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Are indemnified EBMSAs still an effective tool after CMS released Section 4.3?

When the Centers for Medicare and Medicaid Services (CMS) released version 3.5 of the WCMSA reference guide on January 11, 2022, it redefined the potential risk and settlement considerations when non-CMS approved allocations are used in workers’ compensation (WC) settlements.  By adding Section 4.3[1] to the WCMSA reference guide, CMS took direct aim at Evidence-based Medicare Set-Asides (EBMSA) which now raises several critical questions regarding whether the continued use of these allocations may increase potential liability for insurers and claimants as part of workers’ compensation settlements.[2]

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What are indemnified EBMSAs?

By way of background, there is no statute or regulation which requires the use of a workers’ compensation Medicare Set-aside (WCMSA) in a settlement[3] and submitting a WCMSA has always been and continues to be, a voluntary process.  The benefit of including a WCMSA is to establish an amount that may be utilized by the claimant to pay for future medical treatment and which CMS may accept in lieu of the total settlement amount to protect its interest.  42 CFR § 411.46, addresses the issue of future medicals in workers’ compensation settlements. This regulation focuses, in part, on Medicare’s ability to exclude payment of future medical benefits related to a workers’ compensation commutation settlement and if a compromise settlement is “… an attempt to shift to Medicare the responsibility for payment of medical expenses for the treatment of a work-related condition, the settlement will not be recognized.”[4] CMS cites 42 CFR § 411.46 as the basis for CMS to deny payment for Medicare-covered claim related treatment until the beneficiary pays medical expenses equal to the amount of the settlement.[5]

However, since WCMSA submission is voluntary, the industry adopted the use of EBMSAs, which are not submitted to CMS for approval but are designed to calculate injury related future medical treatment based on sound medical principles and clinical guidelines within the intent and obligations of 42 CFR § 411.46. 

As EBMSAs evolved, some MSA vendors later supplemented EBMSA offerings with indemnification language to protect parties if CMS later determined the EBMSA amount was insufficient. Indemnification served to bridge the CMS approval gap by providing additional protections and assuring the EBMSA work product was reasonable, defensible, and sufficient to rebut an alleged shift of the medical responsibility to Medicare. However, with the release of Section 4.3, CMS shifted the burden and primary analysis away from the EBMSA work product with CMS expressly stating it views EBMSAs and other non-CMS approved allocations “as a potential attempt to shift financial burden by improperly giving reasonable recognition to both medical expenses and income replacement.”[6]

Make sure you are really protected

While indemnification language may still afford protection to the parties, we believe it’s an opportune time to review the impact and effectiveness of indemnified EBMSAs after CMS’s release of Section 4.3.  Along these lines, the addition of Section 4.3 raises several critical questions for insurers, claimants (and their lawyers), workers’ compensation courts, and others involved in workers’ compensation settlements to consider including:

Who does indemnification cover?

Indemnification should continue to adequately consider the risks for all parties involved. On this point, CMS as part of Section 4.3 states that “42 C.F.R. 411.46 specifically allows CMS to deny payment for treatment of work-related conditions if a settlement does not adequately protect the Medicare program’s interest” and that  “CMS may at its sole discretion deny payment for medical services related to the WC injuries or illness, requiring attestation of appropriate exhaustion equal to the total settlement … before CMS will resume primary payment obligation for settled injuries or illnesses, unless it is shown, at the time of exhaustion of the MSA funds, that both the initial funding of the MSA was sufficient, and utilization of MSA funds was appropriate. This will result in the claimant needing to demonstrate complete exhaustion of the net settlement amount, rather than a CMS-approved WCMSA amount.[7]  Since the injured worker solely bears the risk and consequences of non-compliance with the regulation, the indemnified EBMSA should ideally protect the claimant against this scenario and promptly pay if it occurs. 

What is indemnified?

Prior to Section 4.3, indemnification language typically focused on protecting against Medicare’s determination that the calculation of the EBMSA amount is inadequate and the proximate cause of CMS’s denial of payment, rather than whether the parties obtain CMS approval of a WCMSA amount.  If CMS currently takes the position that the act of simply using an EBMSA or other non-submission allocation may result in CMS’s denial of payment, then indemnification language and insurance coverage may factor in the same.  Thus, while it’s notable that CMS may later choose to accept an EBMSA as sufficient rather than require the full expenditure of the net settlement amount, CMS potential denial of payment simply based on the fact that a non-CMS approved allocation was used would create another potential area of liability. Therefore, it would be prudent for the settling parties to formalize if, and when, coverage applies.

How does insurance back indemnification after Section 4.3?

If Section 4.3 places the industry (and parties) on notice that the use of a non-CMS approved MSA may trigger Medicare to require the full and proper expenditure of the net settlement amount, the indemnification language may need to be specifically tailored to protect the parties, since insurance is typically not intended to cover intentional acts.  

Should parties obtain confirmation or consent from the insurer that the EBMSA scenario is covered?

Obtaining confirmation or consent from the insurer that the insurance policy will cover EBMSA scenarios may help to set expectations and clear up potential coverage issues.  

What is the exposure if insurance doesn’t pay? 

While indemnification language may provide a basis for reimbursement and coverage for loss, if insurance denies the claim, the parties - especially claimant, may be exposed to significant risk and costs if the indemnitor doesn’t maintain sufficient funds.

Conclusion

With the addition of Section 4.3, it’s critical to assess how CMS’s stated position on EBMSAs impacts risk and potential liability when indemnification is leveraged to mitigate WCMSA costs in general, and as weighed against the certainty provided by CMS approval.  If indemnified EBMSAs continue to be part of your settlements, consider protecting yourself and taking action by:

  • Confirm in writing that the insurer backing the indemnification is aware of the use of EBMSAs under their E&O policy.
  • Requesting to be added as an additional insured on the indemnification policy.
  • Documenting the process of presenting a claim to retain indemnification protections if CMS denies benefits to the claimant.
  • Ensuring the indemnification language protects all parties to the settlement, not just the insurer.

Asking detailed questions, reviewing the indemnification language, and ensuring there is proper funding may assist in mitigating risk and exposure for the settling parties. 

Questions?

We will continue to advocate for our clients, seek clarity from CMS, monitor developments related to CMS’s release of Section 4.3, and provide future updates as may be warranted. In the interim, please do not hesitate to contact the author if you have any questions.


[1] CMS first added Section 4.3 to the WCMSA Reference Guide Version 3.5 in January 2022.  See, CMS WCMSA Reference Guide, Version 3.5 (January 11, 2022).  Section 4.3 was then amended as part CMS’s WCMSA Reference Guide 3.6 (March 15, 2022).

[2] See n.1.

[3] See e.g., CMS’s WCMSA Reference Guide, Version 3.6 (March 15, 2022) Section 1.0.  In this section, CMS states, in part, “[t]here are no statutory or regulatory provisions requiring that you submit a WCMSA amount proposal to CMS for review. If you choose to use CMS’ WCMSA review process, the Agency requests that you comply with CMS’ established policies and procedures.” Id.

[4] See 42 CFR § 411.46.

[5] See CMS’s WCMSA Reference Guide, Version 3.6 (March 15, 2022) Section 4.3.

[6]  See CMS’s WCMSA Reference Guide, Version 3.6 (March 15, 2022) Section 1.0.

[7] See e.g., 42 CFR § 411.46 (b)(2). This section states: “If a settlement appears to represent an attempt to shift to Medicare the responsibility for payment of medical expenses for the treatment of a work-related condition, the settlement will not be recognized. For example, if the parties to a settlement attempt to maximize the amount of disability benefits paid under workers’ compensation by releasing the workers’ compensation carrier from liability for medical expenses for a particular condition even though the facts show that the condition is work-related, Medicare will not pay for treatment of that condition.” Id. (Author’s emphasis). 


Sid Wong, J.D.

Sid Wong is vice president of policy, Casualty Solutions at Verisk. You can contact Sid at swong@verisk.com.


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