Issue #14      June 6, 2005
 

WILL THE LONG ARM OF MEDICARE MEAN AN END TO EMPLOYEE GROUP HEALTH BENEFITS?

 

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

 

          The Medicare Prescription Drug, Modernization and Improvement Act of 2003 (MMA) enacted significant revisions to 42 U.S.C. §1395y, the Medicare Secondary Payer (MSP) statute.  Clearly these revisions were intended to increase the reach of the long arm of Medicare and its ability to recover Medicare overpayments from third parties. 

 

          One of the most well-known results of the MMA's revisions to the MSP statute was the legislative overruling of Thompson v. Goetzman, 315 F.3d 457 (5th Cir. 2002), aff'd en banc, 337 F.3d 489 (5th Cir. 2003), by clarifying that "[a]n entity that engages in a business, trade, or profession shall be deemed to have a self-insured plan if it carries its own risk (whether by a failure to obtain insurance, or otherwise) in whole or in part." 42 U.S.C. §1395y(2)(A)(ii). The MMA also foreclosed future application of the Goetzman court's interpretation of the "120 day rule" as a bar to Medicare's right to reimbursement where a third party cannot be expected to pay "promptly." 42 U.S.C. §1395y(2)(B).

 

          However, another, much more disturbing effect resulted from the following language in the amended MSP statute:

 

In order to recover payment made under this title for an item or service, the United States may bring an action against any or all entities that are or were required or responsible (directly, as an insurer or self-insurer, as a third-party administrator, as an employer that sponsors or contributes to a group health plan, or large group health plan, or otherwise) to make payment with respect to the same item or service (or any portion thereof) under a primary plan. . .

 

42 U.S.C. §1395y(2)(B)(iii) (emphasis added).

 

          At first glance, this new language referring to employers sponsoring or contributing to group health plans (GHP's) appears to refer to employers who self-insure their employee GHP's.  However, as the Telecare Corporation, of Alameda, California, recently discovered, this language is deemed to have a much broader meaning.

 

          In Telecare Corp. v. Leavitt, Op. No. 04-1389 (Fed. Cir. 5/25/2005), the United States Court of Appeals for the Federal Circuit held that this new amendment to the MSP statute extends Medicare's powers of recovery much further than many first believed.  The Court in Telecare found that this new statutory provision allows Medicare to recover an overpayment directly from an employer whose only action was to pay premiums to a GHP to provide coverage for its employees.

 

          Telecare made group health coverage available for its employees through the Kaiser Foundation Health Plan.  Telecare paid the premiums to Kaiser, but Kaiser, the insurer, was contractually liable to pay for all covered services.

 

          Some of Telecare's employees were also eligible for Medicare benefits.  One of these employees incurred medical expenses that were paid by Medicare, even though these expenses were covered under the Kaiser GHP.  Instead of seeking recovery of its overpayment from Kaiser, Medicare brought an action against Telecare.

 

          The Court held that Telecare fell squarely within the wording of the statute, making it a fair target for recovery.  By paying premiums to provide group health coverage to its employees, Telecare was "sponsoring and contributing to the group health plan."  Thus, the Court found that Telecare was liable in full to reimburse Medicare for its overpayment.

 

          Telecare argued that it was neither "required" nor "responsible" to make payment for the employee's medical expenses, as required by the statute.  However, the Court held that under the statute, the term "responsible" was given an expanded meaning beyond its usual meaning of "legally obligated." 

 

          Because that definition would make the use of the word "responsible" immediately after the work "required" redundant, the Court determined that Congress intended "responsible" to mean "involving a degree of accountability."  Further, by specifically enumerating "employer's sponsoring or contributing to a group health plan" in the statute, Congress subjected these entities through the statute itself to the requisite "degree of accountability."

 

          Telecare next tried to argue on the basis of public policy that Kaiser, and not Telecare, should be required to repay Medicare.  First, Telecare argued that a remedy against it was unnecessary, given Medicare's right to seek reimbursement directly from Kaiser. 

 

          Telecare then argued that it was unfair to hold Telecare responsible because, in its agreement with Kaiser, Telecare was only able to obtain a reimbursement from Kaiser within a one-year period, as compared to the three-year period Medicare had to pursue its action against Telecare.  By choosing to pursue Telecare, Medicare effectively relieved Kaiser of its obligation to provide coverage under the GHP.  This differed, argued Telecare, from the statute's treatment of third party administrators (TPA's), who are only liable if they can seek reimbursement from the employer or the GHP.     

 

          The Court's first response was simply to point out that the language of the statute showed Congress' intent to treat employers differently from TPA's.  The Court then held that "it is up to Congress to decide what is unfair to employers."  Finally, the Court stated that Telecare could remedy the "unfairness" problem by "entering into agreements with insurance providers that allow recourse for the same period as the government has recourse against Telecare as an employer." (Although, the Court did not indicate any factual basis for the assumption that this was even possible for most employers.)

 

          Luckily for Telecare, the MSP claim in this case amounted to only $1,470.96.  However, the Telecare opinion has a decidedly more chilling effect when one considers that a prolonged and complicated hospitalization for a Medicare covered employee could be much more costly.

 

          What if Telecare's Medicare covered employee had suffered a serious heart attack with complications, requiring open heart surgery; several weeks in an intensive care unit; several more weeks of hospitalization, rehabilitation and skilled nursing care; skilled nursing care in the home; and numerous follow up visits with physicians and skilled therapists?  The bill could easily have been $200,000.00 to $300,000.00, or more! 

 

          Even more disturbing is the potential effect of such a scenario on an employer significantly smaller than Telecare Corporaton.  Generally, a GHP for any employer with more than 20 employees is a secondary payer with regard  Medicare for employees over age 65.  42 U.S.C. §1395y(b)(1)(A)(i) & (ii).  Many companies which fall into this category would be unable to survive an unexpected and uninsured liability that could reach into the hundreds of thousands of dollars. 

 

          The long term effects of Telecare and the MMA's changes to the MSP statute could be disastrous.  Will companies once again find ways to avoid employing individuals who are disable or over age 65?  Given the stringent and powerful anti-discrimination laws in the United States, this is not the most likely result.    

 

          Alternatively, how many medium-sized companies will continue to provide GHP benefits to its employees if it means exposure to potentially huge liabilities to Medicare that could send the company into bankruptcy?  One could reasonably expect that many, if not most, will not.   

 

          These companies would not be permitted to drop GHP coverage only for their Medicare covered employees over age 65.  42 U.S.C. §1395y(b)(1)(A)(i)(II).  Instead, they would be forced to discontinue GHP benefits for all employees, such as the single mother with three children who keeps her low-salaried position because of the medical benefits.

 

          In a time when many decry the lack of good health care coverage for lower- and middle-class Americans, and politicians are screaming for huge budget cuts in the Medicaid program, the result in Telecare could make matters even worse.  All of the tax and other incentives enacted into law over the last two decades to encourage employers to provide health benefits to employees may now be rendered insignificant, as compared to the exposure to possibly catastrophic MSP liabilities.

 

          Most lower- and middle-income individuals cannot afford the high premiums charged for private health insurance.  If more people are left without health coverage through employer sponsored GHP's, they will have few options.  Many will end up having to qualify for Medicaid. 

         

          The irony is almost unbearable.  The legislation that now allows Medicare to recover its costs directly from employers could very well place the ultimate burden for the health care of their employees onto Medicaid.

 

          Will the long arm of Medicare mean an end to employer sponsored GHP benefits?  Not completely.  Small employers with less than 20 employees are permitted to include provisions in their GHP plans denying or limiting coverage for Medicare covered employees.  Large employers would likely be more able to absorb a potentially significant MSP liability; and may determine that the tax savings from employee benefit incentives are worth the risk.  The largest employers, most of whom already self-insure their employee health plans, would have no further exposure than before Telecare. 

 

          However, the days of GHP coverage for employees of mid-size businesses could be numbered. 

 

          According to the U.S. Census Bureau, over 20.3 million Americans are employed by businesses with 20-99 employees.  U.S. Census Bureau, Statistics About Business Size, Table 2a, (available on the U.S. Census Bureau's website: http://www.census.gov/epcd/www/smallbus.html#EmpSize ).  These businesses will be the ones most likely to cease providing GHP coverage to their employees. 

 

          If even half of these 20.3 million employees, and their spouses and children, were left without health insurance, the resulting financial drain on our health care system and on Medicaid would be devastating.  Even more devastating would be the physical effects on these individuals due lack of proper health care.

 

          However, as the Telecare Court so compassionately commented, "it is up to Congress to decide what is unfair to employers" – and employees.  Somehow, this is not the most comforting thought.

 

For the full text of the Telecare opinion, click here: http://www.fedcir.gov/opinions/04-1389.pdf