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Submitted by Berndt Anderson, Beacon Mutual Insurance Company of Rhode Island and Rona Finkelstein, Injured Workers' Insurance Fund of Maryland
Introduction
By now, those state funds whose states permit the closure of future medicals in full and final settlements have become painfully familiar with The Medicare Secondary Payer Act (the “Act”) and specifically 42 USC §1395y. That statute, enacted in 1977, provides that Medicare will be the secondary, and not primary, payer of medical bills of persons on Medicare whose injuries or illnesses were occasioned by an event for which a workers’ compensation carrier is liable. This article will examine the hurdles occasioned by this law, both those with which workers’ compensation carriers have been dealing, and the newest impediment just recently announced.
Yesterday's continuing hurdles
In 2001, Medicare announced that it would enforce the Act against all parties to a full and final workers’ compensation settlement that closed out the payment of future medicals to the claimant. The Center for Medicare & Medicaid Services (CMS), the federal agency charged with administering the Medicare program, advised at that time that parties to a workers’ compensation settlement that sought to limit or close future medical payments to a qualified claimant could obtain approval of the settlement and “medical set-aside” allocation by CMS. Since then, workers’ compensation carriers have struggled to understand the requirements of the law, the regulations and the CMS guidelines. This has not been an easy task, as the regulations are vague, and CMS has often provided contradictory and ever-changing advice.
Nonetheless, the workers’ compensation Medicare set-aside agreement (WCMSA) has emerged as a mechanism that appears to offer protection in those cases that CMS will review. In this scenario, Medicare will pre-approve certain full and final settlements if sufficient funds are set aside to cover future medical expenses arising from the workers’ compensation injury or illness. Should Medicare approve the settlement, the parties are protected against future liability.
The Medicare set-aside process, however, remains a difficult one. First, it adds cost to the settlement. ...An otherwise cost-effective full and final settlement may become too costly to consider. ...In some cases, the delay has been so long that the settlement has broken down.
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The Medicare set-aside process, however, remains a difficult one. First, it adds cost to the settlement. For example, the insurer typically employs an outside vendor to analyze the medical history and create the Medicare set-aside agreement or chooses to use in-house resources for that purpose. In either case, it may be an expensive proposition. An otherwise cost-effective full and final settlement may become too costly to consider. Moreover, depending upon the particular Medicare contractor that has approval authority, the process for obtaining Medicare approval may take months. In some cases, the delay has been so long that the settlement has broken down.
In either case, the carrier is faced with a continuing open claim. One can understand, therefore, why the Medicare process currently in place is viewed as an impediment to settlement.
The most recent Medicare pronouncement
It is important to note that before January 1, 2006, Medicare did not cover prescription drugs. Thus, parties to a full and final settlement were not required by Medicare to allot funds in a WCMSA for the cost of anticipated prescription drugs. Starting January 1st of this year, however, a Medicare beneficiary can choose to be covered by a Medicare plan under Medicare’s new Part D coverage. This change has resulted in the most recent impediment to settlement: the new internal policy by CMS¹ addressing the payment of prescription drugs under Part D and its effect on WCMSAs.
There are three relevant time frames and different rules applying to WCMSAs filed during these periods:
WCMSAs received prior to 1/1/06
WCMSAs received by the Coordination of Benefits Center (COBC) before January 1, 2006 were not required to include a prescription drug component.
WCMSAs received sent on or after 1/1/06
WCMSAs sent to the COBC on or after January 1, 2006 must include a prescription drug component. Specifically, the cover letter enclosing the submission must separate out the cost for future medical treatment (Parts A and B) and future prescription drug treatment (Part D). The submitter must also explain how the future prescription drug treatment amount was calculated. In other words, was the calculation based, for example, upon actual costs, wholesale prices, or 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 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.
The written response by CMS to WCMSAs received on or after 1/1/06 will include three amounts: the total WCMSA amount for future medical treatment, the submitted prescription drug amount, and the combined total. The combined total is the amount that must be noted in the final settlement agreement. CMS indicates that once the fully executed settlement agreement and Workers’ Compensation Commission Order approving the settlement is ultimately submitted to COBC, the parties can rely upon the written opinion of CMS that the settlement adequately protects Medicare’s interests.
Following approval, the total WCMSA amount must be deposited in an interest-bearing account and its administrator must forward to the Medicare contractor an annual accounting, accounting separately for the medical and prescription drug charges.
WCMSAs submitted on or after 1/1/07
Effective January 1, 2007, Medicare’s Workers’ Compensation Review Center (WCRC) intends to independently review the WCMSA prescription drug component for adequacy. For WCMSAs 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.
A higher hurdle for settlements
The requirement that prescription drugs be included in a WCMSA will add additional cost and confusion to the settlement of a workers’ compensation claim that closes out future medicals.
Based on our experience with WCMSAs before January 1, 2006, it is certain that the size of the average WCMSA will be substantially greater. Even before January 1, 2006, Medicare required that a party submitting a set-aside for pre-approval include, among other things, a list of all payments made by the employer/carrier on the claim. This list, of course, included any payments made for prescription drugs. In addition, most vendors preparing proposals for WCMSAs broke out the projected future medical costs into those covered, and those not covered by Medicare. In most settlements, at least some, and at times the majority of the cost of future medical care, was for payment of prescription drugs. This is because, generally, cases do not settle until the employee is at or near maximum medical improvement. Accordingly, most of these employees do not need additional surgery or extensive medical treatment. However, most will still have permanent impairments and will need pain medication, anti-inflammatories, or other medications to treat their remaining chronic conditions. Some vendors have estimated that on average, 50% of the cost of future medical care is for payment of prescription drugs. If this is correct, that means, on average, the cost of Medicare set-asides will now double, unless something is done to get these cost projections under control.
Previously, projections of the future cost of prescription drugs have been based primarily on the assumption that the employee will continue to use the same prescription drugs, at the same rate after the settlement and perhaps for the rest of his life, as he had been using before the settlement. This assumption overstated the actual future use of the drugs in many instances.
Before the settlement, the employee will have gone through the acute phase of his injury or illness. Accordingly, he will have required much more medication than he will once he reaches maximum medical improvement. Further, a number of medications have contraindications to long-term use. If a treating physician were asked whether he intended to prescribe a particular medication for the rest of the patient’s life, often he would respond with a resounding, “No.” Before January 1, 2006, no one cared if the future prescription drug estimates were overstated. Now that prescription drugs must be accounted for in a WCMSA, it is important to ask the treating physician what he or she expects the employee’s future use of prescription drugs to actually be. A favorable medical report from the treating or examining physician may allow a vendor to reduce the WCMSA by thousands, if not tens of thousands, of dollars.
Once the vendor determines from the medical reports, and, hopefully, with the assistance of the treating physician, the type, quantity, and duration of the prescription drugs an employee is likely to use to treat his or work-related injury in the future, the vendor has to decide how to price these drugs. There are a number of questions that will have to be answered over the next few months as the parties and CMS work through these issues.
At what rate should the drugs be priced? At the average wholesale, actual cost, or workers’ compensation fee schedule rate? 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 vendor probably could use the lower, actual cost in making the projection. Most Medicare regions have agreed to accept the workers’ compensation fee schedule for medical care cost projections, even if that is a lower rate than the rate at which Medicare would generally pay providers. Presumably, if there were a workers’ compensation fee schedule for prescription drugs that was lower than the average wholesale cost, Medicare would accept this lower rate to project future prescription drug costs in a WCMSA.
Apparently, CMS has taken the position that, for set-aside purposes, 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, the vendor should need only include 95% of the future costs, since that is all that Medicare would pay. But what about taking advantage of the discounts and gaps in coverage that the new Medicare law includes? With Plan D, Medicare beneficiaries have to pay a co-payment of 25% up to $2,500. After that point, the 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, may the vendor discount off the average wholesale price for these deductibles and co-payments? There are, of course, a number of other plans available. If an employee indicates a desire to purchase a particular plan that reduces the gap and co-pays, can the set-aside be calculated on the assumption that he does purchase that plan? Can the employee use the set-aside to pay the premiums for his or her Medicare drug plan? It would seem the vendor should be able to calculate the set-aside at least based on the standard deductions and average gap. Nevertheless, a response from one CMS office indicated that the vendor should not discount for these co-pays and deductibles.
The decision by CMS not to start independently reviewing and pricing the WCMSA prescription drug component for adequacy until January 1, 2007 is undoubtedly a recognition by CMS that there will be a number of questions, including those above, that have to be answered before CMS can start its independent review process. Presumably, CMS will be issuing additional notices in the upcoming year to give definite answers to some of these questions. One answer, however, is already clear. Starting on January 1, 2006, WCMSAs will be larger and more costly, making it even more difficult to settle certain workers’ compensation claims.
¹ To view CMS memo, click here.
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