How to Calculate a Medicare Set-Aside

A Medicare Set-Aside (MSA) allocates a portion of an injury claim settlement to cover future medical expenses. This mechanism protects Medicare’s interests under the Medicare Secondary Payer (MSP) Act, mandating Medicare is a secondary payer and other insurance or settlement funds must be exhausted. The primary purpose of an MSA is to prevent shifting financial responsibility for injury-related care from the settlement to Medicare, preserving a claimant’s future Medicare benefits by ensuring funds are available for costs Medicare would cover. Once MSA funds are spent, Medicare assumes its role as the primary payer for subsequent Medicare-covered, injury-related medical services.

When a Medicare Set-Aside Is Required

A Medicare Set-Aside is considered in two contexts: Workers’ Compensation and Liability settlements. For Workers’ Compensation Medicare Set-Asides (WCMSAs), financial thresholds and Medicare beneficiary status often trigger consideration or submission to CMS. CMS reviews a proposed WCMSA if the claimant is a current Medicare beneficiary and the total settlement exceeds $25,000. If the claimant has a reasonable expectation of Medicare enrollment within 30 months of settlement, a WCMSA review is considered if the total settlement exceeds $250,000.

A “reasonable expectation” of Medicare enrollment can arise from various circumstances. This includes individuals who have applied for Social Security Disability Benefits (SSDB), even if their application was denied but is under appeal. It also includes individuals 62 and a half years old anticipating Medicare eligibility by age 65, or those with conditions like End-Stage Renal Disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS) who may qualify for Medicare before age 65. Medicare entitlement for disability begins two years after qualifying for Social Security Disability Insurance (SSDI).

For Liability Medicare Set-Asides (LMSAs), no formal federal regulations or specific CMS review thresholds mandate their creation. Parties in liability settlements are advised to consider Medicare’s interests to avoid future complications. This is important for settlements exceeding $25,000, especially when a significant portion is allocated for future medical expenses, or if the claimant is a current or prospective Medicare beneficiary. Failing to address Medicare’s future interests could lead to Medicare denying payment for injury-related medical care or seeking reimbursement from settlement funds.

Information Needed for Calculation

Comprehensive information and documentation must be gathered before an MSA calculation. Detailed medical records from the date of injury through the present are fundamental, particularly those related to the injury. These include physician notes, diagnostic reports, surgical records, and physical therapy reports, establishing the necessity and scope of future medical care. For CMS submission, records need to cover the last two years.

A thorough prescription drug history related to the injury is essential. This history should detail all medications, including dosages, frequencies, and duration of use, to project future pharmaceutical costs. Even if the claimant is not yet enrolled in Medicare Part D, all injury-related prescription drugs must be included. Current prescription records should be dated within six months of MSA submission.

Understanding the claimant’s projected future medical needs is paramount, often formalized through a life care plan or physician’s prognosis. A life care plan, developed by a medical professional, outlines anticipated future medical services, equipment, and support required due to the injury. This plan is crucial for estimating the frequency and type of future medical interventions.

The claimant’s current and projected Medicare enrollment status is a critical input, directly influencing whether an MSA is required and the applicable guidelines. A detailed payment history from the workers’ compensation or liability carrier for injury-related treatment provides a baseline for typical costs and services. This history, usually covering the past two years and updated within six months, helps establish customary charges.

The claimant’s life expectancy plays a significant role in projecting costs. This is determined by considering their current chronological age, pre-existing medical conditions, and injury-related conditions. CMS utilizes life tables published by the Centers for Disease Control (CDC) for these projections. In some cases, a “rated age,” indicating a reduced life expectancy due to the injury, may be obtained from structured settlement providers, potentially impacting the MSA amount.

Steps in Calculating the MSA

Calculating a Medicare Set-Aside involves a systematic process beginning with a review of medical records. This step identifies all past and present medical care directly related to the injury, distinguishing it from pre-existing or unrelated conditions. The goal is to establish a clear medical history and understand the progression of treatment.

Following medical record review, the next step involves forecasting future medical treatment. This requires projecting the specific types of medical services the claimant will likely need, their anticipated frequency, and expected duration of treatment over their lifetime. These projections encompass services such as doctor visits, physical therapy, surgical procedures, diagnostic tests, and other interventions necessitated by the injury. This forecast relies on medical evidence, including physician prognoses and, for complex cases, life care plans.

Once future medical services are identified, the process moves to costing these projected services. This involves applying appropriate pricing methodologies, including state workers’ compensation fee schedules, usual and customary rates, or actual charges based on historical payment data. The location of treatment, specific injury type, and claimant’s age can all influence these projected costs.

Projecting prescription drug costs is another distinct step. All injury-related medications, including dosages and frequencies, are identified and their ongoing costs estimated for the claimant’s life expectancy. CMS prices Part D drugs based on the Average Wholesale Price (AWP), utilizing data from resources like the Truven Health Analytics’ Red Book.

The calculation also accounts for Durable Medical Equipment (DME) and medical supplies. This involves identifying necessary equipment, such as wheelchairs or specialized braces, and ongoing supplies required for injury management, then projecting their costs. These items are integrated into the overall future medical cost projection.

The claimant’s life expectancy is then applied to these aggregated annual medical, drug, and DME costs. This multiplication extends annual cost projections over the claimant’s remaining lifespan, resulting in a total estimated future medical expense. CMS uses life tables from the Centers for Disease Control (CDC) to standardize these life expectancy calculations.

The total future medical costs are discounted to their present value. This financial adjustment recognizes that a sum of money received today can be invested and grow over time, meaning a smaller lump sum can cover larger future expenses. The discounting process converts the stream of projected future costs into a single lump sum, representing the current value needed to cover those future expenses. Professional MSA vendors or experienced attorneys often perform this work due to its complexity.

Submitting and Managing the MSA

After the Medicare Set-Aside calculation is complete and the MSA proposal prepared, the next phase involves submitting it and managing the allocated funds. For Workers’ Compensation Medicare Set-Asides (WCMSAs) that meet CMS review thresholds, submission to the Centers for Medicare & Medicaid Services (CMS) for review and approval is recommended. This can be completed electronically through the WCMSA Portal. While CMS review is not legally mandated, obtaining approval provides certainty and protection against future denial of claims by Medicare. Effective April 4, 2025, new Section 111 reporting rules require all WCMSA data for settlements involving Medicare beneficiaries to be reported to CMS, even if they fall below formal review thresholds.

During the CMS review process, the Workers’ Compensation Review Contractor (WCRC) examines the submitted proposal. This review assesses whether the proposed set-aside amount adequately covers the claimant’s future Medicare-covered, injury-related medical expenses, and ensures adherence to CMS guidelines. CMS may request additional documentation or clarification. The standard review timeframe ranges from 30 to 60 days, assuming all necessary documents are provided promptly. If CMS determines the proposed amount is insufficient, it may issue a counter-proposal with a higher recommended allocation. If an MSA is not approved or adequately funded, Medicare may deny future claims related to the injury until settlement funds that should have covered the care are exhausted. As of April 7, 2025, requests for amended review of an approved MSA can be submitted at any time, removing the previous one-year waiting period.

Once an MSA is approved, administering the funds begins. Claimants have two primary options: self-administration or professional administration. With self-administration, the claimant assumes direct responsibility for managing the allocated funds. This requires setting up a separate, interest-bearing bank account exclusively for the MSA funds, paying for Medicare-covered and injury-related medical expenses, tracking expenditures, and retaining receipts. Annual reports detailing how the funds were spent must be submitted to CMS.

The alternative is professional administration, where a third-party company manages the MSA funds on behalf of the claimant. This option alleviates the administrative burden and ensures compliance with Medicare regulations. Professional administrators handle bill payments, expenditure tracking, and required annual reporting to CMS. They often provide access to discounted rates for medical services and prescription drugs, potentially extending the longevity of the MSA funds. Regardless of the administration method chosen, compliance is paramount; funds must be used solely for Medicare-covered, injury-related medical treatment, and payments must adhere to Medicare-approved rates to avoid jeopardizing future Medicare benefits.