MEDICARE SET-ASIDE ALLOCATIONS
Nancy LaGasse RN, MS, CDMS, CCM, CLCP, LHRM, ARM
HISTORY OF MEDICARE
The creation of Medicare was initiated in 1965 and honored President Truman for his support of healthcare benefits. The
inception of Medicare began on 7/01/66 as the primary payer for healthcare benefits with the exclusion of Worker’s
Compensation and the Veteran’s Administration. On 12/05/80, OBRA (Omnibus Budget Reconciliation Act) created the
Medicare Secondary Payer (MSP) Program, which resulted in their becoming a secondary payer to other forms of
insurance, such as medical, auto, liability insurances etc. From 1984 -1986, DEFRA (Deficit Reduction Act of 1984) and
COBRA (Consolidated Omnibus Budget Reconciliation Act) amendments created Medicare’s right of recovery against the
primary payer. This included the right to file a private suit against the primary payer for recovery of “conditional payments”
made by Medicare. A conditional payment occurs when Medicare makes a primary payment on an injury related claim and
is later reimbursed from the settlement proceeds on behalf of the beneficiary. This can often occur when a claim for
healthcare benefits has been denied and medical care becomes necessary. Medicare feels that medical care should be
provided to the injured party and payment issues can be resolved at a later date if there is no payer source other than
Medicare is a Federal Health Insurance program for individuals age 65 years and older, individuals under age 65 with
disabilities and individuals with end stage renal disease. It is also an entitlement program, which is not based on assets or
income, not to be confused with Medicaid or SSI, which are based on financial and medical need. Disabled persons must
wait until they have completed a period of receiving 24 continuous months of receiving Social Security Disability benefits
following their injury in order to qualify for Medicare benefits. Medicare has two parts: Part A Hospital Insurance and Part B
Medical Insurance. Medicare Part A provides coverage for inpatient hospital care, skilled nursing facility care, hospice care
and limited home health visits and Part B covers physician services, diagnostic tests, outpatient services (P.T., O.T. Speech
etc.), durable medical equipment, supplies and home health care. The purchase of Medicare Part B is optional, but an
individual can not opt out of Medicare Part A, if entitled to benefits. It is provided at no cost to the individual other than the
deductibles applicable to the medical services provided. If a person has been receiving disability benefits as the result of an
illness or injury, the disability benefits automatically convert to retirement benefits upon his reaching the age of 65, without
changing the amount of the benefit.
MEDICARE & SETTLEMENTS
Medicare has had the legal right to recover monies they paid for medical care on behalf of the beneficiary for many years,
but failed to enforce that right until recent years. As time passed and Workers’ Compensation settlements increased,
beneficiaries were receiving money for future medical care at the time of settlement, spending the money and billing
Medicare for their health care. They were in essence charging Medicare for treatment of their work related injury for which
they had received payment by another party. Medicare began to realize that this was costing them enormous sums of
money, which could contribute to their eventually becoming insolvent. Once the realization of the enormity of the abuse
became evident, they began to address their legal rights and implement a solution. The Medicare Secondary Payers Act
(MSPA) was also affected by the passage of the of the “Medicare Integrity Program” Act of 1996. The MSPA requires that
payment of medical expenses be withheld “to the extent that payment has been made or can be reasonably expected to be
made promptly under a workers’ compensation law or plan or under an automobile or general liability insurance policy or
plan or under no-fault insurance.” 42 U.S.C. & 1395y (b) (2) (A) (ii).
All settlements that meet the criteria for a Medicare Set-Aside must adhere to the directives published by CMS or face
penalties. Even Medicare has been amazed at the number of settlements that have met these criteria and new industries
have sprung up to meet the demands. These include the preparation and processing of the Medicare Set-Aside proposal,
the creation and administration of the Medicare Set-Aside trust and the legal issues involved in the process. It is an ever
evolving and growing process and therefore, the questions continue as time passes and new issues spring to light.
Everyone involved in the process has to remain current and aware that coverage of medical items is constantly changing on
a Federal level, which impacts the cost of medical coverage provided to the beneficiary on a long term basis.
ROLE OF CENTERS FOR MEDICARE & MEDICAID SERVICES (CMS)
The Centers for Medicare and Medicaid Services (Formerly HCFA) are referred to as CMS. They have the responsibility of
administering Medicare, the Federal portion of Medicaid and providing their opinions regarding the adequacy and
acceptance of Medicare Set-Aside proposals. They are charged with protecting the interest of Medicare with adequate
funding for future services. “Under Section 1862 (b) (2) of the Social Security Act (42 USC 1395y (b) (2) requires that
Medicare payment not be made for any item or service to the extent that payment has been made or can be reasonably
expected to be made under a Workers’ Compensation law or plan. Section 1862 (b) (5) (D) and (b) (6) require that CMS
and its providers and suppliers ask beneficiaries about payers that may be primary to Medicare”. A Compromise settlement
agreement intends to compensate an individual for medical expenses incurred prior to the date of settlement. A
Commutation settlement agreement intends to compensate an individual for expenses after the date of settlement. A
Combined settlement can possess both WC compromise and commutation aspects. Medicare Set-Aside Arrangements are
independent of any decision regarding past paid claims, which must be reimbursed to the Medicare Trust Fund.
Several CMS Policy Memos provided directives regarding Medicare Set-Aside arrangements and workers’ compensation
settlements. They were published on July 23, 2001, April 22, 2003, May 23, 2003 and May 7, 2004 and can be found on
the CMS website. These memos addressed the issues concerning the type of claims affected, questions related to the
processing of claims and the intent to enforce and apply penalties for failure to comply with the directives. Following the
release of the memos, CMS became more active in efforts concerning identification and enforcement and actively working
with the states regarding information exchange.
There are ten regional offices of CMS throughout the country. Those regions are as follows:
I JFK Federal Office Bldg. Maine, Vermont, New Hampshire,
Room 2275 Massachusetts, Rhode Island,
Boston, MA 0203-0003 Connecticut / 617-565-1261
II 26 Federal Plaza New York, New Jersey, Puerto Rico
Room 3821 212-264-3855
New York, NY 10278-0063
III The Public Ledger Bldg. Pennsylvania, W.Virginia, Maryland,
Suite 216 Virginia, Delaware, Washington, D.C.
U.S. Dept. Health & Human Serv. 215-861-4140
150 S. Independence Mall West
Philadelphia, PA 19106-3499
IV 61 Forsyth Street Florida, Georgia, Kentucky, Tennessee,
Suite 4720 North Carolina, South Carolina,
Atlanta, Georgia 30303-8909 Mississippi, Alabama / 404-730-2750
V Decision of Survey & Certification Illinois, Minnesota, Wisconsin, Ohio,
105 West Adams Street Michigan, Indiana
15th Floor 312-886-4937
Chicago, IL 60603-6201
VI 1301 Young Street Texas, New Mexico, Oklahoma, Arkansas,
Room 833 Louisiana / / 214-767-6455
Dallas, TX. 75202-4305
VII Federal Office Bldg. Nebraska, Iowa, Kansas, Missouri
601 East 12th Street 816-426-5033
Kansas City, MO 64106-2808
VIII 1600 Broadway Colorado, Utah, Wyoming, Montana,
Suite 700 North Dakota, South Dakota
Denver, CO 80202 303-844-2121 Ext. 448
IX Division of State Operations California, Nevada, Arizona
75 Hawthorne Street 415-744-4907
San Francisco, CA 94105
X Blanchard Plaza Bldg. Washington, Oregon, Idaho
2201 Sixth Street Avenue 206-615-2382
Seattle, WA 98121-2500
CMS has created websites for the public to access current information regarding their organization, policies and procedures
and resources for determining issues of coverage and costs. Some of those resources are as follows:
(CMS home page) (Medicare & Medicaid paper manuals)
(Medicare coverage home page) (Palmetto GBA)
CMS site to obtain carriers, fiscal intermediary, etc. for each state/region)
MEDICARE SET-ASIDE ARRANGEMENT (MSA)
An MSA is an arrangement between the settling parties in order to protect Medicare’s interests when settling future medical
benefits for qualified individuals and to prevent the shifting of burden from the primary payer to Medicare.
1. A Medicare Set-Aside Allocation projecting the amount of money to be set-aside at the time of settlement
for future injury related allowable care
2. A method of funding the MSA account
3. A method of administering the MSA
4. A method of identifying an individual’s injury related medical expenses of the type typically covered by
Medicare and associated costs
EVALUATION FOR MSA & SETTLEMENT
If a person is a Medicare beneficiary at the time of settlement, regardless of the amount of the settlement, a Medicare Set-
Aside must be prepared as part of the settlement. If the person is not a Medicare beneficiary at the time of settlement, which
is over $250,000.00 and a reasonable expectation exists of Medicare enrollment within 30 months of settlement, a Medicare
Set-Aside is required. Reasonable expectation includes, but is not limited to the following:
Receiving social security benefits at the time of settlement,
Applied for SSD or has applied and been denied, but anticipates appealing the decision,
In the process of appealing and/or refilling for SSD benefits
Age 62.5 or greater at time of settlement
End Stage Renal Disease, but does not qualify for Medicare
There is no requirement for a Medicare Set-Aside for a settlement of $250,000.00 or less when the person is not a Medicare
beneficiary and does not have a reasonable expectation of receiving Medicare benefits within a period of thirty months.
DEVELOPMENT OF MSA
If a potential beneficiary meets the criteria for preparation of a Medicare Set-Aside proposal as a requirement for settlement,
the proposed Medicare Set-Aside must be submitted to CMS for approval prior to completion of the settlement. Prior to
submission of the proposal, the Social Security Administration should be contacted for the status of a beneficiary’s Medicare
entitlement. Your local office should be of assistance with a signed release from. the beneficiary. The website is found at
www.ssa.gov and the number is 1-800-772-1213. The MSA Proposal requirements include a cover letter with the following
information for all WCMSA proposals:
Claimant’s name, DOB, Health Insurance or Social Security claim number if he is not yet entitled to Medicare.
Claimant’s address and phone number.
Signed release by the claimant
Claimant’s & Defense counsel: Name, address, phone number
Employer & Carrier: Names, addresses and phone numbers
Date of injury / illness
Total WC settlement amount
Proposed Medicare Set-Aside amount
Documentation that must be available to CMS as an attachment prior to the approval of a WCMSA:
Life Expectancy (Includes Rated age Documentation on letterhead / If applicable)
Life Care Plan (If applicable) / MSA Allocation Cost Projection
Proposed W/C Settlement Agreement / Proposed MSA Allocation Cost Projection
Current treatment (Supporting documentation)
Future treatment (Supporting documentation)
Medical recovery prognosis
Total amount of W/C settlement
Amount of future medical treatment
Proposed Medicare Set-aside amount
Administrator / WCMSA Account / Custodial agreement
Final W/C Settlement Agreement
Signed CMS/Medicare Release
Medical records must be submitted in chronological order, the projected costs should be adequate for coverage of the
beneficiary’s projected life expectancy and the projected monies are only to be used for injury related services for which
Medicare provides coverage. Identification of the diagnosis and inclusion of the appropriate ICD-9 code is required by CMS
for submission of the Medicare Set-Aside proposal. CPT codes are not required, but are important in the determination of
the appropriate cost of the projected medical items and services for the completion of the MSA. The medical diagnosis can
be found in review of the medical records and the appropriate coding can be found through the use of manuals containing
the ICD-9 and CPT codes. They can also be found on the internet and billing sheets.
PAYMENT OF MEDICAL COSTS
There is no uniformity regarding payment of medical costs among the United States. Each of the states has determined its
own form and schedule of fees for payment of work related injuries. Some of those states utilize a fee schedule and others
choose a usual and customary method of payment. The choice of payment schedule is important to the development of a
Medicare Set-Aside proposal for several reasons, although either payment schedule can be submitted and accepted by
CMS. Fee schedules for a large number of the states can be found and downloaded for free from the internet, other states
charge for fee schedules, which can also be researched through the internet regarding the source and cost of purchase.
The issue of the use of fee schedule versus that of actual costs is partially due to the fee schedule usually being lower in
costs than is usual and customary. Settlement is often affected by the amount of the money being available to the claimant
at the time of settlement. If the medical costs are based on the higher of the payment schedules, the amount required to be
allocated for the Medicare Set-Aside proposal is therefore, higher and less money is available upfront for the resolution of
the claim. If the amount of the allocation is based on the lower of the fee schedules, more settlements are possible due to
the carrier requiring less money for settlement and therefore, more settlements become possible.
Both Medicare and non-Medicare costs are to be identified in the Medicare Set-Aside proposal according to CMS.
Incomplete or missing cost projections are often the reason or part of the reason that a proposal is not approved. This is
partially related to the fact that coverage of medical services changes with time, Federal law and directives. It also provides
CMS with a more complete perspective of the beneficiary’s medical status and future needs. At present, prescription
medications are not covered by Medicare in addition to custodial care, hearing aids, bathroom equipment, glasses and
travel for medical treatment etc. Specific Medicare coverage information can be found at the website www.medicare.gov or
CMS now uses the CDC Life tables as their basis of life expectancy. The tables are for determination of an unimpaired life
expectancy and can be found on the CDC website and downloaded. CMS also accepts documentation from physicians and
insurance underwriters regarding life expectancy, but request that the rated age be submitted on the letterhead of the
A rated age is the physical age of the beneficiary versus that of his chronological age based on his medical history, which
tends to reduce his life expectancy. An example being that of a thirty year old man that developed hypertension, diabetes
and coronary artery disease, resulting in his body being that of a much older man from a medical perspective than that of a
man his age. The rated age is then subtracted from his normal life expectancy resulting in a reduced life expectancy versus
what his life expectancy would have been without his medical diagnosis.
CMS has stated that they do not want multiple conflicting life expectancies submitted. They will choose the mean of the
projections as the projected life expectancy. There are approximately twenty to twenty–two companies that will calculate a
rated age in addition to structured settlement companies. There are several important issues, which affect the determination
of life expectancy and often heredity is considered to be one of those factors. Additional factors are as follows:
The life expectancy includes preexisting medical diagnoses in addition to injury related diagnoses.
• Physicians are found to be reluctant to project life expectancies.
• The more that a life expectancy can be reduced, the fewer the number of years money must be provided for future
PROBLEMS IN SUBMISSION
According to CMS, the most common error made in submission is that of missing information. Basic information used for
identification of the beneficiary is necessary for processing, which includes the social security and HIC numbers, name,
address and phone number, date of birth and date of injury. This also allows for a cross reference when there are other
submissions with similar names and numbers and identification within other systems for exchange of information. The
diagnoses must be identified by the appropriate ICD-9 coding and all projected future medical costs must be based on
accepted standards of medical care. CMS has outlined the specific information required in their memos, which can be found
on the internet and as referenced above. Once the proposal has been rejected for missing information, it will start at the
beginning of the process when it is resubmitted.
LIFE CARE PLAN AND MSA
A life care plan is considered appropriate in certain diagnosis for submittal to CMS, normally developed in more severe
forms of injuries. The life care plan and the Medicare Set-Aside proposal have similarities and differences, both of which are
important for the life care planner to understand. They have been outlined as follows:
LIFE CARE PLAN MEDICARE SET-ASIDE
Insurance coverage entitlement not relevant to Required if receiving Medicare or become Medicare
completion of plan. Completed on a case by case basis eligible within 30 months and settlement over
Completed for reserving, basis for stipulations Medicare Set-Aside used for settlement only
regarding housing, transportation, attendant care and
settlement on a case by case basis
Requires review of the medical records, diagnosis and Requires review of the medical records, diagnosis and
physician recommendations for future medical physician recommendations for future medical
treatment with a visit to the beneficiary whenever treatment without a visit to the beneficiary
Preparation includes contact with all treating modalities Preparation does not include contact with treating
regarding medical necessity of future treatment modalities regarding medical necessity of future
whenever possible treatment
Cost projections can be based on usual and Cost projections must be based on the Fee schedule of
customary, Medicare, or Worker’s Compensation Fee jurisdiction
Administration rules are generally not applicable Administration rules regarding disbursement of MSA
funds by either professional or self administration
Funding may be paid to claimant in a lump sum, Funding must be paid to allocation vehicle by either a
annuity, structured settlement or combination of above. lump sum deposit or funded through an annuity
Transportation is included to project the inclusion of Transportation is not included in an MSA. Ambulance
vehicles appropriate to the level of injury including transportation is included under Medicare Part B
future replacements, modifications and mileage to (Not all beneficiaries purchase Part B)
(Modifications for amputees / paraplegics in order to
Assistive devices, aides to promote activities of daily MSA does not provide for assistive devices
living and safety are projected
Equipment cost projections include factors of aging, MSA provides limited equipment considered to be
frequency of use, medical necessity and replacement medically necessary and does not provide for bathing
based on wear and tear and safety measures.
Equipment for bathing is included and considered
Attendant care, medications, housing and home Attendant care, medications, housing and home
modifications are projected when medically necessary modifications are not included in an MSA. (Exception:
RN for acute illness, treatment of complications- short
Catastrophic injuries have a large impact on the MSA does not have a large impact on the cost of the
projected costs of a settlement settlement (A/C, Medications, Transportation, Housing
not covered. Equipment costs limited coverage)
There life care plan and Medicare set-aside plans are similar in that they are both based on scientific methodology and
accepted standards of practice. Either plan can be completed either independently of the other plan. A life care plan is
usually completed in catastrophic cases and a Medicare Set-aside is completed alone in cases of lesser value. An attorney
is not required in the preparation of either the life care plan or the Medicare Set-Aside proposal. They should both be written
with a basic level of clarity and ease of understanding
An attorney is not required for either the preparation or submission of a Medicare Set-Aside proposal or life care plan, but
CMS in it’s “memo of 4/22/03 suggests that attorneys’ consult their national, state and local bar associations for information
regarding their ethical and legal obligations. Additionally, attorneys should review applicable statutes and regulations,
including, but not limited to, 42 CFR 411.24 (e) and 411.26.” The Medicare Secondary Payer Statute (MSP) created by the
Omnibus Reconciliation Act of 1980 and enacted by Congress in 1981 followed by a series of amendments is Federal
legislation designed to prevent the shifting of responsibility for medical treatment from a primary insurance carrier to
Medicare. CMS published a series of memos informing that they would enforce the memos and the penalties for
noncompliance. Under the MSP, CMS has the right to disregard a settlement and seek reimbursement for medical
payments, which should have been paid by the Worker’s Compensation Carrier. Under 42 CFR 411.26, they may also seek
reimbursement from the claimant, his counsel or the defense. The Office of General Counsel may make a demand or bring
suit against the attorneys’ or carrier. In the case of Workers Compensation, CMS may also bring suit for double damages
against the carrier and the claimant could lose his Medicare coverage. As mentioned previously, CMS published a series of
memos documenting that they would enforce the memos and the penalties for noncompliance. CMS will honor a judicial
decision issued following a hearing on the merits, but will not honor approval of a settlement that does not consider
The attorney needs to understand the client’s needs and the requirements set forth by Medicare in order to ensure that the
settlement terms and proposed MSA comply with applicable law and protect his client from future exposure. Settlements are
reportedly lost when counsel is either unfamiliar with the process or unwilling to employ someone to assist him.
FINANCIAL ADMINISTRATION OF THE MSA
The MSA can be funded with cash or ceding and an annuity. The Medicare Set-Aside Allocation can either be self-
administered by the beneficiary or by a professional administrator. The professional administrator will establish a custodial
account for the beneficiary, issue the beneficiary a card for submittal to the healthcare provider, and receive and process all
of the medical billing related to the covered injury. The costs of administration are outlined at the time of settlement. If a
beneficiary chooses to self-administer his account, he will have to open an individual interest-bearing account used
exclusively for the Medicare Set-Aside Allocation. Self-Administration will not be allowed if the beneficiary has been
assigned a representative payee by the Social Security Administration.
The funds must be administered in the same manner for both forms of administration. Yearly accounting reports are
required to CMS, as to the spending of the funds. If the account is depleted during the course of the covered period of a
year, the administrator will coordinate payments with Medicare and then replenish the account. If the Administrator is
audited by Medicare and found that their interest was not properly considered, as mentioned previously penalties incurred
could be double the damages and the beneficiary could lose his future Medicare benefits.
The completion of Medicare Set-Asides is a natural evolutionary process for the experienced life care planner. Certified Life
Care Planners are experienced with the process of projecting future medical costs and consistent in the application of their
philosophy and methodology. Life Care Planning has also been the foundation for the development and submission of
Medicare Set-Asides. It is important for the Life Care Planner to remain current, as codes are often changed on a yearly
basis and to be aware of the fact that Medicare Set-Asides are here to stay in whatever format the evolutionary process
may take them in the future. They are projected to become a consideration in all forms of future settlements in addition to
the area of Workers’ Compensation.
POLICIES & PROCEDURES
The policies and procedures for submittal of Medicare Set-Asides have been modified within the last two years.
They are projected to continue changing over time, as a result of the following: volume of submissions, varying
clarity and completeness of proposals submitted, the changes in Medicare coverage and litigation. Each state has
its own individual Workers’ Compensation law and payment schedule, which will also affect the number of cases
that will meet the requirements for settlement and the ability to affect an acceptable settlement.
The Medicare Prescription Drug Improvement & Modernization Act of 2003 will impact the Medicare Set-Aside
arrangements. Medications will be reimbursed by Medicare beginning in the year 2006. Until that time, medication
costs will be included under the non- Medicare portion of the MSA projected costs. The number of settlements and
Medicare Set-Asides are projected to decrease at that time, based on the costs of medications. In some cases, the
costs of medications will be substantial, particularly in the cost of chronic pain management and therefore, there will
less money available for the beneficiary, which will result in difficulty in the settlement of claims.
About the author:
Nancy LaGasse is a healthcare professional with progressive experience in providing and coordinating medical care for
complex medical injuries and disorders. Her experience includes extensive clinical experience in critical care, home health,
and psychiatry, in addition to fourteen years carrier based coordination of medical services and life care planning for
catastrophically injured persons. Business interactions include the following types of insurance: Group Health, Workers’
Compensation, Disability, Reinsurance, Medicare, Medicaid, Veterans Administration, Black Lung, Railroad Workers’,
Longshore, Champus, Auto, Personal Injury, Liability, Negligence and Medical Malpractice. She is currently President/CEO
of Southern Catastrophic Management Services, Inc which is located in Sarasota, Florida.
How Medicare Set-Aside Arrangements Impact Structured Settlements∗
Patrick J. Hindert∗∗
This article considers how the Medicare Secondary Payer (MSP) rules and Medicare Set-Aside (MSA) arrangements
impact structured settlements.
I. Structured Settlement Definition
A structured settlement is a package of financial and/or insurance products, generally including periodic payments, that a
claimant accepts to resolve a personal injury claim or to compromise a statutory periodic payment obligation.
For purposes of Federal taxation, structured settlement is defined by IRC Section 5891(c)(1) as an arrangement that meets
the following requirements:
A structured settlement must be established by:
A suit or agreement for periodic payment of damages excludable from gross income under IRC Section
An agreement for the periodic payment of compensation under any workers’ compensation law excludable
under Section 104(a)(1); and
The periodic payments must be of the character described in subparagraphs (A) and (B) of IRC Section
130(c)(2) and must be payable by a person who:
Is a party to the suit or agreement or to a workers compensation claims; or
By a person who has assumed the liability for such periodic payments under a Qualified Assignment in
accordance with IRC Section 130.
II. Statutory Sources
Since structured settlements were introduced in the 1970s, an increasing number of Federal and state laws, regulations and
cases have defined the rules of structured settlements including standards and best practices.
The most important Federal law impacting structured settlements historically has been the Internal Revenue Code including:
• IRC Sections 104 (a) (1) and (2) which provide exclusions from income for damages received in workers
compensation cases and physical injury cases respectively;
• IRC Section 130 which defines “Qualified Assignment” and “Qualified Funding Asset”;
(c) 2004 by ALM Properties, Inc., Law Journal Press, a division of American Lawyer Media, Inc. This article is adapted from Chapter 15 of
Structured Settlements and Periodic Payment Judgements.
Patrick Hindert, along with Daniel Hindert and Joseph Dehner, are the authors of Structured Settlements and Periodic Payment Judgements.
• IRC Section 468B which defines “Designated Settlement Funds” and “Qualified Settlement Funds”; and
• IRC Section 5891 which addresses the sale of the future proceeds from a structured settlement (called
“factoring”) and includes the definition of structured settlement referenced above.
The most important State laws impacting structured settlements historically have included:
• Periodic Payment of Judgment Statutes – Thirty-six states have enacted some form of periodic payment
of judgment statute;
• Insurance Insolvency and Guarantee Statutes - almost all states have enacted legislation which
provides limited protection to structured settlement recipients if and when an annuity provider becomes
• Structured Settlement Protection Statutes – thirty-nine states have enacted some form of legislation to
address structured settlement factoring.
• Uniform Commercial Code (UCC) Article 9 - relating to annuity assignments, transfers and security
• Payments to Minors Acts - defining how funds recovered for minors may be paid and/or managed.
• Workers Compensation – The Internal Revenue Code was amended in 1996 to expand Qualified
Assignments to workers compensation settlements.
Federal and state case laws have impacted many structured settlements issues including insolvencies and business
III. Structured Settlement Products
The traditional structured settlement funding products have been fixed annuities (which represent “Qualified Funding
Assets” under IRC Section 130(d)) issued by life insurance companies using a “Qualified Assignment” (defined in IRC
Section 130(c)) to achieve a release and transfer of the structured settlement payment obligation. Structured settlement
payments are also referred to as “periodic payments.”
The advantages of structured settlements funded by fixed annuities using Qualified Assignments include:
• Release - A tort and contract release for all current and future liability for defendants which also
protects their insurers, attorneys, and structured settlement brokers.
• Transfer - A transfer of funding responsibility to a mutually accepted third party (called an
“Assignee”). The Assignee purchases and owns the fixed annuity, which funds the periodic
• Tax Exclusion – A Federal income tax exclusion for claimants who receive the periodic payments
which has significance primarily for claimants in medium to high income tax brackets.
• Lifetime Payouts - Lifetime payouts which can be priced to include substandard age ratings.
• Design Options - Annuity payout options can be designed to match a variety of fixed future payment
• Limited Risk for Claimant – so long as the Qualified Assignee and annuity company remain solvent,
claimants (and/or their successors) will receive the exact periodic payments as and when promised.
Claimant security can be further enhanced with guarantees and/or secured creditor status. State
insurance guarantee funds generally apply to structured settlements.
The disadvantages of structured settlements funded by fixed annuities in Qualified Assignments include:
• Lack of Liquidity. Structured settlement factoring provides one solution. However, factoring can be
expensive and time-consuming and is not available to every structure settlement recipient.
• Fixed Payments. Fixed annuities do not match inflation, do not permit changes in payout timing
and/or amounts and do not provide for unforeseen contingencies.
• Potential Insolvency. Although protective devices (including state guarantee funds) exist, a claimant
remains potentially at risk if the responsible party for making structured settlement payments fails.
• Potential Loss of Public Benefits. Unless structured settlement annuities are paid into qualifying funding
vehicles (eggs trusts or custodial accounts), they can permanently disqualify recipients from receiving
certain public benefits (eggs Medicaid and Medicare).
IV. Medicare Secondary Payer (MSP) Rules
Congress enacted the MSP statute in 1980 (Omnibus Reconciliation Act of 1980) to curb the rising cost of Medicare. The
1980 MSP provisions require liability, automobile and no-fault insurance to make payment for services rendered to Medicare
beneficiaries, leaving the Medicare program to provide benefits only as a “secondary” payer. Pursuant to Section 1862(b) of
the Social Security Act passed in 1965, payments for items and services covered under workers compensation laws were
already primary to Medicare. Workers compensation includes cases involving the Federal Employees Compensation Act,
the U.S. Longshoreman’s and Harbor Workers’ Compensation Act and the Federal Coal Mine Health and Safety Act of 1969
as amended (the Federal Black Lung Program). The MSP program does not apply to the Federal Employer’s Liability Act
which covers merchant seamen and employees of interstate railroads.
Right of Recovery
The Center for Medicare and Medicaid Services (CMS) is the Federal agency within the Department of Health and Human
Services responsible for administering Medicare and Medicaid. In applicable cases, CMS will not recognize a settlement
which does not protect Medicare’s interests as secondary payer. Because Federal law takes precedence over state laws
and private contracts, Medicare is the secondary payer regardless of state law or plan provisions. CMS’ right of recovery is
not subject to any statute of limitations.
If Medicare’s interests are not protected, CMS has a direct right of action against:
• Entities who have received proceeds from the case settlement—including claimants, beneficiaries,
attorneys, consultants, brokers, product providers and medical providers; and/or
• Entities who are “responsible for making payment” primary to Medicare—including insurance
companies and self-insurers. Responsibility for making payment does not require a finding of
liability. An insurer or self-insured is responsible if it enters into a settlement or is subject to a
judgment or award. If CMS must take legal action to recover its MSP recovery claim from the
primary payer, CMS may seek double the amount of the Medicare payment plus interest.
V. Medicare Set Aside (MSA) Arrangements
A Medicare Set Aside (MSA) arrangement is an administrative and funding mechanism used in certain categories of
settlements to set aside money for future medical expenses that would otherwise be covered by Medicare. Unless otherwise
documented and approved, the amount of a MSA is calculated based upon the specific claimant’s life expectancy.
As outlined above, CMS has a direct right of legal action if Medicare’s interests are ignored in any liability case
(occupational or non-occupational) defined by MSP regulations. Despite earlier legislation, CMS did not initiate serious
enforcement of the MSP rules until 2001. CMS’s preliminary enforcement of the MSP rules has focused on workers
MSA Approval Recommended
CMS currently recommends obtaining approval of an MSA arrangement in any workers compensation case when future
medical payments are specifically closed in settlement documents for the following claimant categories:
• Class 1 Claimants—This category includes claimants who are entitled to Medicare (Part A, B or both)
regardless of the settlement amount when future medical payments are specifically closed in the settlement
• Class 2 Claimants—This category includes claimants with a “reasonable expectation” of Medicare
enrollment within 30 months of the settlement date and an anticipated total (non-commuted) settlement of
greater than $250,000 inclusive of future medical expenses, future disability/lost wages, attorney fees plus
any other settlement costs. CMS defines “reasonable expectation” to include the following situations:
(i) Claimant has applied for Social Security disability benefits;
(ii) Although denied Social Security disability benefits, claimant anticipates appealing and/or
re-filing for such benefits;
(iii) Claimant is 62 years and 6 months or older;
(4) Claimant has an End Stage Renal Disorder (ESRD) condition but does not yet qualify for
Medicare based upon ESRD.
Although CMS has issued several policy memoranda addressing Medicare Set-aside arrangements, neither CMS nor the
Code of Federal Regulations mandates a specific type of MSA funding. In applicable cases, however, CMS must approve
MSA funding arrangements, including structured settlement annuities. Certain MSA funding and administration
requirements are the same regardless of the type of funding and regardless of whether the funding is professionally
administered or self-administered:
• Medicare covered expenses cannot be paid out of the MSA account until the claimant becomes a Medicare
• The MSA assets must be held in an interest-bearing account;
• The MSA can only be used for Medicare-covered expenses;
• The MSA must be based upon either the workers compensation fee schedule or actual charges.
Whichever option is selected must be identified in the MSA and approved by CMS;
• MSA accounting must be reported to the CMS Regional Office annually until the MSA funds are exhausted.
In an October 15, 2004 policy memorandum, CMS announced the following additional requirements for structured
• The seed money (lump sum) for the MSA must include sufficient moneys to cover the first surgery
procedure and/or replacement plus two years of annual payments;
• The remainder of the MSA funding amount CMS approves must be divided by the claimant’s remaining
life expectancy or, if CMS approves, by a shorter time period;
• Subsequent annual deposits must be based upon a set “anniversary date” which cannot be more than
one year following the settlement date.
CMS has identified and posted on its website the criteria to be used by contractors and CMS Regional Offices in evaluating
the amount of the proposed settlement to determine whether the amount allocated for future medical expenses is
reasonable. Some of these criteria include: date of entitlement to Medicare; basis for entitlement to Medicare; type and
severity of illness or injury; age of beneficiary; workers compensation classification of beneficiary; prior medical expenses;
amount of settlement; payment period; living situation; whether the expected expenses for Medicare covered services are
The October 15, 2004 CMS policy memorandum also includes important new rules for discounting and inflation. Under
these rules, a workers compensation MSA arrangement does not need to be indexed for inflation and may not be
discounted to present-day value. Because annuities incorporate their own discount rate, these new rules appear to provide
an important cost advantage for annuities compared to lump sum alternatives. However, this cost advantage will also result
in the underfunding MSA arrangements because the CMS rules do not provide for, or require, annuities to include annual
increases for future medical inflation.
Use of structured settlement annuities impacts CMS’s valuation of MSA arrangements. First, CMS must approve any
proposed structured settlement used to fund an MSA arrangement. Second, CMS values structured settlement annuities
based upon projected payout, as opposed to cost, for purposes of the $250,000 Threshold for Class 2 Claimants. Third,
whether or not a structured settlement annuity is part of a proposed MSA arrangement, CMS invites and accepts
submission of “age ratings” from life companies for purposes of evaluating life expectancy. However, the new rules in
CMS’s October 15, 2004 policy memorandum require term certain annuities (based upon life expectancy or, if CMS
approves, for a shorter time period) as opposed to lifetime annuities. Fourth, as stated above, under these same October
15, 2004 rules, annuities now appear to have an inherent cost advantage compared to lump sum alternatives for purposes
of MSA arrangements. Annuities will also result in underfunding of MSA arrangements unless the annuities include annual
increases to account for future medical inflation. The October 15, 2004 CMS rules do not provide for, or require, annuities
to include annual increases for future inflation.
Whoever administers an MSA arrangement must forward annual accounting summaries of MSA expenditures to the lead
CMS contractor responsible for monitoring the individual’s case. The lead contractor is responsible for verifying the funds
allocated to the MSA arrangement were expended only for medical services covered by Medicare. The lead contractor also
insures that CMS makes no payments related to the injury or illness until the MSA arrangement is exhausted.
For structured settlement annuities, the lead CMS contractor must verify the periodic payments regularly. Whenever an
annual annuity payment is exhausted prematurely for Medicare services, CMS will provide payments for the remainder of
that year only. A new accounting begins for the new year and the new annuity payment. If an annuity payment in any year is
not exhausted for Medicare services, the amount remaining must be carried forward to the next period. For that next year,
Medicare will begin to pay for services related to the injury after the amount allocated for that year plus the amount carried
forward from the prior year is exhausted.
In a May 7, 2004 policy memorandum, CMS reversed its previous policy and announced, on a prospective basis, that CMS
would no longer allow MSA administrative fees and attorney costs to be charged to the MSA arrangement. Beginning May
7, 2004, CMS no longer evaluates the reasonableness of such expenses. Payment of these fees must now come from a
payment source which is separate from the MSA.
Funding Options -
• Trust or Custodial Account—Based upon CMS policy memoranda and seminars, the primary funding
vehicles for MSA arrangements appear to be trusts and custodial accounts. Custodial accounts may be
either professionally administered or self-administered.
• Lump Sum or Annuity—CMS must approve annuities used to fund MSA arrangements. The rules for
annuities that CMS communicated on October 15, 2004 are outline above. These rules require annual
payments for specified (term certain) periods generally linked to the claimant’s life expectancy with the
MSA arrangement (trust or custodial account) as payment recipient. Structured settlement annuities create
special valuation and administrative issues for MSA arrangements that are summarized above. These
valuation and administration issues are more pronounced as a result of the October 15, 2004 CMS policy
memorandum. Under the October 15, 2004 rules, structured settlement annuities provide cost advantages
compared to lump sum alternatives. However, assuming future medical inflation, annuities will also result
in the underfunding of MSA arrangements.
Professional or Self-Administration—The CMS requirements are the same whether an MSA arrangement is
professionally administered or self-administered. In addition to providing CMS with an annual report, an
MSA administrator will be required to keep records and accountings, file tax reports, pay bills and comply
generally with CMS requirements. Because trust companies generally establish minimum funding
thresholds, professionally administered trusts generally are not an option for smaller MSA arrangements.
• Selection Criteria—Determining what is the appropriate or best MSA funding option will depend upon
state laws as well as case-specific issues and facts. The CMS rules favoring annuities are discussed
above. In addition, the following general issues should be considered when selecting among MSA funding
options: size of the settlement; comparative administrative costs; availability of funding options; projected
Medicare costs; life expectancy; tax and spendthrift considerations; as well as the administrators’
experience with public benefits and investments.
VI. Impact on Structured Settlements
Neither CMS nor the Code of Federal Regulations defines a MSA arrangement or a structured settlement. CMS
has not specifically linked its rules for MSA arrangements or structured settlements to the definition of structured settlement
in IRC 5891 (c)(1). However, CMS does provide new rules for structured settlements for cases requiring an MSA, most
recently and importantly in its October 15, 2004 policy memorandum.
The MSP and MSA rules create responsibilities and potential penalties for all parties and participants in certain settlements
involving future medical expenses which would otherwise be covered by Medicare. CMS has focused its preliminary
enforcement of these rules on workers compensation cases. These rules require appropriate case identification, valuation,
allocation, funding and administration. A Qualified Assignment with a “full release” will not protect defendants, their insurers,
their attorneys or their structured settlement brokers and product providers if Medicare’s interests are not protected in
applicable cases. Structured settlement participants must adjust and integrate their own funding products, work products,
documentation and work processes to satisfy the MSP rules and MSA requirements.
CMS has not defined the specific types of funding arrangements which are acceptable for MSAs. However, trusts and
custodial accounts appear to be the primary funding alternatives. Whatever MSA funding alternative is proposed must
satisfy CMS administrative requirements. Both professional and self-administration of MSA arrangements are permitted.
Structured settlement annuities are permitted in MSA arrangements provided the CMS requirements outlined above are
satisfied. Under the rules CMS promulgated in its October 15, 2004 policy memorandum, term certain annuities are
required. Specific structured settlements proposals which are part of the MSA arrangement must be approved by CMS.
MSA administrators must track, compare and report to CMS annually the difference between annual structured settlement
annuity payments and MSA disbursements.
Structured settlement annuities may impact whether some cases require a MSA because CMS values structured settlement
annuities based upon projected payout rather than cost for purposes of calculating the $250,000 threshold in Claimant
Category 2 cases. CMS accepts rated ages from structured settlement annuity providers to value life expectancy regardless
of whether the MSA arrangement includes annuity payments. Although CMS no longer requires or permits MSA
arrangements to be indexed for inflation or discounted to present value, this requirement impacts annuities differently than
lump sum alternatives resulting in both lower costs and underfunding when annuities are used.
About the author:
Patrick Hindert serves as Managing Director of S2KM Limited. S2KM is a consulting company specializing in the
application of knowledge management to structured settlements and settlement planning. Hindert has been a leader within
the structured settlement industry since its inception. He founded Benefit Designs, Inc. in 1978 and developed it into a
successful United States structured settlement broker before selling the company in 1998. Hindert is a member of the
National Structured Settlement Association (NSSTA), where he previously served as President and Director, and the
Society of Settlement Planners (SSP), where he previously served as Executive Director. With Daniel Hindert and Joseph
Julnes Dehner, he is co-author of “Structured Settlements and Periodic Payment Judgments”the definitive legal textbook on
structured settlements. For the past four years, Hindert has worked, studied and written about the developing professions
of knowledge management (KM) and KM’s impact on structured settlements and personal injury settlement planning.
Making Those December LCP Deadlines!
RECOMMENDED READING LIST________________
• Physicians’ Fee Reference 2004, Wasserman
Medical Publishers, LTD (800) 669-3337
• National Fee Analyzer, Ingenix, (800) 464-3649
• 2004 Physicians' Fee & Coding Guide Vol. 1, Mag
Mutual Healthcare Solutions, Inc. (800) 253-
The Care Planner Network proudly acknowledges the
winner of the 2004 Lifetime Achievement Award!
Dr. Horace Sawyer
The Vendor Corner
Hill-Rom Reviews the Latest Clinical Information to Assist Care Managers
When Making Treatment Decisions for Patients with Advanced Pressure
Are you interested in improving your clinical and financial outcomes for patients with advanced pressure ulcers?
Patients with advanced pressure wounds often represent a small percentage of patients, but put excessive demands on
resources. Previously, there has been little data on clinical effectiveness of support surfaces to assist with selection. The
Centers for Medicare and Medicaid Services (CMS) currently divide support surfaces into three groups: Group 1 (static
devices/ mattresses), Group 2 (dynamic powered and non-powered mattress replacements and overlays) and Group 3 (air-
fluidized beds). The following study summary provides useful information regarding support surface selection as an integral
part of the patients’ comprehensive treatment plan.
A recent study titled “Effect of Support Surfaces on Pressure Ulcer Healing Rates” provides a comparison of healing rates
from patients placed on Group 1, 2, & 3 support surfaces. The data collection was completed in 2002 by Horn et al.
commonly referred to as the NPULS (National Pressure Ulcer Long Term Care Study). Overall healing rates were: Group
1(0.7 sq cm/wk), Group 2 (0.9 sq cm/wk), Group 3 (3.1 sq cm/wk). Nutrition and severity of illness scores were comparable
for Group 2 & 3. Key findings conclude that air-fluidized therapy (AFT) is superior to other surfaces for the treatment of
stage III and IV pressure ulcers, producing 4 times greater healing rates. In addition, emergency room visits and
hospitalizations were significantly fewer for Group 3 vs. Group 2.
Aggressive intervention has greater potential to improve clinical and financial outcomes. Taking a closer look at the
financials, a faster healing rate results in fewer weeks to heal and provides dramatic cost savings overall. Despite higher
AFT daily rental rates, the overall treatment period shortens and equates to both savings in treatment and the cost of the
Ulcer Treatment Cost Based on Healing Rate
Air (Group II) AFT (Group III)
Healing Rate (cm sq./wk) 0.7 3.1
Pressure Ulcer Size ( L x W) 49.0 49.0
Weeks to Heal 70.0 15.8
Days 490.0 110.6
Pressure Ulcer Cost to Treat/ $25 $85
Cost to Heal $47, 530.00 $10, 732.58
Savings Differential 36, 797.42
Therapy Surface Rental/Day $25 $85
Days 490.0 110.6
Surface Cost Differential -$ 2,845.16
Net Savings with AFT $39, 642.58
What makes air-fluidized more effective? As warm air is forced through the medical grade ceramic microspheres (beads),
they take on fluid-like properties acting as independent particles and are allowed to move freely past each other, rather than
remaining compressed as with stiffer surfaces. This reduction of pressure and shearing is highly effective, especially for
those areas most affected by shearing, such as the ischial tuberosities and sacrum. In the home setting, the fluid like
properties of the bed enhance the ability for a single caregiver to turn, position, clean and inspect the patient.
Air-Fluidized therapy demonstrates superior outcomes when compared to Group 1 & 2 support surfaces. This research
supports Hill-Roms’ Clinitron ® Air-fluidized Therapy as a pressure ulcer intervention which can dramatically improve clinical
and financial outcomes.
To receive a copy of this article or more information on Hill-Rom’s products, please contact the Hill-Rom 24-hour national
customer call center at (800) 638-2546 and ask for your local account representative.
Submitted by Alison Maden
Hill-Rom Account Representative
Phone (714)742-6193, fax- (310) 379-6471