The Social Security Act of 1965 that created Medicare was a federally funded health insurance program initially designed to address the limited availability and high cost of health care for U.S. citizens age 65 and above. From 1965 to 1980, with few exceptions, Medicare was the primary payer of health care services provided to Medicare beneficiaries. As the primary payer, even when a Medicare beneficiary already had existing health care insurance coverage, Medicare paid first. In essence, Medicare was funding the rapidly increasing health care costs of the majority of Americans 65 years of age and over, plus a significant percentage of chronically ill individuals under age 65.
In the 1970s it became increasingly apparent that Medicare had limited resources for a seemingly unlimited and accelerating demand. Changes in the law were inevitable in order for Medicare to survive. In 1980, Congress passed the Medicare Secondary Payer Act (MSP). The MSP Act was enacted to protect the Medicare Trust Fund and preserve Medicare’s viability by ensuring that Medicare does not pay for medical care for which other insurance coverage exists and therefore has primary responsibility. A secondary payer pays only to the extent that full payment has not been made by the primary payer.
The MSP Act has no impact on Medicare beneficiaries whose only health care insurance is Medicare, because in those cases there is only one insurer, Medicare. The balance of this summary applies only to situations where a Medicare beneficiary has private health care insurance, in addition to Medicare, in which case Medicare functions only as a back-up provider or a secondary payer.
Frequently, there are extended delays between a Medicare beneficiary’s injury and a payment decision by the primary payer. To avoid imposing a hardship on health care providers, payments for such care may be made during that period by Medicare, through what is known as a Conditional Payment (CP). The condition on which a CP is made is that the primary payer will reimburse Medicare upon claim closure or settlement.
When an insurer makes any type of payment for a personal injury claim, they become the primary payer and Medicare is moved to secondary payer position and its recovery rights are immediately triggered. If Conditional Payments (or so-called “liens”) owed to Medicare are not promptly reimbursed upon claim settlement, Medicare can (and does) refer the debt to the Department of Justice or the Treasury Department, which have the authority to litigate for reimbursement, including double damages plus interest penalties.
Medicare can seek recovery of a Conditional Payment from any party that makes or receives a payment as a result of a settlement involving a Medicare beneficiary, and their Recovery strategy is generally to go after the “deep pockets” of the insurer. Federal law takes precedence over state law and private contracts in these instances. Even if an insurer somehow believes it is a secondary payer to Medicare based on state law or the contents of its insurance policy, the federal MSP Act provisions have priority.
The 1980 MSP Act is still the law. Although it established a route for recovery of Conditional Payments, it did not require primary payer transparency so there was no means of reimbursement enforcement for Medicare. For 30 years (1980 – 2010), Medicare had no practical means of knowing if a primary payer was involved, who the primary payer was, if a settlement had occurred, and if so, how much money changed hands. This “honor system” for insurers' reimbursement of Medicare’s Conditional Payments failed. The result has been significant potential exposure for many P&C carriers, a major factor in Medicare’s current economic crisis, including the publicly disclosed risk of insolvency.
The Medicare, Medicaid, and SCHIP Extension Act (MMSEA) was signed into law in 2007, and became effective in 2011 as a means of enforcing the 1980 MSP recovery laws. Section 111 of the MMSEA mandates that Responsible Reporting Entities (RREs), including insurance companies, self-insurers and public entities, report all settlements, judgments, awards or other payments made to a Medicare beneficiary as a result of a personal injury claim, to Medicare. This includes:
o the parties involved in the settlement
o the dates payments were made, and
o the amount of money that changed hands.
Non-compliance with Section 111 Reporting, by an insurer (RRE), can subject them to civil monetary penalties up to $1,000 per day of non-compliance for each Medicare beneficiary claim that should have been reported.
Section 111 Reporting provides Medicare with the necessary information to enforce the MSP recovery laws and secure the reimbursement of Medicare’s Conditional Payments, where a primary payer exists. With the recent appointment of a Recovery Audit Contractor (RAC), Medicare has both the identity of the primary payer that should have reimbursed Medicare for Conditional Payments, plus the means and authority to audit and enforce the collection of unpaid funds.