Medicare Secondary Payer experts, including structured settlement and settlement planning professionals whose practice regularly focuses on Medicare Set Aside (MSA) Arrangements, have spent the past couple of weeks analyzing how a recent announcement by the Centers for Medicare and Medicaid Services (CMS) will impact liability MSAs.
On October 13, 2022, without explanation, CMS withdrew its previous Notice of Proposed Rulemaking (“NPRM”) related to protecting Medicare’s interests in liability (and various other non-workers compensation) settlements, judgments and awards.
There are many possible consequences and interpretations of this most recent action by CMS, the Federal agency within the U.S. Department of Health and Human Services responsible for enforcing the Medicare Secondary Payer (MSP) Act rules.
A future Independent Life article about Liability MSAs will discuss some of these possible consequences and interpretations including why CMS heretofore has been unable or unwilling to publish rules for liability MSAs.
For structured settlement and settlement planning professionals who are not MSP experts, the first step in understanding or thinking about liability MSAs should be to obtain a solid understanding of Workers Compensation Medicare Set-Aside (WCMSAs) Arrangements.
By summarizing key sections of CMS WCMSA Reference Guide 3.7 (Reference Guide), this article is intended to help non-MSP expert structured settlement and settlement planning professionals obtain a better understanding of WCMSAs. This article is supplemented by a prior Independent Life article which provides an overview of WCMSA history and industry developments.
Background to WCMSA Reference Guide 3.7
The MSP Act, enacted in 1980, requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries covered under their policies, with Medicare responsible only as a “secondary payer.”
Until 2001, however, when CMS issued the first of several policy memorandums addressing WCMSAs (the Patel Memo), CMS failed to take any practical steps to enforce the MSP rules.
The CMS WCMSA policy memorandums not only defined WCMSAs but also created a format, checklists and procedures for seeking approval for WCMSAs to “protect Medicare’s interests” when workers compensation cases are settled – including references to and initial rules for structured settlement annuities.
Beginning in 2015, CMS began to publish a WCMSA Reference Guide, which originally supplemented and has ultimately replaced the CMS WCMSA memorandums. The Reference Guide, which includes numerous references and rules for structured settlement annuities has been updated multiple times – most recently in WCMSA Reference Guide Version 3.7 published June 6, 2022 and available for download on the CMS website.
Updated versions of the CMS WCMSA Reference Guide have rarely impacted or changed its structured settlement provisions.
Note, however, as discussed in this prior Independent Life article, significant changes did occur with Reference Guide Versions 2.9 and 3.3 that could impact the significant cost advantage CMS has heretofore provided for WCMSAs funded with structured settlement annuities compared with lump sums.
Key Reference Guide 3.7 Provisions Addressing Structured Settlements
Reference Guide 3.7 totals more than 180 pages in 19 sections (most of which have multiple subsections) and eight (8) appendices. Structured settlements are addressed in many of sections and appendices, the most important being:
- 5.2 – Structured WCMSAs
- 9.4.4 – Medical Review
- Step 6: Verify payout method: lump sum versus annuity.
- Step 7: Calculate life expectancy using standard age or median rated age.
- 10.0 – Information Needed for WCMSA Submission
- 10.01 – Section 05 Cover Letter
- Part A Claimant Injured Party Information– includes Median Rated Age Paragraph 7
- 10.3 Section 15 – Rated Age Information or Life Expectancy
- 10.5.3 – Total Settlement Amount
- 19.33 – Structured WCMSA Funds Topics
- 3.1 Funds Left Over / Carried Forward
- 3.2 Funds Used in a Given Period
- Appendix 3 – Glossary
- Structured Settlement defined
- WCMSA defined
- Appendix 6 – Sample Submission
- Appendix 6:05 – Cover Letter – Settlement Details E
- Appendix 6:15 – Rated Age Information or Life Expectancy
- Appendix 6:25 – Settlement Agreement or Proposed or Court Order
- Appendix 6:30 – WCMSA Administrative Agreement
- Appendix 6:35 – Medical Records
Reference Guide 3.7 Overview – A Structured Settlement Perspective
Any structured settlement or settlement planning professional whose practice includes WCMSAs obviously should read and be generally familiar with the entire Reference Guide as well as other sections of the CMS website addressing WCMSAs.
As an introduction, what follows are some of the basic topics addressed in the Reference Guide for structured settlement and settlement planning professionals who do not specialize in WCMSAs. Review the Reference Guide Table of Contents to locate other sections addressing topics such as WCMSA submission and approval process, review thresholds, etc.
Purpose of Guide: The Reference Guide was written to help readers “understand the process used by the Centers for Medicare & Medicaid Services (CMS) for approving proposed Workers’ Compensation Medicare Set-Aside Arrangement (WCMSA) amounts and to serve as a reference for those choosing to submit such amounts to CMS for approval.” [Section 1.0]
WCMSA Definition: “A WCMSA is set up to ensure that all future medical and drug or pharmacy expenses for a work-related injury otherwise payable by Medicare are covered by a WC settlement.” [Appendix 3 Glossary]
Medicare’s Interest: “Any claimant who receives a WC settlement, judgment, or award that includes an amount for future medical expenses must take Medicare’s interest with respect to future medicals into account. If Medicare’s interests are not considered, CMS has a priority right of recovery against any entity that received any portion of a third-party payment either directly or indirectly—a right to recover, or take back, that payment. CMS also has a subrogation right with respect to any such third-party payment.” [Section 3.0]
(No) Requirement: No statutory or regulatory provisions exist requiring anyone to submit WCMSAs to CMS. However, if anyone does select to use the WCMSA review process, CMS requests (demands) compliance with its policies and procedures as set forth in the Reference Guide. [Section 1.0]
Goal of a WCMSA: “to estimate, as accurately as possible, the total cost that will be incurred for all medical expenses otherwise reimbursable by Medicare for work-injury-related conditions during the course of the claimant’s life, and to set aside sufficient funds from the settlement, judgment, or award to cover that cost. WCMSAs may be funded by a lump sum or may be structured, with a fixed amount of funds paid each year for a fixed number of years, often using an annuity.” [Section 3.0]
Structured Settlement Definition: “A settlement in which the agreed-on funds are paid from an initial deposit and subsequent deposits on a regular basis for a given amount of time.” [Appendix 3 Glossary]
Benefit of a WCMSA: although CMS approval of a WCMSA amount is not required, “[t]he primary benefit is the certainty associated with CMS reviewing and approving the proposed amount with respect to the amount that must be appropriately exhausted.” [Section 4.1]
Medicare’s Obligation: “Medicare may … refuse to pay for future medical expenses related to the WC injury until the entire settlement is exhausted…Once the CMS-approved set-aside amount is exhausted and accurately accounted for to CMS, Medicare will pay primary for future Medicare-covered expenses related to the WC injury that exceed the approved set-aside amount.” [Section 3]
Structured WCMSAs: “In a structured WCMSA, an initial deposit is required to cover the first surgery or procedure for each body part, and/or replacement and the first two years of annual payments. The initial deposit (“seed money”) is followed by subsequent annual deposits (or a shorter time period if CMS agrees to such), based on the anniversary of the first deposit. If in any given coverage year the deposited funds are not exhausted (i.e., used up, spent), they are carried forward to the next period and added to the next annual deposit. The whole fund, including carry-forwards, must be exhausted before Medicare will pay primary for any WC injury-related medical expenses. If the fund is exhausted appropriately in a given annual period, Medicare will pay primary for further WC injury-related medical expenses during that period. In the next annual period, the replenished WCMSA funds again must be used, until the WCMSA amount is appropriately exhausted.” [Section 5.2] See also Section 19.3.
Medical Review: The Workers Compensation Review Contractor (WCRC), responsible for reviewing WCMSA proposals and issuing final determinations, follows 10 steps in its medical review process. [Section 9.4.4] Two of these steps address structured settlement related issues:
- Step 6: Verify payout method; lump sum vs. annuity. Step 6 provides details of what should be included in a proposed “seed” or initial deposit amount for a WCMSA structured settlement.
- Step 7: Calculate life expectancy using standard age or median rated age. Step 7 provides CMS rules for submitting and evaluating rated ages (which are optional) and when to use actual ages vs. rated ages.
WCMSA Submission: When a WCMSA is submitted for approval, CMS must have certain documentation available to complete a review of the proposal. Section 10 identifies and discusses information needed for WCMSA submissions including the following related to structured settlements:
- Cover Letter: (Median Rated Age) defines “rated age” as “the age of the claimant that has been adjusted to take into consideration the impact of pertinent medical conditions and impairments.” It further states: “[t]he median (not mean) rated age shall be used where more than one rated age is obtained” and provides an example.
- Cover Letter: (Life Expectancy Used in Proposal) identifies the effective date for calculating a claimant’s life expectancy and references Section 15 for additional information.
- Cover Letter: (Total Settlement Amount) requires that this amount be submitted as a single lifetime number and, among other requirements, include payout totals for all annuities rather than cost or present values. The annuity rate sheet is required to support this calculation. The WCMSA does not need to be indexed for inflation. The Reference Guide includes an example. See also Section 10.5.3.
- Cover Letter (Prescription Drug Disclosure): Where the WCMSA is to be funded by a structured settlement, the cover letter must disclose whether any portion of the projected prescription drug expenses has been included in the lump sum required to cover the first surgery/procedure for each body part, and/or replacement and the first two years of annual payments. An accompanying note details how to accomplish this disclosure and provides an example.
Rated Age Information or Life Expectancy: 10.3 Section 15 sets forth criteria which must be met for a rated age to be considered in a WCMSA case and includes a link to the Centers of Disease Control Tables CMS uses for calculating a claimant’s normal life expectancy.
Past vs. Future Medical Expenses: “If the settlement does not specifically account for past versus future medical expenses, it will be considered to be entirely for future medical expenses once Medicare has recovered any conditional payments it made. This means that Medicare will not pay for medical expenses that are otherwise reimbursable under Medicare and are related to the WC case, until the entire settlement is exhausted.” [Section 10.5.1]
Every structured settlement and settlement planning professional should possess a basic understanding of the MSP statute and WCMSAs. Although lengthy and complex, CMS WCMSA Reference Guide 3.7 (and its likely successors) represents the authoritative resource for WCMSA specialists who must understand the process details used by CMS to approve WCMSAs. For structured settlement and settlement planning professionals who are not WCMSA specialists, the first two articles of this Independent Life MSA series hopefully will serve as a useful MSA introduction and/or update and encourage further reading of the WCMSA Reference Guide itself.