Jay J . Sangerman, PLLC
171 East 84th Street, Unit 21B
New York, New York 10028
212-439-0056 - facsimile

Please note that, although this outline refers to Workers Compensation, according to CMS, Set-Aside Arrangements also are required in liability cases.  Generally, CMS will not review the Set-Aside Arrangement in liability cases, unless there should be a large recovery.  The lack of review, do to the CMS work load, does not mean that a Set-Aside Arrangement is not required in liability cases.                                                                                                                                  


UPDATE, October 10. 2008:     Should MSAs be set up in all cases, whether Worker’s Compensation or Liability Cases?  Probably yes.  The MSA is NOT required under the law.  Set forth below is only what CMS reviews under ordinary circumstances.  So, why do a MSA?  The MSA, if properly developed, sets a “cap” on the liability for Medicare payments for medical care causally related to the funds received in a settlement.  In the absence of the MSA, the entire settlement amount is available to pay for causally related Medicare medical services.  As to liability to all involved in the case, including attorneys, plaintiff and defense, as well as to insurance companies, it appears that there can be liability, but the issue continues to be discussed.

There are active discussions being taken by CMS and various industry groups in regards to Medicare Set-Aside Agreements.


April 6,  2006
This outline is (c) by Jay J. Sangerman, Esq.


 I. Introduction.


  A. Purpose of a Medicare Set-Aside Trust.


        • 1. Medicare Set-Aside Trusts are instruments for the placement of a defined amount of funds received in worker's compensation (WC) cases for purposes of future medical needs which would otherwise be paid for by Medicare.  It is important to note that the funds in the trust are not for payment of any medical needs related to the WC injury, but exclusively for those which would otherwise be covered by Medicare.  Therefore, Medicare Set-Aside Trusts are useful to the beneficiary of a WC action because a determination will generally have been made as to the amount of the WC settlement (commutation cases) has been allocated for future Medicare-covered medical expenses, giving beneficiaries security with regard to the amount that is to be used to pay for an individual’s disability related expenses.
        • 2. Medicare Set-Aside Trusts are also a useful administrative mechanism to Medicare in WC commutation cases in that such vehicles enable Medicare to identify WC situations that would otherwise go unnoticed and which, in turn, prevents Medicare from making mistaken payments.  In such cases, Medicare greatly increases the likelihood that no Medicare payment is made until the set-aside arrangement’s funds are depleted, thereby providing Medicare security with regard to the amount that is to be used to pay for an individual’s disability related expenses.
        • 3. Set-aside arrangements are only used in WC cases that possess a commutation aspect; they are not used in WC cases that are strictly or solely compromise cases.
        • 4. A MSA is not necessary when resolution of the WC claim leaves the medical aspects of the claim open.  However, a MSA is appropriate where the resolution of the WC claim permanently closes the medical aspects of the claim, and the claimant will require future medical services related to the WC claim that Medicare would otherwise reimburse.
        •    5. These set-aside arrangements likely should not be created until the individual’s condition has stabilized so that it can be determined, based on past experience, what the future medical expenses may be.
        • 6. A MSA is recommended by CMS where the claimant is covered under a group health plan or a managed care plan or has coverage under the VA, because such coverage may be reduced or eliminated in the future.
        •    7. According to CMS, there should be no need for an MSA in the following instance:
          • i. The facts demonstrate that the injured party is only being compensated for past medical expenses (i.e., for services furnished prior to the settlement);.
          • ii. There is no evidence that the individual is attempting to maximize the other aspects of the settlement (e.g., the lost wages and disability portions of the settlement) to Medicare's detriment; and
          • iii. The individual's treating physicians conclude in writing that to a reasonable degree of medical certainty the individual will no longer require any Medicare-covered treatments related to the WC injury.
        •   8. As set forth below, the funds set aside in a Medicare Set-Aside Trust can be structured, thereby, providing for the tax advantages of the Internal Revenue Code Section 104 (a).
      • B. Medicare's Right to Subrogation and the Medicare Secondary Payer (MSP) Rule.
        • 1. 42 CFR 411.46 requires that all WC settlements must adequately consider Medicare's interests.  Medicare regulations at 42 CFR 411.46 state that:
          • If a lump-sum compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of the work-related injury or disease, Medicare payments for such services are excluded until medical expenses related to the injury or disease equal the amount of the lump-sum payment.
        • Payment under Medicare may not be made for any items or services to the extent that payment has been made or can reasonably be expected to be made promptly under (1) a workers’ compensation law or plan, (2) a no-fault or liability insurance policy or plan, or (3) an employer group health plan.  See Soc. Sec. Act 1862(b)(2)(A).  Medicare’s liability for payment in these situations is secondary to that of the workers’ compensation or employer group health plan or the no-fault/liability insurer. This exclusion is called the Medicare Secondary Payer (MSP) rule.  If it is uncertain whether an insurer or employer group health plan will pay, Medicare usually will make a conditional payment.  The conditional payment will be recovered later if it is determined that Medicare’s liability is secondary.  If the primary payer is responsible for and pays only a portion of the beneficiary’s bill, Medicare may make secondary payments to supplement the primary payer’s payment. 42 CFR 411.32 , 411.33.  The Medicare manuals (3407.8 of the MIM, 2370.8 of the MCM) state:
          • When a beneficiary accepts a lump-sum payment that represents a commutation of all future medical expenses and disability benefits, and the lump-sum amount is reasonable considering the future medical services that can be anticipated for the condition, Medicare does not pay for any items or services directly related to the injury or illness for which the commutation lump-sum is made, until the beneficiary presents medical bills related to the injury equal to the total amount of the lump-sum settlement allocated to medical treatment.
        • 2. Medicare may bring a subrogation action against any entity that is responsible for payment under the MSP rule, including third-party administrators, or against any provider, physician or supplier that has received a payment from an entity that has primary payer responsibility.  The law further provides for subrogation, to the extent Medicare payment has been made for an item or service, to any right to payment for the item or service from the third party having primary payer responsibility.  See Soc. Sec. Act 1862(b)(2)(B).  The recovery may be made from anyone who is responsible for making the primary payment or from anyone who has received the primary payment. See 42 CFR 411.24.
        • 3. In the case of liability insurance settlements and disputed claims under employer group health plans and no-fault insurance, the third-party payer must reimburse Medicare even if it has already reimbursed the beneficiary or another party.  See 42 CFR 411.24(i).
        •  II. Workers’ Compensation.


      • A. Medicare Will Not Pay If Workers' Compensation Paid.
        • No Medicare payment will be made if workers’ compensation pays an amount that (1) equals or exceeds the gross amount payable by Medicare without regard to deductible and coinsurance, (2) equals or exceeds the provider’s, physician’s, or supplier’s charges for Medicare covered services, or (3) the provider accepts or is required under the workers’ compensation law to accept as payment in full.  If workers’ compensation pays less than these amounts, secondary Medicare payments can be made.
    • B. Lump-Sum Settlements.
        • 1. Negotiated compromise settlements of workers’ compensation claims provide less than full benefits for both income replacement and medical expenses.  If the settlement is approved by the beneficiary and the workers’ compensation agency, the lump-sum settlement is deemed to be the workers’ compensation payment, and the limitation on Medicare secondary payments applies.  Medical expenses that occur after any final settlement may be paid by Medicare insofar as they are not covered by the settlement.
        • 2. Medicare makes a distinction between lump-sum settlements that are commutations intended to compensate the individual for future medical expenses and those that are compromises intended to compensate the individual for past medical expenses.  In the case of commutations, Medicare conditional benefits can be paid using a Set-Aside Trust.  Medicare payment is excluded in such cases until applicable medical expenses equal the amount of the lump-sum payment.
        • 3. Lump sum compromise settlements represent an agreement between the WC carrier and the injured individual to accept less than the injured individual would have received if he or she had received full reimbursement for lost wages and life long medical treatment for the injury or illness. In a typical lump sum compromise case between a WC carrier and an injured individual, the WC carrier strongly disputes liability and usually will not have voluntarily paid for all the medical bills relating to the accident.
        •     4. WC commutation cases are settlement awards intended to compensate individuals for future medical expenses required because of a work-related injury or disease.
        • 5. A WC lump-sum settlement agreement can possess both WC compromise and commutation aspects.  Therefore, lump-sum settlement agreements can designate part of a settlement for an injured individual’s future medical expenses and simultaneously designate another part of the settlement for all of the injured individual’s medical expenses up to the date of settlement.
        • 6. Until the individual actually becomes entitled to Medicare, the set-aside arrangement fund must not be used to pay the individual’s expenses which are not medical expenses related to the injury for which Medicare would otherwise pay.  That is, an individual’s medical expenses must be paid from some other source besides the set-aside arrangement when the individual is not a Medicare beneficiary or when such medical expenses would not otherwise be covered by Medicare for the WC injury.  Once the individual actually becomes entitled to Medicare, then the trustee is permitted to make payments for the individual’s medical care (for Medicare-covered services only which are related to the WC injury) from the Set-Aside Trust.
        • 7. CMS seeks a provision in the settlement agreement to provide for a mechanism so that items or services that were not covered by Medicare at the time of the settlement, but later become covered, are transferred from the commutation specified for non-Medicare covered items and services to the set-aside arrangement, e.g., outpatient prescription drugs become more widely covered.
      • C. CMS Permits Set-Aside Trusts To Be Structured.
        • 1. The settlement funds placed into a Medicare Set-Aside Trust can be structured.
        • 2. Medicare will not make any payments for services performed until all funds in the Set-Aside Trust received to date are completely exhausted.
        •     3. In the instance of a "structure," Medicare may "turn on and off" during various months.  For instance, when there is medical treatment due to a WC related injury and the Medicare related costs are greater than the funds in the Medicare Set-Aside Trust, Medicare will pay for the cost of medical care.  However, thereafter, the next month's (or months') payment will need to be used for payable expenses prior to Medicare once again paying.  Therefore, Medicare could, theoretically, "turn on and off" each month.  The trust administrator will need to give an accounting to Medicare demonstrating that all funds have been used prior to Medicare's "turning on" again. 
        • 4. Because of the possibility that Medicare will be "turned on and off," be careful that the monthly payments in the "structure" are sufficiently large to provide for anticipated Medicare medically related WC expenses.  The CMS Regional Offices could find "structured settlements" too burdensome to review, if they need to review the funds in the Medicare Set-Aside Trust monthly to determine whether Medicare needs to be "turned on."
        •    5. The seed money must include an amount equal to the amount of monies calculated to cover the first surgery procedure and/or replacement and two years annual payments.  The remainder of the approved amount should be divided by the remainder of the claimant's life expectancy (or shorter defined period if CMS had agreed to it).  Subsequent annual deposits are to be based upon a set "anniversary date" which cannot be more than one year after the settlement date.
        • 6. Medicare will not make any payments until the MSA administrator can verify that the funds apportioned in the MSA have been exhausted, including any carry-forward amount, i.e., if the funds are not exhausted during a given period, then the excess funds must be carried forward to the next period.
      •   D. CMS Review Prior to Settlement.
        • 1. The CMS Regional Office will review a proposed settlement, under the thresholds and criteria set forth below, including a set-aside arrangement and will give a written opinion on which the potential beneficiary and the attorney can rely, regarding whether the WC settlement has adequately considered Medicare’s interests per 42 CFR 411.46.  These settlements are handled on a case-by-case basis.  Once the CMS Regional Office has given written assurance that the set-aside arrangement is sufficient to satisfy the requirements at 42 CFR 411.46 when the set-aside arrangement is established and the settlement is approved, the CMS Regional Office is to set up a procedure to follow the case.
        • 2. CMS reviews set aside arrangements in the following circumstances.  The fact that CMS does not review does not mean that a set-aside is not required.  The thresholds are merely set due to the CMS work load.
          • a. For injured individuals who are already Medicare beneficiaries where the total claim is $10,000.00 or more.  Important:  Notwithstanding the threshold, all individuals must consider Medicare’s interests prior to settling their WC claim regardless of the size of their settlement amount.
          •     b. For an injured individual not yet on Medicare, but who has a “reasonable expectation” of Medicare enrollment within 30 months of the settlement date and the anticipated total settlement amount for future medical expenses and disability/lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000. 
          • "Reasonable expectation" is in any of the following circumstances:
            • i. The individual has applied for Social Security Disability benefits.
            • ii. The individual has been deniedapplied for Social Security Disability benefits, but anticipates appealing, or is in the process of appealing or re-applying.
            • iii. The individual is 62 years of age (i.e., will be eligible for Medicare by reason of age).
            • iv. The individual has an End Stage Renal Disease.
        •    3. Computing the Total Settlement Amount:  The computation of the total settlement amount includes, but is not limited to, wages, attorney fees, all future medical expenses, and repayment of any Medicare conditional payments, and that payout totals for all annuities to fund  the above expenses should be  used rather than cost or present values of any annuities.
        •    4. Prescription Drug Coverage:  As of January 1, 2006, must include in the MSA the cost of prescription coverage (Medicare Part D).  Therefore, the cover letter to CMS must separate out the amounts for future medical treatment and the amounts for future prescription drug treatment (and how the cost was calculated).
        • 5. If such injured individual fails to consider Medicare’s interests, then Medicare may preclude its payments pursuant to 42 CFR 411.46 once the injured individual actually becomes entitled to Medicare.  For an individual who does not meet these thresholds, Medicare will pay claims related to the WC injury.
    • E. Criteria CMS Uses in Evaluating the Amount Set-Aside.
    • CMS uses the following criteria in evaluating the amount of a proposed settlement to determine whether there has been an attempt to shift liability for the cost of a work-related injury or illness to Medicare.  Specifically, is the amount allocated for future medical expenses reasonable?  If Medicare has already made conditional payments their repayment also has to be taken into account.
      • 1.  Date of entitlement to Medicare.
      • 2.  Basis for Medicare entitlement.
      • 3.  Type and severity of injury or illness.
      • 4.  Age of beneficiary and rated age.
      • 5.  WC classification of beneficiary (e.g., permanent partial, permanent total disability, or a combination of both).
      • 6.  Prior medical expenses paid by WC due to the injury or illness in the 1 or 2 year period after the condition has stabilized.  If Medicare has paid any amounts, they must be recovered.
      • 7.  Amount of lump sum or amount of structured settlement.  What is the allocation between income replacement, loss of limb or function, and medical benefits.
      • 8.  Is the commutation for the beneficiary’s lifetime or for a specific time period? If not for lifetime, what is the basis?  Is there a reasonable relationship between the respective allocation for services covered by Medicare and services not covered by Medicare.  What is the State law regarding how long WC is obligated to cover the items or services related to the accident or illness?  CMS states that a set-aside arrangement should be funded based on the expected life expectancy of the individual unless the State law specifically limits the length of time that WC covers work related conditions. If an estimate of the beneficiary’s estimated longevity was not submitted, one must be obtained.
      • 9.  Is the beneficiary living at home, in a nursing home, or receiving assisted living care, etc.?  If the beneficiary is living in a nursing home, or receiving assisted living care, it should be determined who is expected to pay for such care, e.g., WC (for life time or a specified period) from the medical benefits allocation of lump sum settlement, Medicaid, etc.
      • 10.  Are the expected expenses for Medicare covered items and services appropriate in light of the beneficiary’s condition?
      • 11. Set aside need not be indexed for inflation, but may not be discounted to present-day value.

    •   F. Documentation Required to be Given to CMS prior to the approval of any arrangement.
      •    1. A copy of the settlement agreement, or proposed settlement agreement.
      • 2. A copy of the life care plan (if there is one), and, if the life care plan does not contain an estimate of the injured individual’s estimated life span, then CMS states that a “rated age” shall be obtained from life insurance companies for injuries/illnesses sustained by other similarly situated individuals. 
      • 3. Documentation which gives the basis for the amounts of projected expenses for Medicare covered services and services not covered by Medicare (this could be a copy of letters from doctors/providers documenting the necessity of continued care).
      •     4. A provision in the settlement agreement to provide for a mechanism so that items or services that were not covered by Medicare at the time, but later become covered, are transferred from the commutation specified for non-Medicare covered items and services to the set-aside arrangement, e.g., outpatient prescription drugs become more widely covered.
      • 5. Set-aside proposal must state whether it is based upon the WC fee schedule or full actual charges.  The administrator (both professional and self-administrators) will need to use the same schedule analysis in making payments.
      • 6. Must separate out the future medical from prescription drugs.
      •    7. Must include whether the individual has a designated representative or guardian and whether the individual has been declared incompetent.

    •    G. CMS Review After Set-Aside Trust Established.
      • 1. Medicare will not make any payments for individuals that possess lump sum arrangements until all of the funds within the arrangement have been depleted.
      • 2. The administrator of the Set-Aside Trust must forward annual accounting summaries concerning the expenditures of the arrangement to the contractor responsible for monitoring the individual’s case.  Final accountings are also required to show that all funds have been exhausted on Medicare related payments prior to Medicare's paying for such services.
      •  III. Administration.


    •   A. Was set-aside based upon the WC fee schedule or full actual charges?  The administrator (both professional and self-administrators) should make payments from the set-aside on the same basis.
    • B. Annual accountings are required.  Must separate out the disbursements  for medical needs from pharmaceutical needs.
    •   C. Administrative fees/expenses for administration of the Medicare set-aside arrangement and/or attorney costs specifically associated with establishing the MSA cannot be charged to the MSA.
    •  IV. Medicare Set-Aside and Medicaid.


  •   It is a significant issue of what the plan should be when the injured party is also a recipient of Medicaid services.  At this writer's request, CMS included this issue in its July 11, 2005 memorandum to regional administrators.  CMS takes no position on this issue and leaves it up to individual Medicaid districts to evaluate the situation.  CMS agreed with the inquiry that a MSA and an SNT may be able to be integrated into one trust document.  Therefore, in the instance of an injured party having a special needs trust, there may be the need for two supplemental needs trusts, one of which is a MSA/SNT.  Medicaid districts must consider Medicare as primary to Medicaid, and Medicare considers the MSA as primary to Medicare.  Therefore, there should be no objection by the Medicaid districts to such proposal.









     Jay J. Sangerman's firm, Jay J. Sangerman, PLLC, is a boutique law firm which practices in the areas of special needs trusts, trusts and estates and elder law.  The firm is listed in The Bar Register of Preeminent Lawyers published by Martindale-Hubbell.  The practice his a major concentration in special needs trusts and related issues in the settlement of medical malpractice and personal injury matters.  The practice, therefore,  includes estate planning, estate administration and estate litigation; supplemental needs trusts; Medicare Set-Aside Trusts; assisting in the settlement of tort claims by maximizing the settlement through effective estate planning; guardianship proceedings; Medicaid planning and eligibility; and hospital discharge planning and nursing home placement. 


     The firm serves as a consultant to attorneys in the settlement of cases, as well as for estate planning upon the anticipated receipt of funds.  The firm prepares fiduciary accountings for trust departments, executors and trustees and guardians.  Our clients include individuals, hospitals and nursing homes, financial institutions and insurance companies.  The firm practices law in New York, Florida and New Jersey.


     Jay J. Sangerman has been an adjunct professor teaching Estate Planning and Gift Taxation at New York University School of Continuing and Professional Studies.  Mr. Sangerman speaks extensively on Estate Planning, Elder Law and planning for disabled adults and children.  Mr. Sangerman graduated cum laude from Yeshiva University's Benjamin N. Cardozo School of Law, where he was a member of Law Review, and an Alexander Fellow which provided him the opportunity to be a full-time student clerk to Chief Judge Jack B. Weinstein of the United States District Court, Eastern District of New York.  Upon graduation, Mr. Sangerman worked for Fried, Frank, Harris, Shriver & Jacobson, where he handled complex litigation matters.  Mr. Sangerman is admitted to practice in New York, Florida and New Jersey.


Jay J. Sangerman, PLLC maintains a web page which contains articles pertaining to the areas of law in which it practices.

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    171 East 84th Street, Unit 21B
    New York, New York 10028
    212-439-0056 - facsimile