As we approach the 17th anniversary of Workers' Compensation Medicare Set-Aside Arrangements, most parties realize there are substantial savings in the resolution of a Medicare set-aside (MSA) when utilizing a structured settlement. Studies have shown that savings average about 34 percent from the lump sum amount. What arises is a question as to why anyone would submit an MSA for approval by the Centers for Medicare & Medicaid Services (CMS) as a lump sum only.
In 2001, after the original Patel Memorandum to the CMS regional offices, the claims industry believed the cost of settlements would escalate. The allocations included an inflation factor, but CMS applied a discount factor to reduce the figure to present value (PCV). There was a lot of discussion regarding the proper inflation factor and discount rate. Carriers believed there should be no inflation, because workers' compensation medical claims were regulated by state fee schedules, which did not follow medical inflation. Additionally, what was the proper discount rate, 10-year treasury rate, 30-year treasury rate?
CMS finally addressed the inflation factor issue in an Oct. 15, 2004 memo: “Effective with the issuance of this memorandum, CMS's position is that the WC Medicare Set-aside Arrangement does not need to be indexed for inflation and may not be discounted to present-day value.” The inability to reduce the set-aside to PCV increased the cost of settlements, however, the memo went on to explain that funding the settlement via a structured settlement was allowable, creating potential cost savings for the insurer.
Medicare recognizes structured settlements as a viable method of funding MSA accounts and gives specific instructions for calculating an MSA using a structured settlement annuity. They further advise in the Workers' Compensation Medicare Set-Aside Arrangement Reference Guide: “If the fund is properly spent in a given annual period, Medicare will pay primary for further WC claim-related medical expenses during that period. In the next annual period, the replenished WCMSA funds again must be used, until the WCMSA amount is properly spent. Spreading lifetime funds over an individual's life expectancy can result in a lower cost of settling the claim. Numerous individuals have conducted studies concerning the cost differential between the lifetime lump sum and the cost of funding the MSA via periodic payments.”
This gives the best claim outcome for the insurance industry and injured workers. It spreads Medicare funds over the injured worker's lifetime and allows funding via an annuity purchased from a life insurance company. By decreasing the carrier's cost, it increases the potential for settlements, allowing injured workers to bring finality to their claims and move on with their lives outside the confines of the workers' compensation venue. With a structured Medicare Set-Aside, injured workers avoid the all-too-real potential of losing eligibility for Medicare coverage after prematurely spending an all-cash MSA on anything other than Medicare-covered medical expenses.
A set-aside submitted as a structured settlement is reviewed with the same medical standards as a lump sum. When the review center completes its review, it adds one further step — calculating the initial seed and annual payments over the life expectancy. The approval letter received from CMS states both the lump sum amount and the periodic payment amounts. From this, the settlement can proceed either as a lump sum or annuity.
A study of 657 settlements between 2007 and 2017 conducted by Arcadia's Medicare Practices team with MSAs showed lifetime lump sum amounts of $90,408,851.00, with initial seed and annuity costs of $59,688,204.76. Had the MSAs been submitted and funded with just a lump sum, the clients would have overpaid the claims by $30,720,646.24. Since the common goal is to achieve the best claim outcome on these cases, which results in a significant savings for the industry, why would the Medicare allocation companies not submit the set-aside to Medicare reflecting a structured settlement in lieu of a lump sum? By submitting as a lump sum, with no consideration of a structured settlement, the carrier overpays the claim.
Structured settlements date back to the early 1970s when they were first introduced by Gerald Sullivan. Mr. Sullivan's concept was to fund the future needs of catastrophically injured people via periodic payments to ensure that injured individuals would not outlive their benefits. This concept was further validated by the IRS via several rulings, including the Periodic Payment Settlement Act and Section 130 of the IRS Code, which made these periodic payments tax-free.
Got a lot of cash to give away? Do a lump sum MSA!!
ABOUT THE AUTHOR
David J. Korch (JD, AIC, SCLA, CMSP, CMSS), is VP of Workers' Compensation and Medicare Practices at Arcadia.
Arcadia is the first structured settlement firm in the world with over 45 years in business providing security and closure. You can find us nearby, with more than 160 experienced settlement professionals including bilingual professionals across the United States, Puerto Rico and Canada.
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