Medicare Secondary Payer Issues Persist Years After Plaintiff Signs Release: Medicare “Surprise Demand” Threatens Receipt of Proceeds Seven Years Later

August 18th, 2020

Medicare Beneficiary Plaintiff’s Lawsuit vs. Liability Carrier for Failure to Reimburse Medicare Survives Motion to Dismiss

By: Paul R. Loudenslager, Esq., MSCC  | Senior Lien Counsel, Precision Resolution, LLC  |  Click to Email Paul

On June 30, 2020, the United States District Court for the District of New Jersey denied a liability carrier’s motion to dismiss a Medicare beneficiary’s case under the Private Cause of Action provision of the Medicare Secondary Payer Statute, 42 U.S.C. Section 1395y(b)(3)(A). Osterbye v. United States, 2020 U.S. Dist. LEXIS 116591, 2020 WL 3546869 (D. N.J. June 30, 2020). Please note that not all details noted below are included in the court’s decision; but such details were extracted from the parties’ motion papers and other submissions to the court.

In 2009, Anna May Osterbye was injured in a fire at her home. Ms. Osterbye alleged that the fire was caused by the negligence of a plumbing contractor. The contractor’s liability insurance carrier was Selective Insurance Company (hereinafter referred to as “Selective” or “liability carrier”). The claim against the contractor was settled at mediation for a lump sum of $740,000. The settlement amount was “based on known damages, including $13,562.90 that Medicare estimated it would seek for reimbursement of conditional payments.” Osterbye, 2020 U.S. Dist. LEXIS at *2.

On April 29, 2013, Plaintiff executed a release which released any and all claims and rights which Plaintiffs had or may have against the plumbing contractor. In the release, Plaintiff also agreed to “satisfy all [Medicare] liens . . . and hereby agrees to indemnify all the above named Releasees and their respective insurance carriers against any further liability for the satisfaction of any such liens.”

After the agreement was executed, Plaintiff’s counsel submitted notice of settlement to Medicare. On June 4, 2013, the Medicare contractor (the BCRC) issued a final demand letter for an amount of $118,071.28; obviously, much higher than the $13,562.90 quoted on the conditional payment letter obtained prior to settlement.

Plaintiff appealed Medicare’s right of reimbursement through the administrative appeals process. The last level of administrative appeal—an unfavorable decision by the Medicare Appeals Council—took four years from the date of the Administrative Law Judge decision.   

After exhausting the administrative remedies available, on August 28, 2019, Plaintiff brought an action in federal court versus the United States (Medicare); but, also against Selective as a “primary plan” under the Medicare Secondary Payer Act’s private cause of action provision at 42 U.S.C. Section 1395y(b)(3)(A).

At some point during the proceedings, Plaintiff and the United States stipulated to the dismissal of the action against the United States with prejudice, leaving Selective, the defendant’s liability carrier on the underlying injury settlement, as the only remaining defendant.

Selective filed a motion to dismiss based upon a statute of limitations defense, and that the release in the underlying injury litigation precluded the carrier’s responsibility for any Medicare lien.

The motion failed on both issues. The court reasoned that the statute of limitations had not expired, because Plaintiff’s claims arose under the Medicare Act, thus requiring exhaustion of administrative remedies before filing suit.

Likewise, the court here left open the possibility that the underlying release could be nullified based upon a theory of mutual mistake of fact.  The mistake of fact would be Medicare’s reimbursement amount.

As of July 2020, the case is noted as having been voluntarily dismissed.

While the case did not last long after the court’s decision on June 30, it is instructive nonetheless. It raises several unanswered questions and provides some important points to consider regarding the obligations of plaintiffs, attorneys, and carriers with respect to Medicare.

While the private cause of action was ruled timely with respect to a statute of limitations defense, the substantive question of whether the plaintiff could have proceeded with this case against the defendant’s liability carrier remains unanswered. The United States had been dismissed from the action, leaving the plaintiff and the carrier to battle over the responsibility to reimburse Medicare.

Moreover, there is a substantial question as to whether the plaintiff could continue this action after agreeing in the release to satisfy all Medicare liens and indemnify the defendant and the defendant’s carrier from any liability to satisfy the lien.

Finally, can the release itself survive? The possibility is noted by the court in this case that the release itself could potentially be undone based on the parties’ mutual mistake. If that is the case, the Medicare reimbursement obligation would likely disappear. The obligation to reimburse Medicare exists only when there is a settlement. The original parties would be left to negotiate once more based on the proper Medicare reimbursement amount.

Important Points to Consider

The opinion states that Medicare was paid the original amount of $13,562.90. There is no mention of the unpaid balance in excess of $100,000. It is important to remember that interest begins to accrue on any unpaid portion of a demand 60 days after the issuance of the final demand letter, even if it is in the administrative appeals process. Here, six years after the date of the original demand, at a rate of approximately 10%, significant interest charges would have accrued on the unpaid balance.

It is unfortunate that this situation continues to occur. But it is still the case that Medicare, for whatever reason, will exclude related medical treatment costs on a conditional payment letter, only to have those claims appear for the first time on a final demand letter, after the case has settled.

We call this situation the “Surprise Demand.” While unfortunate, it is avoidable. Our attorneys at Precision Resolution make it a point to mention this issue at every liens seminar or CLE at which we are invited to speak. If the conditional payment amount seems low in light of the actual medical treatment that a plaintiff has received, and if you see that there is related medical treatment that is missing from the Payment Summary Form, more investigation is required.

It is likely that any “missing” charges will suddenly appear for the first time on a final demand letter. In order to avoid the Surprise Demand, it is sometimes necessary to “dispute” Medicare’s conditional payments so that those missing charges will actually appear on the conditional payment letter. It seems counterintuitive, but sometimes the goal is to increase the Medicare payment amount in an effort to get a real and accurate number, so that you can properly negotiate a settlement.

The worst-case scenario is the Osterbye case from 2020, taking six years after a settlement to get in front of a federal court judge to argue as to who is responsible for Medicare’s reimbursement.

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