How the Advent of the Mandatory Insurer Requirement Causes Problems for Lawyers

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Any time a personal injury lawyer represents someone who is Medicare eligible, it automatically triggers concerns over the implications of compliance with the Medicare Secondary Payer Act (MSP). The passage of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) has triggered heightened concerns of all parties to a settlement involving a Medicare beneficiary. Part of this Act, Section 111, extends the government’s ability to enforce the Medicare Secondary Payer Act.

As of April 1, 2011, a Responsible Reporting Entities/insurers (RRE), (liability insurer, self-insurer, no-fault insurer, and workers’ compensation carriers) must determine whether a claimant is a Medicare beneficiary (“entitled”) and if so, provide certain information to the secretary of Health and Human Services (hereinafter “secretary”) when the claim is resolved. This is the so-called Mandatory Insurer Requirement, MIR for short.

Under MMSEA, the RRE must report the identity of the Medicare beneficiary to the secretary and other such information as the secretary deems appropriate to make a determination concerning coordination of benefits, including any applicable recovery of a claim. Failure of an applicable plan to comply with the reporting requirements potentially exposes them to a civil money penalty for each day of noncompliance with respect to each claim.

These reporting requirements make it very easy for CMS to review settlements to determine whether Medicare’s interests were adequately addressed by the settling parties and potentially deny future Medicare-covered services related to the injuries suffered.

But the advent of MIR causes some very real and difficult problems for lawyers handling claims involving Medicare beneficiaries—most notably, the required disclosure of ICD codes and the need for hypervigilant release language.

Required Disclosure of ICD Codes

The biggest problem with the reporting requirement is the required disclosure of International Classification of Diseases (ICD) medical diagnosis codes which identify the medical conditions that are injury related. These ICD codes can form the basis for the care potentially rejected by Medicare in the future.

If the plaintiff and plaintiff’s counsel are unaware of the conditions disclosed by the defendant/insurer through the reporting process, there could be some serious problems when the plaintiff seeks medical care from Medicare in the future. For example, a plaintiff sustained back and neck injuries which were claimed as a part of their lawsuit. The plaintiff had preexisting neck problems. The case is ultimately settled with the defendant paying nothing for the neck injury because they determined that the neck injury was primarily due to a preexisting condition.

Now the defendant/insurer reports the settlement and lists the ICD-9 codes related to the neck injury even though they paid no settlement dollars toward that injury and rejected that part of the claim. The neck care could be rejected by Medicare in the future leaving the client with no Set-Aside funds to pay for that care and no Medicare coverage either.

Worse yet, your ability to negotiate a conditional payment made by Medicare may be complicated by including care that is unrelated. This issue is further exacerbated by the reporting data being submitted by outside reporting agents who are only providing initial case information without involvement of plaintiff’s counsel.

The Need for Hypervigilant Release Language

In this new age of hypervigilance surrounding Medicare compliance as a result of MIR, release language about protecting Medicare can be longer than the release itself. This language is frequently inaccurate or wholly inapplicable. In practice, I have seen language that mandates that the personal injury victim will not apply for Medicare or even Social Security Disability benefits. Equally as bad, language is frequently included that places a burden on the plaintiff to comply with requirements that aren’t mandated by any law. Most of the language improperly cites statutes or regulations that don’t say anything relevant to the issues at hand.

Therefore, great care needs to be taken by the personal injury practitioner in terms of what is agreed upon and included in the release. Technically, there is nothing required by any law that needs to be addressed in the release as it relates to the MSP. Practically speaking though, language has to be there to placate the other side’s misinformation about their own liability regarding many of the MSP-related issues. It is simple to address these issues concisely and in a way that doesn’t place any onerous obligations upon the plaintiff. Every case is different, and the facts dictate the use of a different language each time, but there is a core set of provisions that can be done in one simple paragraph to deal with the Medicare-related issues at hand.

Work Collaboratively with the Other Side

The Medicare Secondary Payer Act and the Mandatory Insurer Reporting requirements form a complex set of issues that personal injury lawyers must deal with. As a result, realizing that every settlement with a Medicare beneficiary of one thousand dollars or more will be reported along with a variety of data points is critically important. Every time I am consulted by other lawyers about this issue, I suggest that the parties should be collaborating on this aspect of the Medicare settlement process. Working collaboratively with the other side when it comes to these issues is recommended.

If the plaintiff does not know what is being reported, then the scenarios above could easily occur. Without focusing on this issue as part of the settlement process, a plaintiff, plaintiff’s lawyer, or an elder law attorney involved in the case may find there are serious unintended repercussions that result. Having incorrect or inaccurate information reported can cause issues for both your client and your law firm.

For more advice on the Mandatory Insurer Requirement, you can find The Art of Settlement on Amazon.

The Unregulated New Frontier of Medicare Set-Asides

his article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Consider this scenario: you represent a current Medicare beneficiary in a third-party liability case. As part of the workup of the case, you determine the client will need future medical care related to the injuries suffered, and you settle the case. Since the client is a Medicare beneficiary, the defendant will report the settlement under the Mandatory Insurer Reporting law as it is greater than $750 in gross settlement proceeds.

The defendant puts some language into the release about a Medicare Set-Aside being the injury victim’s responsibility and that they can’t shift the burden. Everyone signs the release and settlement dollars are paid. The file is closed, then forgotten.

What happens though if that course of action triggers a denial of future care by Medicare? For many years this was not even a concern for trial attorneys and their clients. However, the risk of this occurring is now a very real possibility. In fact, in 2018, a personal injury victim got this type of notice of denial for injury-related care from Medicare. The service provided was hospital outpatient clinic services under Part B of Medicare. The bill was denied, based upon the notice, because Medicare said, “you may have funds set aside from your settlement to pay for your future medical expenses and prescription drug treatment related to your injury(ies).”

Meanwhile, there are no real hard and fast rules when it comes to Set-Asides since they are not codified in the law. Personal injury lawyers are grappling with the uncertainties of an unregulated new frontier, when it comes to Medicare Set-Asides. Here are some of the big issues and questions that have arisen in this uncharted territory.

The Issue of Funding Future Medicals

One of the big issues that can arise in trying to do a Set-Aside is the question of funding of future medicals. Funding of future medicals is a prerequisite to any type of Set-Aside analysis in the first place. The first question always asked is whether the client is a current Medicare beneficiary or has a reasonable expectation of becoming one within thirty months. If the answer is no, there is no need for a Set-Aside analysis. Similarly, if future medicals aren’t funded then there is no need to engage in a Set-Aside analysis.

The really problematic issue is how do you deal with cases where future medicals are funded but they were settled for pennies on the dollar? Can you apportion the settlement so that you create a reduction formula tied to a comparison of the full value of damages versus what was actually recovered? For example, if the total value of the damages was $1 million but only $100,000 was recovered due to policy limits, can you set aside only 10 percent instead of 100 percent of the value of future medical expenses that are Medicare-covered related to the injuries suffered?

This issue was addressed by a federal district court in 2013. In Benoit v. Neustrom (W.D. La. 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.

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 nonmedical damages.

In effect, it can eliminate the recovery of the nonmedical 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 100 percent reimbursement of future medicals when the injury victim recovers substantially less than his or her full measure of damages.

Malpractice Implications for Lawyers

In the past, trial lawyers never had to worry about whether Medicare would pay for their client’s future care post-settlement. There is cause for concern that this may not be the case in the future. Let’s assume that the injury victim who got this denial letter was not properly advised of the risks of failing to set aside money. Would the trial lawyer potentially face a suit for legal malpractice? The answer is most likely they would.

There could be all sorts of arguments made about whether they fell below the standard of care, but in the end, this is a known issue and one that is of the law. Worse yet, a trial lawyer and his/her firm could have Medicare breathing down their necks. While we haven’t see any instances of Medicare pursuing a law firm over failing to set up a Medicare Set-Aside, there are recent examples of law firms being pursued by the Department Of Justice (DOJ) related to other aspects of the MSP and failing to have a process internally to ensure compliance with the MSP.

All of that being said, you might be wondering why even consider doing a Medicare Set-Aside when they aren’t required by any law. The answer is that actually setting anything aside is less important than doing the legal analysis to determine why anything should be set aside. You ultimately want to educate the client on the risks of failing to do a Set-Aside analysis and then document that education in your file.

Key Takeaways

When it comes to Set-Asides, there are a few key takeaways. First, you only have to worry about this issue if you are dealing with someone who is a current Medicare beneficiary or arguably those with a reasonable expectation of becoming one within thirty months. The latter includes those who have applied for or begun receiving Social Security Disability benefits.

At time of publishing, there is no regulation, statute, or case law requiring a Medicare Set-Aside to deal with futures. Instead, it has become analogous to the situation in resolving cases with those who are on Medicaid or SSI. In those cases, a client must be educated about the opportunity to set up a Special Needs Trust to remain eligible for needs-based benefits. Similarly, a Medicare beneficiary should be informed about the opportunity to set up a Medicare Set-Aside to protect future Medicare eligibility for injury-related care. The good news for attorneys assisting Medicare beneficiaries, is that a Medicare Set-Aside allocation can be used in an offensive manner to set the floor for medical damages in a case.

For more advice on Medicare Set-Asides, you can find The Art of Settlement on Amazon.

What is a Medicare Set-Aside?

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

For many years, personal injury cases have been resolved without consideration of Medicare’s secondary payer status even though since 1980 all forms of liability insurance have been primary to Medicare. At settlement, by judgment or through an award, an injury victim would receive damages for future medical expenses that were Medicare covered.

However, none of those settlement dollars would be used to pay for future Medicare-covered health needs. Instead, the burden would be shifted from the primary payer (liability insurer or workers’ compensation carrier) to Medicare. Injury victims would routinely provide their Medicare card to providers for injury-related care.

These practices began to change in 2001 when Set-Asides were officially developed by Centers for Medicare and Medicaid Services (CMS) as a Medicare Secondary Payer Act compliance tool for workers’ compensation cases. CMS circulated a memo to all its regional offices announcing that compliance with the Medicare Secondary Payer Act required claimants to set aside a portion of their settlement for future Medicare-covered expenses where the settlement closed out future medical expenses. This is the simple definition of a “Medicare Set-Aside” (MSA).

But of course, the “simple” definition is never quite as simple as it seems. Read on to learn more about Medicare Set-Asides and why they’re problematic.

A Deeper Definition

A Medicare Set-Aside is a portion of settlement proceeds set aside, called an “allocation,” to pay for future Medicare-covered services that must be exhausted prior to Medicare paying for any future care related to the injury. In certain cases, a Medicare Set-Aside may be advisable in order to preserve a client’s future eligibility for Medicare coverage.

The amount of the Set-Aside is determined on a case-by-case basis and is submitted to CMS for approval if it is a workers’ compensation case and fits within the review thresholds established by CMS. CMS’ review and approval process is voluntary. There are no formal guidelines for submission of liability settlements and the CMS regional offices determine whether or not to review liability submissions (presently, most do not review).

CMS explains on its website that the purpose of a Medicare Set-Aside is to “pay for all services related to the claimant’s work-related injury or disease, therefore, Medicare will not make any payments (as a primary, secondary, or tertiary payer) for any services related to the work-related injury or disease until nothing remains in the Workers’ Compensation Medicare Set-Aside Arrangements [WCMSA].” According to CMS, the Set-Aside is meant to pay for all work-injury-related medical expenses, not just portions of those future medical expenses.

Once the Set-Aside account is exhausted, the client gets full Medicare coverage without Medicare looking to their remaining settlement dollars to provide for any Medicare-covered healthcare. In certain circumstances, Medicare approves the amount to be set aside in writing and agrees to be responsible for all future expenses once the Set-Aside funds are depleted.

The Problem with MSAs

The problem is that MSAs are not required by a federal statute even in workers’ compensation cases where they are commonplace. There are no regulations, at this time, related to MSAs either. Instead, CMS has intricate “guidelines” and “FAQs” on their website for nearly every aspect of Set-Asides from submission to administration. There are only limited guidelines for liability settlements involving Medicare beneficiaries. Without codification of Set-Asides, there are no clear-cut appellate procedures from arbitrary CMS decisions and no definitive rules one can count on as it relates to Medicare Set-Asides.

While there is no legal requirement that an MSA be created, the failure to do so may result in Medicare refusing to pay for future medical expenses related to the injury until the entire settlement is exhausted.

There has been a slow progression toward a CMS policy of creating Set-Asides in liability settlements over the last seven years as a result of the Medicare Medicaid SCHIP Extension Act’s passage. This creates a difficult situation for Medicare beneficiary-injury victims and contingent liability for legal practitioners as well as other parties involved in litigation involving physical injuries to Medicare beneficiaries given the uncertainty surrounding the need to create a Set-Aside.

There appears to be regulations on the horizon for Set-Asides based upon a Notice of Proposed Rulemaking from CMS entitled “Medicare Secondary Payer and Future Medicals.” Late in the fall of 2018, the Office of Management and Budget issued a notification from the Department of Health and Human Services, which oversees CMS of a proposed rule related to the MSP.

The abstract of the rule says it “would ensure that beneficiaries are making the best healthcare choices possible by providing them and their representatives with the opportunity to select an option for meeting future medical obligations that fits their individual circumstances, while also protecting the Medicare Trust Fund.” It indicated that the rule was “economically significant” and the basis for the legal authority was 42 U.S.C. 1396y(b). The final rule was expected sometime in 2019 but hasn’t yet materialized.

Medicare Set-Asides are an Unregulated New Frontier

All the foregoing considered, while there is no regulation or statute requiring anything be done when it comes to Set-Asides, ignoring the issue isn’t the answer. According to CMS, since Medicare isn’t supposed to pay for future medical expenses covered by a liability or workers’ compensation settlement, judgment, or award, it recommends that injury victims set aside a sufficient amount of a personal injury settlement to cover future medical expenses that are Medicare covered.

In other words, it’s not required, but failing to address this issue can result in a future denial of injury-related care by Medicare. It is obvious that Medicare interprets the Medicare Secondary Payer Act as preventing shifting the burden from a primary payer to Medicare post-resolution of a personal injury settlement. The problem is: how do you do that in a liability settlement given the issues that cause those cases to frequently settle for less than full value? There is no good answer to that question. These are the shifting sands of an unregulated new frontier.

For more advice on Medicare Set-Asides, you can find The Art of Settlement on Amazon.

Why Qualified Settlement Funds are an Important Tool for Trial Lawyers to Understand

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Imagine you just settled a personal injury case for John Doe, who is married to Jane. John has a significant brain injury and there are questions of competency. John was injured on the job but had a product’s liability claim which is the part of the case you resolved. He receives both Medicaid and Medicare benefits, but they both have substantial liens along with the workers’ compensation carrier. Jane has a consortium claim and there are issues of allocation of the settlement to deal with.

A Medicare Set-Aside may be necessary and a Special Needs Trust is a must to preserve his Medicaid eligibility. A structured settlement is being considered for part of the settlement proceeds. You, as plaintiff counsel, would like to defer taxation of your fees using a deferred compensation mechanism like an attorney fee structure.

What do you do when you settle a case like this where your client is on public assistance, there are allocation issues, settlement planning issues must be addressed, and there are liens to negotiate? Where can you “park” the money while you set up any necessary public benefit preservation trusts, determine allocation of the proceeds, figure out a financial plan, and negotiate the liens? How can you get the money from the defendant immediately without ruining the client’s available settlement planning options?

The answers to all these questions is to use a Qualified Settlement Fund (QSF or 468B QSF). Read on to find out more about QSFs and why they’re an important tool for personal injury lawyers to understand.

What Is a QSF?

A QSF is a temporary trust established to receive settlement proceeds from a defendant or group of defendants. Its primary purpose is to allocate the monies deposited into it among various claimants and disburse the funds based upon agreement of the parties, or court order (if required). Upon disbursing all of the monies, the QSF ceases to exist.

There are many reasons to use a QSF in a complicated settlement. First and foremost, they are quite easy to establish. There are only three requirements for establishing a QSF. It must be created by a court order with continuing jurisdiction over the QSF. The trust is set up to resolve tort or other legal claims prescribed by the Treasury regulations. Finally, it must be a trust under applicable state law. Any court, with or without jurisdiction over the matter, may sign the order creating the QSF and exert continuing jurisdiction over the trust.

The QSF is a temporary holding tank for the litigation settlement proceeds. It does not exist in perpetuity and is not meant to be a support trust for claimants. Instead, it exists for as long as there are allocation issues between the parties or planning that needs to be done prior to disbursement. It can exist for weeks, months, or years sometimes. There is no limit on the duration of a QSF.

The Benefits of a QSF

A QSF may hold benefits for all parties as it relates to taxes, timing of income, and settlement planning needs. A tax-free structured settlement and a tax-deferred attorney fee structure can be properly created through the use of a QSF. The parties can influence timing of income through the use of a QSF. QSF claimants are typically not taxed on funds in the QSF until those funds are distributed (assuming the damages are taxable). A QSF also gives some extra time and flexibility for claimants to make decisions related to settlement planning issues.

The defendant receives an immediate tax deduction upon contributing the agreed-upon amount to the QSF and is typically permanently released. This is a significant benefit to the defendant as normally they can’t claim a deduction until the funds are received by the claimant, which can be delayed in a complicated settlement. An important point is that the tax deduction for the defendant is not impacted by when distributions actually flow out of the QSF.

The tax treatment of QSFs is uncomplicated. A QSF is assigned its own Employer Identification Number from the IRS. A QSF is taxed on its modified gross income (which does not include the initial deposit of money), at a maximum rate of thirty-five percent. Thus, it is taxed on accumulations to the principal from interest or dividends less deductions available, which include administrative expenses.

How It Works

IRS Code § 468B and Income Tax Regulations found at § 1.468B control the use of a QSF. These provisions provide that a defendant can make a qualifying payment to the QSF and economic performance would be accomplished, crucial for tax reasons to the defendant. Thus, the QSF trustee can receive settlement proceeds allowing the defendant a current year deduction releasing them from the case. The QSF trustee can, after receiving the settlement proceeds, agree to pay a plaintiff future periodic payments, assign that obligation to a third party, and allow the plaintiff to receive tax-free payments under IRC § 104(a) (the IRS provision excluding structured settlement periodic payments from gross income). The transaction works exactly the same as it normally would when you have the defendant involved in the structured settlement transaction.

In terms of the mechanics, it is easy to establish a QSF. First, a court must be petitioned to establish the QSF. The court is provided with the QSF trust document and an order to establish the trust. Once the order is signed, the defendant is instructed to make a check payable to the QSF and the defendant is given a cash release in return for the payment. The consideration for the release with the defendant is payment into the QSF, thus the consideration recital should reflect payment to the QSF and not the injury victim.

As for timing of distributions from a QSF, that is dependent on the agreement among claimants or as ordered by a court. Upon distribution of funds from the QSF, the trustee will obtain a release from the claimants for the distributions from the QSF evidencing the fact that the distribution resolved or satisfied the claimant’s claims against the QSF. Once all funds have been distributed, the QSF ceases to exist.

Remove the Time Crunch

A QSF is a crucial tool for trial lawyers, not least because it also alleviates the time crunch of lien negotiations, allocations, and probate proceedings. The end of a personal injury case is typically a rush to settlement, which I call the “settlement time crunch.” However, in the rush, things may be overlooked, or important settlement planning issues may be missed.

A Qualified Settlement Fund can be created to receive the settlement proceeds thereby giving everyone the time necessary to carefully plan for the future. Plaintiff counsel can get his or her fees and costs quickly. The funds are obtained from the defendant, they are released, and the client’s settlement dollars can be procured quickly. The liens can be negotiated, allocation decisions can be made, public benefit preservation trusts can be implemented, and settlement planning issues, including structured settlements, can be considered. The attorney’s option to structure his or her attorney fees is also preserved. The QSF is an important tool for trial lawyers to consider.

What are Your ERISA Plan’s Recovery Rights?

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

In 1974, President Ford signed the Employee Retirement Income Security Act (ERISA) into law. According to the US Department of Labor, ERISA “protects the interests of employee benefit plan participants and their beneficiaries.” ERISA governs nearly all employer health plans. The primary exceptions are government employer plans governed by FEHBA and state government or church plans which are governed by state law.

Most, if not all, ERISA health insurance plans state that injuries caused by a liable third party are not a covered expense and require reimbursement when a plan pays for injury-related medical expenses (often referred to as subrogation clauses). ERISA provides that health plans which qualify under its provisions can bring a civil action under section 502(a)(3) to obtain equitable relief to enforce the terms of the plan. Appropriate equitable relief is really the only enforcement mechanism an ERISA plan can utilize to address its reimbursement rights contained in the plan.

While that all may sound simple, ERISA is a “compressive and reticulated statute” which means that the law on this subject is quite complicated. Thankfully, over the last twenty years, the Supreme Court has clarified exactly what is appropriate equitable relief under ERISA. Here’s what they’ve concluded.

The Sereboff and McCutchen Cases

Starting in 2006, the United States Supreme Court began to clarify and articulate just how powerful a “self-funded” ERISA plan’s recovery rights are under federal law. In 2006, the Supreme Court issued its opinion Sereboff. In that decision, the Supreme Court found generally that reimbursement provisions asserted by ERISA group medical plans were enforceable under the ERISA statute and qualified as equitable relief under the ERISA provisions.

Prior to Sereboff, there was disagreement among federal courts about whether an ERISA plan could even enforce its repayment provisions. Post Sereboff, an ERISA qualifying plan’s contractual provisions for repayment can be enforced via equitable principles under section 502(a)(3) by filing an action for an equitable lien or for constructive trust.

In 2013, the McCutchen case was decided by the Supreme Court. After the Sereboff decision was issued, most lawyers understood that to defeat reimbursement actions under ERISA it depended on the strength of equitable defenses/arguments like “made whole” and “common fund.” McCutchen took on the issue of whether those doctrines could prevent an ERISA plan from enforcing its recovery rights.

At the time, there was a split of the federal circuits on the question of whether notions of fairness (equitable defenses) could override an ERISA medical plan’s reimbursement provisions. The McCutchen Court reversed the Third Circuit and held that in a section 502(a)(3) action based on an equitable lien by agreement, the ERISA plan’s terms govern. Post McCutchen, the lesson to savvy plans is to word your master plan in such a way to prevent any and all equitable defenses by disavowing “made whole” and “common fund.”

Obviously the McCutchen decision is important and a tough pill to swallow for the plaintiff who makes a recovery and then must reimburse an ERISA plan. While it is important, there are still many ways to get leverage and reduce ERISA plan liens, but you must know the pressure points to use. You also must realize who you are fighting.

In most instances, it isn’t the plans but instead their recovery vendors like Rawlings, Conduent, Trover, among many others. They are paid based on what they recover so there is plenty of incentive for the industry players to work hard against the plaintiff.

Determine Whether the Plan is Self-Funded

In fighting plans, the first and most important question is whether the plan is self-funded. A self-funded plan is funded by contributions from the employer and employee. If it is self-funded, then ERISA preempts state law and you are left with fighting an uphill battle under McCutchen. If it is fully insured, then the ERISA plan is subject to state law subrogation statutes or general equitable principles under common law. These are plans which are funded by purchased insurance coverage.

How do you determine the funding status? The safest way is by reviewing the Summary Plan Description (SPD) and the Master Plan. How do you get those documents? Simply put, you make a written request to the ERISA plan administrator under 29 U.S.C. §1024(b)(4). Under 1024(b)(4), an ERISA plan administrator must provide, upon request by a participant or beneficiary, a copy of the summary plan description, annual report, “bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.” The request must go to the plan itself, not the plan administrator (TPA) or its recovery contractor (i.e., Rawlings, Optum, Conduent, etc.).

If the plan administrator does not comply within thirty days, 29 U.S.C. §1132(c)(1)(b) establishes a $100 per day penalty for failure to comply. Further, 29 U.S.C. §2575.502c-1 allows for this penalty to be increased to $110 per day. There are plenty of cases out there where federal courts have imposed penalties upon a plan administrator for failing to comply.

In order to combat ERISA plan recovery attempts, the information received from the 1024(b)(4) request is critical. You want to evaluate the strength of the plan’s claim based on the language in the plan. The 1024(b)(4) request arms you with the proper information to do so. This allows you to make the appropriate arguments for reduction.

What you are looking for is abrogation of “common fund” and “made whole” primarily. If those equitable principles have not been abrogated, there are strong arguments for reduction. In addition, when the plan administrator fails to comply with the request, and they often do, penalties will begin to accrue. Once penalties have accrued, you have more leverage to negotiate with the ERISA recovery contractor for a reduced lien amount.

How to Move Forward

To sum up, when evaluating an ERISA plan’s right of recovery, it is important to first determine if it is in fact a plan covered by ERISA and then secondly if it is a self-funded plan. The McCutchen decision has given ERISA self-funded plans strong recovery rights under federal law. Since under that decision plan language is vitally important, using a 1024(b)(4) request to get plan documents is an important tool to properly evaluate the strength of a reimbursement claim. In addition, failure to comply with this information request provides for penalties that can be leveraged to get the lien resolved.

Confused by Medicare? Here’s a Helpful Overview

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

The Medicare program—and the related Social Security Disability Income/Retirement benefit (SSDI)—is one of the primary benefit programs available to those who are injured and disabled. Understanding the basics of this program is imperative to protecting the client’s eligibility for their benefits.

Medicare and SSDI benefits are an entitlement and are not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid enough quarters into the system can receive disability benefits regardless of their financial situation.

The SSDI benefit program is funded by the workforce’s contribution into FICA (Social Security) or self-employment taxes. Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled. Medicare is a federal health insurance program. Medicare entitlement commences at age sixty-five or two years after becoming disabled under Social Security’s definition of disability. Medicare coverage is available again without regard to the injury victim’s financial situation.

The Medicare program is made up of different parts. Part A and Part B are thought of as traditional Medicare, which includes hospital insurance and medical insurance. Part A is the hospital insurance which covers inpatient care in hospitals and skilled nursing facilities (it does not cover custodial or long-term care—only Medicaid does). Part B benefits cover physician visits, durable medical equipment, and hospital outpatient care. It also covers some of the services Part A doesn’t cover, such as physical and occupational therapies as well as some home healthcare. Part D is prescription drug coverage that is provided by private insurers approved by and funded by Medicare. Part C—Medicare Advantage Plans or MAOs, offers all of the coverages through Parts A, B, and D but through a private insurer approved by Medicare. It is an alternative to the service fees for Parts A and B coverages, which can be elected and purchased by a Medicare beneficiary.

There is a connection between Medicare eligibility and SSDI. SSDI beneficiaries receive Part A Medicare benefits, which covers inpatient hospital services, home health, and hospice benefits. Part B benefits cover physicians’ charges, and SSDI beneficiaries may obtain coverage by paying a monthly premium. Part D provides coverage for most prescription drugs, but it is a complicated system with a large copay called the donut hole.

SSDI is the only way to get Medicare coverage prior to retirement age. This is pertinent as many injury victims become Medicare eligible by virtue of disability. Medicare and Social Security Disability Income benefits are an entitlement and are not income or asset sensitive like Medicaid/SSDI. Clients who meet Social Security’s definition of disability and have paid in enough quarters into the system can receive disability benefits without regard to their financial situation. The SSDI benefit program is funded by the workforce’s contribution into FICA (Social Security) or self-employment taxes. Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled. Medicare is our federal health insurance program and as discussed above, is broken up into multiple parts. Medicare entitlement commences at age sixty-five or two years after becoming disabled under Social Security’s definition of disability.

For more advice on Medicare, you can find The Art of Settlement on Amazon.

How to Use a Special Needs Trust to Preserve Benefits Eligibility for Disabled Injury Victims

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

John Doe was a laborer since age eighteen, but when he was thirty, he was severely injured and became paralyzed. John didn’t have health insurance at the time of his accident, and the hospital applied for Medicaid on his behalf after getting injured. He qualified for Medicaid, since he had no real assets and no longer had an income. His family applied for Social Security Disability, since he had worked enough quarters to be insured.

John’s personal injury lawyer has settled the case for $1,000,000, which will help him pay for everything he now needs, but it is far less than what is needed to pay for all his future medical care. The question now is what to do with the settlement? While SSDI isn’t income or asset sensitive, Medicaid is most likely the program John has, and it will have an asset cap of $2,000.

When a client receives personal injury proceeds, it can cause them to become ineligible for means-based-tested government benefit programs. On paper, their settlement makes them look like they’ve hit a windfall, when in fact, they need that money to pay their medical expenses and to continue receiving the care they need. In John’s case, and others like it, a Special Needs Trust is an important planning tool for making sure that your client remains eligible for public assistance while still complying with all federal laws. Here’s how they work.

The Requirements of a Special Needs Trusts: 42 U.S.C. §1396p(d)(4)

Trusts commonly referred to as (d)(4)(a) Special Needs Trusts, named after the federal code section that authorizes their creation, are authorized and regulated by federal law. The 1396p provisions in the United States code govern the creation and requirements for such trusts.

There are three primary types of trusts that may be created to hold a personal injury recovery, each with its own requirements and restrictions. First is the (d)(4)(A) Special Needs Trust which can be established only for those who are disabled and are under age sixty-five. This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit. It can only be established by a parent, grandparent, guardian, or court order. The injury victim can’t create it on his or her own.

Second is a (d)(4)(C) trust, typically called a pooled trust that may be established with the disabled victim’s funds regardless of age. A pooled trust can be established by the injury victim unlike a (d)(4)(A).

Third and last is a third-party SNT, which is funded and established by someone other than the personal injury victim (i.e., parent, grandparent, charity, etc.) for the benefit of the personal injury victim. The victim still must meet the definition of disability.

If a client meets those qualifications, an SNT can be created to hold the recovery and preserve public benefit eligibility, since assets held within a Special Needs Trust are not countable resources for purposes of Medicaid or SSI eligibility.

The Limitations of a Special Needs Trust

The major limitation of all types of Special Needs Trusts is that the assets held in trust can only be used for the sole benefit of the trust beneficiary. The disabled injury victim could not withdraw money and gift it to a charity or family.

The purpose of the Special Needs Trust is to retain Medicaid eligibility, and use trust funds to meet the supplemental, or “special” needs of the beneficiary. These can be quite broad, however, and include things that improve health or comfort such as non-Medicaid-covered medical and dental expenses, trained medical assistance staff (twenty-four hours or as needed), independent medical checkups, medical equipment, supplies, programs of cognitive and visual training, respiratory care and rehabilitation (physical, occupational, speech, visual, and cognitive), eyeglasses, transportation (including vehicle purchase), vehicle maintenance, insurance, essential dietary needs, and private nurses or other qualified caretakers. Also included are nonmedical items, such as electronic equipment, vacations, movies, trips, travel to visit relatives or friends, and other monetary requirements to enhance the client’s self-esteem, comfort, or situation.

The trust may generally pay for expenses that are not “food and shelter” which are part of the Supplemental Security Income (SSI) disability benefit payment. However, even these items could be paid for with trust assets, but SSI payments could be reduced or eliminated. This may not be problematic if the disabled injury victim qualifies for Medicaid without SSI eligibility. However, many states grant automatic Medicaid eligibility with SSI so one has to be careful about eliminating the SSI benefit.

Clients Need to Know Their Options

In cases like John Doe’s, a personal injury recovery can be placed into a Special Needs Trust so that the victim can continue to qualify for SSI and Medicaid. These trusts allow injury victims to continue to access critical needs-based government benefits after settling their case.

Ethically, a personal injury lawyer must be able to explain these options to the extent that the client is informed sufficiently to make educated decisions. Every case and client is different though and careful consideration of the advantages and disadvantages should be done with an elder law attorney.

For more advice on Special Needs Trusts, you can find The Art of Settlement on Amazon.

6 Real-World Considerations for Advanced Settlement Planning

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Jan Smith was the victim of medical malpractice at a hospital. Jan was in her early forties when she decided to have elective surgery on her back for degenerative disc disease. During the surgery, a problem developed while being intubated and the procedure was canceled.

Mrs. Smith was moved to the ICU and no neurologic monitoring was performed that evening after being moved from the surgical suite. The next morning, Mrs. Smith was found to be quadriparetic. A suit was brought against multiple defendants with a significant seven-figure recovery secured. Mrs. Smith and her family had Medicaid coverage and SSI. She had also applied for Social Security Disability Income (SSDI). At the time of settlement, there was no Medicare eligibility, since she had not been approved for SSDI and she wasn’t sixty-five.

In the confusing landscape of public benefits and planning issues that arise today for trial lawyers when settling catastrophic injury cases, finding your way can be a daunting task. In the paragraphs that follow, I’ll use Mrs. Smith’s real-world example to identify six key considerations to look out for when you’re settling a case for a catastrophically injured client.

1. Public Benefits Versus ACA Coverage

As a starting point, the first question is, does it make sense for Mrs. Smith to give up her needs-based benefits completely by taking the settlement in a lump sum and becoming privately insured through coverage under the Affordable Care Act?

This isn’t a question that can be answered with a simple yes or no. There are multiple considerations before deciding to eschew coverage afforded by Medicaid and Medicare along with the needs-based Social Security benefit, SSI. First is whether the ACA coverage will be around for the long term. Will it be repealed at some point? Will portions of it be repealed making it a nonviable option?

Second, does the case involve needs that aren’t provided for by the Affordable Care Act coverage such as in-home, skilled attendant care or long-term facility care? These services can be very costly and may be covered by Medicaid in many states but are not covered by ACA plans. In Mrs. Smith’s case, she will have a significant amount of attendant care needs that can be covered by certain Medicaid programs available in her home state but not by the ACA.

2. Public Assistance Program Analysis

Because Mrs. Smith is eligible for Medicaid and SSI as well as having applied for SSDI, further explanation of these benefits makes sense to adequately understand the issues involved in planning for her recovery. There are two primary public benefit programs that are available to those who are injured and disabled. The first is the Medicaid program and the intertwined Supplemental Security Income benefit (SSI).

The second is the Medicare program and the related Social Security Disability Income/Retirement benefit (SSDI). Both programs can be adversely impacted by an injury victim’s receipt of a personal injury recovery. Understanding the basics of these programs and their differences is imperative to protecting the client’s eligibility for these benefits. So how do we protect Mrs. Smith’s current and potential future benefits?

3. Planning Techniques for Keeping Mrs. Smith Eligible for Public Assistance

Since Mrs. Smith receives Medicaid/SSI, a Special Needs Trust can be created to hold the recovery and preserve public benefit eligibility since assets held within a Special Needs Trust are not a countable resource for purposes of Medicaid or SSI eligibility.

The 1396p provisions in the United States Code govern the creation and requirements for such trusts. There are two primary types of trusts that may be created to hold a personal injury recovery each with its own requirements and restrictions.

First is the (d)(4)(A) Special Needs Trust which can be established only for those who are disabled and are under age sixty-five. This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit. It can only be established by a parent, grandparent, guardian, or court order.

Second is a (d)(4)(C) trust typically called a pooled trust that may be established with the disabled victim’s funds without regard to age. A pooled trust can be established by the injury victim unlike a (d)(4)(A).

4. Planning Techniques to Ensure Mrs. Smith Will Not Lose Medicare Coverage in the Future

Mrs. Smith has applied for SSDI which means technically, according to CMS guidance, she has a “reasonable expectation of becoming a Medicare beneficiary within thirty months.” CMS recommends that injury victims set aside a sufficient amount to cover future medical expenses that are Medicare covered..

In certain cases, a Medicare Set-Aside may be advisable in order to preserve future eligibility for Medicare coverage. A Medicare Set-Aside allows an injury victim to preserve Medicare benefits by setting aside a portion of the settlement money in a segregated account to pay for future Medicare-covered healthcare. The funds in the Set-Aside can only be used for Medicare-covered expenses for the client’s injury-related care.

5. Dual Eligibility: The Intersection of Medicare and Medicaid—SNT/MSA

Since Mrs. Smith is potentially a Medicaid and Medicare recipient, extra planning is in order. If it is determined that a Medicare Set-Aside is appropriate or needed in the future, it raises some issues with continued Medicaid eligibility. A Medicare Set-Aside account is considered an available resource for purposes of needs-based benefits such as SSI/Medicaid.

If the Medicare Set-Aside account is not set up inside a Special Needs Trust, the client will lose Medicaid/SSI eligibility. Therefore, in order for someone with dual eligibility to maintain their Medicaid/SSI benefits, the MSA must be put inside a SNT. In this instance, you would have a hybrid trust which addresses both Medicaid and Medicare. It is a complicated planning tool but one that is essential when you have a client with dual eligibility.

6. Financial Settlement Planning Considerations

While we have discussed Mrs. Smith’s public benefit preservation issues above, what about the management of her significant recovery? The first option is to take all of the personal injury recovery in a single lump sum. If this option is selected, the lump sum is not taxable, but once invested, the gains become taxable and the receipt of the money will impact his or her ability to receive public assistance. A lump sum recovery does not provide any spendthrift protection and leaves the recovery at risk for creditor claims, judgments, and wasting. The personal injury victim has the burden of managing the money to provide for their future needs, be it lost wages or future medical. Needs-based public benefits would be a lost option if a lump sum is taken as would any reduction in the premium costs for the ACA insurance programs.

The second option is receiving “periodic payments” known as a structured settlement instead of a single lump sum payment. A structured settlement’s investment gains are never taxed, it offers spendthrift protection and the money has enhanced protection against creditor claims as well as judgments. A structured settlement recipient can avoid disqualification from public assistance when a structured settlement is used in conjunction with the appropriate public benefit preservation trust. However, a structured settlement alone will never protect the disabled injury victim’s needs-based public benefits.

A third option, which should always be considered, is to create a “settlement trust” as an alternative to structured settlements. Settlement trusts are typically spendthrift irrevocable trusts managed by a professional trustee and can also contain special needs provisions to allow for preservation of needs-based benefits. These trusts provide liquidity and flexibility that a structured settlement can’t offer while at the same time protecting the recovery.

How Mrs. Smith was Protected

After assessing Mrs. Smith’s situation, a settlement trust was created that had two buckets: one with an immediate fixed income portfolio of annuities that provide periodic payments, and a cash reserve to be used when the need arises. The settlement trust had provisions that allowed Mrs. Smith to retain her eligibility for public assistance, which was a win-win solution.

There are no easy answers to settlement questions. Complex settlements require detailed planning and creative solutions. It is up to the personal injury lawyer to discuss those options fully with the client so they can make an informed decision.

For more advice on advanced settlement planning, you can find The Art of Settlement on Amazon.

Jason Lazarus’ New Book on Dealing with Catastrophic Claims

Attorney Jason Lazarus, author and CEO of Synergy Settlements, joins CEO and Chairman, Michael J. Swanson, to discuss Mr. Lazarus’s new book “The Art of Settlement: A Lawyer’s Guide to regulatory compliance when resolving catastrophic claims.”

Mr. Lazarus’s book covers helpful information for plaintiff attorneys that are dealing with catastrophic claims. Jason Lazarus’s book is now available for purchase on Amazon, click here to purchase his book.

To learn more about Jason Lazarus’s book, listen to episode 13 of The How David Beats Goliath Podcast® below or click here to listen. You can also listen to this episode on Apple Podcast, Stitcher, or Spotify.