At what cost closure?

The impact of Medicare’s reporting requirements on workers’ compensation and liability claim settlements

When a Medicare-eligible individual is receiving medical care for a work-related incident or the negligence of a third party, the workers' compensation or liability insurer is considered to be the primary payor for the medical payments.¹ Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007² requires “responsible reporting entities” to report claims to the Centers for Medicare and Medicaid Services (CMS) if the claimant is a Medicare beneficiary³ receiving medical payments from liability, no-fault, or workers' compensation insurers and self-insureds. Reporting began for workers' compensation insurers on January 1, 2010, and for liability insurers on January 1, 2012.⁴

The passage of Section 111 is not simply a procedural inconvenience to liability and workers' compensation insurers. Rather, these mandatory reporting requirements have impacted the ability of workers' compensation, liability, and no-fault insurers to settle and close claims. These requirements could increase costs or result in a claim being reopened. Compared to claim settlement practices that were common just a few years ago, many insurers are facing new challenges in the wake of Section 111 when attempting to settle claims with future medical exposure. This article will identify some of these challenges and remaining issues as insurers navigate through the post-Section 111 settlement process.

Background

Although it sounds like a mere procedural requirement, Section 111 was enacted to protect Medicare’s interests as a secondary payor of benefits. Medicare is a secondary payor in these situations, and has a right of reimbursement for any “conditional payments” it may have made in connection with that claim and the right to refuse future payments if presented. Moreover, Medicare has an interest in any settlement of the primary payor’s future medical obligations. Prior to settling a claim involving future medical benefits with a Medicare-eligible claimant, the insurer must demonstrate that it has protected Medicare’s interests, or it can face potential liability for payments Medicare makes to medical providers treating the claimant.

This is nothing new. By law, Medicare has been a secondary payor with respect to workers' compensation claims since its inception in 1965, and with respect to liability claims since the enactment of the Medicare Secondary Payer Act in 1980.⁵ Section 111 has done nothing to materially affect or change Medicare’s status as a secondary payor. What is new, however, is the way in which CMS can now enforce and protect that status.

Prior to the enactment of Section 111, CMS had no comprehensive mechanism to ensure that Medicare was appropriately refusing to pay for workers' compensation or liability-related injuries. In short, Medicare was unable to easily identify claims where it was a secondary payor, and was therefore not pursuing potential reimbursements from insurers. With the implementation of Section 111, CMS can now maintain a data warehouse of claims in which Medicare is a secondary payor, using the data reported by workers' compensation and liability insurers. Section 111 enables CMS to readily identify the payments that Medicare made as a secondary payor and recoup those payments from the insurers. It also helps ensure that Medicare does not pay or overpay for future medical care on those claims going forward.

Some of the major issues that have surfaced since the enactment and implementation of Section 111 concern this last objective—payment of future medical treatment for Section 111 claims (i.e., claims where Medicare is a secondary payor). After an insurer settles with a claimant who may require future medical treatment, can the insurer close that claim file with confidence that CMS will never again hold it responsible for additional payments? What if the Medicare set-aside (MSA) is insufficient to fund future medical care? What if the claimant uses the medical set-aside monies for purposes other than medical care? Because CMS can now identify a claim as a Medicare secondary payor claim, can it simply deny benefits? Can it force the insurer to reopen its claim file and make additional payments? In the post-Section 111 world, is final ever really final for liability and workers' compensation insurers, and, if so, at what cost?

Workers' compensation Medicare set-asides

The ability to settle with Medicare-eligible claimants hinges on the insurer’s demonstration that it has protected Medicare’s interests in the settlement. Many workers' compensation insurers consider the MSA process to be the best tool available at this time to prevent future medical costs from being billed to the claim. When a workers' compensation claimant is receiving a large settlement⁶ and future medical treatment is expected, a portion of the settlement providing for future Medicare-reimbursable medical treatment is estimated and submitted to CMS for approval. Once approved, the MSA amount then gets placed in a trust fund to be used only for future Medicare-reimbursable medical expenses related to the workers' compensation injury.

Based on many comments and documents circulated by CMS, an approved MSA obtained as part of a properly executed settlement may be the best way to provide “safe harbor” to workers’ compensation insurers. It is important to note, though, that nothing published by CMS on this subject rises to the level of a fully promulgated regulation under the Federal Administrative Procedures Act. Therefore, a long-term legally enforceable safe harbor may not be guaranteed. In short, once the MSA is approved by CMS and funded in a trust, the insurer can settle the claim and close its file. However, insurers should be wary of some pitfalls and uncertainties surrounding their reliance on MSAs.

A primary concern is that workers' compensation MSAs are not required or governed by law or regulation. Thus, benefit determinations and remedies are at the discretion of CMS, and there is no law preventing CMS from later altering its opinion or approval. CMS may require the insurer to reopen a settled claim even if the settlement incorporated an approved MSA. In some cases, the claimant has been able to persuade CMS to reopen the claim and adjust the MSA amount even though the original MSA had been approved by CMS. The likelihood of this occurring might be reduced if various factors are in place at the time of the settlement. For example:

• If the claimant were represented by legal counsel
• If the claimant had been made fully aware of the strict uses of the MSA and the consequences of the settlement, and it is documented in writing and signed by the claimant and claimant’s attorney
• If the settlement were approved by the workers' compensation law judge
• If the MSA is approved by CMS
• If the custodian of the trust fund does not have an appearance of a conflict
• If the claimant signed a release and indemnification protecting the insurer

The administrative approval of the MSA by CMS apparently does not guarantee that the settled claim will remain settled. The process is advisory in nature, and therefore does not eliminate the risk of reopening.

A second concern involves the administrative and substantive impediments to settlement once the decision is made to obtain a CMS-approved MSA. The process of obtaining an MSA prolongs and complicates the underlying settlement negotiations, which in turn can result in higher claim costs. The MSA approval process can take several months. Often, multiple submissions are made if the first one is incomplete or unsatisfactory. These delays can result not only in the payment of ongoing benefits pending settlement, but also higher legal or administrative costs, increased risk of settlement negotiations failing, and increased risk of adverse development (i.e., the claimant’s condition can worsen). In response to a survey request from CMS, Strategic Services on Unemployment & Workers’ Compensation noted that in answer to the question, “Does the amount of time required to process and approve a WCMSA have an impact on your business?” respondents unanimously answered, “yes.”⁷

Third, Medicare’s estimate of the amount required to fund the MSA is often higher than the insurer’s estimate, which can also delay or deter settlement. For example, the inclusion of prescription drugs in MSAs has raised questions, including realistic/appropriate duration of “acute” prescriptions, application of guidelines, inclusion of medications not clearly related to the compensable injury, and the appropriate conversion of expensive brand drugs to equivalent generics.⁸ Generally, medical reports can be unclear about future medical treatment, resulting in divergent estimates of expected Medicare-related costs.

In the past, many insurers would have settled a claim without the approved MSA if they felt that the MSA amount was unreasonably high. The insurer and claimant can always choose to settle a claim without a CMS-approved MSA. However, that settlement amount is not binding on CMS. Moreover, with the implementation of Section 111, there is renewed emphasis on and awareness of the importance of protecting Medicare’s interests—settling a claim without CMS approval is increasingly risky. Thus, despite its shortfalls, there is not a clear alternative to the MSA process that would better serve insurers in complying with their obligation to protect Medicare’s interests when settling a claim. For this reason, many insurers who otherwise would have settled a claim without MSA approval may now opt to simply keep the claim open.

A fourth concern that arises when settling workers' compensation claims pertains to closing a claim file “administratively.” It is standard practice to close a workers' compensation claim after a period of inactivity. For example, if the insurer does not receive a medical bill for a year or more, that insurer may assume that the claimant is no longer treating, and will close the claim. In some cases, this is a reasonable assumption and the closure is appropriate. In other cases, however, it is likely that the claimant has become Medicare-eligible and the medical bills are being submitted to Medicare. Because reporting of such claims was not mandatory or enforced, the ability of CMS to identify these claims and collect reimbursements was limited. With the implementation of Section 111, however, CMS will be able to identify these claims and seek reimbursement for its conditional payments. Thus, insurers may need to reevaluate their claims practices and revise administrative closure procedures, including checks on whether the claimant is subject to the Section 111 reporting requirements. A claim that the insurer considered closed could be at increased risk for reopening, perhaps with significant past conditional payments due.

Liability Medicare set-asides

Unlike workers' compensation, there is not a formal MSA approval process in place for liability carriers. However, the CMS regional offices do have the discretion to review liability MSAs. Review standards and thresholds vary from office to office. Liability insurers have been making increasing use of MSAs as part of the settlement process for the same reasons as workers' compensation insurers—they seek to demonstrate that they are protecting Medicare’s interests as a secondary payor so that settlement can be finalized and the claim closed.

As with workers' compensation, there is no law requiring that MSAs be obtained for liability settlements, nor is there any law governing CMS’s opinion or approval process for liability MSAs. However, MSAs are still perceived by many to be the best option for insurers in terms of demonstrating protection for Medicare’s interests. Indeed, there is no clear direction provided by CMS about how to protect the claimant’s future Medicare benefits in the absence of a set-aside.

However, neither is there any guarantee that obtaining an MSA will provide protection for the insurer from any post-settlement disputes and potential future exposure. As with workers' compensation claimants, liability claimants will need to fully understand the implications of settling their claims if future medical treatment is expected. CMS may expect all settlement funds to be exhausted on Medicare-reimbursable services prior to Medicare being billed.

In May 2011, CMS Region VI issued a “handout” in response to numerous questions. First, the publication emphasizes that the handout includes opinions only, and is not an official CMS statement, nor does it “grant rights or impose obligations.”⁹ That handout states in part:

The handout further states that if a settlement or award does not specify payment for future medical services, this does not mean that future medicals are unfunded. For example, even when the entire settlement amount is designated to “pain and suffering,” if future Medicare-reimbursable treatment is sought then CMS can require that the settlement proceeds be exhausted before Medicare is responsible. Thus, the parties to a settlement cannot determine that no future medical treatment is required, or that none of the settlement proceeds are to be used for future medical costs. CMS would not necessarily be bound by that agreement. The only exception is if a court of competent jurisdiction has determined that no future medical services are required.¹⁰

This raises the question of whether liability insurers in certain cases may opt to go to court rather than settling as they would in the past. Of course, that decision comes at a price. Trying a case increases the uncertainty associated with the ultimate value of the claim, and also significantly increases associated expenses.

Summary

While appearing procedural on its face, Section 111 could have an impact on insurers’ ability to settle and a resulting impact on costs. Settlement values could increase, driven by high MSA values. Settlement opportunities may be delayed, thereby increasing costs as well as the risk that settlement may fail entirely. In the face of perceived or actual obstacles to claim settlements, workers' compensation insurers may opt to keep more claims open and liability insurers may choose to proceed to trial. Both of these options increase uncertainty, and increase expenses related to the claim. Claims that in the past would have been administratively closed for inactivity may need to remain open with increased investigation and expenses to determine the Medicare status of the claimant. Insurers have little guidance or direction with regard to how to best protect Medicare’s interests—and in so doing, protect their own. The MSA appears to be the front-runner of choice, but even this vehicle does not offer complete “safe harbor” (if available at all).

With the issues surrounding the passage of Section 111, the increased activity surrounding MSAs, and the renewed emphasis on Medicare’s secondary payor status, it is no wonder that insurers are asking themselves, “At what cost closure?”

¹ Section 1862(b) of the Social Security Act (SSA) (42 U.S.C. Section 1395y).

² 42 U.S.C. §1395y(b)(8).

³ Reporting would apply not only to beneficiaries but a wider group of Medicare-eligible individuals. Ibid.

⁴ For settlements on or after October 1, 2011.

⁵ Op. cit. SSA §1862(b).

⁶ A total settlement amount of $25,000 or greater for claimants who are Medicare beneficiaries, and a total settlement amount of $250,000 or greater for claimants who have a reasonable expectation of becoming a Medicare beneficiary within 30 months of the settlement. Op. cit. 42 U.S.C. §1395.

⁷ Survey response provided by Doug Holmes, President of Strategic Services for Unemployment & Workers’ Compensation.

⁸ The author wishes to acknowledge and thank PMSI for providing this information.

⁹ Handout dated May 25, 2011, Department of Health & Human Services, Centers for Medicare & Medicaid Services, Division of Financial Management and Fee for Service Operations, Region VI.

¹⁰ Ibid.