There is a $20 billion calamity on the tracks ahead, and no one seems to care. As this train hurtles ever closer to its inevitable demise, the passengers ride oblivious. A program created to protect those passengers – U.S. taxpayers -- seemingly will do anything but what was originally intended.
Medicare Set Asides were developed with the good intentions of protecting Medicare, and the taxpayers that fund it, from unnecessarily paying for injuries and illnesses that are the prior responsibility of third parties. Quite simply, people were taking settlement money received from a general liability or workplace accident—money that was supposed to pay for future medical needs from the injury—and were spending it on anything but its intended purpose. While this was great for the bass boat and travel industries, it was a less than stellar deal for the U.S. taxpayer, who wound up paying for the injured persons’ care once they were eligible for Medicare.
Enter the MSA: a vehicle designed to protect a designated portion of settlement funds by placing them aside and requiring they be used for the purpose intended. This is not new. The roots of today’s MSA lie in the passing of the Medicare Secondary Payer Act of 1980. That act was significantly strengthened in 2003, however, and this has resulted in far more activity for the workers’ compensation industry over the past decade.
True to form, the government has not made implementation easy. Extremely detailed reporting requirements, extensive fines for the Responsible Reporting Entity (even for rules not established at the time) and a complex process made for a confusing road for employers and payers. An entire industry has sprung up to manage this process. The risks of not complying are serious, and the liability for getting it wrong is huge. The Medicare Set Aside today is integral to virtually any settlement situation in the workers’ compensation industry.
All of this is done to protect the U.S. taxpayer from Joe Sixpack and his desire for a bass boat.
I am in no way an expert on MSAs. I have, however, spent time over the last two years attending conferences and talking to various experts on the topic, trying to better understand their purpose and procedure. I discovered a singular statistic that absolutely floored me. It was a fact that, in my opinion, flies in the face of logic and makes all the burdened activity around the MSA seem pointless.
What is so shocking? Only 4% of completed MSAs are professionally administered.
The rest, 96%, are given directly to the claimant/recipient and are self-managed. That means that, when all is said and done, when the calculations are made, when the submissions and approvals are complete, the money that is set aside for the purpose of protecting Medicare and the U.S. taxpayer is given right back to Joe Sixpack, the guy we were trying to protect ourselves from in the first place.
It makes no sense. None.
I am not saying Joe Sixpack is a bad guy. I am not saying his intents are not pure. I am saying that managing payments from an MSA, making sure they are properly coded and complying with mandated reporting is difficult. The process may be well beyond the ability of an injured worker turned fund manager.
Even with his best efforts, Joe could be in trouble when Medicare starts paying for his health care. If he has not dotted every “i” and crossed every “t,” as well as made sure all expenditures were classified to show appropriate care for the affected injury, he could find himself denied needed coverage by Medicare.
And when an army of Joes are pounding at the door of Medicare, because of possible denial of coverage, something is going to have to give.
So how bad is it? What are we looking at here?
For that I turned to Ken Paradis, chairman of Ametros Financial, a company that offers professional administration of MSAs. He confirmed that my suspicions were potentially accurate and provided some very interesting – make that scary – numbers.
In 2010, the Centers for Medicare and Medicaid Services (CMS) approved $1.4 billion in MSAs. Assuming a consistent approach since 2001, the inception of the current program, we can estimate that $16.8 billion have been approved for MSAs in the past 12 years. Using a straight-line estimation, this could mean that $16.1 billion is being self-managed.
Not all MSAs are reviewed by CMS—some are set up with no input or review by the government—and these Class III MSAs represent a completely unknown addition in risk to the long-term health of Medicare. Paradis indicated from experience that 20% of MSAs may be in this category. Using the base numbers from our equation, that estimate brings the total risk pool to perhaps $20 billion.
That figure represents true risk for the nation and our industry.
It seems that many are under the impression that self-administered funds are managed with some level of competence by Joe Sixpack’s counsel. However, the existence of waiver or hold-harmless indemnification language in many settlement agreements tells a different tale. The November 2013 manual on MSAs included guidance for non-professionally administered MSAs, which tells us someone out there might need that advice.
After all the convoluted effort focused on setting up MSAs to protect the interests of Medicare, the guidelines on administration offered by CMS are surprisingly simple:
- Deposit the fund into an interest-bearing account.
- Use the fund only for the MSA settlement injury.
- Use the fund only for expenses covered by Medicare.
- Pay according to the appropriate fee schedule.
- Prepare and submit an annual account report to CMS.
The first three seem easy enough to understand. The last two, however, are where the wheels will most likely come off the bus for our wayward injured worker turned financial wizard. Fee schedule and medical classification codes are a science unto themselves, yet we expect Joe Sixpack to navigate that labyrinth with a ninja-like accounting skill set that many industry professionals themselves do not possess.
As for those detailed annual reports, anecdotal information shows CMS hasn’t actually seen many of those over the last decade or so. They, and we, are operating blind in that area.
And, as I’ve indicated, it is a damn big area.
The harsh truth is, no one knows what is out there. No one knows what is coming. We are blindly turning on faith that all this energy and effort will somehow end up doing what was intended. Trust me; this is not going to end well.
The cost of professional administration is a mere pittance when compared with the cost and complexity of setting up an MSA. It seems even smaller when we fully recognize the consequences at hand. Some in the industry are openly suggesting that the expense of professional administration could easily be offset by using it in place of the costly and slow approval process. By skipping the approval but securing the long-term health of the MSA, the greater goal of limited liability will be met. The indemnity saved by settling the case sooner would in many cases more than offset the cost of a professional manager.
Under the current scenario, the taxpayers will clearly be on the hook, but the workers' comp industry should not be foolishly complacent. There are potential clawbacks in our future, and many who think they've put these issues to bed may be again facing a call for more cash by our government.
Why the government fails to close the loop on this and secure the protection it originally intended is beyond comprehension. We are requiring the crafting of a lengthy and expensive letter, getting it reviewed, edited and approved, and then no one is putting a stamp on the envelope.
All that effort, all that expense, only to wind up where we were to begin with; with the exception of our new sense of security. Our false sense of security.
This is part of a much bigger issue: 10,000 retirees are entering the Social Security system every day. The Medicare trust fund will be broke by 2022 at its current expenditure rates, and the ability of Joe Sixpack to manage his funds has never been more critical. There is a train wreck coming, and we are all on board for the ride. An army of angry Joes will soon be pounding on our door, and the $20 billion may be nowhere to be found.
After all the effort and fuss, I find myself wondering: Why?
