicare is prohibited from making payments for services “to the extent that payment has been made or can reasonably be expected to be made under any of the following: (i) workers’ compensation; (ii) liability insurance; (iii) no-fault insurance.”[2] Further guidance comes from the May of 2011 CMS Region VI Stalcup memo and the CMS September of 2011 Benson memo which both provide insights into Medicare’s position when it comes to shifting the burden to Medicare post settlement.[3] Unlike accepted workers’ compensation settlements, liability settlements have different considerations and require a more nuanced analysis of the potential impact of the MSP Act on a settlement. Although a Medicare Set-Aside allocation may be appropriate in a certain case, there are many settlements where other options are more appropriate.

The Medicare trust fund remains in dire financial straits. Medicare’s decision to withdraw the notice of proposed rule might mean that a greater focus will be placed on the Section 111 Total Payment Obligation to Claimant (TPOC) reporting resulting in increased denials of post-settlement injury-related claims. For the time being, our recommendation is as always make sure that your client is educated about the potential impact of the MSP on payment for future injury-related care post settlement. Consulting with experts and having the issues explained to an injury victim are best practices. Then ultimately, you want to document your file about what has been done to educate the client and their final decision. If a denial of care occurs in the future, you then have documentation of what was done and why.

Medicare is analogous to Medicaid at settlement meaning just like the obligation to advise a Medicaid beneficiary about the availability of a special needs trust, you need to explain to your client about the possibility of establishing a set-aside. As commentators have suggested, a lawyer must “ensure his client is informed about the options of structured settlements, trusts and the effect of the judgment or settlement on the client’s public benefits.”[4] The same is true for Medicare beneficiaries. Making sure a client receives proper counseling about the form of settlement is required by the Rules of Professional Conduct.[5]

We will continue to monitor this issue and keep you advised of further developments. Synergy’s team of MSP compliance experts is here to assist you in navigating the murky waters of MSP compliance.

[1] Miscellaneous Medicare Secondary Payer Clarifications and Updates (CMS-6047), RIN: 0938-AT85.

[2] 42 C.F.R. § 411.20; see also 42 U.S.C. § 1395y(b)(2)(A).

[3] Memorandum from Sally Stalcup, MSP Regional Coordinator, CMS, Medicare Fee for Service Branch, Division of Financial Management and Fee for Service Operations (May 25, 2011), available at https://static1.squarespace.com/static/5807a480d482e9eb1f5d9c54/t/589d81823e00bea366d73d90/1486717333702/00-CMS-Sally-Stalcup-Memo-5-25-2011.pdf; Memorandum from Charlotte Benson, Acting Director, Financial Services Group, Office of Financial Management, Department of Health & Human Services, Centers for Medicare & Medicaid Services, to Consortium Administrator for Financial Management and Fee-for-Service Operations, Medicare Secondary Payer—Liability Insurance (Including Self-Insurance) Settlements, Judgments, Award, or Other Payments and Future Medicals – INFORMATION (Sep. 30, 2011), available at https://www.cms.gov/files/document/future-medicals.pdf.

[4] Bernard A. Krooks & Andrew H. Hook, Special Needs Trusts: The Basics, The Benefits and The Burdens, 15 ALI-ABA Est. Plan. Course Materials J., 17 (Dec 2009).

[5] See Model Rules of Prof’l Conduct, R. 1.0(e) and 2.1.