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Medicare Set-Aside Trusts: Latest Cms Policy Effectively Bars Closure Of Many Claims

September 06, 2006 BY Def Admin

Effective January 1, 2006, all Medicare set-aside agreement (MSA) must include the cost of prescription drugs. The effect of this decision has ballooned the cost of MSA’s. Employers and Insurers must now face the reality that many cases involving current or potential recipients of Social Security Disability Benefits have now become prohibitively expensive to settle. 


For many years, Medicare paid for medical treatment for injured workers even when the treatment covered work-related injuries or illnesses. However, those days ended when the Center for Medicare & Medicaid Services (CMS), the federal agency charged with administering the Medicare program, announced in 2001 that it would enforce the Medicare Secondary Payer Act (the “Act”) against all parties to a workers’ compensation settlement that closed out the payment of future medicals. 

MSA’s became the administrative mechanism accepted by CMS that allowed settlements to properly consider Medicare’s interests. If sufficient funds were set aside to cover future medical expenses, CMS would pre-approve settlements of workers’ compensation claims. Such approval protected parties against future liability. However, MSA’s did not previously include prescription drugs, custodial care, and nursing home care.

Today, there are three relevant time frames and different rules applying to MSA’s that Employers and Insurers should be aware of:

MSA’s received prior to January 1, 2006:

MSA’s received by CMS before January 1, 2006 were not required to include the cost of prescription drugs. 

MSA’s received on or after January 1, 2006:

MSA’s sent to CMS on or after January 1, 2006 must now include prescription drug costs. Specifically, the MSA must separate out the cost for future medical treatment as well as future prescription drug treatment. There must be an explanation of how the future prescription drug treatment amount was calculated. In other words, was the calculation based, for example, upon actual costs or wholesale prices (or, in some States where the medical fee schedule includes prescription drugs: the State’s workers’ compensation medical fee guide)?

If the cover letter does not include an amount for future prescription drug costs and the current treatment records do not indicate a need for future treatment with prescription drugs, CMS will accept that Medicare’s interests are adequately protected and Medicare will be responsible for the future payment of any prescription drugs. If, on the other hand, the cover letter does not include an amount for future drug costs but the current treatment records indicate prescription drug use in the past or the need for them in the future due to the workers’ compensation injury or illness, CMS will reject the settlement.

MSA’s submitted on or after January 1, 2007

Effective January 1, 2007, CMS intends to independently review an MSA’s prescription drug component for adequacy. For MSA’s submitted on or after that date, CMS will require two (2) years of prescription payment history to be provided with the submission. If the injury occurred more than two (2) years from the date of the submission, the prescription payment history must still be included. If the submission fails to include a payment history, or there was no previous payment for prescriptions, but prescriptions will be needed in the future, CMS intends to independently price the Medicare-covered prescription drugs.

Clarifying Drug Use and Price for an MSA

Now that prescription drugs must be accounted for in a MSA, close scrutiny must now be given as to which medications must be taken and for how long. It is important to ask the treating physician what she expects the employee’s future use of prescription drugs to actually be. A number of medications cannot be used on a long-term basis. A treating physician may very well report that certain medications are not intended to be used for the rest of the employee’s life but only for a limited time.

Once the type, quantity, and duration of the prescription drugs an employee is likely to use is identified, close scrutiny must then be turned to how the drugs will be priced. Several options are available: average wholesale price or actual cost (another option may exist in those states that incorporate prescriptions drugs into their workers’ compensation fee schedule). Generally, Medicare will pay 95% of the average wholesale price of prescription drugs, unless the actual cost is less. Although one might think the cost to an injured worker would never be lower than the average wholesale price, in fact, at times it is, if the injured worker purchases his drugs from a large pharmacy chain, or a managed care provider that has been able to obtain the particular drug at a substantial discount from the average wholesale price. Under those circumstances, the MSA should be based on the lower, actual cost of the prescription drug. 

Unanswered Questions Remain with New CMS Policy

CMS has apparently taken the position that every eligible injured worker will opt into Medicare Plan D. Generally, under Plan D, Medicare will pay 95% of the average wholesale price, or the actual cost, whichever is lower. In projecting the cost of future prescription drugs, MSA’s could simply factor in only 95% of future costs since that is all that Medicare would pay. 

But what happens if the employee chooses to take advantage of discounts and gaps in coverage in the new Medicare law? With Plan D, Medicare beneficiaries have to pay a co-payment of 25% up to $2,500. After that point, beneficiaries must pay for all prescriptions up to $3,600. After this amount, a 5% deductible or smaller co-payment will be required. In pricing the cost of future prescription drugs in an MSA, can one discount off the average wholesale drug price for these deductibles and co-payments?

Furthermore, what if an employee wishes to choose a different plan? There are a number of other plans available for Medicare beneficiaries. If an employee indicates a desire to purchase a particular plan that reduces the gaps in coverage or changes the co-pay amount and benefits, can the MSA be accurate based on the assumption that the individual chooses Plan D? 

The decision by CMS to delay independent review of the prescription drug component in MSA’s until January 1, 2007 is clearly an acknowledgement that a number of questions and issues remain. CMS will likely issue another policy memorandum in the coming year providing further clarification. In fact, CMS recently issued a new one on April 25, 2006 noting a new threshold by which CMS will review settlements for current Medicare beneficiaries (all settlements must consider Medicare’s interests; this is only a workload review threshold). Previously, that threshold was $10,000.00. With the April 25, 2006 Policy Memorandum, that threshold is now $25,000.00. This is an implicit acknowledgement that the recent CMS policy change has increased the size of settlements overall.

It is clear today that claims involving current or potential Social Security Disability recipients will rarely settle, if at all, due to the substantial increase in MSA’s under the new policy. Closer scrutiny and analysis than ever before must be made to the need, duration, and price of prescription drugs in the new world we now live in as a result of CMS’ latest policy changes.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley
(Editor-in-chief)