Guest Commentary

Medicare Beware: Tread Carefully Into The Unknown

, The Connecticut Law Tribune

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Michael Raymond
Michael Raymond

It is generally agreed that until recently the lack of proper "coordination of benefits" in a liability settlement has worked to the detriment of Medicare. This has changed. According to the Centers for Medicare and Medicaid Services, Medicare saves now more than $8 billion annually on claims processed by insurances that are primary to Medicare. Today, more than ever, Medicare will not pay for services to the extent that payment has been made or can be reasonably be expected to be made under workers' compensation, liability, no-fault, automobile and self-insured responsible entities. Furthermore, Medicare has the authority to recoup payment from the rightful primary payer if necessary (42 U.S.C. 1395y(B)(2)(A)(II)).

At a minimum, plaintiff and defense counsel, insurance adjusters, and any organization that must report under §111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007, including liability insurers, no-fault insurers, self-insurance, and workers' compensation plans and insurers, known as Responsible Reporting Entities (RRE), acknowledge that an understanding of the SCHIP act compliance issues is mandatory today. The Medicare Secondary Payer Act provides that Medicare may not make payment on behalf of a claimant for medical services or prescription drug therapy charges where payment has been made or can reasonably be expected to be made promptly (1) under a workers' compensation law or plan of the United States or a state; (2) under a liability policy (including a self-insured plan) or automobile no-fault coverage; or (3) under a group health policy. If one of these primary plans does not pay or cannot be expected to pay promptly, Medicare may make the payment "conditionally." Further, the statute provides that if the settlement appears to represent an attempt to shift to Medicare the responsibility for payment of medical expenses for the treatment of a work-related condition, the settlement will not be recognized.

The impact on the settlement could be catastrophic. Over and above the risk that the Centers for Medicare and Medicaid Services may not recognize the terms of the settlement, the claimant may lose Medicare coverage, and the Office of General Counsel may make demand or bring suit against the claimant and attorneys. (See United States v. Harris, No. 5:08CV102 (2008) U.S. District Court, Northern District of West Virginia).

Attorneys today must carefully determine if their client is a so-called Class I or II qualified individual. Class I includes those who are Medicare beneficiaries at the time of settlement, age 65 or over, or have been receiving Social Security disability benefits for 24 months or longer. Class II comprises those who have a "reasonable expectation" of becoming a Medicare beneficiary within 30 months and the total settlement amount is $250,000 or greater. At a minimum, a board-certified medicare set-aside specialist should be brought into cases now more than ever.

Angelo Sevarino, an attorney in East Windsor, has extensive experience in workers' compensation and liability Medicare Set-Asides and advises that the "proper use of a liability Medicare set-aside (LMSA ) is entirely voluntary and referral of any LMSA is not required at the moment, but is generally considered the best method we have today to document that you have properly considered Medicare's interests in the settlement and provide a level of certainty as to the client's future access to Medicare coverage."

Malpractice Suit?

Furthermore, in some cases, there is risk to attorneys, even if the claimant does not fall under the guidelines of Medicare set-aside compliance upon settlement. For example, let's say a 45 year-old-male was severely injured in a personal injury case. The man is injured enough to make any reasonable person agree that he should or may never work again. This man, however, wants to work. He states to all concerned during settlement proceedings that he plans on working at least another 10 years—"God willing." As a result, he receives his substantial settlement unprotected by a special needs trust or Medicare set-aside — an outside Medicare set-aside expert was never called in. The claimant's attorney is satisfied and is more than happy to pass on the settlement check to the client.

Then sadly, two years later, the man realizes he cannot do what he had hoped for. He quits his job, and applies for Medicare and Social Security Disability benefits. We know the outcome here. Medicare has no responsibility whatsoever to pay this man's medical bills for his accident-related medical expenses until the settlement assets are spent first. The client may attempt to sue his own attorney for malpractice, claiming he was not properly advised.

We are not aware of any Connecticut case where the attorney has been sued or had a grievance filed against him or her for not properly advising the client of failure to establish a set-aside. That is not to say there is no such case in the pipeline in Connecticut. We do know of cases in other states though, including Grillo v Pettiete, in the 96th District Court in Tarrant County, Texas (2001). In that case, it was successfully charged that the plaintiff's attorneys failed to employ or consult "competent … experts in taxation, trusts, and/or structured annuities" resulting in an out of court settlement for $1.6 million. There are no winners in this potential legal drama.

The potential issue may be mitigated to some degree with some planning. The attorney should consider bringing in settlement planning experts—a team proficient in Medicare set-aside law, taxation, elder law, and settlement and investment advisory services. Once all the options are discussed in detail, the client should be asked to sign a well-crafted individually designed Informed Consent as to Medical Expenses or Care with Self-Administered Liability Medicare Set-Aside Account. This helps and informs properly all concerned.

Debt Trouble

Another important question comes up frequently. With a Medicare set-aside funded with an annuity where (a) the claimant is the owner or (b) the carrier is the owner and the claimant the beneficiary, can the seed and subsequent feeds be reachable by a general creditor? As we wrote previously in the Law Tribune, a good number of tort victims are generally unsophisticated investors, and they are generally thought to be a high-risk group for spending down their recoveries in short order. If they fall into new debt that they cannot repay, it may be trouble for everyone.

For example, a 30-year-old claimant purchases a life with a period certain structured annuity that pays $3,450 for life payable monthly, guaranteed for 30 years. In this case, in 2013, the cost was $1 million, with "Guaranteed Benefits" equaling $1,243,847 and "expected benefits" equaling $2,156,000. Subsequently, the client, for a variety of reasons, defaults on significant debt.

Connecticut has some exemptions in Connecticut General Statutes 52-352b; however these statutes are not on point in so far as we speak of annuities—specifically 52-352b(q). In some states, such as Florida (which has very liberal exemption laws), the annuity contract is exempt from attachment from creditors, but once the payments have been made and received by the plaintiff, we cannot speak as to how they would be treated and recommend they address those questions to a local bankruptcy expert.

When we speak of annuities in particular, Connecticut is one of only a handful of states (including Massachusetts, New Hampshire and Virginia) that offer no statutory protections for annuities, with the exception of ERISA plans, from creditors. However, in this case, we are speaking about assets that have been annuitized through a structured annuity. All the client owns thereafter is a "stream of income," which cannot be accelerated. Furthermore, clients could not be accused in court of annuitizing assets in order to hinder, delay, or defraud creditors. Without evidence to support a claim of fraudulent conveyance (nearly impossible considering the source of funds to buy the annuity came about through a settlement for injury), the creditor would have to attack the Medicare set-aside each year for its income stream—hardly a promising venture. There is case law from other states that support the annuity exemption, allowing settlement recipients to exempt challenged annuity payments from their Chapter 13 estate.

In re Baker, 604 F.3d 727 (Second Circuit, 2010), New York state law provided an exemption for a settlement annuity. The bankruptcy court ruled the debtor's interest in an annuity arising from a settlement of a wrongful death action was exempt even though the annuity is owned by an insurance company and the debtor merely has a right to its proceeds. In re Orso, 283 F.3d 686 (Fifth Circuit, 2000), the court ruled that holding structured settlement annuity contracts under which payments were owed came within scope of Louisiana statute exempting such contracts from the claims of creditors.

In re Belue, 238 B.R. 218 (S.D. Fla., 1999), the "debtor who was named, as payee and intended beneficiary, under an annuity purchased by insurance company to fund its obligations under a structured settlement agreement, was entitled to claim annuity payments as exempt under special Florida exemption for proceeds of any annuity contracts issued to citizens or residences of state." In In re Alexander, 227 B.R. 658 (N.D. Texas, 1998), the court ruled that holding structured settlement annuity paid to debtor following the death of their children in an automobile accident was entitled to exemptions as annuity under Texas law.

We cannot find any Connecticut case law on the subject; however, as we outlined above, other states have ruled the annuity payments are exempt. Therefore, it appears that settlement recipients have some things going for them. Since the owner of the annuity would be the assignment company affiliated with the life insurance company and since it is a workers compensation or liability case, the payment rights would not be able to be transferred. While not ironclad, plaintiff's counsel might explore as well C.G.S. 31-320 – Exemption and Preference of Compensation, which holds: "All sums due for compensation under the provisions of this chapter shall be exempt from attachment and execution and shall be nonassignable before and after award." Until a Connecticut case goes to court and/or grievance, however, we cannot be certain at this time. •

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