Issue #16     July 5, 2005


By John J. Campbell, Esq., CELA, MSCC




          The federal Medicare Secondary Payer (MSP) statute and regulations applicable to worker's compensation (WC) settlements require that a reasonable portion of the WC settlement be allocated towards future medical expenses.[1]  The Centers for Medicare and Medicaid Services (CMS) requires that WC settlements meeting its review criteria[2] be submitted for review with a Medicare Set-Aside arrangement (MSA), funded with an amount representing the claimant's future work injury-related medical expenses of the type normally covered by Medicare.  Otherwise, CMS will require that the entire settlement be spent on future work injury-related medical care before Medicare will cover those expenses.


          As a result, the manner in which WC settlement proceeds are allocated is vital to the preservation of the claimant's Medicare benefits.  An effective MSA Allocation, as part of a Medicare Set-Aside submission to CMS, can mean the difference between prompt CMS approval of the settlement and many long months of negotiation and document production.  This article provides suggestions on how to properly allocate WC settlements; and prepare MSA Allocations which will withstand CMS' scrutiny upon review.  


Allocating the WC Settlement


          WC claims typically consist of several elements.  Most commonly, those elements are: 1) indemnity; 2) past medical expenses; 3) future medical expenses; and 4) attorney's fees & costs.  The indemnity portion of a WC settlement consists of any remaining wage replacement claim that has not already been satisfied by the employer or WC carrier.  The past medical portion usually represents past medical expenses that were disputed and have not been paid by the carrier or employer as of the date of settlement.  The future medical portion represents medical benefits the claimant would have been entitled to over the lifetime of the WC claim on an ongoing basis, but for the settlement.  Indemnity and future medical expenses are typically the largest components of a WC settlement. 


          The claimant's WC attorney will also seek payment of his or her attorney's fees and costs from the settlement.  Payment of these fees and costs, as well as the terms of the entire settlement, will require approval by the state WC judge before the settlement can be finalized and the attorney can be paid.


          Every WC settlement must be reduced to written form for approval.  The resulting Settlement Agreement is often referred to as a Compromise and Release.  For WC settlements requiring submission and further approval by CMS, it is extremely important that the Compromise and Release set forth the total amount of settlement as well as allocations of that total amount to the various elements of the settlement.  The most important allocations will be those representing indemnity, future medical expenses and attorney's fees & costs.


          Indemnity is usually calculated and allocated by the WC attorney under a statutory formula in the state's WC laws.  The indemnity award is usually referred to as an award for permanent partial disability (PPD), temporary partial disability (TPD), permanent total disability (PTD) or temporary total disability (TTD).  There should always be an allocation to indemnity in any WC settlement that closes out the WC carrier's/employer's future liability to pay wage benefits to the claimant.


          The indemnity allocation is important in most states[3] because the Social Security Act and the Social Security regulations both require a reduction in SSDI benefits if the claimant's combined SSDI and monthly WC indemnity benefits total more than 80% of the claimant's average current earnings.  (42 U.S.C. §424a; 20 C.F.R. §404.408.)  If the allocation to indemnity is unreasonably low, the entire settlement will be treated as indemnity under Social Security regulations and will likely result in a substantial or complete elimination of monthly SSDI benefits.


          Attorney's fees and costs payable to WC counsel will be calculated by counsel according to his or her fee agreement with the claimant; and according to any applicable limiting provisions under state WC laws.  The attorney is required under every state's laws to disclose his or her fees and costs and to obtain approval for payment from the state WC judge. 


          Future medical expenses will need to be determined on a case-by-case basis by the claimant's treating physician or other medical professional.  Unlike the indemnity and attorney's fee allocations, determination of future medical expenses will require detailed analysis of the claimant's specific circumstances.  Medical expense projections will be unique to each case.


          The allocation to future medical expenses in important because it will include the portion of the settlement required to fund an MSA.  The MSA allocation will be based upon the claimant's future work injury-related medical expenses of the type normally covered by Medicare over the claimant's life expectancy.  Life expectancy, in turn, will be based either upon chronological age or a rated age, and determined according to the CDC 2002 Life Expectancy Tables.


          If the WC settlement does not contain a reasonable allocation to fund the MSA, CMS will treat the entire settlement as future medical expenses.  Medicare will not cover any of the claimant's future work injury-related medical expenses until the entire settlement has been exhausted on these expenses.


          Is allocation important?  Imagine what would happen if the WC settlement failed to make reasonable allocations to both indemnity and future medical expenses.  The claimant would risk losing both SSDI benefits and Medicare coverage!


          The allocation to past medical expenses in equally important in the context of a Worker's Compensation Medicare Set-Aside (WCMSA) submission.  CMS will want to compare past medical expenses to future medical expenses in determining the reasonableness of the allocations.  Past medical expenses for purposes of a MSA Allocation will be based upon historical data: either the WC claim payment history from the WC carrier; or medical expenses documentation provided by the claimant's WC counsel. 


          Even the allocation to attorney's fees and costs is important beyond protection of the WC attorney's interest in being paid.  If Medicare has made any conditional payments for treatment of the claimant's injuries prior to settlement, Medicare will have a secondary payer claim that must be satisfied from settlement proceeds.  This MSP claim will be automatically reduced by CMS to take into account the claimant's costs of procuring the settlement.  Thus, the claimant's attorney's fees and costs will result in a reduction of the amount that must be repaid to Medicare.


The Medicare Set-Aside Allocation


          The MSA Allocation is a vital component to any WCMSA submission to CMS.  The MSA Allocation provides the medical analysis and basis for determining the reasonableness of the proposed set aside amount.  In smaller settlements where the claimant's injuries may not be as severe, an Independent Medical Examination (IME) or a statement from the claimant's treating physician(s) may suffice.  However, in cases involving serious or catastrophic injuries and disabilities, the MSA Allocation should take the form of a life care plan or a Medicare Set-Aside Allocation Report. 


          The amount projected for future work injury-related, Medicare-covered services in the MSA Allocation is the lodestar for determining a reasonable set- aside amount.  Whatever other, non-medical issues might exist to justify a reduced set-aside amount, the projections in the Allocation will be the starting point.  Where a reduced set-aside amount is not justifiable, the set-aside projection in the Allocation will be the last word.


          The claimant needs his or her settlement funds for more than just future medical expenses of the type normally covered by Medicare.  The claimant may expect significant medical expenses that Medicare will not cover.  The claimant will also have living expenses; and debts which will have accumulated during the pendency of the WC proceeding.  These needs are important in the eyes of the claimant.  Therefore, the professional preparing the MSA Allocation must avoid "over-allocating" to future medical expenses. 


          Preparing a proper and effective MSA Allocation requires much more than just "number crunching."  The allocator must take the time to review and analyze all of the claimant's past and current medical records, preferably since the date of the claimant's injuries.  The WC carrier's claim payment history must be reviewed; and the allocator should at least interview the claimant and the claimant's primary physician.


          In addition to listing and pricing all projected future medical care, the MSA Allocation should divide that future medical care into care that is covered by Medicare and care that is not.  This will require a careful analysis of every projected medical item, service and expense. 


          The costs assigned to each future medical item or service is based upon either "full and actual" charges or WC schedules, depending upon the circumstances of the case.  Usually, WC schedule rates and charges are used when the claimant's medical providers agree to accept payment at those rates and charges; and where the person or entity who will administer the claimant's MSA can readily determine what those rates and charges are for any given item or service.  If possible, the use of WC schedules is preferable because this will result in a lower set aside amount.


          According to CMS, future medical costs in an MSA Allocation should not be based upon Medicare approved charges.  Further, the MSA Allocation should not factor in Medicare deductible amounts or co-payments. 


          The allocator must remember that the threshold test for Medicare coverage is "medical necessity."  In particular, with the single exception of hospice services, Medicare will not pay for any item or service that is not "reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body member."[4]


          The allocator must become familiar with Medicare coverage criteria; and must learn to look at any projected medical expense as a Medicare Fiscal Intermediary or Carrier would.  For each projected item or service, the allocator must ask: "Is this item or service medically necessary?" and "Is this item or service generally covered under Medicare Part A or Part B?" 


          Further, the allocator should take the time to check Medicare's local coverage determinations (LCD's) and national coverage determinations (NCD's) to see whether a predicted item or service usually covered by Medicare may be excluded from coverage for the claimant's particular medical condition.  The LCD's and NCD's are extensive and prohibit payment for many treatments that initially appear to be within the parameters of Medicare-covered services.  In recent years, CMS has increasingly employed the LCD's and NCD's as an alternative to the passage or amendment of statutes and regulations to restrict Medicare coverage.


          The MSA Allocation is not like a traditional life care plan prepared in anticipation of litigation.  The goal of the traditional life care plan, at least from the perspective of the claimant, is to project maximum justifiable expenses for any and all items or services which may be beneficial to the claimant's treatment and quality of life.  An MSA Allocation prepared under such criteria would likely result in significant over-funding of the claimant's MSA.  Over-funding of the claimant's MSA benefits no one but Medicare; and goes beyond the requirement that Medicare's interests be reasonably considered.


          Instead, the MSA Allocation is intended to fairly project reasonable and necessary medical items and services at the lowest justifiable expense.  This is all that the reasonable consideration of Medicare's interests requires. 


          The allocator must learn to think in terms of "basic needs."  Medicare does not pay for frills or extras; and the MSA Allocation should not include such items in projections for future medical expenses.  For example, when pricing durable medical equipment, such as a wheelchair, the allocator should shop all available resources for the lowest priced item that will meet the claimant's basic needs.  If a $2,000 manual chair is all that is medically necessary, Medicare would not pay for a $4,500 electric chair; and if the allocator can find the manual chair for $1,500, that is the cost that should be used in the Allocation.


          The allocator must also be aware that there may be issues in the claimant's case which may affect the legal liability of the WC carrier or employer under state WC laws.  There could be disputes over such issues as whether the claimant's injuries are work-related; whether the claimant was an employee at the time of the injuries; or whether the claimant's settlement of a companion third party liability claim for the same injuries may relieve the carrier or employer of liability under WC. 


          The degree to which Medicare's interests as a secondary payer are implicated in any WC settlement is directly proportional to the degree of the WC carrier's or employer's underlying liability as a primary payer under state WC laws.  If the WC carrier or employer is not liable for payment of the claimant's future medical expenses, Medicare has no interest at stake and there will be no MSA, regardless of what projected future medical expenses might be.


          CMS requires certain medical information for the processing of a WCMSA submission.  The MSA Allocation will provide a great deal of this information.  An effective MSA Allocation should discuss all of the following:

$    Life expectancy;

$    Past treatment history;

$    Current treatment;

$    Prognosis for recovery and whether the claimant has reached maximum medical improvement (MMI);

$    Future treatment needed;

$    Recommendations of the claimant's treating physician(s);

$    Cost projections for each anticipated item or service, as well as total cost projections;

$    Whether each projected cost is a Medicare-covered expense or not; and

$    The MSA Set Aside Allocation amount.


          The allocator is uniquely qualified to prepare a MSA Allocation containing all of this listed information except for the last item.  Because the allocator's projections only provide the lodestar amounts, the allocator should not attempt to determine the final MSA Set Aside Allocation amount without consulting the Team.


Multidisciplinary Approach


          Yes, "the Team."  While the MSA Allocation is a vital component of the WCMSA submission, it is only one vital component.  A WC settlement and a WCMSA submission of the settlement for CMS approval will require legal analysis and advocacy; expert medical cost projections; fiduciary administration of the MSA; Medicare expertise; and settlement funding expertise.  Neither the allocator nor anyone else is qualified to wear all of these hats.


          Medicare Set-Aside practice in the context of WC settlements requires a multidisciplinary approach.  Many professionals will need to work together to accomplish a successful settlement, obtain CMS approval and ensure proper administration of the claimant's MSA.  The Team may include the claimant's WC attorney; a structured settlement professional; an MSA or special needs attorney; a professional trustee or custodian; a medical claims administrator (MCA) or third party administrator (TPA); and a life care planner or MSA allocator.


          The claimant ultimately chooses the Team leader in most cases.  If not, the Team member with the greatest knowledge and experience will normally assume a leadership role.  Most importantly, all of the Team members must understand that teamwork is essential to a successful outcome. 


          Each of the members of the settlement Team must communicate with each other effectively and thoroughly.  Each must be willing to consult with the rest of the Team and draw upon the special expertise of each member of the Team.  All Team members must coordinate their efforts and actions.  Finally, there must be full cooperation among all members of the Team. 


          By acting as a cohesive unit, the Team can accomplish what no single professional could.  The combined knowledge and experience of a multidisciplinary team of professionals provides the greatest chance for a fair and successful WC settlement and WCMSA submission; the maximum practicable meeting of the claimant's needs; and the safe and appropriate management of the claimant's MSA funds.




          Proper allocation of the proceeds of a WC settlement is essential to ensure the preservation of the claimant's continued eligibility for public benefits, such as SSDI.  Where the settlement meets CMS' review criteria and the preservation of the claimant's Medicare benefits is at stake, a proper allocation of settlement proceeds to the claimant's future work injury-related, Medicare-covered medical expenses is equally essential.


          Obtaining CMS approval of a WC settlement and a related WCMSA submission will require an effective MSA Allocation.  Preparing an effective MSA Allocation requires a different approach to life care planning.  Unlike traditional life care planning, the goal in preparing an effective MSA Allocation is to minimize the amount that must be set aside to reasonably consider Medicare's interests.


          As a result, the life care planner or MSA allocator is vital to a successful outcome.  However, the other experts on the Team are vital, too.  The myriad legal, medical, financial and fiduciary issues involved in the settlement of WC claims involving serious or catastrophic injuries requires a multidisciplinary approach.  Only in this way can the best practical outcome for the claimant (and for the WC carrier and employer) be achieved.

End Notes

[1]  42 U.S.C. §1395y(b)(2); 42 C.F.R. 411.46.

[2] CMS requires submission and review of a Medicare Set-Aside Arrangement in any WC settlement where: 1) the claimant is eligible for Medicare; or 2) the claimant is reasonably expected to become eligible for Medicare within 30 months of the settlement and the value of the WC settlement, including indemnity, is greater than $250,000.

[3] The laws of 14 states require a reduction in state W.C. benefits rather than SSDI benefits.  These “reverse offset” states are:  California, Colorado, Florida, Louisiana, Minnesota, Montana, Nevada, New Jersey, New York, North Dakota, Ohio, Oregon, Washington and Wisconsin.  Social Security Administration, Program Operations Manual, POMS §DI 52001.080(3)(a).

[4]  42 U.S.C. §1395y(a)(1)(A).



         John J. Campbell, the founder and principal attorney of the Law Offices of John J. Campbell, P.C., has practiced law for 19 years and has practiced in the area of Medicare Set-Asides since 1996.  Mr. Campbell is certified as an Elder Law Attorney by the National Elder Law Foundation;* and is a Medicare Set-Aside Consultant Certified (national certification through the Commission on Health Care Certification).*  Mr. Campbell is licensed to practice law in Colorado and is also licensed and on inactive status in Missouri.  He is a member of the Colorado Bar Association (Trust & Estate Section and Elder Law Section), the Arapahoe County Bar Association, the Missouri Bar Association, the National Academy of Elder Law Attorneys, The National Structured Settlements Trade Association and the National Alliance of Medicare Set-Aside Professionals.  His areas of concentration include elder law; estate, disability and long term care planning; probate; guardianship and conservatorship; Medicare, Medicaid, Medicare Set-Aside Arrangements, and the preservation of public benefits in catastrophic third party liability and worker’s compensation settlements.  Mr. Campbell has published numerous articles and has presented numerous seminars on issues relating to Medicare Set-Aside Arrangements across the country.


*The State of Colorado does not certify attorneys as experts in any field





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