The Centers for Medicare and Medicaid Services (CMS) published an 88-page WCMSA Reference Guide (WCRG) on its website March 29,2013. Its intended purpose: to help WCMSA professionals, beneficiaries and other stakeholders "understand CMS' [WCMSA] amount approval process and to serve as a reference for those electing to submit such proposals to CMS for approval."
A prior S2KM blog post highlights selected excerpts from the WCRG addressing and summarizing non-structured settlement specific issues. This blog post identifies and discusses structured settlement issues, including rated age information requirements for determining WCMSA beneficiary life expectancy, featured in the WCRG.
Arguably, the most important WCRG statement for structured settlements is the following comment about CMS WCMSA policy memorandums which appears in WCRG Appendix 4 - WCRC Proposal Review Reference Tools: "CMS has issued policy memorandums since 2001 on a variety of topics related to WCMSAs, such as review thresholds, pricing of services and prescription drugs, rated ages, life expectancy, and more. "The WCRG follows all CMS policy memorandums currently in effect. The memorandums are published on the CMS website."
Why is this statement so important for structured settlements?
- First, because one of the policy memorandums (dated: October 15, 2004) includes the following questions and answer:
- "Q4. Inflation Adjustment/Discount for Present Value/Change in Policy - Must the WC Medicare Set-aside Arrangement include an upward adjustment for inflation? May the WC Medicare Set-aside Arrangement include a downward adjustment as a discount for the present-day value of the total WC Medicare Set-aside Arrangement?"
- "A4. 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."
- Second, as a result of this CMS policy:
- Structured settlement annuities have had an inherent cost advantage over lump sum alternatives for funding WCMSAs; and
- Structured settlement annuities have underfunded WCMSAs, because they do not include any inflationary component, with Medicare ultimately responsible for the underfunded amount.
- For a simplified example, assume the projected WCMSA payments are $10,000 per year for 10 years.
- Lump sum - Without any inflation index or discounting, the lump sum present value will be $100,000 which will be invested in an interest-bearing account.
- Structured settlement - Ignoring "seed money" (see below), the cost of a certain only annuity to fund $10,000 per year for 10 years (even with today's low interest rates) is approximately $94,000 - which is $6,000 less than the lum sum present value because the annuity incorporates a discount rate. Without inflationary increases (which CMS' October 15, 2004 policy memorandum does not require), however, the annuity payments of $10,000 per year will not keep pace with future increases in medical costs. Note also: other types of annuities (eg. temporary life) could cost less than a certain only annuity.
- Medicare responsibility - If the $10,000 per year proves insufficient, Medicare will make up the difference (see below) and once the WCMSA is fully paid out, Medicare becomes responsible for any further Medicare-related medical expenses.
- Third, the WCRG does not address the inflation-discount issue. The Glossary in Appendix 4 defines "present-day value" as "the cost to fund a WCMSA annuity". Therefore, it appears the October 15, 2004 CMS WCMSA policy memorandum remains in effect and that annuities will continue to represent a lower-cost funding alternative than lump sums for many, if not most, WCMSAs.
- Bottom line: during this era of low interest rates and declining structured settlement sales, WCMSAs have represented, and apparently continue to represent, a singular sub-market where structured settlements enjoy an inherent cost advantage compared with lump sums. The new CMS WCRC appears to maintain that cost advantage by re-affirming the applicability of the October 15, 2004 policy memorandum.
The WCRG further underscores the continuing importance of structured settlements for WCMSAs by the considerable attention structured settlements receive in the in the following sections:
- Section 5.0 - WCMSAs Can Be Funded in Two Ways: a Lump Sum or Structured Payments
- Section 5.2 - Structured WCMSAs
- Section 10.1.1 - Cover Letter - E. Settlement Details
- Section 10.1.3 - Rated Age Information or Life Expectancy
- Section 19.3 -Structured WCMSA Topics
- 19.3.1 - Funds Left Over / Carried Forward
- 19.3.2 - Funds Used in a Given Period
- Appendix 3 - Glossary - entry for "structured settlement"
- Appendix 5:15 -Rated Age Information or Life Expectancy - includes sample:
- Rated Age Statement
- Annuity Provider Underwriting Assessment
- Annuity Broker Statement
- Appendix 5: 25 -Settlement Agreement or Proposed or Court Order
- Includes annuity payout
What follows are non-sequential S2KM comments about selected structured settlement issues addressed in the WCRG. Quotes are excerpted from the WCRG.
Definition - The WCRG Glossary defines "structured settlement" as "[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." Although other sections of the WCRG discuss annuities in the context of structured settlements, this definition fails to mention annuities. In addition, there is no specific link in the WCRG to either structured settlement tax law generally or the tax definition for “structured settlement” in IRC 5891(c)(1) more specifically.
WCMSA cover letter - When a WCMSA is funded with a structured settlement, the cover letter seeking CMS approval must identify the following:
- Name of the carrier
- Cost of the annuity
- Proposed initial deposit (seed money)
- Minimum annual deposit for the balance of the claimant’s life
- Annuity starting date
- Length of annuity
- Annual payout of annuity
- Annual funding date
Settlement amount - "Medicare determines the value of the annuity based on how much the annuity is expected to pay over the life of the settlement, not on the Present Day Value (PDV) or cost of funding that annuity." The WCRG includes an example calculation and requires submission of annuity rate sheets to support calculations of settlement amounts.
Initial deposit - If a WCMSA is funded with structured settlement, the WCRG requires an initial deposit "to cover the first surgical procedure or replacement and two years of annual payments" and provides an example to illustrate how to calculate this seed money. The WCMSA cover letter must disclose whether any portion of the projected prescription drug expenses has been included in the initial deposit.
Scheduled periodic payments - With a structured settlement, the initial deposit is followed by subsequent annual payments to the WCMSA account (or a shorter time period if CMS agrees), to cover projected expenses for a fixed number of future years on the anniversary of the first deposit. It is significant that the CMS WCRG requires annuities with fixed numbers of future years despite allowing/encouraging the use of rated ages to determine reduced life expectancies.
Over-and-under funding - If structured settlement deposit for a given year is not used up, the remaining amount is carried forward to the next payment period. Medicare's threshold to begin paying claims in any subsequent period would then be increased by the amount of the carry-forward. Alternatively, if a WCMSA fund is appropriately exhausted (including roll-over amounts) in a given time period, Medicare will become the primary payer for the remainder of that period assuming CMS receives proper verification. The WCRG includes an example to help explain this over-and-under funding process. When the entire WCMSA fund is exhausted, including all future structured settlement payments, Medicare will pay primary for any future WC-related medical expenses. Obviously, any such over-and-under funding requires additional work for both CMS and the WCMSA administrator compared with lump sum funding.
Rated age information
The WCRG Glossary does not provide any definition for "rated age". Generally the terms "rated age" and/or "substandard age rating" refer to an annuity provider's determination that an annuitant's life expectancy is less than normal. A rated age generally results in a lower premium for life contingent annuities compared with an annuitant having a normal life expectancy. CMS, however, utilizes rated age information from annuity providers ("insurance companies") to determine the fixed number of years for which a WCMSA must be funded.
If rated age information is not provided, CMS will determine a claimant's life expectancy using the actual age. If, however, rated age information is submitted with a WCMSA for CMS approval, CMS requires the following:
- "Rated age confirmation with original proposal documents as outlined in current procedure memorandums. CMS will not accept any variation or substitute wording.
- "A stand-alone statement indicating that all rated ages obtained on the claimant are included.
- "Each rated age is presented on company letterhead for each insurance company (or companies) that made the rating and for each settlement broker that obtained them from the insurance company. Note: Letterhead includes the name and address of the insurance company or settlement broker.
- "All rated age sources shall be independent, in fact and appearance, of the submitter, carrier, and claimant.
- "If more than one rated age is submitted, CMS will use the median of all rated ages submitted.
- "When multiple rated ages are provided, the submitter becomes subject to enforcement of the requirement to use the median rated age and must provide all rated ages to CMS.
- "All rated ages shall be accompanied by a written justification on how such age was determined. For example, if a rated age obtained from life insurance companies for like injuries/illnesses is the method of evaluation, include documentation to support the life expectancy. CMS will project the cost of the claimant’s future treatment over the claimant’s life expectancy, using the Centers for Disease Control (CDC) Tables unless documentation from a medical professional provides justification for an alternative projection.
- "CMS uses the Centers for Disease Control (CDC) Life Tables for WCMSA life expectancy calculations. Please see the WCMSA site for information on the latest tables to use.
- "Do not include the following:
- "Actuarial charts or life expectancy charts from the CDC or elsewhere, or statements that there are no rated ages.
- "Do not include any documents on rated ages that contain redacted data. They will not be considered."
Submitting rated age information for CMS approval requires significant additional work compared with a typical structured settlement. The benefit of obtaining a rated age is a shorter WCMSA payout period resulting in a lower cost of funding whether the funding is lump sum or structured.
For additional S2KM reporting about government benefit issues, see the structured settlement wiki. For analysis of the interaction of structured settlements and government benefits, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).