The Latest on an Insurer’s Obligation to Honor a Medicare Lien

By Kevin M. Miller

Do you think Medicare takes too long to acknowledge a lien and its proper amount? Have you seen CMS bring the settlement process to a grinding halt? Have you settled a case, only to have the MSP program prolong the winding up process by several months while all parties await confirmation of Medicare’s lien? Well, you’re not alone!

Medicare’s delay at settlement was the subject of a recent Congressional hearing conducted by the House Energy & Commerce Committee entitled “Protecting Medicare with Improvements to the Secondary Payer Regime.” Some of the comments coming out of the hearing included the following by Congressman Tim Murphy (R-Pa): “The Current MSP system … discourages and even prevents companies from settling claims involving Medicare beneficiaries because CMS won’t tell the settling parties how much is owed. … Only in Washington could someone who wants to send money back to the federal government be ignored.”

While Congress currently struggles to reform the MSP rules and mandatory reporting requirements, insurers are left with having to face angry plaintiffs’ lawyers who do not want an insurer to await word from Medicare before issuing settlement drafts. The question remains, then, whether it is unlawful or proper for an insurer to settle a claim and let months go by before cutting a check for the settled amount while CMS determines the amount of its lien. A Federal Court in Kentucky recently answered that question favorably for the insurance industry.

A recent decision issued by the U.S. District Court for the Western District of Kentucky, Wilson v. State Farm, the plaintiff sued an insurer with whom he had settled an uninsured motorist claim, alleging bad faith insurance practices for State Farm’s refusal to issue a settlement draft. Wilson was injured in a motor vehicle accident and sustained medical and hospital bills that Medicare paid. State Farm offered its UM policy limit of $50,000, and Wilson accepted it. Wilson suggested that the $50,000 be put into an escrow account while the details of the Medicare lien were worked out, and offered to hold State Farm harmless for issuing its settlement draft in this manner without listing Medicare as a payee. State Farm declined to do so, electing instead to hold the money itself and await Medicare’s confirmation of its lien. While awaiting word from Medicare, Wilson had enough time to file suit against State Farm, have the lawsuit served on the insurer, and litigate the case to the point of moving for summary judgment on the bad faith claim.

Fortunately, the federal court ruled that State Farm did not act in bad faith for “delaying” payment of a settled claim until Medicare defined its lien, despite the fact that Wilson himself found the prolonged process vexing. The court reasoned:

To comply with federal law and to protect [an insurer’s] own legitimate interest against overpayment is reasonable and certainly is not in bad faith. Defendant did not delay payment in order to pay less or harass Plaintiff. While it may serve Defendant’s self interest to comply with federal law, such action was not bad faith.

Many insurers operate under the assumption that Medicare should be listed as a payee on a settlement draft when Medicare has paid medical and hospital bills. Insurers promulgate rules that require them to await payment of settled claims until such time as a Medicare lien is defined by CMS. Wilson v. State Farm tells us that these practices are correct (and required?) and certainly not in bad faith.

Originally published in the Fall 2011 edition of Quinn Quarterly.

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