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Wayne Schlaht
Wayne Schlaht
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Medicare Can't Just Not Show Up for a Hearing – Frank v. Gateway Insurance Company

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With the Medicare trust fund facing exhaustion and the uproar over national healthcare, it is amazing that Medicare ignores a court proceeding designed to protect Medicare's future interests. That is the case in the Frank v. Gateway Insurance Company decision.

The Frank decision stemmed from a motion pending before the United States District Court for the Western District of Louisiana. The motion the court had to consider was for “Determination of Need for, and Amount of Medicare Set Aside for the purpose of complying with the Medicare Secondary Payer Statute.” Mr. Frank was injured while working so this isn’t pure liability situation. There is a workers’ compensation component although that was not at issue in the present case. Mr. Frank was unloading merchandise off of a trailer owned by the defendant in this matter who was insured by Gateway insurance. The trailer had a hole in it which Mr. Frank fell into an injured his back. Mr. Frank’s employer was not involved in this litigation.

As a result of the accident, Mr. Frank had spinal fusion surgery that was successful. The orthopedic surgeon who treated Mr. Frank opined that it was more likely than not that he would not need any future surgery. He also stated that Mr. Frank’s future treatment would consist of pain medications, anti-inflammatories; follow up office visits and x-rays to assess healing of the fusion. Mr. Frank brought suit in Louisiana state court to recover damages he sustained as a result of the accident. The defendants removed the action to federal court based upon diversity jurisdiction. The defendants contested liability and damages. Ultimately, the case was settled amicably with all issues being resolved at the time of settlement with the exception of the future Medicare Set Aside.

This led to the motion to determine the Medicare Set Aside and a hearing on the motion. CMS was put on notice of the hearing but refused to participate. CMS, through Assistant United States Attorney Karen King, sent a letter to the parties and the court. The pertinent part of the letter read:

CMS [The Centers for Medicare and Medicaid Services] does not review or verify counsel's determination of whether or not there is a recovery for future medical services or counsel's determination of the amount to be held to protect the Medicare Trust Fund except under limited circumstances.

In this particular matter, CMS would neither participate or review the parties' determination of whether a set aside was needed or the amount of the set-aside.

In submitting evidence for the hearing, a pharmacist who was providing medications to Mr. Frank and his treating physician submitted affidavits estimating future Medicare covered services. The pharmacist estimated that medications would be in the range of $700.00 to $1,000.00. The treating orthopedic surgeon estimated that total future Medicare covered treatment would total approximately $2,200.00. Medicare’s conditional payment amount for payments made prior to settlement totaled $4,352.67. Medicare, since they failed to appear, presented no evidence relating to future cost of care or about the conditional payment amount.

The federal district court in Frank made findings of fact and conclusions of law as a result of the hearing. Prior to getting to the findings and conclusions, it is important to note the discussion the court engaged in while addressing the procedural background. The court addressed the Bradley decision, which was an 11th Circuit decision that tackled the sanctity of a probate court’s allocation of settlement proceeds in a wrongful death settlement involving Medicare conditional payments. Bradley addressed CMS’s claim of entitlement to recovery of conditional payments from the estate. CMS refused to show up in the probate court and rejected the allocation made by the probate court between the estate and survivors under Florida’s wrongful death statute. In Bradley, CMS cited it’s field manual for the proposition that the agency did not have to recognize the probate court’s allocation of the monies because it wasn’t a decision on the merits. The 11th Circuit rejected the argument and stated the manual was not entitled to deference under Chevron U.S.A. Inc. v. Natural Resources Defense Council since its manual was not entitled to the force of law. The 11th Circuit upheld the probate courts allocation of the majority of the settlement proceeds to the survivors thereby defeating most of Medicare’s conditional payment obligation.

Presumably, the discussion regarding Bradley was the Frank court’s attempt to address the letter CMS had sent to the court through the US Attorney and any reliance upon the field manual to reject the court’s Medicare Set Aside allocation. Implicit in the holding is the court’s belief that it could bind CMS by approving a liability Medicare Set Aside allocation. The portions of the Bradley opinion quoted by the Frank court seem to bolster this theory as it focused the attention on the fact that the field manual was not law and that CMS’s failure to respect a court’s allocation when the merits were not addressed encouraged litigation. The latter portion of the quote focused on the burdens placed on the court system if Medicare were to force parties to a trial on the merits of a case before settlement proceeds could be allocated as their field manual requires.

After discussing the procedural background and Bradley, the court made findings of fact. Part of those findings was a statement that we have seen before from courts when addressing Medicare Set Asides in liability settlements. The court stated that:

CMS does not currently require or approve Medicare Set Asides when personal injury lawsuits are settled. CMS does not currently have a policy or procedure in effect for reviewing or providing an opinion regarding the adequacy of the future medical aspect of a liability settlement or recovery of future medical expenses incurred in liability cases.

Curiously, thereafter the court goes on to address the affidavits offered by the pharmacist and treating orthopedic surgeon that discussed the amount of future Medicare covered services. The Frank court found that future Medicare covered services, per the evidence presented, amounted to $3,200.00. Further, the court in its conclusions of law stated that:

Frank will become an "entity who received payment from a primary plan," and is therefore responsible as a primary payer for future medical items or services that would otherwise be covered by Medicare, which are related to what was claimed and released in this lawsuit, in the amount of $3,200.00 To the extent there are items or services incurred by Frank in the future that would otherwise be covered or reimbursable by Medicare, that are related to what was claimed and released in this lawsuit, Medicare shall not be billed for those items or services until the funds received by Frank for that purpose through the settlement are exhausted.

The court went on to determine as a matter of law that the sum of $3,200 was reasonable and fair thus taking into account “Medicare’s interests”. According to the court, since CMS provides no procedure to determine the adequacy of protecting Medicare’s interests for future medical in the case of a 3rd party settlement and there is a strong public policy favoring out of court settlements it was appropriate to find that Medicare’s interests were adequately protected in this case. The order stated that Frank shall fund $3,200 out of his settlement to fund future Medicare covered or reimbursable services related to what was claimed and released. The order also gave instructions for administration stating that the funds “shall” be deposited into an interest bearing account for the purpose of paying any injury related future Medicare covered services.

Analysis of the Frank Decision

The opinion is quite confusing for a couple of reasons. First, why would there be a set aside at all in this case? If there was a workers’ compensation claim and that was left open then a primary payer would exist obviating the need for a set aside in the liability settlement. Similarly, if the workers’ compensation claim had been closed then a set aside would have been done at the time medicals were closed and a second set aside would not be necessary unless medical conditions related to the liability settlement were different or the set aside was not adequately funded by the comp settlement.

Second, why does the court ignore two CMS memorandums that have addressed Medicare Set Asides in liability settlements? The Frank opinion was rendered in March of 2012. In May of 2011, Sally Stalcup (a CMS Regional Director) issued a detailed memorandum about the use of Medicare Set Asides in liability settlements. That memo indicates that anytime a settlement funds future medicals, it can “reasonably be expected” that those funds are available to pay for future Medicare services thus Medicare should not be billed until those funds are exhausted. This is precisely what the court stated in its opinion but it didn’t cite to the memorandum issued in May of last year. The second memorandum issued in September of last year dealt with an exception to when a liability set aside was not necessary. In that memo, CMS announced that a set aside was not necessary in a liability settlement if the treating physician certified in writing that there would be no future Medicare covered injury related care. While that memorandum wasn’t applicable in the Frank case, it still is important from the standpoint of what CMS believes is required in the context of a personal injury settlement. If CMS is telling us when you don’t have to do a set aside, implicit in that is there are situations where you do have to do a set aside in liability settlements.

The opinion continues to illustrate the confusion amongst all parties when it comes to Medicare Secondary Payer Compliance for futures in the liability settlement world. Since CMS has failed to give us detailed guidelines when it comes to the set aside question for liability settlements beyond the two memos issued last year, parties are seeking the court system’s intervention. However, all of the decisions thus far in the context of set asides for liability settlements have been district court opinions and not Circuit Court appellate decisions interpreting the current state of the law. We don’t have any substantive “law” when it comes to set asides as the “law” does not require set asides. Instead, they are CMS’s method of choice to best protect the Medicare program. There is no statute or regulation that addresses set asides in 3rd party liability settlements. The problem is that all settlements with Medicare beneficiaries $100k or greater must be reported to Medicare now under the Mandatory Insurer Reporting laws implemented by the Medicare, Medicaid & SCHIP Extension Act of 2007. In April, reporting will begin for settlements $50k or greater. Given the reporting, the injury victim is at risk for denial of future Medicare covered services related to his or her injury if these issues are not addressed. Uncertainty also makes defendants and insurers nervous about potential Medicare Secondary Payer Compliance exposure if they ignore these issues.

Unfortunately, the current state of affairs does not provide any bright line solutions. In my opinion, any liability settlement involving a Medicare beneficiary must at least consider and properly address this issue. That may not involve going to the lengths the parties did in the Frank case, but it does require more than just lip service in a release to these issues. There are methodologies that can be utilized to properly arrive at a greatly reduced set aside or no set aside at all if the facts warrant that outcome. The starting point is getting a handle on the projected future Medicare covered services. Without having that information, the parties can’t adequately protect themselves. While parties can prepare the estimate on their own, there is a format that CMS recognizes called an allocation that will protect all of the parties as much as possible. Failing to properly analyze the issue does expose the injury victim to possible denial of future Medicare covered services related to what was claimed and released in a settlement. In turn, that exposes plaintiff counsel to the risk of a malpractice claim if the client was not fully advised of the risks. That is an exposure I would not want to take on if I were representing many Medicare injury victims when there are ways to avoid the risk.

A Final Word

So what are the options to properly deal with settlements involving Medicare beneficiaries? I will go from least protective to most protective. Option one would be to prepare an estimate of the future Medicare covered services by discussing future treatment with the physicians caring for the injury victim and examining prescription drug payouts. Option two would be to have a professional prepare an estimate based upon summaries of the medical issues and prescribed drugs then, if applicable, applying reduction methodologies. Option three would be to have a Medicare Set Aside Consultant Certified prepare an “allocation” based upon a full review of all medical records, bills and prescription drug payouts. A reduction methodology still can be used with an allocation, in my opinion, if the facts warrant application of a reduction. Without implementing one of these solutions, the injury victim is exposed to risk as is plaintiff counsel too without an informed consent/waiver.