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.