Beyond Structured Settlements

CMS WCMSA Reference Guide - 2

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).

CMS WCMSA Reference Guide - 1

Thirty-three years following enactment of the Medicare Secondary Payer (MSP) Act and 12 years after the Centers for Medicare and Medicaid Services (CMS) issued its first workers compensation Medicare set-aside (WCMSA) memorandum, CMS has finally published a WCMSA Reference Guide (WCRG).

Enacted in 1980, the MSP Act requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries, with Medicare responsible only as a “secondary payer.”

CMS, the agency responsible for administering Medicare policies, failed to take practical steps to enforce the MSP rules until 2001 when it issued the first of several policy memorandums addressing WCMSAs. These policy memorandums created a format, checklists and procedures for seeking approval for WCMSAs to "protect Medicare's interests" when workers compensation cases are settled. The WCRG states: "The WCRG follows all CMS policy memorandums currently in effect. The memorandums are published on the CMS website."

Although CMS and its field offices have also issued informal guidance about the use of MSAs in liability cases, nothing comparable exists to the CMS WCMSA memoranda. As a result, there is no uniform position or consensus among tort practitioners as to whether and when MSAs are required in liability cases.

The WCRG continues a series of Medicare legislative and regulatory compliance initiatives which also include the Medicare, Medicaid and SHIP Extension Act (MMSEA) and the Strengthening Medicare and Repaying Taxpayers Act (SMART Act).

Published by CMS on March 29, 2013, the 88-page WCRG (including Appendices) applies only to workers compensation cases. 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."

This blog post provides excerpts from the WCRG addressing and summarizing non-structured settlement specific issues. For a more complete understanding, read the entire 88-page WCRG. Subsequent S2KM blog posts will summarize and discuss WCRG structured settlement issues including rated age information requirements for determining WCMSA beneficiary life expectancy.

Overview

• Medicare's interests:
  • "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 a portion of a third party payment either directly or indirectly."
  • "Medicare may also refuse to pay for future medical expenses related to the WC injury until the entire settlement is exhausted."
• Compromises: "CMS does not compromise or reduce future medical expenses related to a WC injury."
• WCMSA statutes and regulations: "There are no statutory or regulatory provisions requiring that you submit a WCMSA amount proposal to CMS for review."
• What are WCMSAs: "A WCMSA allocates a portion of the WC settlement for all future work-injury-related medical expenses that are covered and otherwise reimbursable by Medicare. When a proposed WCMSA amount is submitted to CMSfor review and the individual or beneficiary obtains CMS’approval, the CMS-approved WCMSA amount must be appropriately exhausted before Medicare will begin to pay for care related to the beneficiary’s settlement, judgment, award, or other payment."
• Benefit of WCMSA: "The primary benefit [of submitting a WCMSA] is the certainty associated with CMS reviewing and approving the proposed amount with respect to the amount that must be appropriately exhausted."
• Goal of WCMSA: "The goal of establishing a WCMSA is to estimate, as accurately as possible, the total cost that will be insured for all medical expenses otherwise reimbursable by Medicare for work-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."
• Creating a WCMSA: "Generally there are four steps involved in creating a CMS-approved WCMSA:
  • "Analysis of the claim and medical information in order to determine the amount of money required for the fund.
  • "Negotiation of a tentative settlement and preparation of draft settlement documents to settle the WC case incorporating terms for creation and administration of the WCMSA (CMS is not a party to the settlement).
  • "Obtaining approval from CMS regarding the settlement and the proposed WCMSA.
  • "Finalizing the settlement and funding the WCMSA."
• WCMSA funding:
  • "CMS has no process to accept up-front cash payments in lieu of a CMS reviewed WCMSA."
  • "WCMSAs may be funded by a lump sum or may be structured, such that a fixed amount of funds are provided each year for a fixed number of years."

CMS Review of WCMSAs - excluding structured settlement and rated age issues which S2KM will be address in subsequent blog posts.

• Introductory note: CMS introduced a WCMSA internet portal in November 2011 for submission of WCMSA proposals.
• Review threshold: "CMS will review a proposed WCMSA amount when the following workload review thresholds are met:
  • "The claimant is a Medicare beneficiary and the total settlement amount is greater than $25,000.00; or
  • "The claimant has a reasonable expectation of Medicare enrollment within 30 months of the settlement date and the anticipated total settlement amount for future medical expenses and disability/lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000.00."
  • "A claimant has a reasonable expectation of Medicare enrollment within 30 months if any of the following apply:
    • "The claimant has applied for Social Security Disability Benefits.
    • "The claimant has been denied Social Security Disability Benefits but anticipates appealing that decision.
    • "The claimant is in the process of appealing and/or re-filing for Social Security Disability benefits.
    • "The claimant is 62 years and 6 months old.
    • "The claimant has an End Stage Renal Disease (ESRD) condition but does not yet qualify for Medicare based upon ESRD."
• Review not required: "It is unnecessary for the individual or beneficiary to obtain CMS approval for a proposed WCMSA amount if all of the following are true:
  • "The facts of the case demonstrate that the injured individual is only being compensated for past medical expense
  • "There is no evidence that the individual is attempting to maximize the other aspects of thesettlement (e.g., the lost wages and disability portions of the settlement) to Medicare’s detriment; and
  • "The individual's treating physicians conclude (in writing) that to a reasonable degree of medical certainty the individual will no longer require any Medicare-covered treatments related to the WC injury. However, if Medicare made any conditional payments for WC-related services furnished prior to settlement, then Medicare will recover those payments. In addition, Medicare will not pay for any WC-related services furnished prior to the date of the settlement for which it has not already paid."
• Review process:
  • "If you choose to use CMS’ WCMSA review process, the Agency requests that you comply with CMS 'established policies and procedures."
  • "When a WCMSA is submitted for approval, CMS must have certain documentation available to complete a review of the proposal. Table 1 lists the documents normally submitted with a WCMSA proposal."
  • "Submit the gross total settlement amount as a single lifetime number and NOT the settlement amount minus attorney fees, expenses, etc."
  • "Once this information is received, the COBC will apply it to the beneficiary's Medicare record and assign the case to the Medicare Secondary Payer Recovery Contractor (MSPRC)."
  • "The MSPRC will send the beneficiary a “Rights and Responsibilities” letter that explains Medicare's recovery rights with respect to conditional payments and information regarding what steps the beneficiary should take next."
  • "Once the Rights and Responsibilities letter is received, all further inquiries must be made through the MSPRC."
  • "If the parties to a WC settlement stipulate a WCMSA but do not receive CMS approval, then CMS is not bound by the set-aside amount stipulated by the parties, and it may refuse to pay for future medical expenses in the case, even if they would ordinarily have been covered by Medicare."
  • "If CMS approves the WCMSA and the account is later appropriately exhausted, Medicare will pay related medical bills for services otherwise covered and reimbursable by Medicare regardless of the amount of care the beneficiary continues to require."
  • "You can see your case’s status on the WCMSAP, if the case was submitted on the Portal. For cases that were submitted via mail, case status can be obtained by contacting the WCRC."
  • "When CMS does not believe that a proposed set-aside adequately protects Medicare’s interests,and thus makes a determination of a different amount than originally proposed, there is no formal appeals process. However, there are several other options available."

Life Care Plans

• "A Life Care Plan is a dynamic document based on published standards of practice, comprehensive assessment, data analysis, and research that provides an organized concise plan for current and future needs with associated costs for individuals who have experienced catastrophic injury or have chronic health needs."
• "A life care plan is appropriate when the claimant’s injury or disease is extensive and serious, e.g., paraplegia, quadriplegia, brain damage."
• "Although submission of a life care plan is optional, you are required to include drug and dosage lists. Include all pricing charts, cost projections, pricing information, and explanatory narratives and analyses."
• "When the parties to a WC settlement present CMS with “life care plans” or similar evaluations prepared by non-treating physicians to support and justify their proposed WCMSAs, Medicare will consider accepting such evaluations if the physician does all of the following:
  • "Examines the claimant;
  • "Reviews the claimant's medical records;
  • "Contacts any of the claimant's treating physicians (if applicable);
  • "Is available to answer CMS’ questions;
  • "Prepares a report that summarizes the above; and
  • "Offers a written medical opinion as to all of the reasonably anticipated future medical needs of the claimant related to the claimant's work injury or illness/disease."

Future Treatment

• "Determine the cost of future medical expenses that are directly related to the injury or illness suffered by the worker. This amount can be determined by reviewing medical records and past medical expenditures. The WCMSA must show the amount of money that should be invested to provide the yearly expenses for the worker’s life expectancy."
• "Note: In order to protect Medicare’s interests, a WCMSA should be funded based on the life expectancy of the claimant unless state law specifically limits the length of time that WC covers work-related conditions. The key is that both the principal amount that is to be set aside and the anticipated interest that it will earn must be sufficient to provide for the worker’s future medical treatment and administration fees for the worker’s lifetime."
• "Identify specific types of medical services or items, the frequency and duration of the medical services or items, and the projected costs of the medical services or items related to the work injury or disease that are expected in the future in light of the claimant's condition."

Time Frame

• "When you submit a WCMSA for review, CMS tries to review and decide on proposed settlements within 45 to 60 days from the time that all relevant documents are submitted."
• "Parties to the settlement may settle the indemnity (non-medical-expenses) portion of the claim separately from the WCMSA portion, in order to avoid having indemnity payments continue while CMS is still reviewing the proposal. CMS will still consider the whole claim, including indemnity, in its threshold calculations."

Administration

• "Once a WCMSA is established and funded, it must be administered."
• "This can be done by the claimant, by the claimant’s representative payee, appointed guardian, or conservator, or by a professional administrator."
• "The administrator of the account will be responsible for keeping accurate records of payments made from the account."
• "The administrator must establish the WCMSA account, pay Medicare-covered services from the WCMSA account, and provide CMS with a reporting of the expenditures from the WCMSA."
• "Every year, beginning no later than 30 days after the 1-year anniversary of settlement the administrator must sign and send a statement that payments from the WCMSA account were made for Medicare-covered medical expenses and Medicare-covered prescription drug expenses related to the work-related injury, illness, or disease."

Death of the Claimant

• "If a claimant dies before the WCMSA is completely exhausted, the [Regional Office] and [Medicare Secondary Payer Recovery Contractor] will ensure that all claims have been paid."
• "Then any amount left over in the WCMSA may be disbursed pursuant to state law, once Medicare’s interests have been protected."
• "This may involve holding the WCMSA open for some period after the date of death, as providers, physicians, and other suppliers are permitted to submit their initial bill to Medicare for a period of 12 months after the date of service."
• "Often, the settlement itself will dictate the appropriate dispersal of funds up on the death of the claimant."

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).