Structure of MSA Negotiation Provides Insurer with Rare Windfall
The way MSAs are arranged these days, carriers generally have no benefit in unused funds upon a claimant’s premature death. Absent a custodial situation, carriers retain no rights in funds ultimately not needed for future medical expenses. MSA funds are actually completely unencumbered upon settlement and claimants’ use unrestricted with the exception of the possible condition placed on the use within the settlement agreement that they only be used for medical expenses otherwise covered by Medicare and related to the work comp claim. But even then, there is no one policing the funds. If the funds are unavailable at the time related treatment is required, CMS, being on notice through mandatory insurer reporting of the TPOC, should deny Medicare benefits and the claimant left to replace the funds and properly exhaust them on related treatment before Medicare benefits resume. The federal government depriving a Medicare beneficiary of medically necessary treatment when he has no alternative payment options? Unlikely… but that’s another story.
So due to costs associated with custodial administration, the only mechanism used during the past decade to prevent a totally improper and premature dissipation of MSA funds has been the structured settlement. This allows only one year’s worth of funds at a time to improperly disappear should the claimant’s condition prove to not be as serious as presented and/or his intentions in settling his claim not entirely pure. It is unclear as to whether it is this protective feature or cost savings that drives the decision to structure, but the ability to fund an MSA at present value is also an underutilized tool in work comp settlements. However, a recent North Carolina appellate decision provided one additional benefit that carriers should seriously consider when proposing structures – the possibility of not funding it at all.
In 2010, a 1990 North Carolina WC claim was settled at mediation. The terms were $250,000, mediation costs paid by the carrier, non-surgical medical benefits paid through CMS approval and funding of an MSA. The twist is that claimant died of pneumonia prior to any funds changing hands. Without a question, the carrier cut checks for everything but the MSA, arguing that because claimant was dead, there was no need to fund it any longer (a solid point). Claimant’s wife disagreed and argued unjust enrichment. The NC Industrial Commission found frustration of purpose and ruled in favor of the carrier, however the NC Court of Appeals didn’t see the issue the same way.
At the end of the day, an MSA is nothing more than a contractual term of settlement. There are no laws or regs, state or federal, that requires an MSA in any type of settlement. The need is inferred through the MSP given Medicare is statutorily prohibited from making payments in a secondary payer situation and has a statutory recovery right should it do so. The only thing that governs the funding of an MSA is the settlement agreement, a concept supported by an increase in nationwide case law over the past three years.
In the case at hand, the mediation statement signed by all parties is the governing document. It provided for funding of “a Medicare Set-Aside Allocation (‘MSA’) in the amount of $186,032.51, with ‘$19,582.37 seed money for the Medicare Set Aside for the benefit of Washington Holmes’ and payments of $9,247.23 annually beginning on September 15, 2011, payable 18 years only if Washington Holmes is living.’” Given that there was language that provided that only nonsurgical medical expenses would be paid through CMS approval, the parties obviously recognized risks associated with such a delay prior to finalization. It is possible that lesson may have been learned through the TJ Maxx case in California where the applicant received the surgery funded in the proposed MSA while under review with CMS and ended up paying for the surgery twice. So if capable of such an exception, expressly stating what would happen in the event of death while waiting for CMS approval is not an unreasonable expectation by the court. It is actually interesting that the settlement itself was not conditioned upon the CMS approval given it was mentioned in this capacity but that appears to be another failing in the terms as established at mediation.
Now there was some argument regarding the intended purpose of the MSA funds being frustrated preventing the need to provide them at all. However the condition applied only to the claimant while alive to limit use to payment of related medical expenses. It did not account for what happened to the funds upon his death when his assets passed to his estate. An MSA is nothing more than an unencumbered asset once it belongs to the claimant. This is the same reason we have case law granting spouses portions of MSAs in divorce and why MSA funds are not protected from creditors, child support claims, bankruptcy etc.
So that essentially left the terms of the structured settlement to govern the outcome of this case. Had the MSA been negotiated as a lump sum, there is no doubt that the court would have awarded the entire amount to the wife. It is only because the annuity was proposed as a life only benefit that the wife was only able to obtain the initial seed monies. The annual payments were expressly conditioned upon claimant being alive at the time they were made, therefore the estate had rights no different than had the annuity actually been purchased and the life company received the windfall. Had it been proposed using a period certain benefit, this outcome would most definitely have been different.
So while it does feel as if it is unfair that the carrier got away with not funding the annuity, one needs to remember that the purpose of an MSA is to provide for unknown future medical expenses calculated in an unreasonable manner to begin with. If there are no expenses, carriers have no reimbursement rights or control over those funds and that’s not fair either. This is the right outcome and the North Carolina appellate court should be commended for arriving at it.