ArvinMERITOR, Inc. v. Johnson

Medicare Set-Aside Blog on March 2, 2011
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For years we have advised clients that it is OK to seek Board approval of a settlement prior to obtaining CMS’ opinion, so long as they leave themselves an out to hedge against the unpredictable behavior of CMS. While that is still true, apparently we need to do so with greater caution as to what not to state in the settlement agreement as well. A recent decision by an Alabama appellate court essentially blew up a workers’ compensation settlement because the parties provided conflicting details in their MSP compliance efforts. Despite doing everything substantively right, the efforts proved pointless because of a technicality.

ArvinMERITOR, Inc. v. Johnson involves an occupational disease for which work comp benefits were claimed in 1999, and in 2003, the employee was deemed 100% permanently and totally disabled. In November 2008, the employee entered into a confidential settlement agreement with a third party regarding the same injury, for which the workers’ compensation carrier was entitled to a credit pursuant to Ala. Code ยง 25-5-11. In January 2009, the employee and employer entered a joint petition to settle the work comp claim in exchange for a waiver of reimbursement from, or the credit against, the third party settlement, plus an MSA in the amount of $65,000 with the employee contributing anything in excess of the amount that CMS deems a reasonable protection of Medicare’s interest. Unfortunately, working in reliance upon an MSA obtained by the employer, the settlement agreement expressly implied that the employee’s obligation was the exact amount of the difference between the $65,000 and the vendor’s MSA, effectively capping the employee’s contribution. Because the CMS approved MSA amount exceeded the sum of both contributions, the parties entered into a new dispute over who bears responsibility for the excess.

Expressed provisions in the joint petition included:

Full and final settlement in exchange for waiver of rights against 3rd party settlement + contribution to an approved MSA up to $65K
Employee to fund MSA in excess of the employer contribution
Employer to pay medicals until MSA is established
If employer is not relieved of obligation of future meds, it retains rights to reimbursement from the 3rd party settlement

Five months later, the employee filed a petition complaining that the MSA had not been established despite his willingness to fund his $18,936.17. For those of you who have already guessed, the CMS approval obviously came back in excess of the MSA submitted by the employer’s vendor, how much the opinion never disclosed. What the court had on its hands was not a motion to enforce a settlement so much as a dispute over who’s responsibility it was to fund the excess required by CMS.

The problem was located in the settlement agreement itself. Paragraph b stated:

“This agreement closes all of [the employee’s] rights to workers’ compensation benefits of any kind, including, without limitation, medical benefits. A Medicare set aside trust for the future compensable medical expenses of [the employee] will be established. The cost of such Medicare set aside trust is $83,936.17. Upon entry by this Court of the order described in Paragraph a. above, [the employer] will contribute up to $65,000 to fund the Medicare set aside trust, with the balance of the amount necessary to fund such Medicare set aside trust to be paid by [the employee] . The Parties agree that the establishment of an approved Medicare set aside trust will relieve [the employer] of any future medical expense obligation concerning [the employee].”. . . .

Because the MSA vendor amount was specifically referenced and there was no discussion of the possibility of CMS requiring more, the implication was that the $84K was the cost to fund the MSA, thus inferring the employee contribution being the difference of nearly $19K. With the employer not required to pay more than $65K and the employee only the next $19K, the trial court ultimately ruled for the employee and decided that his contribution was capped and therefore it was the employer’s responsibility for funding the excess. The employer appealed.

The appellate court agreed with the trial court that the employee didn’t have to pay any more than the expressed difference in the settlement agreement, despite the intent and express requirement that he pay anything in excess of the employer contribution. It also determined that it was not up to the lower court to impose upon the employer a responsibility greater than what was agreed upon. The joint petition expressly and unambiguously stated that the employer agreed to pay no more than $65K towards the MSA. Nothing in the state law permits the court to substantially alter or modify the terms of the settlement agreement, and thus it may only enforce the terms as they exist. There was some discussion by the trial court accusing the employer of materially misrepresenting the cost of the MSA and of a “mistake” by the MSA vendor, but ultimately neither carried any weight with the appellate court, hopefully because it saw and understood that this mess was created by CMS and was nothing that could have been avoided by the parties absent a better draft of the settlement agreement.

So here we have both sides fully compliant with the terms of the settlement agreement and ready to fund their obligations at the expressed amounts; however the employer is not discharged from its medical responsibilities until an approved MSA is established. If no one funds the excess required by CMS, then the employer is not discharged from providing work comp benefits. Furthermore, if the employer is not relieved of all obligations for future meds, it retains all of its rights to reimbursement from the 3rd party settlement. While the appellate court clarified that the employer had a right to subrogation, not reimbursement, it still effectively said that the employer should request a hearing to determine the amount of the confidential, undisclosed settlement agreement so that it could evoke its rights to seek reimbursement from those funds and establish its right to withhold further medical benefits.

Who won or lost in this situation is impossible to assess without knowing the amounts in question, however my guess lies with the employer. We don’t know what the 3rd party settlement was or the amount of the CMS counter, but we can assume that the counter was high enough to fight over and that the settlement was substantial enough that its lack of disclosure to the employer was intentional. I suspect that the employee will fund the excess MSA rather than risk the employer asserting its subrogation rights and becoming entitled to reimbursement of meds paid to date, credit for future meds until that portion of the settlement is exhausted, and effectively gaining nothing from his work comp claim. But that’s just an educated guess.

Take away point:  while I still encourage parties to not allow CMS to cost them substantial indemnity dollars while waiting around for its approval, which is currently running approximately 120-150 days on average, I do so cautiously based on how the contingencies are expressly laid out in the settlement agreement. This was an unfortunate outcome because the intent of the contribution cap was clear, however it is representative of the handling of MSP cases in our courts, both state and federal. Rather than addressing the CMS problem or MSP compliance in general, most cases involving MSAs are analyzed on the technical issues within the underlying claim, in this case contract law. Specifically, the court could have upheld its determination that the MSA number agreed upon was what was ordered pursuant to state law and required no further funding, or that the ordered amount was adequate in its opinion and held the infamous hearing on the merits to make that determination, or done a number of other things to dispel the assumption that the CMS “requirement” was in any way statutorily based. Instead we have more case law that permits CMS’ opinion as to its rights to an inchoate, immeasurable obligation that the parties may or may not have at some point in the future take de facto precedence over the interests of all others. With these types of outcomes, it is no wonder why many continue to roll over and simply pay whatever CMS wants just to be done.

ArvinMeritor, Inc. v. Clifton Johnson
No. 2090822
Court of Civil Appeals of Alabama
February 25, 2011

Read the opinion in its entirety at: