There are two recent court cases that could have a significant effect on liability settlements. Both Bradley v. Sebelius and Hadden v. US deal with the issue of how much of their lien Medicare is entitled to receive in a compromised settlement.
Bradley v. Sebelius
On September 29, 2010 the 11th Circuit Court of Appeals (CA) reversed a district court ruling and upheld a probate court finding that Medicare was only entitled to 2% ($787.50) of its full Medicare Lien ($22,480.89) because the entire case settled for 2% ($52,500.00) of its full value ($2,538,875.08). This decision stems from a Gainesville, Florida wrongful death case where a nursing home settled for its liability policy limits of $52,500.00.
The CA ruled against Medicare’s long-standing practice of claiming that its lien was superior and took priority over other claims in a case entitling them to the full amount of their claim even in a compromised case, on several grounds. First, the court rejected Medicare’s reliance on their internal MSP policy manual saying that it “do[es] not have the force and effect of law and [is] not accorded that weight in the adjudicatory process”. Secondly the court reasoned that “the Secretary’s position would have a chilling effect on settlement(s)” and “throughout our history, our law has encouraged settlements” in order to prevent “burdening the court system”.
This is a very important case and a victory for the Property and Casualty industry because it will encourage settlements and be more equitable for injury victims.
Hadden v. US
In a closely related Kentucky case, a truck swerved to avoid a car that ran a red light and struck and injured Mr. Hadden who was innocently walking down the street. The car left the scene and was never found so Mr. Haden’s only recourse for compensation for his injuries was from the truck driver’s liability carrier. But, obviously the truck was not the primary cause of the accident. The parties agreed to settle the case for 10% of its full value, or $125,000.00. Medicare however demanded that 100% of its lien ($62,338.07 less fees) be paid from the settlement proceeds. The District Court ruled in favor of Medicare, the case was appealed and the Sixth Circuit Court of Appeals (CA) just heard the case on October 13, 2010.
Interestingly, if the Sixth Circuit CA rules in favor of the U.S. it will be in conflict with the 11th Circuit CA in Bradley v. Sebelius and would likely be heard by the U.S. Supreme Court to resolve the conflicting decisions by the two Circuits. Of course the entire settlement community is hoping that the CA rules in favor of Hadden because of the positive effects it will have on settlements.
It has never seemed fair to me, and many others in the settlement community, that Medicare takes more than its proportionate share of settlement proceeds when a case is settled for less than value. However, it looks like the courts are finally stepping in and requiring a more equitable distribution of the reduced settlement proceeds in these cases.
Keep in mind that these two cases involve “apportionment” of past Medicare liens in liability cases that settle for less than value.
The next step is to apply this “apportionment” method to the settlement of future medicals in liability cases, which frequently settle for less than value. Strangely, Medicare has remained silent on this issue and related issues about how, specifically, to protect Medicare’s interests as a secondary payer in liability cases. In our opinion this is odd because encouraging liability settlements to reasonably take Medicare’s interest into consideration would save perhaps billions of dollars for the Medicare Trust Fund, but that is another subject for another day.