Breaking Down Florida’s New Proposed Bar Rule on Lien Resolution Outsourcing

Recently there has been some confusion caused by the Florida Bar introducing subsection (E) to Rule 4-1.5(f)(4) and its application to non-lawyer lien resolution companies.  Subsection (E) was approved by the FL Bar Board of Governors at their meeting on May 31st and the rule now awaits adoption by the Florida Supreme Court.  The confusion, though not unexpected, is clearly resolved by a plain reading of the comment to this proposed amendment.

The comment states that given the complex nature of certain “extraordinary” lien types (the Special Committee specifically mentions ERISA and Medicare conditional payments) it may be in the best interest of the client to engage another with significant experience in lien resolution and subrogation to maximize the plaintiffs’ net recovery.  In the event that the reasonable efforts of the personal injury attorney fail to resolve these liens a non-lawyer third party can be engaged.  Moreover, the comment expressly states that with the client’s written informed consent the cost associated with the engagement of the lien resolution expert can be billed as a “cost to the client”.

Our lien resolution unit specializes in the resolution of “extraordinary” liens and has policies and practices in place to ensure that Florida attorneys abide by the ethical guidelines that are being established under Rule 4-1.5(f)(4)(E).  To aid the personal injury attorney in compliance our intake packages include a specific and detailed informed consent form which clearly articulates the lien resolution services offered, and the fees charged for those services.

To view the amended rule adoped by the Florida Bar, click HERE

Synergy reduces self-funded ERISA plan by over 70% for a savings of $85,955.02

This case involved a Virginia plaintiff who was injured when a shower chair collapsed.  The plaintiff had a pre-existing hip injury which involved an implanted prosthetic.  The plaintiff retained the services of an attorney and was able to obtain $525,000.00 in settlement proceeds. The self-funded ERISA plan demanded full repayment of the $122,393.32 in medical benefits they provided and were unwilling to consider a reduction or listen to arguments about the pre-existing injury.  Plaintiff’s counsel engaged Synergy Lien Resolution Service to assist in the resolution of the ERISA plan’s reimbursement claim.  Despite the unfavorable law in the 4th Circuit, which was recently bolstered by U.S. Airways v.McCutchen, within two (2) weeks Synergy was able  to obtain a 70.2% reduction for a savings of $85,955.02.

Medicare Advantage Plan’s Statutory Recovery Rights – Private Cause of Action?

By Synergy Director of Lien Resolution

Medicare Advantage plans, otherwise known as Medicare Part C, have proven to be a hot and confusing topic for plaintiff’s attorneys over the past few years.  Recent rulings by the U.S. Supreme Court and 9th Circuit have done little to eliminate this confusion.  Instead, the latest case law has increased the complexity.  The Medicare Secondary Payer Act has been appropriately described as one of “the most completely impenetrable texts within human experience.” (See Cooper Univ. Hosp. v. Sebelius, 636 F.3d 44, 45 (3 Cir. 2010)) and the line of reasoning in the area of repayment to Medicare Advantage plans for benefits they have provided is a shining example of this sad truth.  The question boils down to the ability of the Medicare Advantage Organization (“MAO”) to utilize the Medicare Secondary Payer Act as the basis for enforcement of the MAO’s reimbursement rights.  It appears that due to the cross referencing between 42 U.S.C. §1395w-22(a)(4) and 42 U.S.C. § 1395y(b)(2)(A) the MAO plan is allowed to seek a repayment under 42 U.S.C. § 1395y(b)(3)(A).

Approximately twenty five percent (25%) of all Medicare beneficiaries, twelve million (12,000,000) people, are enrolled in MAO plans.  Medicare Advantage plans allow Medicare entitled individuals to receive healthcare services through a non-governmental organization, commercial insurance companies, who contract with the Centers for Medicare and Medicaid Services (“CMS”) to administer Medicare benefits. CMS pays a capitated monthly fee for the traditional Part A & B coverage and a separate amount for Part D, prescription drug benefits.  The MAO plan then is entitled to charge a premium to their enrollee.  These MAO plans must handle all aspects of benefit administration, including the recoupment of benefits paid that should have been paid by a “primary payer.”  It is this responsibility, and the mechanism for performing it, that has sparked much litigation and created significant uncertainty.

Over the past few years a consensus had been growing that MAO plans had no private right of action under the Medicare statutes, rather, they have state court contract claims. (See, Care Choices HMO v. Engstrom, 330 F.3d 786 (6th Cir. 2003); Nott v. Aetna U.S. Healthcare, 303 F.Supp.2d (E.D. Pa. 2004); Parra v. Pacificare, 2011 WL 1119736 (D. Ariz. 2011), Humana v. Reale, 2011 WL 335341 (S.D. Fla. 2011)).  However, this trend was derailed when the U.S. Supreme Court denied the petition for writ of certiorari in In re Avandia Marketing, Sales Practices and Product Liability Litigation, 685 F.3d 353 (3d Cir. 2012), called Avandia II.

In Avandia II the Third Circuit reasoned that the MSP should be read broadly and that the language of the Medicare Advantage Organization statute (42 U.S.C. §1395w-22(a)(4)) cross references the Medicare Secondary Payer Act’s (“MSP”) language (42 U.S.C. § 1395y(b)(2)(A)) which allows these plans to utilize the enforcement provision of the MSP (42 U.S.C. 1395y(b)(3)(A)).  The Third Circuit added to their opinion that the MAO plans are able to use the MSP since to deny them this ability would put them at a competitive disadvantage and moreover that the federal agency had enacted reasonable regulations in 42 C.F.R. § 422.108.  This regulation is relied on by the MAO plans in their recovery actions as it states that the MAO plans have the same recovery rights as traditional Parts A & B.  This decision was considered by most to be outside the trend in this area of law, but when the U.S. Supreme Court denied certiorari it became clear that MAO plans now had equal and parallel rights for a private cause of action as did traditional Medicare.

Immediately following this decision by the U.S. Supreme Court the Ninth Circuit weighed into the fray and issued its ruling in Parra v. Pacificare of Arizona, 2013 U.S. App. LEXIS 7861.  In Parra the MAO enrollee was struck by a car and later died from his injuries. Para’s wife and children (“Survivors”) made a demand for wrongful death damages, which under the Arizona Wrongful Death Statute did not include the debts or liabilities of the deceased.   PacifiCare, the MAO, argued that it had a private right of action under two provisions of the Medicare Act: (1) §1395w-22(a)(4) (the “MAO Statute); and (2) §1395y(b)(3)(A) (the Medicare Secondary Payer Act “Private Cause of Action”). The Ninth Circuit Court of Appeals rejected both arguments.

Unlike the Third Circuit the Ninth Circuit was not persuaded that the cross referencing of the MAO Statute (42 U.S.C. §1395w-22(a)(4) ) and the MSP (42 U.S.C. §1395y(b)(2)) created a federal cause of action.  The Ninth reasoned that this cross-reference simply explains when MAO coverage is secondary to a primary plan, but does not create a federal cause of action in favor of a MAO.

PacifiCare then attempted to invoke 42 C.F.R. §422.108(f) as support for its position to the creation of a private cause of action. This regulation confers on the MAO “the same rights to recover from a primary plan, entity, or individual that the Secretary exercises under the MSP regulations.” Here the Court found that “[l]anguage in a regulation may invoke private right of action that Congress through statutory text created, but it may not create a right that Congress has not”.  They elaborated by stating in clear terms that “[i]t is relevant laws passed by Congress, and not rules or regulations passed by an administrative agency, that determine whether an implied cause of action exists”.

Attempting to rely on Avandia II and the U.S. Supreme Court’s de facto endorsement of the Third Circuit’s holding, PacifiCare turned to the private cause of action created under 42 U.S.C.  §1395y(b)(3)(A). Here the Ninth Circuit chose not to take on the rationale of the Third Circuit and rather made a fact specific determination that the language of the statute applies only “in the case of a primary plan which fails to provide for primary payment”.   That was not the circumstance in the Parra litigation.  Here the primary plan had “long ago tendered the sum claimed by PacifiCare … [and] Pacificare’s claim for relief is not against the insurer, or even against the Parra’s estate for sums received from a primary plan for medical expenses, but rather against the Survivors.”

The holding of the Ninth in Parra is not of much assistance to the practitioner as it is tailored narrowly to the facts of the specific case.  Though not cited, the reasoning is the same as found in Bradley v. Sebelius, 621 F.3d 1330 (11th Cir. 2010) which found that a “primary payer” under 42 U.S.C.  §1395y(b)(2)(A) is not defined as “surviving children with tort property beneficiary rights.”  This ruling, while helpful, has limited applicability as currently the only opportunity to avoid repayment to the MAO plan under MSP is in situations involving a wrongful death claim where the proceeds of any settlement or award are not held by the estate of the MAO enrollee.

Synergy reduces AARP Medicare Advantage repayment by 95% for a savings of $49,000.00

This case involved an elderly plaintiff who had Medicare Part C coverage through his AARP Medicare Advantage plan.  The plaintiff was injured when he was walking through a parking lot and was forced to jump out of the way of a speeding motor vehicle.  The member injured his hip and legs in the leap and subsequent fall.  The AARP Medicare Advantage plan asserted a reimbursement claim in the amount of $51,669.34.  The entire underlying personal injury action settled for $50,000.00 from which the injured plaintiff’s attorney took $16,666.66 as his fee, resulting in a net recovery of approximately $33,333.00 for the plaintiff.  Rather than pay the balance of these funds over to AARP, counsel for the injured plaintiff engaged Synergy Lien Resolution to assist in resolving AARP’s  claim. Synergy applied itsproven tactics and within forty five (45) days had reduced the claim to $2,690.40.  This is a reduction of almost 95% which created a savings of $48,978.94 allowing the injured plaintiff to retain over 80% of his net recovery.

A Response to the SEC Bulletin: The Truth about Factored Structured Settlements as an Investment Vehicle

By Matt Bracy[1] and Jason Lazarus[2]

Every investment vehicle has inherent risks.  This is the tradeoff for the chance to make higher returns.  However, “factored” structured settlements present investors with a unique low risk/high yield opportunity.  “Factored” structured settlements are periodic payments due to a personal injury claimant, paid through a fixed annuity, that have been sold at a discount to a “factoring” company.  Once a factoring company purchases these structured settlement payments, they either bundle the payment streams together in securitized transactions for institutional investors or sell those streams of income to individual investors.  When individual streams of income are sold, they are typically offered by a financial professional to individual investors.  The latter practice is the subject of a recent Investor Bulletin issued by the SEC and FINRA.

On May 13, 2013 the US Securities and Exchange Commission, Office of Investor Education and Advocacy, issued an Investor Bulletin entitled, “Pension or Settlement Income Streams: What you need to know before buying or selling them.” It is the opinion of the authors that this bulletin is misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle.

The bedrock of securities laws, Rule 10b-5, recognizes that partial information and misinformation can be as detrimental to investors as outright falsehoods. In part, the rule makes it unlawful:

To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading (emphasis added)

The SEC bulletin muddles together two distinctly different businesses, pension purchasing and structured settlement factoring.  To make matters worse, the bulletin further muddles the distinctions between the process of purchasing payments from the structured settlement recipient and selling purchased payment streams to investors. What could have been an informative and educational memo for investors to help understand these transactions and investment opportunities instead became a confusing and misleading series of partial truths mixed with some outright misstatements.

The purpose of this article is to add clarity to these issues, at least as it pertains to structured settlement factoring and the use of these payment streams as investments.

Background

Structured settlements and related annuities have been used since the 1970s as a tool to settle personal injury and workers’ compensation claims. Structured settlements are agreements to settle physical personal injury claims through payments over time, using fixed annuities offered by highly rated life insurance companies.  The novelty of structured settlements, and one of their greatest attributes, is that they allow for payment of compensatory damages over time – ideally, payments matched to monthly medical or income replacement needs. The primary advantage of structured settlements is that the payments are completely federal income tax-free to the injury victim.  .

For the vast majority of structured settlement recipients (some estimate as many as 95%), these periodic payments work very well and continue to meet their needs year after year.However, an estimated 5% of structured settlement recipients at some time find that they need liquidity. Structured settlements inherently lack liquidity or the ability to adapt to changed circumstances, since the payments are “set in stone” when the structure is created, and cannot be “increased, decreased, accelerated or deferred”[3]. Considering the difficulty in predicting needs going out 20 years or more, which is common for structured settlements, this low percentage of people needing a change is truly remarkable.

Due to unforeseen changes in life circumstances, such as medical needs, oppressive debt, or positive life-changing opportunities, the structured settlement’s periodic payments may no longer suffice. Beginning in the late 1980s, finance companies began buying part or all of a structured settlement recipient’s rights to receive future payments in exchange for a lump sum payment. By 2002, this process was formalized through state and federal laws, requiring local court approval for all such transfers upon a finding that the transfer is in the best interest of the seller, taking into account the welfare and support of any dependents, among other things.

Prior to the financial crisis of 2008/2009, many finance companies purchasing future structured settlement payment rights were backed by large financial institutions and international banks. Since 2009, with credit tightening, investors began buying structured settlement payment rights from factoring company originators providing necessary capital to the factoring companies.  Many private investors and financial advisors have become attracted to factored structured settlement payment rights due to their relatively high yields and low risk of default. Universal court approval of transfers and good due diligence regarding each transaction have led many to consider this a viable alternative to more traditional investments offering low returns.

Instead of focusing on the real risks, the SEC and FINRA bulletins have combined concerns over factoring structured settlements, pensions and investment in structured settlement payment rights after a factoring company has purchased them.  The bulletin specifically recognizes the attractiveness of these high yields and points out, correctly, that there are commissions associated with the sale of the payment streams.  This is so with almost any financial product sold to investors.  The bulletin also correctly points out that the income streams are illiquid.  Where the bulletin confuses the issues is when it begins to talk about the lack of reliable information about factored structured settlement annuities as investments and its discussion of legal enforceability of a transfer of future structured settlements.

Clearing up the Muddle

Some features of structured settlement factoring that should be clarified:

Always Court Ordered

Contrary to the SEC bulletin’s statement that “the secondary sale of a structured settlement often must be approved by a court, in keeping with the Uniform Periodic Payment of Judgments Act”, the truth is that since 2002 all structured settlement transfers must be court approved. This is so because of the intersection of federal tax law (IRC 5891), providing a punitive excise tax to structured settlement transfers unless approved by a state court, and state laws now in place in nearly all states[4] (and none of them have anything to do with the Uniform Periodic Payment of Judgments Act).

One of the reasons investors may be so attracted to structured settlement payment streams is that the court order clearly approves the transfer and orders the annuity issuer to make the designated payments to a specified transferee.[5]  Accordingly, the bulletin is not completely accurate when it suggests that there could be legal challenges to the purchase of future payments of a structured settlement by an investor.  If a structured settlement factoring transaction complies with federal and state structured settlement transfer laws, the risk of a challenge is relatively small.  While there is some risk, having an independent legal evaluation of the transaction to make sure all laws were properly complied with lessens this risk greatly.  In addition, the legal evaluation provides the necessary background information regarding the structured settlement annuity and the issuer so that an investor knows exactly what he or she is getting.  The information is reliable and readily available as part of the closing process of the sale of a factored structured settlement to an investor.

No Negative Tax Consequences to the Seller

The payee of a structured settlement is the personal injury claimant, or his/her heir or estate. Clearly, they receive the payments federal income tax free.[6] What about when these payments are sold?

Because the SEC bulletin combines so many divergent topics, it is not clear who or what situation they are addressing when they write, “The lump sum payment you collect may be taxable.” The IRS long ago clarified[7] that the seller of structured settlement payment rights does not suffer any adverse tax consequences from the sale, but rather receives the lump sum purchase price federal income tax free, just as they received the payments being sold. Investors who subsequently purchase future periodic payments from a factored structured settlement annuity will have gain and should consult a tax professional about proper reporting of taxable income.  However, that is normal recognition of taxable income as one would have with any other taxable investment vehicle.

Investors’ Rights

There is no better example of the muddling confusion of this bulletin than this statement:

Your “rights” to the income stream you purchased could face legal challenges. It may not be legal to purchase someone’s pension. And it may be difficult to legally force the original owner of a pension or structured settlement to forward or assign their income to a factoring company or investor.

Again, this article is focused on the structured settlement world, and we leave the nuances of the pension purchasing process to those more knowledgeable of it. Our focus is on the second sentence above, and the impressions that it creates. First, no one involved in structured settlements or structured settlement factoring are interested in “forcing” anyone to assign their payments. Willing sellers of such payments, motivated by whatever pressing financial need is in their lives, decide to sell this valuable asset in return for a lump sum. Once the terms are agreed upon, a judge decides whether or not the sale is in their best interests, and whether the transfer laws have been complied with (written disclosures about the terms of the transaction are delivered prior to the contract being signed, the seller is advised to seek independent professional advice, etc.).

Significantly, once the order is signed, the annuity issuer is now bound to send the payments to the factoring company or investor as directed in the court order. Legal enforcement of a court order is relatively straightforward, should it be needed. If the court order designates the factoring company as the payment recipient, and the payment rights are subsequently assigned to an investor, enforcement of that assignment is also relatively straightforward.

The Real World

Despite the inaccuracies and misleading information, the SEC bulletin makes a few good points — not unique to structured settlement payment rights, but good points nonetheless: Investors should learn about what they are buying, investigate the company they are doing business with, and hire professionals for help and guidance. Structured settlement payment rights have become popular with many investors because they realize the relative stability of this asset and opportunity for making a good return. As the bulletin’s garbled message makes clear however, it is not always easy to understand how this works and the process is somewhat complicated. Education about this product becomes more difficult however when partial information, or misinformation, are spread.

Ultimately, an investor must work with professionals who do the proper due diligence as it relates to the factored structured settlement investment opportunities.  Having an independent legal evaluation of each transaction is critical to the process of making sure the investment vehicle is “clean”.  The independent legal evaluation will answer most of the questions identified in the SEC bulletin as being critical for the investor to analyze.  In the end, each investor will have to decide based upon the real facts whether this is an appropriate vehicle or not.  However, a low risk high yield investment opportunity shouldn’t be avoided or discredited without complete and accurate information.  Hopefully this article has provided some clarity to the cloudy picture painted by the SEC’s bulletin.

[1] Matt Bracy is a partner with the law firm Nesbitt, Vassar & McCown, LLP in Dallas, Texas. Matt was the General Counsel of Settlement Capital Corporation, a structured settlement factoring company, for over 10 years, is the past president of the National Association of Settlement Purchasers, and is a frequent commentator on structured settlement factoring issues for the Legal Broadcast Network.

[2] Jason Lazarus is a founding principal and CEO of Synergy Settlement Services in Orlando, Florida.  He is also the managing partner of the Special Needs Law Firm which provides legal services related to public benefit preservation, MSP compliance and complicated health care liens.  Jason is a frequent lecturer regarding complex settlement related issues and has been published many times over.

[3] Pursuant to IRC 130, the tax code section that provides tax benefits for structured settlement recipients and the insurance companies setting up the structure.

[4] 48 states currently have transfer laws. Transfers are governed by the law of the state where the payee resides. For states or US jurisdictions without transfer laws, federal law provides that the transfer can be brought under the law of the state where the annuity issuer or owner reside.

[5] Practices vary regarding who the “transferee” is under the approval order. In some cases it is the factoring company originator, or a specified and identified investor, or an entity created to hold the interest.

[6] See IRC 104(a).

[7] See IRS PLR 1999-36030

20 Helpful Tips Every Plaintiff Attorney Should Know About the Medicare Secondary Payer Act and Medicare Set Asides

B. Josh Pettingill, MBA, MS, MSCC

1.  Addressing Medicare’s past interests (resolving conditional payments) is an issue for everyone involved in the lawsuit/settlement process. Don’t forget to get the final demand letter from MSPRC before you disperse funds to your client.

2.  The Medicare future interest issue is a plaintiff issue, not a defense issue. Don’t let the other side convince you otherwise. Take control of the MSP process early on in the negotiations.

3.  A Medicare Set Aside (“MSA”) is not required by any law but it is Medicare’s preferred method  to protect their “future” interests and comply with the Medicare Secondary Payer Act.

4.  The CMS Submission and review process for liability MSAs is completely voluntary, so don’t agree to it as part of the settlement. You do not want to be stuck waiting for months to hear back from them and there is no formal appeal process if Medicare disagrees with the MSA allocation for future medical.

5.  The MSA can be self-administered or professionally administered. Professional administration is the best way to ensure your client is protected.

6.  An MSA can be funded with a lump sum or with an annuity. Annuity funding is cheaper (20-30% discount) than lump sum, which means more cash in your client’s pocket and a happier client.

7.  An MSA utilizes a rated age vs. normal life expectancy for calculating future medicals. Since life expectancy is reduced when a rated age is issued, it means less money has to be set aside because future Medicare covered services is calculated over remaining life expectancy. In turn, this means less money is needed to fund the set aside and more cash is available to your client.

8.  Never put the actual MSA amount in the release. This can potentially limit your client’s ability to deduct medical expenses as an itemized tax deduction.

9.  For “small cases” involving a current Medicare beneficiary, you still need to take into account Medicare’s future interests. There is no “small case” exception or safe harbor.

10.  CMS is going to know about the client’s settlement by way of conditional payment resolution or through the Mandatory Insurer reporting requirement. If your client is a current Medicare beneficiary, they will find out about the settlement

11.  Make sure your file is documented indicating the steps taken to address Medicare’s future interest. If Medicare ever audits your file in the future, you need to show them adequate steps were taken to protect their interests.

12.  There are many CMS Memorandums on WCMSA’s.  There are only 2 of them which pertain to Liability MSAs and only one of those is from CMS headquarters.

13.  The Medicare Secondary Payer Act has been interpreted by CMS as requiring protection of Medicare’s future interests. The MSP is the only law dealing with Medicare as a secondary payer.

14.  “Benoit v. Neustrom” is must read case law on Liability Medicare Set Asides. Click HERE to see our CEO’s blog post on Benoit

15.  Do not agree to overbroad or general language in the release regarding MSAs.

16.  Do not ever make CMS approval of a liability MSA a condition of settlement. Some CMS Regional Offices refuse to review liability Medicare Set Asides.

17.  Do not ever let the defendant put Medicare on the settlement check. You will not be able to cash it and your settlement will be delayed. There is case law to support this position.

18.  The Medicare, Medicaid, SCHIP Extension Act (MMSEA) is simply a reporting requirement for Responsible Reporting Entities settling cases with current Medicare beneficiaries.  It created a means for CMS to track current Medicare beneficiaries and settlements.

19.  If your case is being reported to Medicare, make sure the correct ICD codes are submitted. Otherwise, your client could get treatment cut off that is unrelated to the accident.

20.  A Medicare set aside should only be used to pay for injury related medical expenses ordinarily covered by Medicare.

For all of your MSP compliance and Medicare Set Aside needs, please call us at (877) 242-0022 or visit us at www.synergysettlements.com.

Let Synergy be your knowledgeable and trusted settlement partner giving you peace of mind.   We resolve the most complex settlement related issues for law firms so lawyers can focus on being trial lawyers. Our team of highly skilled professionals includes attorneys, Certified Financial Planners, certified Medicare set aside consultants, subrogation experts, nurse consultants and case managers. We handle the difficult issues such as Medicare Secondary Payer compliance, structured settlements, public benefit preservation, lien resolution and complex settlement planning questions allowing you to concentrate on what you do best.

Synergy resolves 8 year conflict with Medicare and obtains complete waiver of their claim

This case involves a deceased Medicare beneficiary who was injured and
eventually died as a result of medical malpractice. The date of the malpractice was December 1999, the case settled in 2003.  Counsel for the heir began disputing and negotiating with Medicare immediately after settlement, but in 2005 Medicare referred the case to an attorney at the Department of Health and Human Services to begin prosecuting Medicare’s Conditional Payment recovery rights.  In the following eight (8) years plaintiff’s counsel engaged a second attorney to assist with the Medicare conditional payment issue but this to prove futile and Medicare continued to demand a repayment.  The second attorney retained over $42,000 of the original settlement in his firm trust account for the entire 8 years. In searching for options to resolve this matter, counsel engaged Synergy’s Lien Resolution Service.  Employing experience and expertise, Synergy was able to obtain a complete waiver and file closure letter from Medicare within 90 days of beginning work.  After waiting a decade from the end of the original litigation ,the heir is now able to finally put this matter to rest and is able to enjoy an additional amount of settlement proceeds previously thought lost to Medicare.

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:

 

Total Case Value

 $         1,000,000.00
 

 

Actual Settlement

 $             100,000.00
 

 

Fees, Costs & Liens

 $               44,293.00
 

 

Net to Client

 $               55,707.00
 

 

Set Aside Amount

 $             305,512.00
 

 Percentage of Recovery

5.57%
 

 

Reduced Set Aside Amount

 $               17,019.16

 

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:

Actual Settlement

 $             100,000.00
 

 

Fees, Costs & Liens

 $               44,293.00
 

 

Net to Client

 $               55,707.00
 

 

Set Aside Amount

 $             305,512.00
 

 Net as a Percentage of MSA

18.23%
 

 

Reduced Set Aside Amount

 $               10,157.60

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

Back to the Future: U.S. Airways v. McCutchen

On April 16, 2013, the United States Supreme Court clarified how equitable principles interact with the plan language of self-funded ERISA health plans.  The question presented to the Court was: Should the principles of “common fund,” often referred to as a reduction for attorney fees, and “made whole,” the principle requiring full compensation to the injured party before subrogating parties are allowed to recover, overcome express plan language abrogating those principles? Sadly, the Court has ruled that they should not.  This ruling effectively turns back the clock on the rights of the ERISA plans to their status from 2006 (Sereboff v. Mid Atlantic Medical Services, Inc., 126 S. Ct. 1869 (2006) until 2011 (US Airways v. McCutchen, 663 F.3d 671 (3rdCir. 2011).  With clear, express plan language, the ERISA plan can demand a full repayment for medical benefits it has paid on behalf of the injured plaintiff.  (U.S. Airways v. McCutchen, 569 U. S.              (2013);  See, Zurich American Insurance Co. v. O’Hara 604 F .3d 1232 (11th Cir. 2010), Admin. Comm. of Wal–Mart Stores, Inc. Associates’ Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir.2007); Administrative Committee of Wal–Mart Stores, Inc. Assocs.’ Health & Welfare Plan v. Varco, 338 F.3d 680 (7th Cir.2003);  Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348 (5th Cir.2003)).

The ruling in this case unifies the Circuits and will likely empower recovery vendors to press for larger recoveries and many may cease to reduce their demands even in the most inequitable circumstance.  This ruling makes addressing and resolving self-funded ERISA liens a significant issue for the plaintiff’s bar.  The argument raised by Mr. McCutchen, and the circumstance in which he found himself are ones which many plaintiff’s attorney have experienced.

“In January 2007, McCutchen suffered serious injuries when another driver lost control of her car and collided with McCutchen’s…McCutchen retained attorneys, in exchange for a 40% contingency fee, to seek recovery of all his accident-related damages, estimated to exceed $1 million.   The attorneys sued the driver responsible for the crash, but settled for only $10,000 because she had limited insurance coverage and the  accident  had  killed  or  seriously  injured  three other people.   Counsel also secured a payment from McCutchen’s own automobile insurer of $100,000, the maximum amount available under his policy.  McCutchen thus received $110,000—and after deducting $44,000 for the lawyer’s fee, $66,000.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 2).

“[] US Airways paid $66,866 in medical expenses for injuries suffered by [] McCutchen … The plan entitled US Airways to reimbursement if McCutchen later recovered money from the third party [including his own insurance] …  US Air-ways demanded reimbursement of the full $66,866 it had paid.  When McCutchen did not comply, US Airways filed suit under ERISA [requesting the $41,500 being held in an escrow account and $25,366 more in McCutchen’s possession].”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., syllabus).

Counsel for McCutchen raised the arguments that every plaintiff attorney raises with logic and equity on their side.

“McCutchen rais[ed] two defenses… First, he maintained that US Airways could not receive the relief it sought because he had recovered only a small portion of his total damages; absent over-recovery on his part, US Airways’ right to reimbursement did not kick in [read as “made whole” doctrine].  Second, he contended that US Airways at least had to contribute its fair share to the costs he incurred to get his recovery; any reimbursement therefore had to be marked down by 40%, to cover the promised contingency fee [read as “common fund doctrine].”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 4).

Though it is not addressed by the court, I think most plaintiff’s attorneys would note the extra sting of repayment in this case where 90% of the settlement funds come from the plaintiff’s own first party insurance.

The Court ruled that the terms of the plan control since the contract for health benefits between an ERISA plan and its participants is a “bargained for exchanged” and equitable principles will not trump express plan language.

“McCutchen [] cannot rely on theories of unjust enrichment to defeat US Airways [] plan’s clear terms.  Those principles, as we said in Sereboff, are ‘beside the point’ when parties demand what they bargained for in a valid agreement.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 9).

“The agreement itself becomes the measure of the parties’ equities; so if a contract abrogates the common-fund doctrine, the insurer is not unjustly enriched by claiming the benefit of its bargain.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 11).

“[If] [t]he express contract term … contradicts the background equitable rule … the agreement must govern.

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 14).

These are dire words for the plaintiff’s attorney as the insurance industry has spent the years since Sereboff drafting plan language to address just these specific equitable principles. However, there is a glimmer of hope in that the court has made it clear that the language abrogating these doctrines must be clear and express.

“[If] the plan is silent on the allocation of attorney’s fees, []in those circumstances, the common-fund doctrine provides the appropriate default.  In other words, if US Airways wished to depart from the well-established common-fund rule, it had to draft its contract to say so …”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 12).

“The words of a plan may speak clearly, but they may also leave gaps.  And so a court must often “look outside the plan’s written language” to decide what an agreement means.  CIGNA Corp. v. Amara, 563 U. S.      ,       (slip op., at 13); see Curtiss-Wright, 514 U. S., at 80–81.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 13).

“To be sure, the plan’s allocation formula—first claim on the recovery goes to US Airways—might operate on every dollar received from a third party … [b]ut alternatively that formula could apply to only the true recovery, after the costs of obtaining  it  are  deducted.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 14).

The Court significantly bolsters the argument that absent plan language the “common fund” doctrine applies.

“A party would not typically expect or intend a plan saying nothing about attorney’s fees to abrogate so strong and uniform a back­ ground rule.  And that means a court should be loath to read such a plan in that way”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 15).

“The rationale for the common-fund rule reinforces [the] conclusion [that] [t]hird-party recoveries do not often come free: To get one, an insured must incur lawyer’s fees and expenses.  Without cost sharing, the insurer free rides on its beneficiary’s efforts—taking the fruits while contributing nothing to the labor.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 16).

Yet despite their clear support and understanding of the need for the equitable principle of the “common fund” doctrine, they impose a Draconian result on Mr. McCutchen and all plaintiffs who are participating in self-funded ERISA plans.  The result is so self-evident that the Court acknowledges it themselves.

“[I]n some cases—indeed, in this case—the beneficiary is made worse off by pursuing a third party.  Recall that McCutchen spent $44,000 (rep­ resenting a 40% contingency fee) to get $110,000, leaving him with a real recovery of $66,000.  But US Airways claimed $66,866 in medical expenses.  That would put McCutchen $866 in the hole; in effect, he would pay for the privilege of serving as US Airways’ collection agent.”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 16).

The lesson for the wise plaintiff’s lawyer is to address resolution of your client’s self-funded ERISA plan early on in the case.  It would be an unhappy client who spent years in litigation, depositions, hearings, mediations, and even trials to learn that it had all been for the benefit of the “health insurance company” they had been paying “premiums” to for potentially years prior and during the litigation. The plaintiff’s attorney must now evaluate accepting cases at all that have large self-funded ERISA liens and limited recovery potential.

“When the next McCutchen comes along, he is not likely to relieve US Airways of the costs of recovery.  See Blackburn v. Sundstrand Corp., 115 F. 3d 493, 496 (CA7 1997) (Easterbrook, J.) (“[I]f . . . injured persons could not charge legal costs against recoveries, people like [McCutchen] would in the future have every reason” to make different judgments about bringing suit, “throwing on plans the burden and expense of collection”).”

U.S. Airways v. McCutchen, 569 U. S.        (2013)(slip op., at 16).

The plaintiff’s bar is now thrust back to the future and must forego arguments of equity and return to the contract based arguments that were fashioned pre-McCutchen.  Remember that the burden is on the ERISA plan to be clear in its plan language, the requirements of Sereboff still are enforceable, and the Plan Administrator must still comply with the demands of 29 U.S. 1024(b)(4). These and other statutory and contractual arguments remain for the plaintiff’s attorney who must confront a subrogation/reimbursement claim from a self-funded ERISA plan.  However, the luxury of dealing with “lien issues” at the close of litigation is one that can no longer be enjoyed by the wise plaintiff’s attorney.