Leading Edge Ideas for Settlements with Medicare/Social Security Entanglement

Common problems with settling cases where the claimant is Medicare- or Social Security Disability- entitled.

The hardest-to-settle cases are often those where the claimant is currently entitled to Social Security disability and/or Medicare benefits. There are two common obstacles posed by Medicare or Social Security disability entitlement are (1) sky-high future medical allocations necessary to satisfy the Secondary Payment obligation of the carrier/employer make the overall settlement unpalatable; and (2) settlements where the claimant/petitioner is afraid to take a lump-sum settlement because their monthly Social Security disability check may decrease.

Problem 1: Medicare’s Future Interest is driving up the settlement.

We must consider Medicare’s present- or future-interest in any settlement where the right to future medical benefits from the carrier/employer is being waived. This comes into play in the following ways in the jurisdictions I practice in when the claimant/petitioner is Medicare entitled:

  • New York: Section 32 settlements (WCL §32).
  • New Jersey: Section 20 settlements (N.J.S.A. 34:15-20).
  • Longshore: Section 8(i) Settlements (33. U.S.C. 908[i]).

If we determine that Medicare has an interest we usually “set aside” funds from the settlement proceeds to cover any future medicals costs which would “shifted” from the carrier/employer onto Medicare. But there are cases where the legal issues or fact pattern support a minimal settlement exposure, but settlement is not attractive because Medicare’s future interest is so great. For example a case where the parties agree to settle the claim (including future medical) for $50,000 lump sum, but then the Medicare Secondary payer allocation is determined to be $500,000, far exceeding the amicable settlement range for the claim.

Problem 2: Social Security will reduce their entitlement because of their workers’ compensation settlement.

Disability payments from private sources, such as private pension or insurance benefits, do not affect Social Security disability benefits. However, workers’ compensation and other public disability benefits may reduce a recipient’s Social Security benefits. If a petitioner/claimant receives workers’ compensation benefits and Social Security disability benefits, the total amount of these benefits cannot exceed 80 percent of their pre-accident “Average Current Earnings (“ACE”). When a lump sum settlement is obtained, the recipient may see their Social Security benefit significantly reduced.

Solutions

Here are three techniques to obtain lump-sum dismissal settlements in cases where the Medicare Secondary Payer Act or entitlement reductions complicate settlement.

Solution to Huge Set Aside: Using the ACA to Fund Coverage

For cases where the set-aside allocation greatly exceeds the value of the underlying claim, consider using the Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 (2010) (“ACA”) “exchange” markets to purchase a personal health policy to cover just the conditions at issue in the workers’ compensation claim.

For example, a case in which the facts or legal posture are such that the parties which to settle the underlying workers’ compensation matter for $100,000. However (presuming Medicare eligibility for the claimant) Medicare’s future exposure for medical care related to the alleged condiition is $1,000,000. Because Medicare’s recovery contractor does not consider the viability of the underlying workers’ compensation claim – i.e., how strong the claimant’s case is – the employer/carrier can not settle the case and foreclose future medical unless an additional $1,000,000 is “set aside.” This has a negative effect on the ability of the parties to settle “marginal” cases where medical causation is typically an issue.

In resolving a case where the set aside significantly outweighs the settlement value of the case it may be preferable to purchase a policy on the Affordable care Act exchange to cover a specific condition. Where set aside is potentially large, purchasing a private health policy on an exchange where a pre-existing condition can not be used as a basis to deny issuance may be viable. The employer/carrier is then insulated from the Medicare Secondary Payer exposure.

Pitfalls & Problems.

  • The “open enrollment period” to purchase a plan on the exchanges is only open from November through January of each year.
  • Navigating the state exchanges is difficult.
  • The plans offered quote a monthly cost; professional help will be necessary to find and price appropriate plans.

Solution to Reduction in Social Security Benefit in a New Jersey Settlement: Using the New Jersey Permanent Partial Disability rate as the Allocation rate

Legal authority for approach.

Section 224 of the Social Security Act provides in pertinent part:

Reduction of Benefits Based on Disability on Account of Receipt of Workmen’s Compensation
Sec. 224. (a) If for any month prior to the month in which an individual attains the age of 62 —
(1) such individual is entitled to benefits under section 223, and
(2) such individual is entitled for such month, under a workmen’s compensation law or plan of the United States or a State, to periodic benefits for a total or partial disability (whether or not permanent), and the Secretary has, in a prior month, received notice of such entitlement for such month,
the total of his benefits under section 223 for such month and of any benefits under section 202 for such month based on his wages and self-employment income will be reduced (but not below zero) by the amount by which the sum of —
(3) such total of benefits under sections 223 and 202 for such month, and
(4) such periodic benefits payable (and actually paid) for such month to such individual under the workmen’s compensation law or plan, exceeds the higher of —
(5) 80 per centum of his “average current earnings”, or
(6) the total of such individual’s disability insurance benefits under section 223 for such month and of any monthly insurance benefits under section 202 for such month based on his wages and self-employment income, prior to reduction under this section.
***
(b) If any periodic benefit under a workmen’s compensation law or plan is payable on other than a monthly basis (excluding a benefit payable as a lump sum except to the extent that it is a commutation of, or substitute for periodic payments), the reduction under this section shall be made at such time or times and in such amounts as the Secretary finds will approximate as nearly as practicable the reduction prescribed by subsection (a).

The Social Security Administration Regulations (20 CFR 404.408(d)) provide that amounts included in the workmen’s compensation award which are specifically identifiable as being for medical, legal, or related expenses paid or incurred by the individual in connection with his workmen’s compensation claim, or the injury or occupational disease on which it is based, are excluded in computing the reduction. For purposes of figuring out what is excluded as an expense (usually, attorney’s fees) Social Security will look to the compensation award, compromise agreement, or court order which specifies or itemizes the amount of such expenses included in the workmen’s compensation award or agreement.

The relevant case law stands for the proposition that regardless of whether or not the claimant/petitioner was entitled to periodic payments, obtaining a lump sum settlement will be considered as “future periodic payments and as a substitute for them” and therefore the entire lump sum will be considered a payment, negating the claimant’s entitlement until the entire sum is absorbed. See Walters v. Flemming, 185 F. Supp. 288 (D.Mass., 1960). However, the regulations instruct Social Security to consider the terms of the settlement on the award or judgment entered quod erat demonstrandum. Therefore, a description of the future periodic payments that the lump-sum settlement is allegedly representing will be accepted by Social Security if it comports with tthe individual’s State’s (for LHWCA) compensation law (note that in Walters, supra, the Federal court reviewed the relevant Masachusett’s law in concluding that the lump sum represented a compromise of future periodic payments).

Social Security will consider the lump-sum to be “allocated” at the State’s maximum temporary total disability benefit rate until it is exhausted. At the current rates in effect, this means that the following amounts will be added together with the claimant’s ACE to determine of the claimant has exceed their 80% ACE:

  • New York: $3,234.60(max rate now in effect: $808.65 );
  • New Jersey: $3,420 (max rate now in effect: $855);
  • Longshore: $5,508.08 (max rate now in effect $1,377.02).

This offers a possible solution to the dilemma posed in this example: Prior to injury, the claimant’s average current earnings were $4,000 a month. Post-accident, the claimant was entitled to receive a total of $2,200 a month in Social Security disability benefits. However, if the claimant also received $2,000 a month from workers’ compensation, the total amount of benefits ($4,200) would exceed 80 percent of pre-accident average current earnings ($3,200). Social Security would reduce benefits by $1,000 per month. If the future periodic payments were settled into a lump sum under New York’s §32, New Jersey’s §20, or the Longshore Act’s §8(i), then there may be a large gap in time where Social Security would refuse to pay until the award was “absorbed” (Social Security’s terminology) and the Social Security benefit resumed.

Model language and technique.

In New Jersey, the workers’ compensation lump-sum settlement offered pursuant to Section 20 (N.J.S.A. 34:15-20) can contain language describing the terms of the settlement with an allocation describing a hypothetical permanent partial total award pursuant to N.J.S.A. 34:15-12 (calculator here)(example):
"In approving this proposed settlement, the Court finds that the Claimant's net recovery of $20,000 is equivalent to 12% permanent partial total disability, which, if not for significant issues of jurisdiction, liability, causal relationship or dependency which make this case appropriate for disposition pursuant to N.J.S.A. 34:15-20, would be payable at $228 per week for 90 weeks as per the N.J.S.A. 34:15-12 and N.J.S.A. 34:15-22. This allocation is provided for Social Security review purposes only."
The settlement document must also clearly set forth the attorneys’ fees, stenographic fees, medical costs (usually, cost for petitioner’s permanency examination), translator fees, and any other costs so that these fees and costs can be subtracted from the allocation for the purposes of calculating the post-award total income (Social Security Disability benefit plus theoretical workers’ compensation monthly allocation).

 

Solution to Reduction in Social Security Benefit in a New York Settlement: Using the New York Loss of Wage Earning Capacity/Classification rate as the Allocation rate

[For a legal discussion of the relevant federal guidelines, see above “Legal background,” supra]. New York’s permanent partial disability benefit is also called “Classification” or “Loss of Wage Earning capacity” (“LWEC”). LWEC is calculated on of two ways:

If the claimant is not working at the time permanent disability is assessed.

If the claimant is not working at the time permanent residual disability is assessed, the Board will take testimony and proofs on the issue of medical impairment and find a disability (expressed as a percentage, not to exceed 75%). Then the Board will assess vocational abilities and functional loss to come to an “overall” finding. This overall LWEC is expressed as a percentage (not to exceed 75%).

If the claimant is working at the time permanent disability is found, the LWEC equals actual lost earnings (“reduced earnings”).

Calculating reduced earnings follows the following formula:
Pre-injury wage less post injury wage times 2/3rds = benefits due.
Or to put it another way,
(Pre Injury Wage – Post Injury wage) * 2/3rds = benefit rate.

Example.

To use simple numbers: imagine a pre-injury wage of $200 per week, and a return to work wage of $100 per week. In this case, the difference is $100 per week, which is a 50% LWEC. 50% LWEC is compensated for 350 weeks. So, a lump sum settlement where the claimant is currently working at another position could include allocation language, such as (example):
"In approving this proposed settlement, the Court finds that the Claimant's net recovery of $20,000 is equivalent to 50% LWEC, which would be payable at $66 per week for 350 weeks as per the New York Disability Duration Guidelines and Workers' Compensation law. This allocation is made for Social Security review purposes only."
The settlement document must also clearly set forth the attorneys’ fees (usually referenced in an accompanying OC-400.5) and any other costs so that these fees and costs can be subtracted from the allocation for the purposes of calculating the post-award total income (Social Security Disability benefit plus theoretical workers’ compensation monthly allocation).

For more on settlement techniques and other related topics in workers’ compensation, subscribe to my monthly newsletter:

Greg Lois is the managing partner of LOIS LLC and dedicates his practice to defending employers and carriers in New York and New Jersey workers' compensation claims. Greg is the author of a popular series of "Handbooks" on workers' compensation, and is the co-author of the 2016 & 2017 Lexis-Nexis New Jersey Workers' Compensation Practice Guide. Greg can be reached at 201-880-7213 or glois@loisllc.com