The Medicare Secondary Payer Act has been in place for more than two decades. During that time, much has been written regarding the requirements to comply with Medicare. Third-party administrators and self-insureds are particularly vulnerable to changes in Medicare regulations—most recently, and in particular, the State Children Health Insurance Program Extension Act. This article traces the evolution of Medicare secondary payer compliance, and provides recommendations on how to manage and potentially reduce Medicare loss costs.
Reviewing History: A Strained Medicare System
In 1980, 42 USC 1395y and 42 CFR 411 became law. The intent of the legislation was for Medicare to serve as a secondary payer whenever a primary payer exists. During the early stages of the Medicare Secondary Payer (MSP) Act, enforcement was difficult. However, in the late 1990s the Secretary of Health and Human Services created the Center for Medicare and Medicaid Services (CMS), an administrative agency. This action paved the way for true enforcement of the MSP Act, which began on July 23, 2001 when CMS released the first in a series of memoranda related to the MSP Act.
The first memo outlined the review and approval process for certain types of workers’ compensation claims. If a case exceeded “workload review thresholds,” i.e. any case where the total value of the settlement was over $10,000 and the claimant was a current Medicare recipient, CMS was to review and approve the dollars allocated to the future medical benefits. This oversight role, to be played by CMS, was designed to protect the interests of Medicare.
After just nine months, CMS’ workload became overwhelming due to the new policy, and the agency raised the threshold from $10,000 to $25,000. The low threshold of $10,000 had resulted in a bottleneck effect that caused significant delays (up to several months) in generating approvals.
Upon further evolution of CMS and its oversight authority, the agency decided to add pharmacy benefits to its purview. Therefore, the Medicare system was broadened to include Part D prescription drug costs, as were the calculations of the Medicare Set-Aside (MSA) allocation reports.
Classification of Workers’ Compensation Claims
In an attempt to simplify the process of protecting Medicare’s interests, three claimant categories have been identified (see Figure A).
The Catch-all Class
The final category of claims, Category III, is all of the claims in which the settlement recipient is giving up the right to future medical benefits. Sometimes, in an abundance of caution, those in the industry summarize in the settlement documents the portion that is allocated for future medical expenses and how that number is calculated. The reports offered by allocators for this purpose vary widely.
If the purpose for this Category III type of report is to exercise caution and address Medicare’s future interests, the number should reflect medical care that is reimbursable under the Medicare guidelines at the time of the settlement, not all medical care that the individual may be receiving. An example of care that is not covered by Medicare, but may be covered by a state WC law, is acupuncture.
While MSAs are a recommended practice, there are tools that self-insureds and their agents can use to reduce their loss cost exposure.
As the industry continues to address the growing costs associated with MSA allocations, one tool used to shield the Medicare system from these high payout costs is the use of rated ages.
A rated age (RA) means the actual age of an individual does not match that of their physical condition. An individual who has poor health conditions or behavior patterns, such as smoking, may obtain a rated age as a result of a life insurance underwriter reviewing the pertinent medical records and concluding that the person might live a fewer number of years than their projected age would suggest. The impact of the rated age is a reduction in the life expectancy. Thus, this translates into a reduction in the number of years of future medical care for which the allocation report is projecting.
Funding through annuities
One underutilized cost-saving tool is the funding of an MSA allocation with an annuity. An annuity is purchased for an amount less than the payout value. The annuity then issues periodic payments, usually on an annual basis, to fund the MSA account. Figure C is an example of the savings potential when using an annuity.
Recovery of funds post mortem
On April 22, 2003, CMS issued another memorandum answering many questions raised in the community regarding what happens to the balance in the MSA account upon death of the claimant.
If the primary payer does not ask for the cash balance in the MSA account to be returned to the carrier or self-insured client, the funds will never be returned. Potentially, large amounts of money are being passed annually from the MSA account to the estate of the claimant.
Pharmacy Benefits Management
Prescription drug review is a tool that allocators use to reduce the cost of the Part D (pharmacy) allocation. The reductions are achieved once a PharmD (Doctor of Pharmacy) reviews the existing drug regime and makes comments and recommendations regarding the duration and specific selection of medications. CMS has not provided direction with respect to the method of calculation for the Part D pharmacy benefits. Thus, this Prescription Drug Review tool can be applied in situations of high annual Part D allocation values. Of note, these recommendations may or may not be submitted to the treating physician, and they are not required to be approved by a treating physician.
Documentation from the treating physician is critical in capturing additional savings. Many times the documents provided within the claim file depict an aggressive treatment plan that may not be representative of the long term future medical plan. With this being said, obtaining a life-long treatment plan from the physician may be difficult, especially in situations where the claim is in litigation. Thus, it becomes critical for the defense bar to examine the need for the future medical care and obtain under oath the opinions of the treating physician. This may be the only opportunity the claim administrator has to consolidate the treatment plan.
Federal law 42 USC 1395y[b] outlines that Medicare has a right not only to be sheltered from future payments if a primary payer exists, but to have its past payments reviewed for conditions being compensated under a claim. This results in an automatic lien by Medicare with respect to the prior payments.
Once Medicare learns of a workers’ compensation, liability, or other primary payer claim for a current Medicare recipient, data is recorded and an electronic assignment is made by the Coordinator of Benefits (COB) to the recovery contractor. This action then starts the search for conditional payments. An initial letter is issued to the primary payer indicating that a search is being conducted. Once the matter is resolved, the recovery contractor is then able to complete identification of the lien and issue an official request for payment. The primary payer subsequently is obligated to respond to the request for payment.
Liability Medicare Set-Aside Allocations
Asked to comment on payment requirements for liability files, two attorneys who dedicate their practice to Medicare compliance, Melisa C. Zwilling and Bennett L. Pugh of Carr, Allison, Pugh, Howard, Oliver & Sisson, P.C. (a large southeast-based law firm), explained “with regard to MSAs, there is a fundamental distinction between workers’ compensation cases and liability cases. The obligation to pay future medical expenses related to a work injury in a workers’ compensation case is typically absolute and based upon a requirement of a particular state’s law. In contrast, with liability cases, there is no obligation to pay medical expenses over the remainder of a claimant’s lifetime. Any obligation to pay for future medical expenses is a product of the settlement agreement itself, not a state or federal law.” Although CMS has reminded the claims community that the Medicare Secondary Payer Act applies to liability as well as workers’ compensation, the liability community has not responded as quickly as their counterparts working with workers’ compensation.
This could be due in part to the difficulty of applying workers’ compensation categories to the liability environment. However, the same care should be given to review the categories of claims. If a need is identified, then some mechanism should be used to adequately consider Medicare’s future interests. Each primary payer will need to identify and form policies and procedures to comply with the MSP Act in each of the three categories of claims.
The passing of the State Children Health Insurance Program Extension Act (SCHIP) in late December 2007 will have a tidal wave effect on the claims community.
The requirement for primary payers to identify the Medicare beneficiary status and report all settlements, judgments and awards to the Secretary of Health—or face penalties of $1,000 per day per claim—could be devastating to the claims community. All claims professionals, regardless of type (e.g. workers’ compensation, liability, auto no-fault, etc.) will have to become accustomed to identifying the settlement recipient’s Medicare status.
“The law is on Medicare’s side,” said John Williams, president and CEO of Gould and Lamb, LLC. “These new reporting requirements allow CMS to collect all the data it will need to recover past conditional payments and stop erroneous future payments.”
Where do we go from here?
The claims community needs to revise the methods in which they resolve claims. All claims professionals must start the resolution process, even before negotiations, with identification of Medicare’s interest and involvement. Then, the claims professionals must address the following:
- Verification and reporting of the settlement, judgment or award recipient’s Medicare Status.
- If the recipient is a Medicare beneficiary, SCHIP must be complied with to avoid penalties of $1,000 per day per claim.
- Medicare’s past interests—Are there conditional payments?
- Medicare’s future interests—Is an MSA or some other form needed to identify what portion of the settlement is being allocated for future medical expenses?
- Review process—If the matter warrants an MSA, does it need to go to CMS for review and approval?
This environment is ever changing. All parties must take serious consideration in establishment of MSP Compliance guidelines, and consider partnering with a team of vendors who are able to address MSP Compliance from beneficiary identification to funding of the liability.