SPECIAL ISSUES IN WC AND TPL SETTLEMENTS INVOLVING PRESERVATION OF ELIGIBILITY FOR MULTIPLE PUBLIC BENEFIT PROGRAMS: PART II Medicare Set Aside Bulletin

Issue #9 April 4, 2005

SPECIAL ISSUES IN WC AND TPL SETTLEMENTS INVOLVING PRESERVATION OF ELIGIBILITY FOR MULTIPLE PUBLIC BENEFIT PROGRAMS: PART II

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

Introduction

Planning to maintain Medicare eligibility in the context of worker’s compensation (WC) settlements has become a fairly common practice. As a result, Medicare Set Aside Arrangements are now used routinely in the settlement of WC claims involving future medical expenses where the claimant must maintain eligibility for Medicare benefits. Plaintiffs wishing to preserve Medicare eligibility following their TPL settlements involving future medical expenses also should be more likely to employ some sort of arrangement, similar to a Medicare Set Aside Arrangement, as part of their settlements.

However, there are many cases where the plaintiff may be severely disabled and may have future requirements for significant attendant or custodial care, which are not covered by Medicare. In addition, the plaintiff may only receive a limited monthly SSDI benefit and may wish to be able to qualify for SSI. There are those cases, too, in which the plaintiff might currently rely on Medicaid or SSI, in addition to Medicare and SSDI, to meet his or her ongoing needs.

Because eligibility criteria for Medicare, Medicaid, SSDI and SSI vary so widely, unique and complex issues arise in settlements for plaintiffs needing to access these multiple benefit programs. Settlement of these types of complex cases requires a holistic approach to public benefit planning to ensure that the receipt of settlement proceeds will not foreclose the plaintiff’s ability to access all public benefit programs which he or she may need.

Part I of this article focused on the features and eligibility criteria applicable to each of the 4 most relevant public benefit programs: Medicare, Medicaid, SSDI and SSI. Part II of this article will discuss some special settlement planning techniques and considerations necessary to preserve multiple public benefit eligibility for the settling plaintiff.

Government Claims and Liens

In any settlement involving a plaintiff who was eligible for either Medicare or Medicaid at any time following his or her injury, there may be a Medicare Secondary Payer (MSP) claim or a Medicaid lien that must be satisfied before any other payments may be made from settlement proceeds. Therefore, it is essential in such cases to give notice of the plaintiff’s claim and any potential settlement to the Medicare Coordination of Benefits Contractor and the Medicaid agencies in any states where the plaintiff may have received those benefits.

Notice of the plaintiff’s WC or TPL claim should be given as soon as the plaintiff knows of its existence. Early notification can help to prevent or minimize overpayments where a third party, such as a WC or no-fault carrier, has the responsibility to provide for the plaintiff’s medical care on an ongoing basis. Further, the sooner Medicare and Medicaid are on notice of the existence of a claim, the more quickly they can determine the total amounts of any payments they may have made for injury related medical care.

The plaintiff should also notify both Medicare and Medicaid of a potential settlement as soon as the real possibility of settlement arises. This will increase the likelihood that at an accurate estimate of any potential MSP claim and Medicaid lien amounts can be known before the parties negotiate the final settlement terms.

This is important because satisfaction of both the MSP claim and the Medicaid lien is required before any distributions from settlement can be made to the plaintiff or to fund a Medicaid or SSI exempt trust under OBRA ‘93. If the plaintiff agrees to a settlement amount without knowing what the MSP claim or Medicaid lien amounts are, he or she takes the risk that those government claims and liens could exhaust the settlement proceeds and leave little or nothing for the plaintiff’s needs.

Medicare Secondary Payer Claims

The Medicare Secondary Payer statute was originally enacted in 1980 and is codified under federal law at 42 U.S.C. §1395y(b). The statute was amended by the Omnibus Budget Reconciliation Act of 1989 (OBRA ‘89); and again by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).

The OBRA ‘89 provisions became the subject of significant controversy for several years recently, due to conflicting federal court decisions regarding the interpretation of the amended statutory language. The language at issue, contained in 42 U.S.C. §1395y(b)(2)(A) & (B), stated:

(2) Medicare secondary payer

(A) In general

Payment under this subchapter may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that . . .

(ii) payment has been made or can reasonably be expected to be made promptly (as determined in accordance with regulations) under a workmen's compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insurance plan) or under no fault insurance.

In this subsection, the term "primary plan" means . . . a workman's compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan) or no fault insurance, to the extent that clause (ii) applies.

42 U.S.C. §1395y(b)(2)(A); and

(i) Primary Plans

Any payment under this subchapter ... shall be conditioned on reimbursement to the appropriate Trust Fund established by this subchapter when notice or other information is received that payment for such item or service has been or could be made under such subparagraph. ...

(ii) Action by United States

42 U.S.C. §1395y(b)(2)(A).

In 2002, the U.S. Court of Appeals for the 5th Circuit decided the case of Thompson v. Goetzman, 315 F.3d 457 (5th Cir. 2002), aff'd en banc, 337 F.3d 489 (5th Cir. 2003). In that case the 5th Circuit held that a payment by the defendant directly to the plaintiff did not constitute a "self-insurance plan" under the federal MSP statute, since the defendant did not have formal claims procedures in place similar to those used by an insurance company. The Goetzman Court also found that the existing language of the MSP statute limited the government’s right to recover its MSP claim to those situations in which a third party payer was expected to pay promptly (within 120 days according to the MSP regulations) for the plaintiff’s medical claims. Thus, the defendant in Goetzman was held not to be a "third party payer" under the MSP statute and was permitted to completely avoid repayment of Medicare's considerable MSP claim in that case.

The following year, the U.S. Court of Appeals for the 11th Circuit arrived at the opposite conclusion regarding the meaning of the language in 42 U.S.C. §1395y(b)(2)(A) & (B). United States v. Baxter Int'l, Inc., 345 F.3d 866 (11th Cir. 2003). The 11th Circuit concluded that it was the clear intent of the statute that Medicare always be secondary, regardless of whether prompt payment could be expected from a third party payer. The Baxter Court also rejected Goetzman’s holding that a setting aside of funds and the existence of formal claims procedures are necessary to the existence of a “self-insurance plan.”

The MMA, which was enacted by Congress in 2003, contained significant revisions to the MSP statute which were clearly directed at setting this controversy aside. Specifically, the MMA made the following changes to the MSP statute (new language is underlined and language that was removed is stricken through):

(2) Medicare secondary payer

(A) In general

Payment under this subchapter may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that . . .

(ii) payment has been made or can reasonably be expected to be made ~~promptly (as determined in accordance with regulations)~~ under a workmen's compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance. . .

. . . An 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.

(B) Repayment required

(i) AUTHORITY TO MAKE CONDITIONAL PAYMENT- The Secretary may make payment under this title with respect to an item or service if a primary plan described in subparagraph (A)(ii) has not made or cannot reasonably be expected to make payment with respect to such item or service promptly (as determined in accordance with regulations). Any such payment by the Secretary shall be conditioned on reimbursement to the appropriate Trust Fund in accordance with the succeeding provisions of this subsection.

(ii) Primary plans

Any payment under this subchapter with respect to any item or service to which subparagraph (A) applies shall be conditioned on reimbursement to the appropriate Trust Fund established by this subchapter when notice or other information is received that payment for such item or service has been or could be made under such subparagraph. A primary plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made by the Secretary under this title with respect to an item or service if it is demonstrated that such primary plan has or had a responsibility to make payment with respect to such item or service. A primary plan's responsibility for such payment may be demonstrated by a judgment, a payment conditioned upon the recipient's compromise, waiver, or release (whether or not there is a determination or admission of liability) of payment for items or services included in a claim against the primary plan or the primary plan's insured, or by other means. If reimbursement is not made to the appropriate Trust Fund before the expiration of the 60-day period that begins ~~on the date such notice or other information is received~~ on the date notice of, or information related to, a primary plan's responsibility for such payment or other information is received the Secretary may charge interest (beginning with the date on which the notice or other information is received) on the amount of the reimbursement until reimbursement is made (at a rate determined by the Secretary in accordance with regulations of the Secretary of the Treasury applicable to charges for late payments).

(iii) Action by United States

In order to recover payment under this subchapter for such an item or service, the United States may bring an action against any entity which is required or responsible (directly, as a third-party administrator, or otherwise) to make payment with respect to such item or service (or any portion thereof) under a primary plan (and may, in accordance with paragraph (3)(A) collect double damages against that entity), or against any other entity (including any physician or provider) that has received payment from that entity with respect to the item or service, and may join or intervene in any action related to the events that gave rise to the need for the item or service. 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(b)(2)(A) & (B) (2004).

Thus, Congress essentially legislated Goetzman out of existence in passing the MMA's amendments to the MSP statute. Brown v. Thompson, 374 F.3d 253 (4th Cir. 2004). Medicare’s status as secondary payer and its rights to recover any overpayments or conditional payments are now clear. Any third party who is liable for payment of Medicare covered services is considered primary to Medicare. By agreeing to settlement of a WC or TPL claim, the WC or liability insurance carrier (or self-insured defendant) establishes its liability under the MSP statute.

Any payments Medicare may have made for the plaintiff’s injury related medical expenses prior to settlement, even if payments were made by mistake, will result in an MSP claim which must be satisfied as part of the settlement. If not, the Centers for Medicare and Medicaid Services (CMS) can bring suit for repayment of Medicare’s claim against the WC or liability insurance carrier, a self-insured defendant or employer, or any entity which receives proceeds from the settlement, including the plaintiff and his or her attorney.

In a suit against an insurance carrier to recover its MSP claim, CMS can seek double damages. A similar private right to sue the carrier for double damages is also granted under federal law to the WC claimant who is eligible for Medicare benefits.

Medicare’s claim is always first in line for repayment from settlement proceeds, even before any state Medicaid liens that may exist.

Medicare will reduce its claim to take into account the plaintiff’s costs and attorney’s fees in procuring the settlement. In addition, there are essentially three methods that can be employed to seek full or partial waivers of Medicare’s claim. The MSP claim can be either compromised or waived, pursuant to 31 U.S.C. §3711 (the Federal Claims Collection Act), under the MSP statute (42 U.S.C. §1395y(b)(2)(B)(iv), or under 42 U.S.C. §1395gg(c).

The bases for a compromise under 31 U.S.C. §3711 are: 1) the claimant does not have the money to repay the claim within a reasonable period of time; 2) CMS would find it difficult to prevail on the claim in a court of law; or 3) the costs to CMS of collecting the claim exceeds the value of the claim. Under 42 U.S.C. §1395gg, claims can be compromised for economic hardship, for equity and good conscience, and for reasons beyond the fault of the claimant.

Under the MSP statute, claims can be waived, in whole or in part, if waiver is determined to be in the best interests of the MSP program. A denial of a waiver request under this provision is not appealable.

Medicaid Liens

The ability of the states to recover liens from WC and TPL settlements for Medicaid benefits provided to the plaintiff has its origins in two federal statutory provisions. Those provisions state:

(a) A State plan for medical assistance must – . . .

(25) provide – . . .

(H) that to the extent that payment has been made under the State plan for medical assistance in any case where a third party has a legal liability to make payment for such assistance, the State has in effect laws under which, to the extent that payment has been made under the State plan for medical assistance for health care items or services furnished to an individual, the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services.

42 U.S.C. §1396a(a)(25)(H); and

(a) For the purpose of assisting in the collection of medical support payments . . . a State plan for medical assistance shall –

(1) provide that, as a condition of eligibility for medical assistance . . . to an individual . . . the individual is required –

(A) to assign the State any rights . . . to payment for medical care from any third party; . . .

(C) to cooperate with the State in identifying, and providing information to assist the State in pursuing, any third party who may be liable to pay for care and services available under the plan. . .

42 U.S.C. §1396k(a)(1).

At the same time, federal law contains a seemingly conflicting provision, often referred to as the “anti-lien statute.” That statute provides:

(a) . . .

(1) No lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under the State plan, except

(A) pursuant to the judgment of a court on account of benefits incorrectly paid on behalf of such individual, or

(B) in the case of the real property of an individual - (i) who is an inpatient in a nursing facility, intermediate care facility for the mentally retarded, or other medical institution, if such individual is required, as a condition of receiving services in such institution under the State plan, to spend for costs of medical care all but a minimal amount of his income required for personal needs, and (ii) with respect to whom the State determines, after notice and opportunity for a hearing (in accordance with procedures established by the State), that he cannot reasonably be expected to be discharged from the medical institution and to return home . . .

42 U.S.C. §1396P(a)(1).

A controversy arose almost immediately over whether the anti-lien statute prohibited states from executing Medicaid liens against the proceeds of WC and TPL settlements. The U.S. Department of Health and Human Services, Departmental Appeals Board issued two decisions in the mid-1990's addressing this issue. Those decisions each stated the position of the U.S. Department of Health and Human Services (HHS) that federal law permits states to seek recovery from all settlement proceeds; and that these proceeds are not considered “property of the individual” because the state’s Medicaid lien attaches while the settlement proceeds are still property of the defendant (or the defendant’s insurance carrier). Calif. Dep’t. of Health Servs., D.A.B. No. 1504. 1995 WL 66334 (HHS Jan. 5, 1995); and Wash. State Dep’t of Soc. and Health Servs., D.A.B. No. 1561, 1996 WL 157123 (HHS Feb. 7, 1996).

The courts in several states were quick to adopt HHS’s position. A line of cases ensued in which it was held that the effect of 42 U.S.C. §1396a(a)(25)(H), 42 U.S.C. §1396k(a)(1) and HHS’s construction of 42 U.S.C. §1396P(a)(1) was to render the Medicaid lien statute inapplicable to TPL settlements altogether. Thus, these cases held that the states were empowered to recover their liens from all settlement proceeds under statutorily mandated assignments by Medicaid beneficiaries of all of their rights to recovery against third parties. Cricchio v. Pennisi, 683 N.E.2d 301 (N.Y. 1997); Calvanese v. Calvanese, 710 N.E.2d 1079 (N.Y. 1999); Waldman v. Candia, 722 A.2d 581 (N.J.Super.App.Div. 1999); Wilson v. State, 10 P.3d 1061 (Wash. 2000); and Houghton v. Department of Health, 57 P.3d 1067 (Utah 2002).

In 2002, the Minnesota Supreme Court rejected the position of HHS and the courts in New York, New Jersey, Washington and Utah in an unusually meticulous and thorough opinion. Martin v. City of Rochester, 642 N.W.2d 1 (Minn. 2002). In the Martin case, the Court undertook a detailed analysis of all three federal statutory provisions under criteria requiring that, wherever possible, statutes should be construed to give them their plain meaning and to resolve any apparent conflicts.

The Martin Court first declined to follow HHS’ position that settlement proceeds are not considered “property of the individual” because the state’s Medicaid lien attaches while the settlement proceeds are still property of the defendant. The Court found that the plaintiff’s right to pursue a claim against a liable third party is property of the individual; and that the federal anti-lien statute forbids the placing of a Medicaid lien against such property, except to the extent the plaintiff may have assigned his or her claims to the state under 42 U.S.C. §1396a(a)(25)(H) and 42 U.S.C. §1396k(a)(1).

The Court then reasoned that the clear meaning of the language in 42 U.S.C. §1396a(a)(25)(H) and 42 U.S.C. §1396k(a)(1) was that the states were only permitted to recover liens for Medicaid benefits provided to the extent that the plaintiff may have held a claim against a third party for medical expenses that were paid by Medicaid. Therefore, the state statute that required Medicaid beneficiaries to assign all claims against third parties to the estate was in excess of what was allowed under federal law. The Court held that, to the extent the state’s assignment statute required assignment of claims other than claims for past medical expenses that were paid by Medicaid, the state statute was preempted by federal law.

The Martin Court ultimately found that the three federal statutes created a statutory scheme whereby the states were authorized under 42 U.S.C. §1396a(a)(25)(H) and 42 U.S.C. §1396k(a)(1) to seek recovery from any portion of a TPL settlement meant to compensation the plaintiff for past medical expenses that were covered by Medicaid. At the same time, the federal anti-lien statute prohibited the states from placing Medicaid liens on settlement proceeds meant to compensate the plaintiff for damages other than past medical expenses, as those other damage claims could not rightly be required to be assigned to the states.

In 2005, the first decision on this issue by a federal appellate court was issued by the U.S. Court of Appeals for the 8th Circuit. Ahlborn v. Arkansas Dept. of Human Services, 397 F.3d 620 (8th Cir., Feb. 9, 2005). In that case, the plaintiff had been seriously injured and permanently disabled in a motor vehicle accident in 1996. She applied and qualified for Medicaid benefits in the State of Arkansas.

According to Arkansas law, she was required, as a condition of Medicaid eligibility, to assign “any settlement, judgment, or award which may be obtained against any third party” to the Arkansas Department of Human Services (ADHS), the state Medicaid agency, “to the full extent of any amount which may be paid by Medicaid” for her benefit. Ark. Code Ann. §20-77-307(a).

By the time Ms. Ahlborn settled her third party tort claim, Medicaid had made payments totaling $215,645.30 for her care. The net amount of Ms. Ahlborn’s settlement was $550,000, of which $35,581.47 represented settlement of her claim for past medical expenses. Based upon state law and the required assignment, ADHS attempted to assert its $215,645.30 Medicaid lien against the entire settlement.

Ms. Ahlborn sued ADHS in federal court, seeking a declaratory judgment that ADHS could only recover its lien from the portion of her settlement representing payment for past medical expenses. Ms. Ahlborn’s argument was based upon the anti-lien statute.

ADHS argued that the Arkansas statute requiring the assignment of all rights against third parties was required by 42 U.S.C. §1396a(a)(25)(H) and 42 U.S.C. §1396k(a)(1). Those provisions, argued ADHS, allowed the state to recover its lien from all settlement proceeds, rather than just that portion of proceeds meant to compensate the beneficiary for medical expenses. Further, ADHS argued that the federal anti-lien statute did not prohibit this because the settlement proceeds were not Ms. Ahlborn’s property when the state’s lien attached, since the proceeds were still in the hands of the defendants.

ADHS’ argument relied heavily on Houghton v. Dep’t of Health, 57 P.3d 1067 (Utah 2002); and Wilson v. State, 10 P.3d 1061 (Wash. 2000). ADHS also relied heavily on the U.S. Department of Health and Human Services, Departmental Appeals Board decisions in Calif. Dep’t. of Health Servs., D.A.B. No. 1504. 1995 WL 66334 (HHS Jan. 5, 1995); and Wash. State Dep’t of Soc. and Health Servs., D.A.B. No. 1561, 1996 WL 157123 (HHS Feb. 7, 1996).

The Eighth Circuit Court of Appeals analyzed and rejected the holdings in Haughton and Wilson. Primarily, the Court disagreed with those courts’ construction of the federal statutes permitting state Medicaid lien recovery. As the Court stated:

We believe a straightforward interpretation of the text of these statutes [42 U.S.C. §1396a(a)(25)(H); and 42 U.S.C. §1396k(a)(1)] demonstrates that the federal statutory scheme requires only that the State recover payments from third parties to the extent of their legal liability to compensate the beneficiary for medical care and services incurred by the beneficiary. Under §1396a(a)(25)(H), a state Medicaid plan must include provisions specifying that, when the State provides medical benefits to an applicant, “the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services.”. . . This acquisition of rights occurs only in cases where “a third party has a legal liability to make payment for [medical] assistance. Id. Section 1396k(a)(1) similarly requires that an applicant assign to the State her right “to payment for medical care from any third party.” . . . Both statutes are thus limited to rights to third-party payments made to compensate for medical care.

In so ruling, the Court favorably cited Martin. The Court, following the same line of reasoning as did the Minnesota Supreme Court, determined that the key issue was whether the proceeds of the settlement constituted Ms. Ahlborn’s “property.”

Further, the Court was not willing to accept HHS’s interpretation of the relevant federal statutes on that issue. The Court stated that deference to HHS’s interpretation of the law, as stated in the two HHS decisions cited above, was inappropriate where the language of the federal statutes in question was not ambiguous.

Instead, the Court conducted a separate analysis and concluded that Ms. Ahlborn’s unliquidated tort claim was a “chose in action”, treated as “property” under both statute and common law. Further, the Court declined to differentiate between the settlement proceeds themselves and Ms. Ahlborn’s claim to those proceeds. Thus, the Court reasoned, the federal anti-lien statute clearly prohibited the placement of a lien on those claims, except to the extent that 42 U.S.C. §1396a(a)(25)(H) and 42 U.S.C. §1396k(a)(1) permitted the states to recover from third party payments for medical care.

As the Court stated:

In the end, we are left with a federal statutory scheme that clearly requires Ahlborn to assign her rights to recover from third parties for the costs of medical care and services incurred as a result of their tortious conduct, but protects all of Ahlborn’s nonassigned property from recovery by the State through the anti-lien statute. The Arkansas statutes requiring Ahlborn to assign her entire cause of action against the third-party tortfeasors, and establishing a statutory lien on settlement proceeds for matters other than medical care and services, conflict with and frustrate this federal scheme.

As a result, the Court held that, to the extent that the Arkansas statutes require an assignment of rights to third party claims or payments other than for medical care, the Arkansas statutes are pre-empted by federal law.

The Ahlborn case is the first case decided by a federal appellate court on the issue of the scope of the states’ rights to recover Medicaid liens from the proceeds of third party settlements. As such, Ahlborn could signal a significant change in the law in this area. Further, while Ahlborn dealt with a TPL settlement, the Court’s reasoning would seem equally applicable to WC settlements.

For large settlements where a state Medicaid agency may attempt to assert a lien significantly greater than the portion of the settlement reasonably allocated to past medical expenses, it may be worth pursuing the remedy of declaratory judgment in federal court, rather than waiting for the state agency to sue in state court. A state’s allegedly over broad enforcement of its Medicaid lien recovery rights may also form the basis of a suit in federal court under 42 U.S.C. §1983.

Certainly, for plaintiffs living in one of the states under the jurisdiction of the federal Eighth Circuit Court of Appeals, the Ahlborn opinion would constitute strong precedent. Medicaid lien recovery is almost certain to be restricted to settlement proceeds for past medical expenses these states.

Other federal circuits may find Ahlborn persuasive as well. The federal Tenth Circuit Court of Appeals, for instance, has issued rulings in the past that seem to signal a policy to restrict the ability of states to enact Medicaid laws that go beyond the powers granted to the states under federal law. E.g., Ramey v. Reinertson, 268 F.3d 955 (10th Cir. 2001).

Even in states such as Utah, New York, New Jersey and Washington, where the state courts have ruled that their state Medicaid agencies are empowered to seek recovery from non-medical portions of settlement recoveries, the federal courts with jurisdiction over those states may prove more friendly forums. Alternatively, a state Medicaid agency may be more willing to negotiate recovery of its lien from settlement, knowing that there is a risk that a federal court may determine the state’s Medicaid lien statute to be subject to federal preemption under Ahlborn.

Strong advocacy is needed when dealing with state Medicaid liens in the context of third party and worker’s compensation settlements. The Ahlborn case could prove to be an effective tool to ensure that the greatest possible portion of settlement proceeds will remain available to the plaintiff.

Medicare Set Aside Arrangements

WC Settlements

Federal law provides Medicare with expansive rights in the context of WC settlements involving claimants who are, or soon will become eligible for Medicare benefits. The MSP statute and regulations establish Medicare’s status as secondary payer in relation to the WC carrier or self-insured employer. Any overpayments or conditional payments that Medicare may make prior to settlement must be reimbursed before any other claims or liens.

The MSP statute and regulations also specifically provide that Medicare will not pay for any future medical expenses after a settlement is received until the total future medical expenses related to the employee’s injury equals the portion of the settlement which was allocated to future medical expenses. (42 C.F.R. §411.46(d)(2).)

If the WC settlement does not close out future medical expense liability, Medicare will continue to be secondary payer with relation to the WC carrier. However, federal law also allows Medicare to retain its secondary payer status after a WC settlement that does foreclose future liability for the claimant's work related medical expenses, at least until the amount of the settlement which was allocated to future medical expenses is exhausted on medical expenses. Any conditional payments or overpayments Medicare may make for the claimant’s work related medical expenses after settlement can result in a post-settlement MSP claim, leaving the claimant, his or her attorney and the WC carrier or self-insured employer vulnerable to potential future liability.

Where a proper allocation to future medical expenses is not made as part of settlement that closes out future medical expenses, CMS will consider the entire settlement as being allocated to future medical expenses by application of a formula found in the federal regulations. If CMS believes that a WC settlement does not reasonably consider Medicare's interests and that the settlement is an attempt to shift responsibility for the WC claimant's future medical expenses from the WC carrier to Medicare, CMS even has the power to disregard the settlement altogether. (42 C.F.R. §411.46(b)(2).) In such instances, CMS may then continue to treat the WC carrier as a primary payer, even after the settlement has been approved and finalized by the state WC judge or commissioner.

Even in settlements containing a reasonable allocation to future medical expenses, the claimant will have the responsibility to ensure that these allocated funds are spend only on future, work related medical expenses of the type normally covered by Medicare. Otherwise, CMS will deny future coverage for work related medical care.

When a WC claim is settled without the parties properly complying with the requirements of the federal MSP statute and regulations (42 U.S.C. §1395y; and 42 C.F.R. §§411.20-.37 and 411.40-47), the WC carrier, the claimant, and their attorneys may remain exposed to significant potential liability after the settlement; and the claimant may risk the denial of his or her future Medicare benefits. A Medicare Set Aside Arrangement provides a safe vehicle for settling a WC claim for future medical expenses; and for the proper post-settlement administration of a WC future medical expense allocation.

Since July, 2001, CMS has released several memoranda, through which CMS has refined its policies and procedures for the review and processing of proposals for Medicare Set Aside Arrangements. The contents of all of CMS' memoranda have been published as “Answers to Frequently Asked Questions” on CMS' website: http://www.cms.hhs.gov.

Currently, CMS review and approval is mandatory for WC settlements of future medical expenses in which the claimant is already eligible for Medicare; and in cases where the claimant is reasonably expected to become eligible for Medicare within 30 months of the settlement and the total value of the settlement, including future medicals expenses and indemnity, is greater than $250,000. For cases not meeting these review criteria, CMS approval is not currently required.

The funds in a Medicare Set Aside Arrangement may only be used to pay for the claimant’s future, work related medical expenses of the type normally covered by Medicare; and only while the claimant is eligible for Medicare benefits. Funds in a Medicare Set Aside Arrangement may not be used to pay premiums for Medicare Supplemental (“Medigap”) Insurance.

CMS no longer allows the payment of administrative fees or attorney’s fees from funds in any Medicare Set Aside Arrangement created after May 7, 2004. Therefore, it is extremely important to provide a means to pay these expenses out of settlement proceeds other than those that will be used to fund the Medicare Set Aside Arrangement. In many cases, a separate annuity can be funded to pay anticipated expenses directly to the trustee or professional custodian, who would be required upon termination of administration to refund any unused payments to the beneficiary or to some other payee designated by the beneficiary.

Obtaining CMS’s release of the MSP claim and its approval of the proposed settlement and a Medicare Set Aside Arrangement in WC cases meeting the above review criteria provides the safety and finality necessary to accomplish settlement, while ensuring that Medicare will pay for future medical expenses, once the Medicare Set Aside Arrangement is exhausted. This results in lower costs and reduced exposure to future liability for the WC carrier or self-insured employer; and greater peace of mind and reduced costs for claimants because their medical benefits will not be summarily denied.

TPL Settlements

Until recently, CMS only actively asserted its post-settlement status as secondary payer following settlement of WC claims. Representatives from CMS have now announced CMS’ position that Medicare retains its secondary payer status after settlement of TPL claims as well.

According to CMS, its position regarding TPL settlements is not new, but is based upon language in the MSP statute that has been in effect since at least 1989. The MSP statute, at 42 U.S.C. §1395y(b)(2)(A) states:

Payment under this subchapter may not be made . . . with respect to any item or service to the extent that. . .

(ii) payment has been made or can reasonably be expected to be made promptly (as determined in accordance with regulations) under a workmen's compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance.

42 U.S.C. §1395y(b)(2)(A)(ii) (emphasis added). CMS' position is based on its interpretation of the MSP statute as providing that a TPL settlement that closes out future medical expenses represents a situation in which "payment has been made" for an item or service otherwise covered by Medicare “under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance.”

However, CMS' power to determine whether an allocation to future medical expenses in a settlement represents a reasonable consideration of Medicare's interests is based upon the MSP regulations that apply only to WC settlements. These provisions in the MSP WC regulations provide the only authority for CMS to review the "reasonableness" of an allocation for future medical expenses or to disregard a settlement if it appears to be an attempt to shift responsibility for future medical expenses to Medicare. The same is true of the regulation that allows CMS to determine its own "reasonable allocation" of a settlement. 42 C.F.R. §411.47.

CMS arguably appears to have the statutory authority, following a TPL settlement, to consider a portion of any TPL settlement allocated to future medical expenses as being a "payment that has been made" for an item or service covered by Medicare. However, CMS does not appear to have any authority under any statute or regulation to independently determine which portion of a TPL settlement represents payment for a future "item or service" absent an allocation in the settlement itself. Further, CMS appears to have no authority in a TPL settlement to determine the reasonableness of the settlement's allocation to future medical expenses or to calculate its own allocation.

In spite of this, it appeared initially that CMS was going to require submission and review of Medicare Set Aside Arrangements in TPL settlements meeting the WC review criteria. Now, it appears that CMS is not ready to go quite so far, at least not yet.

CMS' has not yet published policy on this issue in an official written statement. Representatives from the agency have indicated that they are preparing new "Answers to Frequently Asked Questions" (FAQ's) that will hopefully provide guidance on what the agency expects or requires. Those FAQ's are to be published on CMS' web site, but CMS has not stated when this will be.

Until the FAQ's are published, the following guidance, provided very recently by the MSP Coordinators from two of CMS’ Regional offices, is offered:

CMS' position is that we expect any funds that are allocated for future medicals to be spent before any claims are submitted to Medicare for payment and the beneficiary will probably be asked about it on the initial enrollment questionnaire that is systems-generated, but, we are not asking that MSA's be established in theses cases, nor are we reviewing/approving/denying them.

and

CMS has no current plans for a formal process for reviewing and approving liability Medicare set-aside arrangements. However, even though no formal process exists, there is an obligation to inform CMS when future medicals were a consideration in reaching the liability settlement, judgment or award as well as any instances where a settlement, judgment or award specifically provides for medicals in general or future medicals.

Thus, CMS currently has no official procedure for review of Medicare Set Aside Arrangements in TPL settlements and likely would neither review, approve or deny any Medicare Set Aside Arrangement that a settling TPL plaintiff might choose to submit. However, CMS does require that the parties "reasonably consider Medicare's interests" in TPL settlements.

Thus, it is necessary to notify CMS of any TPL settlement in which future medical expenses is a consideration or in which there is a specific provision for past or future medical expenses. Further, Medicare will require that any funds which are allocated to future medical expenses in the settlement be spent on injury related medical expenses before any claims are submitted to Medicare.

Until CMS publishes policy regarding future medical benefits in TPL settlements, each plaintiff settling a TPL claim will have to determine a safe means to ensure that his or her future injury related medical expenses will be covered by Medicare. Thus, it is currently advisable in TPL settlements to create and fund some type of arrangement to ensure payment of future medical expenses as part of the terms of settlement. This will be extremely important in the event the plaintiff later receives a denial of benefits from Medicare for future injury related care. The amount with which to fund such an arrangement and the type of arrangement used will depend on the facts of each individual case.

It will also be very important for the plaintiff's attorney to ensure that language is included in the settlement documents allocating a specific amount to future medical expenses; and to properly document the plaintiff's file with a life care plan or some similar expert projection of future medical expenses. This should allow the plaintiff to later demonstrate that Medicare's interests were reasonably considered.

The current position of CMS appears to recognize that the agency's powers are more limited in TPL settlements than in WC settlements. However, what little has been said by agency representatives at this point indicates that CMS has not altogether foreclosed the possibility of requiring submission and review of Medicare Set Aside Arrangements in TPL settlements in the future. Unless and until a federal appeals court may determine limits on CMS's powers regarding the treatment of future medical expenses in TPL settlements, failure to take some precautions to ensure compliance with CMS's current policy in this area could result in a denial of Medicare benefits for future injury-related medical expenses for the settling plaintiff.

Medicare Set Aside Trusts

Until as recently as 1995, claimants settling a WC claim involving future medical benefits found themselves in a difficult situation. The settling WC claimant was expected to apply the portion of his or her WC settlement allocated to future medical expenses solely to payment of work related future medical expenses before Medicare would cover those items. However, there was no formal vehicle or process in place at that time to accomplish this. WC claimants were left completely on their own.

Most claimants did not have the experience or sophistication to keep the meticulous records needed to verify proper application of their settlement funds, especially where those funds might take several years to exhaust. Further, most claimants were not equipped to determine which of their medical expenses were of the type normally covered by Medicare or what the proper payment amounts should be. The risk that claimants would make errors in the application of funds from their future medical expense allocations or that they would not keep proper accounting records and receipts was colossal. It was a situation fraught with potentially disastrous consequences for the claimant, as well as the settling employer and its WC insurance carrier.

This situation gave rise to the invention and use of the first Medicare Set Aside Trust in 1995. The original purpose of the Medicare Set Aside Trust was to provide a formal and safe means for the settling WC claimant to reasonably consider Medicare's interest with the "blessing" of CMS. This continues to be the primary purpose behind all of today's Medicare Set Aside Arrangements.

A Medicare Set Aside Trust is a formal trust agreement, administered by a trustee. As such, Medicare Set Aside Trusts are subject to all of the state and federal fiduciary laws applicable to trusts and trustees. These laws provide significant protections for the claimant who is the beneficiary of the trust, as well as for Medicare.

State fiduciary laws will permit the trust beneficiary to bring an action in court to hold a trustee liable to reimburse the trust for any losses due to improper administration. Further, professional trustees are generally required to be licensed and bonded or insured.

The funds in a Medicare Set Aside Trust should be placed in low risk, highly liquid investments to ensure continued growth of the funds; and to ensure that funds will be available when needed to cover medical costs. Professional trustees will have experience in how to properly invest funds in the trust, based on acceptable investment risk tolerances and on the individual needs of the beneficiary.

However, the proper administration of a Medicare Set Aside Trust requires more than knowledge and experience in investment and trust administration. It also requires expertise in medical claims administration, particularly in the administration of claims under criteria for Medicare coverage under Medicare Part A and Part B. Therefore, a Medicare Set Aside Trust should contain language requiring the trustee to possess such expertise or employ a medical claims administrator who does.

A properly and carefully drafted Medicare Set Aside Trust under the administration of an experienced trustee and medical claims administrator provides the safest vehicle for administration of set aside funds. However, it is no longer the only such vehicle that is recognized or approved by CMS.

Medicare Set Aside Custodial Agreements

It took almost 9 years for CMS to gradually develop its current official policies and procedures regarding the use of Medicare Set Aside Arrangements in WC settlements. At first, CMS indicated that a Medicare Set Aside Trust was the preferred method of reasonably considering Medicare’s interests. The use of a formal trust was seen as the only vehicle which would provide sufficient protections to ensure proper administration of Medicare Set Aside funds.

However, Medicare Set Aside Trusts have two main drawbacks. Many of the medical claims administrators with the expertise in Medicare needed to ensure proper trust distributions for Medicare covered services are unable to become licensed as professional trustees. Thus, proper administration requires both a trustee and a professional medical claims administrator. This results in increased costs of administration.

Further, professional trustees typically charge fees based upon a minimum annual amount, plus a percentage of the value of the monies in the trust; and many professional trustees will only agree to administer trusts with at least $100,000 in assets. Thus, in WC settlements where the Medicare Set Aside amount is less than $100,000, it is difficult to find a professional trustee willing to serve; and the fees charged by professional trustees who will agree to serve become disproportionately large as compared to the size of the fund being administered.

Only a small percentage of WC claims for future medical expenses are settled for more than $100,000. As a result, most WC claimants were forced to look to another type of Medicare Set Aside Arrangement to ensure proper administration of the set aside funds, while minimizing the costs of administration. In response to this need, medical claims administrators began to offer their services under Medicare Set Aside Custodial Agreements.

These custodial agreements are drafted to contain guidelines and protections similar to those found in trust agreements. However, since custodial agreements are not technically considered trusts, the medical claims administrators can administer the funds directly without being licensed as professional trustees; and can also fulfill their medical claims administration functions. Thus, custodians are able to charge significantly less in fees than those associated with the administration of formal Medicare Set Aside Trusts.

Before the publication of CMS' initial policy memorandum on July 23, 2001, "Workers' Compensation: Commutation of Future Benefits", there was little guidance from the government regarding its official position on the use of Medicare Set Aside Arrangements. However, that memorandum clarified that CMS will accept the use of non-trust arrangements, such as custodial agreements, as part of an approved Medicare Set Aside Arrangement.

Self-Administered Medicare Set Aside Arrangements

Even formal Medicare Set Aside Custodial agreements can become disproportionately expensive to administer in smaller WC settlements. The vast majority of WC claims for future medical expenses settle for less than $50,000. In fact, most will settle for under $20,000. In these cases, even the fees of professional medical claims administrators can be prohibitive.

As a result, CMS was virtually flooded with requests to allow claimants to “self-administer” their Medicare Set Aside Arrangements. Self-administration provides the advantage of eliminating most administration costs altogether. On the other hand, it eliminates the protection of having an experienced medical claims administrator to determine what claims are properly payable as injury related medical expenses that would normally be covered by Medicare.

In a policy memorandum released on April 23, 2003, CMS announced that self-administration of Medicare Set Aside Arrangements will be permitted, so long as this is allowed under state law. However, CMS requires that self-administered arrangements will be subject to the same guidelines for administration as arrangements being administered professionally.

Claimants are using self-administered arrangements at an increased rate, especially since the ban on payment of administrative fees from Medicare Set Aside Arrangements went into effect on May 7, 2004. As more and more Medicare Set Aside Arrangements are being self-administered, many practitioners have become increasingly concerned over the possible problems with self-administration.

The simple truth is that, even though self-administration is permitted, it is not always advisable. Many claimants will simply not make appropriate administrators due to lack of sophistication or poor money-management skills.

Further, if the claimant is mentally incapacitated, CMS will not permit him or her to act as administrator. Sometimes, a friend or relative of the claimant may be able to act in the claimant’s place. However, where no suitable volunteer is available to administer the Medicare Set Aside Arrangement, it may still be necessary to use a professional administrator.

CMS has now provided guidelines for self-administration of Medicare Set Aside Arrangements. These guidelines essentially advise plaintiffs of the following information regarding self-administration requirements:

1. Medicare regulations at 42 CFR 411.46 state that:

“If a lump-sum compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of the work-related injury or disease, Medicare payments for such services are excluded until medical expenses related to the injury or disease equal the amount of the lump-sum payment;”

2. The guidelines presume that the claimant has settled his or her case and has funded an MSA account with sufficient funds to pay for future skilled medical care that is accident-related;

3. The Set-Aside arrangement fund must not be used to pay the individual’s expenses unless the individual is then currently eligible for Medicare;

4. The Set-Aside funds must be placed in an interest-bearing account separate from the individual’s personal savings and checking accounts;

5. The Set-Aside fund may only be used to pay for medical services related to the work injury that would normally be paid by Medicare. Examples of some items Medicare does not pay for are: prescription drugs, acupuncture, routine dental care, eyeglasses, or hearing aids. Plaintiffs are advised to obtain a copy of the booklet “Medicare & You” from their local Social Security office for a list of services not covered by Medicare. If they have any questions, they are advised to call 1-800-Medicare (1-800-633-4227);

6. If payments from the Set-Aside arrangement fund are used to pay for services that are not covered by Medicare, Medicare will not pay injury related claims until these funds are restored to the Set-Aside arrangement fund. Once the MSA is properly exhausted, the claimant is eligible for Medicare;

7. The Administrator of the account (the claimant) will be responsible for keeping records of payments made from the account, and sending an annual attestation or summary (if requested) of any medical bills paid to the Medicare contractor. The annual attestation or summary should be submitted no later than 30 days after the end of each year (beginning one year from the establishment of the account). A summary should give a line item description of every bill paid. Rate and dollar amounts of every bill must be included.

8. An annual accounting summary must include the following for each transaction:

C Date of Service

C Procedure performed

C Diagnosis

C Paid receipt or canceled check

C The cost of the procedure

C A statement of the balance in the account at the end of each year; and

9. The funds in the account may be used to pay for the following costs that are directly related to the account:

C Photocopying charged

C Mailing fees/postage

C Any banking fees related to the account

These guidelines are helpful, but do not contain specific provisions regarding administration comparable to those found in a formal Medicare Set Aside Trust or Custodial Agreement. Further, these guidelines alone do not constitute a binding agreement between the claimant and the WC carrier or self-insured employer regarding the administration of the Medicare Set Aside Arrangement. Thus, the WC carrier or self-insured employer may have little or no recourse against the claimant if he or she fails to follow the guidelines, resulting in a post-settlement MSP claim.

It is strongly advised that a formal custodial agreement be used, even where it is to be self-administered. It is also advised that the claimant or other non-professional administrator be required to provide a written acknowledgment of the guidelines and a written agreement to abide by them.

Even these precautions will not provide much protection to the claimant. Therefore, claimants are advised to seek the counsel or assistance of an attorney or other professional regarding proper administration of their Medicare Set Aside Arrangements.

Limitations on Use of Custodial and Self-Administered Arrangements

Medicare Set Aside Custodial Agreements and self-administered Medicare Set Aside Arrangements will cause problems for plaintiffs or claimants who may also need to preserve eligibility for Medicaid or SSI. Whether a Medicare Set Aside Arrangement is required by CMS in a WC settlement meeting CMS’ review criteria or a similar arrangement is used in a TPL settlement on a voluntary basis, these types of arrangements, whether self-administered or not, will be treated as “implied trusts” under both SSI and state Medicaid regulations.

Even formal Medicare Set Aside Trusts will be problematic if they are only drafted to reasonably consider Medicare’s interests. Since Medicare Set Aside Trusts, Custodial Agreements and Self-Administered Arrangements are all funded with property belonging to the plaintiff or claimant, each will be subject to SSI and Medicaid restrictions applicable to self-settled trusts.

As a result, funds held in such arrangements will generally be considered available resources for purposes of determining Medicaid or SSI eligibility; or the funding of such arrangements will be treated as transfers without fair consideration, resulting in the imposition of a period of ineligibility. Where the plaintiff must preserve Medicaid eligibility, it will be necessary to use a formal Medicare Set Aside Trust that will also comply with the criteria applicable to self-settled Special Needs Trusts under OBRA ‘93.

Further, the Medicare Set Aside Trust must be irrevocable; and any payments from the trust for support items will be treated as income to the plaintiff. Finally, the plaintiff may not act as the settlor of the Medicare Set Aside Trust; nor may the plaintiff serve as the trustee.

In WC cases where CMS review criteria apply, the Medicare Set Aside Trust arrangement must still be submitted to CMS for approval, although this is currently not required for Medicare Set Aside Trust arrangements in TPL settlements. However, in both WC and TPL settlements, the trust will have to be submitted separately for approval by either the state Medicaid agency, the Social Security Administration or both.

In short, where a plaintiff or claimant wishes to preserve eligibility for Medicare, as well as for Medicaid or SSI, the Medicare Set Aside Arrangement will be subject to the same criteria for creation, approval, funding and administration as will an OBRA ‘93 Special Needs Trust. At the same time, the Medicare Set Aside Arrangement will also need to comply with Medicare’s regulations and policies.

Use of Trusts In WC and TPL Settlements Involving Medicare, SSI and Medicaid Eligibility Issues

To more fully understand how to coordinate the use of a Medicare Set Aside Trust in a settlement involving multiple public benefit eligibility issues, it is necessary to understand Medicaid and SSI planning strategies involving the use of trusts. It is also necessary to understand the strategies regarding the use of different types of trusts often used in WC and TPL settlements.

The use of trusts is fairly common in WC settlements which only involve public benefits such as Medicare or SSDI where eligibility is not based on financial need. The same is true of TPL settlements in which financial needs based public benefit eligibility is not an issue. Since trusts employed in these settlements need not meet the strict requirements contained in Medicaid or SSI regulations, it is not uncommon, especially in large settlements, to utilize multiple trusts for different purposes.

In settlements involving seriously disabled plaintiffs who may require significant attendant or custodial care several years in the future, it may be important to preserve the ability to qualify for Medicaid or SSI at a later time, even though immediate eligibility is not required. Similarly, a plaintiff may not wish to access Medicaid right away for a variety of other reasons, such as an aversion to the restrictions that must be placed on the use of settlement funds in a Medicaid or SSI exempt trust. In these cases, both exempt and non-exempt trusts are often employed.

Support Trusts and general Medical Trusts are two common examples of non-exempt trusts often used in WC and TPL settlements. These types of trusts can be attractive to both plaintiffs and defendants. From the plaintiff’s point of view, the trust provides a fund that will be professionally administered to guaranty a source for payment of medical and/or support expenses. From the point of view of the defendant or the defendant’s insurance carrier, these trusts can actually limit the costs of settlement over the long term by including “reversionary” provisions that will pay any unused funds remaining in the trusts back to the defendant or the defendant’s carrier after the plaintiff dies.

Where both exempt and non-exempt trusts are created and funded as part of a WC or TPL settlement to preserve future Medicare, Medicaid and SSI eligibility, special considerations will apply.

Support Trusts or general Medical Care Trusts will need to contain provisions permitting those trusts to “empty out” into an exempt OBRA ‘93 Special Needs Trust when the plaintiff needs to qualify for Medicaid or SSI. When this happens, any reversionary provisions in those trusts will become ineffective. In addition, the plaintiff’s ability to receive or benefit from support payments from an SSI or Medicaid exempt trust will be limited.

Even where non-exempt trusts are not used, a Medicare Set Aside Trust specially drafted to comply with the requirements of OBRA ‘93 will still be limited to payment of future, injury related medical expenses of the type normally covered by Medicare. Therefore, a separate OBRA ‘93 Special Needs Trust or Pooled Trust account will also need to be created and funded from settlement proceeds to pay for expenses and services not covered by Medicaid, SSI or Medicare.

Finally, the criteria governing the creation and administration of Medicaid and SSI exempt trusts will depend upon whether the plaintiff will require long term care or attendant care in the home; and upon the laws in the state where the plaintiff resides.

Will Medicaid or SSI Criteria Apply?

In a decision issued on October 1, 1999, the Federal District Court for the District of Colorado considered, among other things, 1) whether, in an SSI state, a trust approved under the federal SSI eligibility criteria could nonetheless be considered invalid under state Medicaid law; and 2) whether a Medicaid beneficiary in an SSI state can be denied Medicaid benefits under state Medicaid regulations if the individual continues to qualify for SSI. Ramey, et al., v. Rizzuto, 72 F. Supp.2d 1202 (D.C. Colo. 1999).

The case involved three plaintiffs, all severely disabled with multiple sclerosis. All three had self-settled trusts. The main issue before the Court was whether the trusts were available resources in excess of $2,000 with respect to each of the respective plaintiffs. In analyzing the trusts, the State of Colorado attempted to apply the federal and state laws relative to Medicaid Qualifying Trusts, and the Colorado Medicaid laws requiring that all trusts for Medicaid beneficiaries must be approved by the state Medicaid agency.

The Court correctly determined that Colorado is a state in which an individual who is eligible for SSI benefits is categorically eligible for Medicaid. The Court held that, since the plaintiffs’ trusts were approved by the Social Security Administration and, given that the plaintiffs were qualified for SSI, the state was required to grant them Medicaid benefits, regardless of whether their trusts complied with the state’s Medicaid law regarding treatment of trusts. That is, the District Court found in clear and precise language that the Medicaid agencies in SSI states cannot employ methodology or criteria more restrictive than that of SSI when evaluating trusts.

Since the Social Security Administration had already approved two of the trusts, the Court held that the State of Colorado could not now fail to approve the trusts. Further, the Court held that the state Medicaid agency had no independent right to review the trusts once the trusts had been approved by Social Security.

The District Court’s opinion was affirmed in 2001 by the United States Court of Appeals for the 10th Circuit in Ramey v. Reinertson, 268 F.3d 955 (10th Cir. 2001).

The Court’s holding in Ramey reaches beyond the treatment of SSI-approved trusts. It governs any situation in which state Medicaid regulations in an SSI state might impose more restrictive criteria for eligibility than those imposed by federal regulations governing SSI.

The result is that, in an SSI state, an individual who is eligible for SSI under the federal Social Security regulations cannot be denied Medicaid benefits due to the application of a more restrictive state law or regulation.

Special Planning Considerations for SSI and Medicaid

To persons planning for SSI and Medicaid eligibility and living in SSI states, the Ramey case is extremely important. In these states, a trust which is approved by the Social Security Administration for an SSI beneficiary cannot also be required to comply with any additional requirements under state Medicaid law; and an individual who qualifies for SSI cannot be denied Medicaid under any state Medicaid law that might impose eligibility requirements, (e.g., regarding treatment of in-kind income), stricter than those imposed by SSI.

Thus, for a person whose Medicaid eligibility is due to eligibility for SSI, that person’s Medicare Set Aside Trust and Special Needs Trust must comply with SSI criteria, regardless of what criteria may exist under state Medicaid law. Further, if such an individual qualifies for SSI, even after consideration of all cash and in-kind income, that individual cannot be denied Medicaid benefits, even if a calculation of the individual’s cash and in-kind income under state Medicaid regulations might otherwise result in ineligibility.

If the beneficiary’s Medicaid eligibility is due to SSI eligibility, the Medicare Set Aside Trust and the Special Needs Trust must be drafted and created to comply with both OBRA ‘93 criteria and the SSI criteria found in the POMS. This will require certain provisions that will actually be more restrictive than what would be required under Medicaid regulations alone.

When a Special Needs Trust or OBRA ‘93 compliant Medicare Set Aside Trust is created for an adult beneficiary, SSI will not recognize the trust as valid if it is created by the beneficiary’s parent or grandparent. This is because SSI does not consider a parent or grandparent to have complete legal authority over the assets of an adult child or grandchild, even when the parent or grandparent is acting under a power of attorney. Thus, an exempt Special Needs Trust or Medicare Set Aside Trust for an adult beneficiary must be created by a court or by the beneficiary’s legal guardian to satisfy SSI requirements in the POMS.