Settlements and Medicare

Intro: Medicare requires coordination of all Workers Compensation settlements to protect and repay related medical bills paid by Medicare and “future protection” for bills expected to be paid by Medicare that are injury related.  As of July 2001, special consideration must be given in settlement contracts to protect Medicare from future payments for injury related medical expense by the establishment of a separate “Medicare Set Aside” account. The following article discusses the statutory basis and adoption of a prior approval process by CMS. Prior approval by CMS guarantees that Medicare will be satisfied with the dollar amount set forth in the settlement contract.  This article was written for lawyers and may be a bit technical for easy reading.  The Secondary Payor Regulations have undergone 2 important modifications after this article was written and they now include the need to address Medicare’s prescription drug plans in a future needs assessments and they now include CMS notification requirements on workers comp and liability insurance carriers for reporting Medicare beneficiary status in mandatory insurance reporting in workers compensation eff. July 1, 2009.       For review contact: Illinois Workers Compensation attorney   Or reach us by phone:  (312) 541-0049Avoiding the Medicare Trap: Workers’ Comp Settlements and Medicare Secondary Payer Regs Illinois State Bar Journal (December 2003)By Brad BleakneyDrafters of workers’ compensation settlement agreements take note: if you fail to account for the lien created by Medicare’s secondary-payer regulations, Medicare could deny future-injury-related benefits to the claimant and sue employers, carriers, or insurance plan administrators for reimbursement.

Medicare’s secondary-payer regulations, found at 42 USC 1395y(b)(2), make Medicare the secondary medical coverage for its insureds and give it a right of subrogation for payments made on behalf of those insureds. Aggressive new enforcement of this provision, described below, has profound implications for the drafting of workers’ compensation settlement agreements.  

Before this new zeal on Medicare’s part, parties could settle workers’ compensation claims knowing that Medicare would cover future medical expenses. Now, however, the secondary-payer provisions act as a preexisting-condition exclusion for some accident-related medical expenses and can expose respondents, carriers, or administrators to reimbursement claims long after settlement proceeds are distributed. More to the point, lawyers for employers must consider the possibility that their clients will be sued for reimbursement by Medicare and plan accordingly.

As a consequence, practitioners must revise lump-sum settlement language so that it allocates future medical expense for expected Medicare-covered payments. The revised language is necessary both to prevent claimants from being denied Medicare coverage until their workers’ compensation settlement is exhausted and to fend off federal reimbursement actions for future Medicare payments against employers, carriers, or third-party administrators. 

Practitioners can reduce these risks by clearing proposed workers’ compensation settlements with Medicare in advance or by arbitration of the claim to keep medical rights open. This article discusses Medicare’s prior approval process and other aspects of the workers’ comp Medicare lien.

II. Secondary Payer Regulations

Medicare secondary payer laws preclude Medicare from paying a beneficiary’s medical expenses when they “ha[ve] been….or can reasonably be expected to be [paid]…under a workmen’s compensation law or plan…or under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance.”

Medicare lien: synopsis of the statutory basis or the so-called “secondary payer” regulations at 42 USC 1395y(b)(2) read as follow:

(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-

(i) payment has been made, or can reasonably be expected to be made, with respect to the item or service as required under paragraph (1), or

(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….

(B) Conditional payment

(i) Repayment required: Any payment under this subchapter…shall be conditioned on reimbursement to the appropriate Trust Fund….

(ii) 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. The United States may not recover from a third-party administrator under this clause in cases where the third-party administrator would not be able to recover the amount at issue from the employer or group health plan and is not employed by or under contract with the employer or group health plan at the time the action for recovery is initiated by the United States or for whom it provides administrative services due to the insolvency or bankruptcy of the employer or plan.

(iii) Subrogation rights The United States shall be subrogated (to the extent of payment made under this subchapter for such an item or service) to any right under this subsection of an individual or any other entity to payment with respect to such item or service under a primary plan.

For years, these provisions required the parties to consider Medicare’s lien interests for sums paid prior to the settlement or where there had been “conditional payments” (i.e., those subject to reimbursement) of medical expenses prior to a settlement. Medicare requires payment of their lien within 60 days of receipt of any settlement proceeds. After 60 days, interest charges apply and Medicare can bring enforcement actions. Although it can be time consuming, the claimant’s attorney can obtain and negotiate the Medicare lien amounts directly through Medicare or through designated Medicare contractors.
For payment information, contact Medicare’s coordination-of-benefits call center at (800)999-1118).As discussed in the next section, the difference today is that Medicare will review workers’ comp settlements to enforce credits or reimbursement for future Medicare payments.

III. Future Medicare Expenditure Protection

Fearful of the burden that an aging work force will place on Medicare, the government is aggressively pursuing payment of Medicare liens and requiring local CMS offices to review settlements. The objective is to assure that settlement agreements protect Medicare from assuming future medical expenses that should be paid instead by the employer or its carrier.

43 CFR 411.24 provides that “CMS has a direct right of action to recover from any entity responsible for making primary payment. This includes an employer, an insurance carrier, plan, or program, and a third-party administrator.” If the primary payer, the third party payer, or insurance plan fails to reimburse Medicare, then “the third party payer must reimburse Medicare even though it has already reimbursed the beneficiary or other party.” 43 CFR 411.24(i).

The regulations also provide in subpart (g) that Medicare “has a right of action to recover its payments from any entity, including a beneficiary, provider, supplier, physician, attorney, state agency or private insurer that has received a third party payment.” 43 CFR 411.24(g). These provisions for payments of Medicare’s “super-lien” are being extended in some cases to cover not only past but future payments.

Respondent attorneys, adjusters, and carriers have always been concerned with closing future medical rights in any settlement. Typical settlement language terminates a claimant’s future medical rights under section 8(a) of the Illinois Workers’ Compensation Act, found at 820 ILCS 305/8. It is precisely such a provision; i.e., one that terminates the right to future medical care without allocation or an apportionment for future medical expense ; that can give rise to exposure for future Medicare claims of reimbursent.

Based on such typical settlement language, Medicare can conclude that the parties to the settlement did not adequately protect Medicare’s interests against future payments. This standard language can also expose the claimants to denial of future-injury-related Medicare coverage to the extent of the entire settlement. Irate clients are likely to complain that their attorney failed to advise them or take the necessary precautions to prevent such unintended consequences.

If you expect the claimant to incur significant injury-related future medical expense, the only prudent course is to get Medicare to approve a proposed settlement; a service that Medicare provides and that is discussed below; or to proceed with arbitration to leave future related medical rights open.

IV. Commutation v Compromise Settlement

Medicare regulations 42 CFR 411.46(a) (“Lump-sum commutation of future benefits”) state in pertinent part as follows:

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.

Medicare regulations, 42 CFR 411.46(b) (“Lump-sum compromise settlement”), state as follow:

(1) A lump-sum compromise settlement is deemed to be a workers’ compensation payment for Medicare purposes, even if the settlement agreement stipulates that there is no liability under the workers’ compensation law or plan.
The Medicare regulations and manuals make a distinction between “compromise” and “commutation” cases. Where the settlement merely represents a commutation of future benefits to a present lump-sum value, Medicare will not cover future injury-related medical expense.  However, under a lump-sum “compromise” settlement, medical expenses incurred after the date of the settlement are payable under Medicare as per 42 CFR 411.46(d)(1).

If the compromise settlement agreement allocates money for specific future medical expenses, Medicare will not pay medical expenses up to the extent of the allocated amounts. 42 CFR 411.46(d)(2). Where no allocation of future medical expense is made in the settlement, Medicare can apportion the settlement pursuant to 42 CFR 411.47.

According to the Medicare Manual MCM 3407.1, a “commutation” settlement is one in which the beneficiary accepts a lump-sum payment as compensation for all future medical expenses and disability benefits related to the work injury or disease. A “compromise” settlement is one that provides less than the individual would have received had the claim not been compromised.

Why, then, do the parties need to concern themselves with Medicare’s future payments in “compromise” settlements? Because Medicare looks to the language waiving future medical expense and does not consider itself bound by the “dispute” language of the settlement agreement in determining whether it is a “commutation,” “compromise,” or both.

If you have a disputed “compromise” settlement where no monies are being paid for future medical expense, it is recommended that the parties add language to the settlement noting that no money is being paid for future medical expense because of the disputed nature of the claim and it is recommend the contracts reflect the specific nature of the dispute by pointing to the specific medical opinion relied upon to support the dispute.  In such case, if any of the attorneys are later requested to review the contracts in the future, the language will contain a ready reference to the reason for the disputed compromise settlement.  In such cases, one should include specific allocation language noting the $0.00 dollar amount for future medical, for example:

The parties stipulate and the arbitrator finds that no portion of this settlement represents payment of past, present or future medical expenses.  Accordingly, the amount to be set aside for Medicare future injury related medical expenses is $0.00.

The Medicare regulations specifically provide at 42 CFR 411.46(b)(2) that settlement language will not be recognized if it appears to reflect an attempt to shift responsibility for work-related medical expenses where the facts show that a medical condition is work related.

If a claim is settled solely on a disputed “compromise” basis at a substantially discounted value to terminate the litigation, an internal memorandum from the Department of Health and Human Services to Regional Medicare Offices indicates that the requirement for a Medicare medical set aside allocation does not apply (see the July 23, 2001 memorandum discussed at section VI(A) below).   However, the mere use of “disputed” settlement language; e.g., over whether the accident occurred or whether it arose in the course of employment; will not prevent Medicare’s right to payment.

Uncertainty remains over exactly which settlements require future medical allocation and approval of set-aside accounts. Often, Illinois settlements combine elements of a disputed compromise and undisputed commutation settlements.  The problem could be avoided entirely by omitting settlement language under which the claimant waives future medical rights, but most employers, carriers, or defense counsel will insist on such a provision.

The problem for claimants and their attorneys is that if no allocation amount is specifically set forth for future medical expense in compromise settlement agreements, Medicare might refuse to recognize the compromise language and deem the entire settlement amount as a credit against its liability to make future injury related payments. Employers, carriers, or third party administrators might also be forced to reimburse Medicare even in disputed settlements; perhaps for double damages; if Medicare finds that its interests in reimbursement for future injury related medical expense have not been adequately protected.

The Medicare set-aside allocation is necessary where the parties agree to a lump sum settlement closing out all expected rights to further benefits and to expected future medical benefits. The thrust is that Medicare requires reasonable amounts to be allocated for future medical expense based on the known facts, issues, and medical evidence of the case. These allocated funds are then to be “set aside” solely for future injury related medical expenses that otherwise would have been payable by Medicare.

V. Set-Aside Fund Administration

Medicare regulations, 42 CFR 411.46, require that all workers’ compensation settlements adequately consider Medicare’s interests. However, the regulations do not prescribe a particular administrative mechanism for set-aside funds. Medicare will consider the adequacy of interest-bearing accounts set aside solely for future Medicare medical expense.

These “set-aside” accounts require accurate maintenance of records of all distributions and expenditures. The administrator of the set-aside account must forward annual accounting summaries concerning the expenditures from the account to CMS and the Medicare contractor responsible for monitoring the individual’s case.

The coordination-of-benefits contractor responsible for monitoring the individual’s case is then responsible for verifying that the funds allocated to the set-aside arrangement were spent on medical services for Medicare-covered services only. Additionally, the Medicare contractor responsible for monitoring the individual’s case will be responsible for ensuring that Medicare makes no payments relating to the illness or accident until the set-aside arrangement has been exhausted.

It is not clear whether Medicare will impose a dollar limit on self-administered trusts or whether and under what circumstances it will require professional management of trust funds.

VI. Medicare Prior Approval

Note that the parties can obtain Medicare’s prior approval of an allocation for future related medical expense. Medicare will also review the sufficiency of the proposed administration of the set aside funds at the time of approvalfee, third-party vendors will offer opinions on future medical allocation amounts and secure Medicare’s prior approval for proposed settlements. However, you can apply directly to the regional centers for Medicare and Medicaid services (CMS) for prior approval of the terms of settlement with submission of pertinent documentation.

You can write to our regional CMS office at this address:

Department of Health & Human Services
Centers for Medicare & Medicaid Services
233 North Michigan Avenue, Suite 600
Chicago, Illinois 60601-5519

Attn: Gloria Walker
Manager, Budgets and Collection Branch, Division of Financial Management.

A. Medicare Approval Guidelines

In a July 23, 2001, internal memorandum from the Department of Health and Human Services to the Medicare associate regional administrators, Medicare established internal guidelines for Medicare regional offices to use in assessing and approving settlement dollar amounts for future medical expenses. (To get a copy of the memorandum, contact the CMS office at the address listed in the preceding paragraph.)  (updated:  see our Resource Page link to the Memo)

The memorandum requires that administrators use the following criteria in deciding whether to approve settlement agreements and to evaluate the adequacy of settlement allocation amounts to protect Medicare’s future interests:

(1) the date of Medicare entitlement,(2) the basis for Medicare entitlement,(3) the type and severity of injury,(4) the age and projected life span of the beneficiary,(5) the worker’s compensation classification of disability type,(6) the prior Medicare and worker’s compensation payments in the previous 1 or 2 years,(7) the amount and allocation of settlement proceeds,(8) the commutation of time periods over which settlement allocations are spread,(9) the residence (nursing home or otherwise) of the beneficiary, and

(10) the reasonableness of the allocation given Medicare’s projected payments.

B. Documentation Required

Those seeking advance approval must provide Medicare with sufficient medical documentation to ascertain 1) what the injuries are and 2) whether the injuries or medical care are being contested as unrelated to the accident. Required documentation also includes treating medical records and recent IME reports. Counsel or adjusters may need the help of medical life care planners to establish projected future medical care expenses.  The last two or three years of workers’ compensation medical payments record can also be provided.

At a minimum, those seeking approval must submit the proposed settlement agreement and the documentation (e.g., doctors’ reports) upon which projected future medical expenses, both Medicare or non-Medicare, are based.

C. Minimum Threshold

Our regional center for Medicare & Medicaid Services recently stated a threshold level below which their review approval is not required (pursuant to the guidelines of the Internal Memorandum).

An injured individual who is not yet a Medicare beneficiary should only consider Medicare’s interests when the injured individual has a “reasonable expectation” of Medicare enrollment within 30 months of the settlement date, and the anticipated total settlement amount for future medical expenses and disability/lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000.

A memorandum was issued on May 23, 2003, from the Department of Health and Human Services in an attempt to clarify the review threshold for claimants who are not yet Medicare beneficiaries. The memorandum from Thomas L. Grissom, Director, Center for Medicare Management, states in pertinent part:

[T]o the extent a WC settlement meets both of the criteria (i.e., the settlement is greater than $250,000 AND the claimant is reasonably expected to become a Medicare beneficiary within 30 months of the settlement date), then CMS approved Medicare set-aside arrangement is appropriate. However, if a WC settlement is $250,000 or less OR where the claimant of that settlement is not reasonably expected to become a Medicare beneficiary within 30 months of the settlement date, then a CMS approved Medicare set-aside arrangement is unnecessary. …[W]hen an individual’s settlement does not meet both thresholds Medicare will make payment for WC related services that are otherwise reimbursable under Medicare once the individual enrolls in Medicare.

Thus, most workers’ compensation settlements do not now qualify for Medicare prior approval. However, where the claimant is a Medicare recipient, or is expected to be one within 30 months, consideration of Medicare’s allocation amount is required even if the dollar amount of the settlement is less than $250,000. Note that the current review thresholds (i.e., 30 months and $250,000) will be subject to adjustment once CMS has experience reviewing these matters under the instructions of the internal guidelines.

VII.  Conclusion

Where the claimant is a Social Security Disability recipient or, more likely, a Medicare recipient or someone expected to be a recipient, Medicare requires adequate protection of his or her future interests.  Specifically, Medicare requires an allocation of that portion of the settlement that represents future medical expense.

Allocation of appropriate monetary amounts for future medical expense can be difficult, particularly if there are conflicting medical opinions or disputes about whether expenses are “reasonable and necessary” or “related.”

Note that the allocation requirement applies when the claimant is a Medicare recipient or can reasonably be expected to be one within 30 months of the settlement.

Failure to allocate might be considered a failure to adequately protect Medicare’s interests, which could lead to reimbursement proceedings.

Keep the following Medicare-lien pointers in mind:

(1) Parties to a settlement should inquire about the claimant’s Medicare status and whether he or she has applied for Social Security benefits.

(2) Include a future-related-medical-expense allocation in the settlement contract that i) assures that Medicare liens for conditional payments will be satisfied and ii) accounts for Medicare’s future liability for injury-related medical expense.

(3) When settlement proceeds come in, put Medicare’s portion in a separate interest-bearing account or other arrangement acceptable to Medicare.

(4) The standard settlement contract language should be modified to reflect i) whether future medical care is disputed, ii) if so, the basis for the dispute, and iii) what portion of the funds if any represents settlement of expected future medical expense.

(5) If you seek Medicare’s prior approval of the allotted amounts and adequacy of the set aside arrangements, you must apply to the regional CMS office.

Efforts are underway to refine requirements and create expedited procedures to obtain prior Medicare approval from the regional CMS office.  How these settlement proposal packages will be handled and whether more definitive guidelines for Medicare’s prior approval will be developed remains to be seen.


Disclaimer: This article is not intended as a substitute for professional legal advice nor intended to be taken as legal advice. Only a review by a legal professional of the specific facts and the related medical information for each claim can be relied upon for an accurate assessment of application.

It is highly recommended that readers consult a Medicare Set Aside or MSP compliance expert.  Contact our office for further assistance, review or representation.

Author’s Note: The Centers for Medicare and Medicaid Services (CMS) continues to update and change their procedural requirements and the minimum review threshold is currently set at $25,000.

Only a current review of the most recent Federal Regulations, CMS guidelines and CMS directives can be relied upon. CMS directive memos should be read in their entirety from earliest to current for a running history of changes as they are cumulative.   Some of the early directives are subsequently modified or changed by updated memos.  See the CMS Reference Guide link below. 

Please also note, the new address for prior approval submission has now changed to the CMS Detroit office:

Coordination of Benefits Contractor,

P.O. Box 33849,

Detroit, Michigan 48232.

Medicare Secondary Payer Recovery Contractor (MSPRC)  tele 1-866-677-7220


READ the online Guide:  Updated Medicare Set-aside Reference Guide (12-14-2015)

SEE the CMS Medicare Recovery Portal

NOTE: This article was only a starting point for early adoption of MSP regulations and procedures which have dramatically grown in scope.  We strongly recommend consulting an MSP expert at MEDVAL for compliance, guidance and instruction.

ORDER:  The Complete Guide to Medicare Secondary Payer Compliance, by Jennifer C. Jordan (LexisNexis®)

         Order by phone, call 1-800-223-1940    Order online, click here    For MSP Compliance Contact MedVal or other MSP specialists.

For assistance in a Illinois workers compensation claim contact an Illinois workers compensation attorney.