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Sterrett v. Klebart: Court Agrees to Zero Future Medical Allocation

The parties in this recent case agreed to allocate no moneys from a compromised liability settlement to future medical items, even though future medical treatment was anticipated.  They then filed a joint motion asking the Superior Court of Connecticut to determine if they reasonably considered Medicare’s interest as required by the Medicare Secondary Payer Act.

Facts

Mr. Sterrett (Claimant) was a “social invitee” at the home of the Mr Klebart (Defendant) when he fell backwards while ascending the stairs and suffered a spinal cord injury that resulted in paraplegia.  He sued the Defendants claiming they were negligent for not having a handrail in the stairway.  The Defendants asserted that Mr. Sterrett was contributorily negligent because he was under the influence of alcohol.  The parties reached a settlement in the amount of $550,000.   The settlement agreement did not reflect any compensation for future medicals even though it was anticipated that Medicare would be paying expenses related to the injury in the near future.  The parties did, however, reimburse Medicare $14,448.30 for conditional payments that Medicare had previously made.   In addition, the settlement allocated $183,333.33 to a loss of consortium claim brought by the co-plaintiff, Barbara Sterrett.  The settling parties then filed a motion, asking the court to determine that the parties reasonably considered Medicare’s interest as required by the Medicare Secondary Payer Act, 22 U.S.C. 1395(y)(b)(2)(B)(ii).

Court Decision

The Superior Court relied on Finke v. Hunter’s View, Ltd, 2009 WL 6326944 (D. Minn. 2009) to conclude that: (a) the parties had reasonably taken Medicare’s interest into consideration and (b) no Medicare Set-Aside was necessary.  The court also based it’s opinion on the fact that the settlement agreement did not address any future medical expenses.   The court further found that “the plaintiffs and defendants should not be subject to any claim, demand, or penalty from Medicare as a result of the settlement payment that has been agreed upon in this matter”. 

Discussion

This case again points out how troubling and flawed the Medicare Secondary Payer program is regarding liability settlements.

First, the Sterrett court relied on Finke.   However, Finke was not expected to be a Medicare beneficiary in the foreseeable future, and had other insurance to pay any anticipated future injury related medical bills.  So in Finke the court found that the settlement, which allocated no monies to future medical bills, reasonably protected Medicare’s interest because it was not foreseeable that Medicare would make any payments for medical bills in the foreseeable future.   However, in the Sterrett case “The parties agree, and the court understands that it is contemplated that Sterrett will incur medical bills payable by Medicare in the foreseeable future”. It’s puzzling how the Sterrett decision protects Medicare from paying for any future medical treatment that might be required that should reasonably be expected to be made under a liability insurance plan [see 42 U.S.C 1395(b)(2)(A)].

The second problematic issue involves “equitable apportionment”, one of the most hotly debated issues in the MSP industry today.  The Sterrett court determined that the settlement, in spite of allocating no monies to future medicals, satisfied the requirement to reasonably consider and protect Medicare’s interest.  The reasoning was that the $550,000 settlement represented a substantial compromise over the potential verdict amount should this case go to trial.  Furthermore, the court concluded that it was reasonable, in this severely compromised case, to apportion all of the settlement dollars first to the other parts of the settlement leaving nothing left for the future medical portion.

The Centers for Medicare and Medicaid Services (CMS) generally takes the position that they should be first in line in apportioning a compromised settlement like this so that monies for conditional payments and future medicals would be apportioned first.   The Sterrett Court took the opposite position and decided that CMS’ interest is last in line regarding apportionment of future Medicare Set-Aside monies.   Many in the industry think that an “equitable apportionment” that reduces all parts of the settlement proportionately makes the most sense.

An “equitable apportionment” method in this case would work like this.  First, lets assume that the future medicals were determined to be say $100,000.   Second and most difficult, say it could be determined that a reasonable estimate of the full value of the case was four times the $550k settlement amount or $2.2M.  So instead of Medicare’s interest being protected first or last, Medicare’s interest would be apportioned down proportionate to the total settlement reduction.  Since the entire case settled for 25% of value, Medicare would get 25% of it’s conditional payment reimbursed or $3,612.08 (25% of $14,448.30) and a MSA would be funded to protect Medicare’s future interest at $25,000 (25% of $100,000).

Amazingly, for the 33 years since the passage of the MSP Statute in 1980, CMS has not addressed the issue of equitable apportionment for future medicals in liability settlements.  This leaves the issue up to the settling parties and sometimes a court to determine what is reasonable.

We believe that equitable apportionment of future medicals is a practical necessity to be able to implement liability MSAs. Medicare should be limited to a fair and equitable portion of a reduced settlement.  It is very unfair to a claimant who receives a reduced settlement to have to pay Medicare their full lien and set aside a full portion into an MSA.  In some cases this leads to a ludicrous result where a severely injured claimant receives no funds at all from a settlement with the at-fault party.   The Medicaid system uses an “Ahlborn” formula for this purpose and it works well.   This same equitable apportionment concept can work in the Medicare context, too.

The truly amazing thing about CMS not endorsing an equitable apportionment methodology for liability MSAs is that, in our opinion, it is the key to implementing a liability MSA program that would save the Medicare Trust Fund perhaps $4-$7 billion dollars per year.  The Sterrett court decision allowed CMS’ interest in future medicals to be set at zero by the two settling parties and CMS was left with nothing.  Wouldn’t it be better for CMS to adopt an “equitable apportionment” approach rather than be stiffed and get nothing?

To view the Sterrett v. Klebart case click here.

To view the Finke v. Hunter View, Ltd. case click here.

To view the Medivest response to the CMS-6047-ANPRM which explains more about our proposed improvements to the MSP program click here.

 

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