Beyond Structured Settlements

SSP 2009 Annual Meeting - 1

The Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) hosted sequential annual meetings the week of April 26 in Washington, D.C. This blog post begins S2KM's reporting about those meetings.

SSP's meeting (titled "Securing the Financial Needs of Injury Victims and their Families") was notable for the diversity of attendees, topics and viewpoints. Several NSSTA members were among the attendees as well as settlement planning and secondary market attorneys, annuity and trust providers, primary and secondary market intermediaries, authors, bloggers and law students.

Former NSSTA Executive Director Randy Dyer was a featured SSP speaker. Dyer spoke twice and provided:

• A definitive history of structured settlement insolvencies - annuities and bond trusts.
• An allegorical lesson about how to jump start structured settlement annuity sales.

Kevin Mack, former Director of Travelers' structured settlement program and former Chairman of NSSTA's legal committee, offered insights to "in-house" structured settlement programs. Mack made several recommendations for growing and improving the structured settlement industry including: more plaintiff intermediaries; improved education for judges and plaintiff attorneys; plus mandatory "disclosure" of structured settlement compensation and conflicts of interest.

Joseph Tombs, SSP's new President and Chairman of the Registry of Settlement Planners (RSP) Board of Directors spoke about three topics. Tombs:

• Reported on the status of the RSP program;
• Honored the first 10 RSP graduates;
• Outlined current "state of the art" for settlement planning.

Richard  Risk moderated SSP's settlement planning tax panel headlined by Sylvius von Saucken and Peter Wayne. von Saucken and Wayne responded to a series of Risk's questions addressing qualified settlement funds (QSFs), commutations, estate taxes, punitive damages, non-qualified assignments and sexual battery tax requirements among other issues.

Texas attorney Phillip McCrury surveyed state laws for judicial approval of minors' settlements. Common features in many states: "best interest" test; prohibitions against conflicts of interest; segregated accounts; guardian ad litems; and "reasonableness" of attorney fees.

Mark Popolizio reported on Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA). Popolizio summarized the new CMS NHGP User Guide and addressed reporting triggers, deadlines and issues for "responsible reporting entities" (RREs).

Eric Nordman, Research Director for the NAIC, discussed "life insurance insolvencies". Nordman summarized historic data and warned about future issues including systemic risks and the challenge of defining "transparency".

Christi Fried and David Eichenbaum spoke about settlement trusts and settlement planning software respectively. Tim Nay's presentation about "special needs trusts" outlined relevant laws and added practical advice and perspective.

Anthony Alfieri's "Litigation and Legislative Update" summarized Spencer v. Hartford; the PLR for non-qualified assignments; plus the Fresno County and Rapid Settlement factoring cases among other topics.

John Bowman, Director of Federal Relations for the American Association for Justice (AAJ), discussed how the 2008 elections have impacted AAJ's political priorities. One primary AAJ objective: keep medical malpractice out of anticipated health care reform.

Patrick Hindert, Managing Director of S2KM Limited, offered strategic analysis about the current settlement planning industry.

Congratulations to SSP, and especially Greg Maxwell, Joseph Tombs, Richard Risk and Rhonda Bentzen, for their continuing high education and annual meeting standards.

In subsequent blog posts, S2KM will:

• Summarize the NSSTA 2009 Annual Meeting;
• Analyze and compare the settlement planning and structured settlement industries.

MSA Update - 3C: Structured Settlement Annuities

This S2KM blog post is the sixth in a series of S2KM blog posts in 2008 updating Medicare set-aside (MSA) developments that impact the growth of structured settlements.

S2KM's previous posts about MSAs include:

• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA)
• MSA Update - 1: Historical Background and Recent Developments
• MSA Update - 2: CMS Rules for Structured Settlements
• MSA Update - 3A: Interview with Thomas Spratt A
• MSA Update - 3B: Interview with Thomas Spratt B

John Campbell and other NAMSAP members have thoughtfully pointed out to S2KM that CMS has distributed a new policy memo dated August 20, 2008 that appears to conflict with its earlier May 20, 2008 policy memo related to life expectancy. As of today's date, CMS has not yet posted online the August 20, 2008 policy memo with its earlier WCMSA policy memos which are available for download on this CMS website.

The May 20, 2008 CMS policy memo is addressed to "Consortium Administrator for Financial Management and Fee-for-Service Operations". It states, in part:

"Effective with WCMSA submissions received by CMS' Coordination of Benefits Contract on or after July 1, 2008, CMS will only accept life expectancies obtained from the CDC [Centers for Disease Control] Table 1, Life table for the total population. The CMS will only use the CDC Table 1 in its WCMSA review process."

The May 20, 2008 CMS policy memo does not mention annuities or structured settlements or rated ages.

The August 20, 2008 CMS policy memo is addressed to the same "Consortium Administrator". It states, in part:

"To protect the Medicare Trust Fund, a set-aside relationship should be funded based upon the life expectancy of the individual unless the State law specifically limits the length of time that WC covers work-related conditions. Unless a submitter furnishes acceptable proof of a Rated Age for a claimant, CMS will estimate the claimant's remaining life expectancy using Actual Age. Acceptable proof of Rated Ages includes independent rated ages on the letterhead of an insurance carrier or settlement broker and a statement from the submitter that all rated ages obtained on the claimant have been included."

Industry issues:

• How will CMS regional offices and contractors interpret these two recent policy memos?
• How do these two policy memos impact the growth of structured settlements?
• How do the developing CMS rules for structured settlements impact industry growth?

Learning resources:

• Release 44 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) features an update for MSAs and the Medicare Secondary Payer (MSP) rules.
• MSA Update-2 summarizes existing CMS rules for structured settlements and WCMSAs.
• Thomas Spratt's Interview B highlights challenges and advantages for the structured settlement industry specific to MSAs and rated ages.
• NAMSAP will host its 2008 Annual Meeting October 2 in Washington, D.C.

S2KM will continue to report MSA developments that impact the growth of structured settlements in S2KM's blog and structured settlement wiki.

MSA Update - 3B: Structured Settlement Annuities

Introduction (added September 9, 2008): The CMS rules for structured settlements and MSAs are dynamic and subject to change and conflicting interpretations. Since S2KM published this post, S2KM and Thomas Spratt became aware of an additional and more recent CMS policy memorandum dated August 20, 2008. Please see S2KM's subsequent blog post titled "MSA Update - 3C" for more current information about the CMS rules for life expectancy and rated ages.  This new CMS policy memo makes Tom's comments below about past CMS changes and inconsistencies with age ratings all the more relevant and valuable.

A prior S2KM blog post (MSA Update - 3A: Structured Settlement Annuities) introduced Thomas Spratt as a Medicare set-aside (MSA) expert. This post continues that conversation and looks more closely at MSA cases involving structured settlement annuities. S2KM's interview with Thomas Spratt is part of two related S2KM series:

• Growing the Structured Settlement Market
• Medicare Set-Aside Update

S2KM is also capturing and featuring the "Growing the Market" series in S2KM's Structured Settlement Wiki.

S2KM: S2KM's earlier blog post (Medicare Set-Aside Update - 2) summarizes current CMS rules for structured settlements and MSAs. What about these existing CMS structured settlement rules strikes you as most significant?

TOM SPRATT: Two requirements jump out at me as significant. First, although CMS requires two years of seed money, the annuity must begin funding within one year. Despite this CMS "over-funding" requirement, annuities still may cost less than lump sum alternatives because of the set-off method CMS uses to calculate present value. Second, the CMS payout rules for structured settlements favor temporary life annuities - the shorter of actual life and a fixed term estimating life expectancy. Beginning July 1, 2008, CMS calculates life expectancies based upon a life table for the total population (Table 1) developed by the Centers for Disease Control (CDC). If an MSA beneficiary lives beyond the projected life expectancy, a potential shortfall could arise that would unfairly burden either Medicare or the MSA beneficiary.

S2KM: Is CMS enforcing its MSA structured settlement rules consistently?

TOM SPRATT: In my experience, yes. Prior to July 1, 2008, there was some confusion and inconsistency with rated ages supplied by annuity providers which CMS utilized to determine life expectancy. CMS initially used the "mean" when several rated ages were submitted, then changed to the "median". CMS also rejected rated ages for determining life expectancies from annuity providers affiliated with casualty insurers without restricting the purchase of an annuity from these companies. In its May 20, 2008 policy memorandum, however, CMS announced it would only accept life expectancies obtained from CDC Table 1. S2KM note: the May 20, 2008 policy memorandum is available for download on this CMS website.

S2KM: Besides structured settlement annuities, what are the most common MSA funding products?

TOM SPRATT: CMS does not mandate any specific type of MSA funding mechanism. Even with annuities, however, CMS does require MSA assets to be retained in an interest-bearing account.

S2KM: Under the current CMS MSA rules, what are the advantages and disadvantages of structured settlements?

TOM SPRATT: Despite having to "over-fund" MSAs with two years of seed money when annuities are utilized, annuities still result in a lower settlement cost in many cases. In addition, the great majority of MSAs are self-administered. The CMS administrative requirements for MSAs are the same for self-administrators and professional administrators. Annuities help prevent premature dissipation of MSAs - especially self-administered MSAs. If an MSA is dissipated prematurely, a beneficiary risks losing Medicare payments. If premature MSA dissipation occurs, workers compensation settlements might be further reduced. Not all states permit workers compensation settlements. Some states preclude the settlement of future medical expenses.

S2KM: In the context of "growing the structured settlement industry", what should the structured settlement industry be doing to improve MSAs?

TOM SPRATT: The most significant issue for the MSA industry, including structured settlements, is the problem of "changing numbers". To reduce delays in its MSA approval process, CMS has encouraged workers compensation insurers and self-insurers to obtain state approval for a settlement before submitting the case to CMS for its approval. Unfortunately CMS often changes the numbers including the seed money, the annuity start date, annual payouts, life expectancy, etc. Of course, this creates havoc for annuity providers and consultants. CMS needs to address this problem of changing numbers.

S2KM: Tom, thank you for the informative interview.

This concludes S2KM's interview with Thomas Spratt about Medicare set-aside arrangements and structured settlements.

Medicare Set-Aside Update - 2

Introduction (added September 9, 2008): The CMS rules for structured settlements and MSAs are dynamic and subject to change and conflicting interpretations. Since S2KM published this post, S2KM became aware of an additional and more recent CMS policy memorandum dated August 20, 2008. Please see S2KM's subsequent blog post titled "MSA Update - 3C" for more current information about the CMS rules for life expectancy and rated ages.

S2KM's prior blog post titled "Medicare Set-Aside Update-1" provides historical background and summarizes recent developments impacting Medicare set-aside arrangements (MSA) in the context of growing the structured settlement market. This S2KM blog post summarizes existing CMS rules for structured settlements as funding options for MSAs.

Neither Medicare nor the Code of Federal Regulations (CFR) nor the rules for MSAs promulgated by the Centers for Medicare and Medicaid Services (CMS) defines an MSA or a structured settlement. Although CMS does provide rules for structured settlements in its MSA policy memoranda and its Workers Compensation (WC) Proposal Requirements Checklist, CMS does not specifically link its rules for MSAs or structured settlements to tax law generally or to the definition of "structured settlement" in I.R.C. section 5891(c)(1) specifically.

Some of the greatest challenges for growing the structured settlement market result from the complex interaction of Federal laws (including taxation; Social Security; Medicare; and Medicaid) and state laws (including workers compensation; structured settlement protection laws; periodic payment of judgments; Medicaid; and the Uniform Commercial Code). The resolution of many issues involving structured settlements and government benefits (including Medicare) still awaits authoritative guidance from legislators, regulators, and the judiciary.

That said, CMS has addressed structured settlement issues directly and indirectly in a series of ten (10) WCMSA policy memoranda beginning July 23, 2001. All of these CMS WCMSA policy memoranda are available for download on the CMS website. Although these CMS policy memoranda do not represent legal authority, they provide important guidance for CMS regional offices and outside CMS contractors as well as MSA industry participants.

Three of the ten (10) CMS WCMSA policy memoranda directly address structured settlements:

• July 23, 2001 Memorandum - This CMS memo outlines CMS' initial enforcement policy for WCMSAs. It includes a structured settlement example where the annual payment in Year 1 is exhausted before year end. In such cases, Medicare "may" make payments for services performed for the remainder of Year 1 once the contractor responsible for monitoring the WCMSA can verify the WCMSA structured settlement payment allocated to Year 1 has been fully paid out. In Year 2, Medicare would not make any payments until the Year 2 structured settlement payment is exhausted. This CMS memo also includes a lengthy list of criteria Medicare uses to determine whether the amount of a WCMSA lump sum or structured settlement is sufficient.
• April 22, 2003 Memorandum - Medicare will not approve any structured set-aside arrangement if the settlement has not adequately considered Medicare's interests. If a structured settlement payment is not fully paid out during a specific year, the excess funds must be carried over to the following year. This carry-forward process continues until the accumulated carry-forward plus the structured settlement payment for a given year is exhausted. For purposes of evaluation thresholds, Medicare determines the value of an annuity based upon how much the annuity is expected to pay over the life of a settlement not on the cost of the annuity. 
• October 15, 2004 Memorandum - Requirements for structured settlements used to fund WCMSAs include:
  • WCMSA seed money (lump sum) must be sufficient to cover the first surgery procedure and/or replacement plus two years of annual payments.
  • The remainder must be divided by the WCMSA beneficiary's remaining life expectancy or, with CMS approval, by a shorter time period.
  • Subsequent annual payments must be based on an "anniversary date" which cannot be more than one year following the settlement date.

All ten (10) of the CMS WCMSA policy memoranda address additional issues that impact WCMSA structured settlements. Some of the most important WCMSA structured settlement issues and the CMS responses are:

• Life care plans (July 23, 2001) - If a life care plan is not used to justify a beneficiary's medical expenses, then the individual of his or her representative must present alternative evidence that sufficiently justifies the amounts set aside for Medicare.
• Amount of structured settlement (July 23, 2001) - Obtain as much information as possible regarding the allocation between income replacement, loss of limb or function, and medical benefits.
• Payout period (July 23, 2001) - A WCMSA should be funded based upon life expectancy unless state law provides otherwise.
• Contingent payees (April 22, 2003) - If a WCMSA beneficiary dies before the WCMSA is completely exhausted, any amount left over may be disbursed pursuant to state law, once Medicare’s interests have been protected.
• Self-administration (April 22, 2003) - If state law permits, a beneficiary may administer his or her own WCMSA.
• Administrative fees and attorney costs (May 7, 2004) - Beginning May 7, 2004, CMS no longer allows WCMSA administrative fees and attorney costs to be charged to the WCMSA and no longer evaluates the reasonableness of such expenses.
• Discounting and inflation (October 15, 2004) - A WCMSA does not need to be indexed for inflation and may not be discounted to present-day value. S2KM note: the results of this CMS ruling appear to impact structured settlements differently than lump sums, resulting in both lower costs and underfunding when annuities are used.
• Prescription drugs (July 24, 2006) - All WC settlements that occur on or after January 1, 2006 must consider and protect Medicare’s interests when future treatment includes prescription drugs along with the future medical services that would otherwise be reimbursable by Medicare.
• Life expectancy (May 20, 2008) - beginning July 1, 2008, CMS will only accept life expectancies obtained from the Centers for Disease Control (CDC) Table 1 (Life table for the total population). S2KM notes:
  • Prior to May 20, 2008, CMS allowed and encouraged the use of rated ages from annuity providers to determine life expectancy.
  • Because Medicare pays for Medicare-related medical expenses once a WCMSA is completely paid out, there appears to be no reason to fund WCMSAs with life contingent annuities, as opposed to fixed term annuities.

WCMSA Proposal Requirements Checklist - On July 8, 2008, CMS updated its prior WCMSA Proposal Requirements Checklist. Under a section titled “Medicare Set-Aside Arrangement Account”, CMS states: "If an account is structured and funded by an annual annuity, identify the source of the annuity and include the annual payment amount, annual funding date, and the amount of the initial lump sum deposit.”

For additional information about the Medicare Secondary Payer rules and Medicare set-aside arrangements, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) including Release 44 available November 2008.

Medicare Set-Aside Update - 1

Expanding the use of structured settlement annuities as funding alternatives for Medicare set-aside arrangements (MSA) and special needs trusts (SNT) represents a strategic industry priority for growing the structured settlement market. This S2KM post provides historical background and summarizes recent developments impacting MSAs.

A Medicare set-aside arrangement (MSA) is an administrative and funding mechanism utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute. Congress enacted the MSP statute in 1980 to curb the rising cost of Medicare. The 1980 provisions require insurers to pay for medical services rendered to Medicare beneficiaries leaving Medicare to provide benefits only as a "secondary" payer. Medicare may make conditional payments for medical services if payment by a primary payer cannot reasonably be expected to be made promptly in which case the primary payer must reimburse Medicare.

The Center for Medicare and Medicaid Services (CMS) is the Federal agency within the U.S. Department of Health and Human Services responsible for enforcing the MSP rules. Until 2001, however, CMS did not enforce the MSP statute. Beginning in 2001, CMS began enforcing the MSP statute by recommending MSAs for certain categories of workers compensation (WC) commutation settlements. According to CMS, it currently receives, on average, 1550 WCMSA submissions per month. Since 2001, CMS has issued 10 policy memoranda for WCMSAs, several of which address structured settlement issues. These CMS WCMSA policy memos are available for download on this CMS website.

The application of the MSP rules to WCMSAs is further enforced by Medicare regulation 42 CFR 411.46 which states: “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”.

On December 29, 2007, President George W. Bush signed into law the "Medicare, Medicaid and SCHIP Extension Act of 2007" (MMSEA). Beginning July 1, 2009, Section 111 of MMSEA requires liability insurers (including self-insurers, no-fault insurers and workers compensation insurers) to:

• Determine Medicare status for all claimants; and
• Report all claims involving a Medicare beneficiary to CMS when those claims are resolved.

If the reporting for any claimant is not done in a timely manner, MMSEA authorizes CMS to enforce a civil penalty of $1000 per day per claimant. These information requirements and penalty provisions provide the basis for expanded enforcement by CMS of the MSP statute.

During the past three months, CMS has announced several important MSA developments:

• Policy Memorandum titled "Medicare Secondary Payer - Workers Compensation - Information"
  • Published May 20, 2008, this CMS memorandum announced a new CMS policy for determining life expectancy in WCMSAs: “Effective with WCMSA submissions received by CMS’ Coordination of Benefits Contract on or after July 1, 2008, CMS will only accept life expectancies obtained from the [Centers for Disease Control] CDC Table 1 [Life table for the total population]".
  • Prior to this memo (which can be downloaded from this CMS site), CMS accepted annuity provider age ratings to determine life expectancies.
• Request for Information (RFI)
  • CMS published an RFI on its website July 8, 2008 seeking "new ideas and more efficient and more effective approaches to projecting the costs of Medicare-covered future medical services and future prescription drug treatment related to a workers' compensation (WC) injury, illness/disease for a WC claimant".
     
  • CMS states that the RFI is not a Request for Proposal (RFP). The intent of the RFI is to:
    • Identify small businesses with the necessary technical capabilities to perform the requirements of a related Draft Statement of Work (SOW) seeking a Workers Compensation Review Contractor (WCRC); and
    • Receive comments and questions from all industry participants about the related Draft Statement of Work (SOW).
  • Industry professional associations, including NAMSAP, have submitted written responses to CMS.
• Draft Statement of Work (SOW)
  • If the WCRFI is successful, CMS may award a “Set-Aside Cost Plus Award Fee” type contract in Fiscal 2009 pursuant to a related July 8, 2008 Draft SOW available for download on the RFI site. Should that occur, CMS anticipates a one-year base contract with four one-year options.
  • Under the Draft SOW, CMS would seek “to procure an impartial entity, not as an agent of the Federal government, to independently price future Medicare-covered Medical treatment costs related to the WC injury and, as an option, future prescription drug expenses.”
• Proposal Requirements Checklist
  • Also on July 8, 2008, CMS updated its prior WCMSA Proposal Requirements Checklist.
  • Under a section titled “Medicare Set-Aside Arrangement Account”, CMS states: "If an account is structured and funded by an annual annuity, identify the source of the annuity and include the annual payment amount, annual funding date, and the amount of the initial lump sum deposit.”
• MMSEA Section 111 Reporting Requirements
  • On August 1, 2008, CMS issued a “Supporting Statement for the MSP Mandatory Insurer Reporting Requirements of Section 111 of the MMSEA” (available for download on this CMS site)outlining CMS' proposal for the reporting and collection of the required data.
  • CMS has scheduled an Open Forum for Questions on September 14, 2008 with official comments due September 30, 2008. Addition information and instructions will be posted on the CMS website.  

For additional information about:

• MSP and MSA rules, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• MMSEA, see this earlier S2KM blog post.
• NAMSAP, see S2KM's Structured Settlement Wiki