Last week, I presented at a conference where my presentation focused, in part, on why I believe the concept of self-administration of Medicare Set-Asides (MSAs) is flawed because it assumes most people are capable of properly managing large sums of money in accordance with complex rules and requirements. To my surprise, Don McNay, best selling author and the country’s leading authority on why so many lottery winners run through their money so quickly, was the guest dinner speaker. I purchased a copy of his new book, Life Lessons from the Lottery, and read it with great interest on the flight back to Florida.
In his book, he describes many tragic stories of lottery winners whose lives were devastated because they received a large sum of money. Jack Whitaker’s life completely came unraveled after winning $315 million in a Powerball jackpot. He was arrested for drunk driving and assault, his granddaughter died of a drug overdose, he was accused of writing $1.5 million in bad checks to an Atlantic City casino, and his wife (who said she wished they had torn up the lottery ticket) divorced him. Amazingly, prior to winning the lottery, Mr. Whitaker was a successful, self-made millionaire and by all accounts, was in a stable marriage and was considered a loving father and grandfather.
Don McNay refers to a 2009 article in Sports Illustrated titled, “Why Athletes go Broke”, that stated that after two years of retirement, 78 percent of former NFL players go bankrupt, get a divorce or are under financial distress. Within five years of retirement, an estimated 60 percent of NBA players are broke.
Abraham Shakespeare won $16.9 million in the Florida lottery. After years of legal problems, his body was found buried five feet deep under a concrete slab in the back yard of an acquaintance. Police reported that all the money was gone within three years.
So, why do so many lottery winners blow through their money so quickly? One reason, says Don McNay, is that about 98 percent take the money in a lump sum payment instead of periodic payments. Most of those that take a lump sum run through it all within just a few years. Social Security, defined benefit pension plans, and many other programs pay out money over time. As Don McNay explains, if you take lottery winnings in annual payments over, say 25 years, and make mistakes that lose you that money in the first year, you have 24 more opportunities to get it right. Other reasons that lottery winners lose their money so quickly, says Don McNay are: family, friends, bad advisors and lack of knowledge.
We have a very similar situation with Medicare Set-Asides where about 95% of claimants self-administer their MSA funds. Many of these injured individuals suddenly have a large sum of medical settlement money deposited into their bank account. They often have the same issues that lottery winners have: lack of knowledge, bad advisors, and family and friends. However, many times they also have serious injuries like brain damage, cognitive impairment, back injuries, paraplegia or quadriplegia and are on serious narcotic pain medications. In addition, the rules that must be followed to properly manage a Medicare Set-Aside are very complex.
The objective of a Medicare Set-Aside is to save money for the Medicare Trust Fund by making sure that the MSA monies are spent first, before Medicare pays. We expend a lot of cost, effort, review and expertise in the cost projection process. However, in the end, if a neutral, competent and accountable third party does not administer the money, MSP compliance is most often an expensive failure.