How Does a Medicare Set-Aside Work?

A Medicare Set-Aside (MSA) is a financial arrangement that allocates a portion of a personal injury or workers’ compensation settlement to cover future medical expenses related to the injury. Its fundamental purpose is to protect Medicare’s financial interests as a secondary payer. This means Medicare does not pay for injury-related care when settlement funds are available from another source, preventing the shifting of medical costs to the Medicare program. The establishment of an MSA helps to preserve a beneficiary’s future Medicare benefits for unrelated medical needs.

What a Medicare Set-Aside Is

The funds within an MSA are exclusively for future medical care that Medicare would normally cover and that is directly connected to the settled injury. This could include physician visits, prescription medications, or durable medical equipment.

There are generally two common types of MSAs: Workers’ Compensation Medicare Set-Asides (WCMSAs) and Liability Medicare Set-Asides (LMSAs). Both serve to protect Medicare’s interests, though their applicability and review processes can differ. An MSA ensures settlement funds are utilized first for injury-related care before Medicare assumes responsibility. This is crucial because Medicare generally will not pay for an illness or injury covered by workers’ compensation or liability insurance. By setting aside these funds, the injured individual ensures resources for ongoing medical needs while complying with federal regulations.

When a Medicare Set-Aside Is Required

The Centers for Medicare & Medicaid Services (CMS) sets specific conditions and thresholds for establishing a Medicare Set-Aside (MSA). These criteria protect Medicare’s interests, particularly in workers’ compensation and liability settlements. For Workers’ Compensation Medicare Set-Asides (WCMSAs), CMS has established clear review thresholds that trigger the need for an MSA.

A WCMSA is generally required if the claimant is a Medicare beneficiary at settlement and the total settlement exceeds $25,000. This applies if the individual is enrolled in Medicare Part A or B. An MSA is also required if the claimant has a reasonable expectation of becoming a Medicare beneficiary within 30 months of settlement, and the total settlement exceeds $250,000. A “reasonable expectation” includes applying for Social Security Disability benefits, receiving Social Security Disability Income (SSDI) for at least 24 months, or having conditions like End-Stage Renal Disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS).

For Liability Medicare Set-Asides (LMSAs), CMS has no formal mandates or specific review thresholds like those for WCMSAs. However, Medicare’s interests must still be considered and protected in liability settlements, especially if the settlement releases future medical obligations. Failure to consider Medicare’s future interests can lead to significant consequences, potentially jeopardizing future Medicare coverage for the injury. Even without formal CMS review, parties often establish an LMSA to demonstrate due diligence and ensure compliance with Medicare Secondary Payer (MSP) laws.

How a Medicare Set-Aside Is Established

Establishing a Medicare Set-Aside (MSA) involves calculating the appropriate amount and submitting the proposal for review. The calculation begins with a comprehensive review of the injured individual’s medical history. This includes collecting all relevant medical records, physician reports, and prescription lists to project future injury-related medical costs. Professional MSA allocators perform this task, analyzing past treatment, current medical status, and anticipated future needs over the individual’s life expectancy.

The allocator determines the estimated cost of future Medicare-covered services related to the injury, considering factors like applicable fee schedules, usual and customary charges, and actual billing histories. This projection results in a proposed MSA allocation report. The report outlines the types of medical care, prescription drugs, and medical equipment expected to be necessary for the injury over the claimant’s lifetime. Accurate documentation, including at least the last two years of treatment records and pharmacy records, is essential for a precise calculation.

Once the MSA allocation is determined, submission begins, primarily for Workers’ Compensation Medicare Set-Asides (WCMSAs) that meet CMS review thresholds. Submissions are typically made electronically through the Workers’ Compensation Medicare Set-Aside Portal (WCMSAP), the recommended method. CMS reviews the proposal to ensure the allocated amount adequately protects Medicare’s interests. This review takes 30 to 60 days, depending on complexity and completeness. If CMS deems the allocation insufficient, they may issue a “counter-higher” proposal; approval is typical if the proposed amount is within 5% of CMS’s calculation.

For WCMSAs that fall below CMS review thresholds, or for Liability Medicare Set-Asides (LMSAs) where formal CMS review is not available, parties still have the responsibility to consider Medicare’s interests and set aside appropriate funds to avoid future issues. While not formally reviewed by CMS, a professional MSA report provides documentation that Medicare’s interests were considered.

Administering a Medicare Set-Aside

Once a Medicare Set-Aside (MSA) is established, the ongoing management of these funds becomes a crucial responsibility. The allocated funds must be held in a separate, interest-bearing bank account, distinct from any personal funds. Any interest earned on this account must remain within the MSA to be used for medical expenses. This segregation ensures clarity and compliance regarding the use of the settlement funds.

There are two primary methods for administering an MSA: self-administration or professional administration. With self-administration, the injured individual manages the funds, pays for eligible medical services, and maintains meticulous records. This includes ensuring payments are only for Medicare-eligible, injury-related services and tracking all expenditures. Professional administration involves a third-party company managing the MSA, handling bill payments, and ensuring compliance. While self-administration offers direct control, professional administration can reduce complexity and risk, which Medicare recommends.

MSA funds can only be used for Medicare-covered expenses directly related to the injury. Eligible expenses include doctor visits, prescription drugs, durable medical equipment, and physical therapy, provided they are Medicare-allowable and injury-related. Funds cannot be used for non-injury-related care, non-Medicare covered services, or personal expenses. Strict adherence to these guidelines is necessary to avoid jeopardizing future Medicare benefits.

Annual reporting to CMS is a mandatory requirement for all MSAs. This involves submitting an attestation detailing the account balance, expenditures, and any interest earned. Failure to properly manage and report MSA funds can lead to severe consequences, including Medicare denying future coverage for injury-related medical care until the account is reconciled. If MSA funds are legitimately exhausted due to injury-related, Medicare-covered expenses, Medicare can then become the primary payer for those specific medical needs again. The individual typically notifies CMS of the depletion, and after verification of proper fund usage, Medicare resumes its primary payer role for the injury.