A Plain English explanation of why Medicare can (and should) grab part of your worker’s comp or court settlement . . . and what to do about it!  Give me five minutes!

I proudly told my 94 year-old Mom and 15 year-old son that I had just been awarded something called a “Medicare Set-aside Certified Consultant” designation by the International Commission on Health Care Certification. My mother exclaimed, “I am SOOO proud of my son!” My son raised an eyebrow, gave me a knowing nod and exclaimed, “Dude!” They both then wondered, “But what does THAT mean? What is Medicare secondary payer?” I think I explained it to my mother. After 5 minutes, my son said, “That’s OK, Dad . . . .”

This “plain English” explanation is for folks like them.

The Case of Theodore Cleaver

Theodore Cleaver was seriously injured in a work-related accident. Four years later his worker’s comp lawyer managed to secure a lump sum worker’s comp settlement of $450,000. Also of some relief to Theodore was that he was determined to be disabled by Social Security and was covered by Medicare starting about two years ago – which was a great help with his serious and ongoing medical bills.

The Case of Kitten Anderson

Five years ago Kathy (“Kitten”) Anderson received life threatening injuries after being side-swiped by a tractor-trailer rig owned by a national trucking line. Her personal injury attorney is about to settle the case for $1.5 million. Kitten never applied for Social Security Disability and is not on Medicare as a result (but fortunately she had a group health plan for most of the time). Kitten is 64 and will suffer from accident-related side effects for the rest of her life (which will likely be shortened as a result of her injuries).

What Do Theodore and Kitten Have In Common?

Medicare! Theodore is on it, and Kitten will be soon. Federal law has required for many years that Medicare is always (well . . . almost always) the payer of last resort for medical and surgical bills. If some other company or insurer is legally on the hook and can be reasonably expected to pay soon, Medicare will not pay until the other legally obligated party has paid up. Think: No double-dipping.

Conditional Medicare Payments

If the other party cannot be reasonably expected to pay soon – perhaps there is ongoing litigation in which the other party is denying any liability – Medicare will pay for covered medical expenses that are injury-related for an otherwise eligible person. Medicare, however, will insist on being paid back once the parties settle the case and figure out how much of the settlement represented compensation for past medical expenses. In fact, Medicare can be as tough as the IRS when it comes to getting itself paid back. These interim payments are called “conditional payments” because they are . . . well . . . paid on the condition that Medicare will eventually get paid back if any later funds surface that represent payment for medical expenses.

Medicare paid a great deal on behalf of Theodore while he was waiting for his worker’s comp case to settle. Those “conditional” Medicare payments were certainly welcomed by Theodore and his doctors, but if Medicare is not handled carefully and correctly Theodore could lose future Medicare coverage, lose a great deal of his Social Security Disability Benefits, and possibly be ineligible for Medicaid if he needs to go to a nursing home. The problems don’t stop there. If Theodore’s worker’s comp attorney and his employer’s worker’s comp insurance carrier don’t handle Medicare correctly, Medicare can come after them for the repayment of the conditional payments. In fact, the insurer could be on the hook for double! Nobody happy.

Commutation: A Fancy Word For ‘Looking Ahead’

What both Theodore and Kitten need to be concerned with is that Medicare will not pay for any future medical services if some other entity has paid, or will be paying, for those services. Both Theodore and Kitten have received settlements that contain at least some money meant to pay for future medical expenses.

The Medicare Secondary Payer Act not only gives Medicare the authority to seek (how about “take”?) reimbursement for conditional payments already paid, but to set-up systems to insure that it does not pay for future medical care that has been paid for in advance by some other party at the time of a workers comp or personal injury settlement.

No one knows what the future holds, particularly with regard to medical care. Once a defendant or an insurance company has been found liable for future medical care related to an injury the insurance company/defendant can (A) make payments for future medical services for the next several decades until either Theodore or Kitten have died, or (B) try to come to some sort of agreement on a lump sum they can pay to cover future medicals, and then ride off into the sunset never to look at Theodore or Kitten again. Any sane defendant/insurance company will opt for Option B. Option B is referred to as a “commuted payment” and the whole process a “commutation of medicals.”

Medicare takes a keen interest in commuted payments because the law prevents it from paying for services that someone else has already paid for.

Looking Back – Looking Ahead

My friend and colleague John Campbell, a great elder law and Medicare Set-aside Certified Consultant in Denver, has come up with a great explanation. The Medicare secondary payer process is like the Roman god Janus. Janus was a two-faced fellow, sometimes thought of as the god of new beginning, as well as doorways and arches. He looked back, and he looked forward.

Medicare does the same. It looks back to collect conditional payments already made for services that are later paid for by another, and it looks ahead to insure that it is not paying for services that were covered in a commuted payment for future medicals.

The law requires all parties to a workers’ compensation, a personal injury, or medical malpractice settlement to make “reasonable” provision for the interests of Medicare. There is a fair amount of guidance for workers’ comp parties to rely upon when satisfying themselves that they have looked after the “reasonable” interests of Medicare. There is very little to rely upon in the area of personal injury or medical malpractice . . . other than government statements that they expect everyone to look out for Medicare’s best interests. The penalties for being wrong are drastic.

As mentioned above, the collection process can be brutal. If settlement funds representing conditional payments are paid or spent before Medicare has been reimbursed, Medicare will come after the Medicare beneficiary (Theodore or Kitten), the lawyers, the insurance companies . . . just about anyone who has had anything to do with the settlement. Medicare will look for the deep pockets.

The Cummutation Clawback

If Medicare believes that it has paid for services that were also the subject of a commuted or settled amount, Medicare will stop paying for any injury-related medical care until an amount equal to the entire settlement has been expended on injury-related services that Medicare would ordinarily pay for. That can be an absolute catastrophe for an injured individual with high medical costs and no other source of payment. Think of it as being smashed by Janus’ Big Hammer. The personal injury/workers’ comp attorney who messed it up can think of it as malpractice!

The Settlement Dilemma

If settlements represented nothing more than payments for medical expenses already incurred and for future medical expenses (and you make the added assumption from Never-Never Land that Medicare covers all medical expenses), the situation would not be too difficult:  Call Medicare, find out how much it has paid in conditional payments, then set aside the rest of the settlement and use it to pay for medical services (remember, Medicare would have paid for everything in this make-believe place). When the money is gone, show Medicare how the money was spent and then Medicare kicks back in.

In the real world, however, settlements often represent several different elements. In the workers’ comp arena the injured worker is paid for lost wages (“indemnity”), in addition to medical expenses. In the personal injury/medical malpractice arena settlements often represent compensation for pain and suffering, lost income, and punitive damages . . . in addition to past medical expenses and future medical expenses.

If Medicare’s interests have not been reasonably considered and provided for, Medicare will consider the WHOLE settlement as compensation for conditional payments, and then when those have been covered, anything left will be applied to future medical expenses before Medicare will pay a dime.

To add to the nightmare, if the plaintiff is also depending on Medicaid, Medicaid will consider the whole settlement as available and not pay anything as long as the individual is holding the settlement. Good planning would prevent this.

Allocation Magic

The trick is to carefully (and reasonably) allocate the settlement among indemnity or lost wages and income, pain and suffering, punitives, and medical expenses (past and future). If Medicare believes that it has not been reasonably considered, it will ignore the whole allocation and treat it as all for medicals.

The process involves careful negotiation with Medicare regarding what represents amounts paid by Medicare as conditional payments, and preparing detailed allocation reports showing that a reasonable medical plan of future care has been considered and money allocated (set aside) to pay for those future medical costs. The process is multi-disciplinary and involves attorneys familiar with the legal ramifications and the process, medical personnel who understand the process and who can prepare allocation reports, and insurance professionals if the settlement is going to be paid out as an annuity (periodic payments over time, also known as a “structured settlement”).

Medicare has a fairly detailed system for reviewing workers’ comp allocations. There is no similar system for reviewing personal injury/medical malpractice settlements . . . which has lulled many attorneys and their clients into believing nothing needs to be done with those types of personal injury settlements. What an expensive mistake. The agency that runs Medicare (Centers for Medicare and Medicaid Services or CMS) has repeatedly cautioned that Medicare’s interests must be taken into account. As government budgets tighten, look for aggressive collection techniques.

Often, if not usually, the best way to insure proper future administration is to drop the commuted medical settlement amounts into a trust, and turn it over to a competent third party administrator who can handle proper payment of “otherwise Medicare covered” medical expenses and make the necessary reports to Medicare.

But Wait! There Is More!

If the individual receiving the settlement plans to finance future care with the settlement, Medicare AND Medicaid (and perhaps even Supplemental Security Income or SSI) then there is the added complexity of continuing to qualify in spite of receiving the settlement. At that time the only alternative is to fund a trust that qualifies in such a way to keep Medicare’s Lord Janus happy, while at the same time qualifying as a Medicaid/SSI special needs trust.

And So . . .

That, Mom and Bobby, is why I became a Medicare Set-aside Certified Consultant. There are very few attorneys who understand the whole process and can also address the special needs issues involving disabled clients. It also makes me feel even more socially useful because I am helping other attorneys and their injured clients, as well as doing my bit to prevent duplicate payments by Medicare (we all have an interest in the continued financial viability of that program).