On July 23, 2001, the Centers for Medicare & Medicaid Services (CMS) released, under the name of Parashar B. Patel, Deputy Director, Purchasing Policy Group for CMS, what has become known as the “Patel Memo”, directed to the CMS Associate Regional Administrators on the subject of “Workers Compensation: Commutation of Future Benefits.”
Anders summarized the impact of the Patel Memo for workers compensation (WC) MSAs, including structured settlements, in his NMSP newsletter:
“The Patel Memo cited regulatory authority and gave a green light to the regional office review and approval process for submitted MSAs, including criteria and thresholds for review for non-Medicare beneficiary claimants. It established instructions for the regional office to add the MSA to the CMS common working file and annual accounting requirement for the MSA administrator once the MSA was funded. The memo also acknowledged structured [settlement] set-aside arrangements, confirmed that an MSA should be allocated over life expectancy and allowed for fee schedules as a basis for allocating care.” (emphasis added)
CMS now defines a WCMSA as “a financial agreement that allocates a portion of a workers’ compensation settlement to pay for future medical services related to the workers’ compensation injury, illness, or disease. These funds must be depleted before Medicare will pay for treatment related to the workers’ compensation injury, illness, or disease.”
Background to the Patel Memo
Recognizing that the Medicare Trust Fund established by the Social Security Act of 1965 was eroding, in part because Medicare recipients were living longer than expected, Congress enacted the Medicare Secondary Payer (MSP) Act in 1980.
The MSP Act requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries, with Medicare responsible only as a “secondary payer.”
CMS, however, failed to take practical steps to enforce the MSP rules until 2001 when it issued the Patel Memo, the first of several policy memorandums addressing WCMSAs. Taken together, these policy memorandums not only defined WCMSAs but also created a format, checklists and procedures for seeking approval for WCMSAs to “protect Medicare’s interests” when workers compensation cases are settled – including references to and initial rules for structured settlement annuities.
Beginning in 2015, CMS began to supplement, and eventually replace, its WCMSA Memos by publishing a WCMSA Reference Guide which included more detailed references and rules for structured settlement annuities. The Reference Guide has since been updated multiple times – most recently in April 2021 as CMS WCMSA Reference Guide Version 3.3.
Nonetheless, the Patel Memo remains historically important for multiple reasons including:
- The memo represented the first time CMS codified MSA rules although these rules were, and remain, limited to workers compensation MSAs.
- The memo set forth its own regulatory authority based upon 42 CFR 411.46 – an MSP Regulation under the Subpart “Limitations on Medicare Payment for Services Covered under Workers Compensation.”
- The memo distinguished between commutation and compromise settlements, stating: “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.”
- The Question & Answer Section of the memo established important MSA foundational concepts including that Medicare would not pay until there was temporary (annual) depletion in a structured MSA or a permanent depletion in a lump sum MSA.
Impact on Structured Settlements
The impact of the Patel Memo and subsequent CMS MSA communications on both structured settlements and personal injury settlement planning has been significant.
12 Questions and Answers comprised 12 of the 17 pages of the Patel Memo. Of these 12 Questions and Answers, three addressed structured settlements or structured settlement issues:
- Question 4: What types of steps should the [Regional Office] and the contractors take to ensure that Medicare makes no payments related to the illness or accident until the set-aside arrangement has been depleted?
- Question 5: What are the criteria that Medicare uses to determine whether the amount of a lump sum or structured settlement has officially taken its interest into account?
- Question 10: Are there documentation requirements that must be satisfied before the [Regional Office] can provide a written opinion on the sufficiency of a set-aside arrangement?
Each of these Questions and the Answers have been updated, incorporated and/or replaced by more current CMS MSA guidance including the most recent WCMSA Reference Guide Version 3.3.
For structured settlements, arguably the most important CMS memo was issued October 15, 2004. In it, CMS identified the methodology by which it requires WCMSA stakeholders to calculate present value as follows:
“Effective with the issuance of this memorandum, CMS’s position is that the WC Medicare Set-aside Arrangement does not need to be indexed for inflation and may not be discounted to present-day value.”
Because structured settlement annuities incorporate their own discount rate, they therefore almost always result in a lower cost for WCMSAs than a lump sum equivalent. This structured settlement cost advantage, unique to WCMSAs, has resulted in an important WCMSA structured settlement submarket.
Industry experts have informed this writer that WCMSA’s might now represent approximately 25% of total structured settlement industry cases (as opposed to premium) – with average per case premium of $55,000 to $60,000 compared with overall industry premium case averages for 2020 (including WCMSAs) of approximately $225,000. The majority of these WCMSA cases are defense driven.
Also important to note: CMS WCMSA Reference Guide Version 3.3 includes the following statement: “The intent of this reference guide is to consolidate and supplant all historical memoranda in a single point of reference. Please discontinue the reference of prior documents.” (emphasis added)
Does this last statement mean, therefore, that CMS has changed its methodology for calculating present value? Not necessarily. This writer is not aware of any such change - or any current written statement which now exists that defines how CMS calculates present value.
Does this statement mean structured settlements annuities have lost their related cost advantage, compared with lump sums, for funding WCMSAs? Again, not necessarily. At least not unless and until CMS announces some change to how it requires parties to calculate present value.
Patel Interview by Shawn Deane
The interview features background history about Parashar Patel while at CMS, what led up to CMS issuing the “Patel Memo” and Patel’s thoughts about the evolution of the 1981 memo into today’s niche industry where MSAs have become a standard practice in resolving workers compensation claims with a proliferation of MSA companies, certification programs and trade organizations including NMSP and the MARC coalition.
This writer also recommends the Patel interview for Shawn Deane’s informative analysis of MSAs in general – including his commentary on foundational Federal regulation 42 CFR 411.46, the components of an MSA, how an MSA is allocated, the MSA review process and potential liability MSA regulations.
The transition of structured settlements to personal injury settlement planning is a fascinating and continuing story. Structured settlements began as a defense-controlled binary concept: cash or structure; cash and periodic payments; cost savings and tax benefit.
Social Security, Medicare, Medicaid, other means-tested benefits, trusts, integrated settlement plans initially fell completely outside the framework of a structured settlement discussion.
The Patel Memo represented an important milestone – part of a transitioning settlement landscape that has not only linked structured settlements to Social Security law and benefits but has also transformed structured settlements in other ways to become a strategic product within the larger and more complex settlement planning market.
The Chronicle has provided, and will continue to provide, readers with articles and commentary about this continuing transformation and growth of structured settlements - the products, the business models, the participants and the market more generally. Here are some of our additional recent articles: