WHY USE AN ANNUITY FOR AN MSA?
By: Robert H. Jennetten
An annuity funded Medicare Set Aside (MSA) will almost always reduce the cost of a work comp settlement. Medicare is secondary payer for medical bills incurred for treatment of a work related injury. Medicare requires that its interest as secondary payer be taken into consideration in a work comp settlement which closes future medical. There are thresholds to determine whether Medicare/CMS must approve the settlement but the interests of Medicare must be taken into consideration.
In Illinois, settlement of work comp claims often includes settlement of any claim for future medical expenses. This settlement of future medical is one of the few advantages the Illinois work comp system has over some other states. This benefit to employers, TPA's and insurers is complicated by Medicare's status as secondary payer. However, there are procedures in place to determine what if any portion of a settlement should be set aside or allocated to pay future Medicare-covered medical expenses. The MSA can be paid in a lump sum payment or funded with seed money and future annual payments using an annuity.
Medicare does not require the parties to consider that the cost of future medical expenses are likely to go up due to inflation. As long as the seed money and the future annual payments equal the amount allocated for the MSA, Medicare considers its interests protected. The savings in using seed money and an annuity is usually substantial. For example, assume an injured worker with a life expectancy of 25 years is projected to have future medical expenses of $46,094 over the remainder of his or her life. Medicare should approve an MSA funded by seed money of $3,688 and up to 24 annual payments of $1,767. The cost of an annuity to make those future payments should cost about $22,640. Medicare will approve a plan which will pay the 24 annual payments only if the injured worker is living. With the life expectancy providing a cap on the number of payments, the cost of the annuity is reduced. In this example, the projected savings from using seed money and an annuity is $19,766, about a 42% savings.
It is not cost effective to use an annuity for a very small MSA especially if the payout period is short. Additionally, there are delays, internal administrative costs and even additional defense costs associated with using an annuity to fund an MSA. The settlement contract should spell out the funding mechanism and include terms required by the annuity company. These additional costs and expenses should be modest compared to the savings. I should also point out that there are cases in which it is cost effective to leave medical open rather than to use an MSA but those are few and far between.
In conclusion, consider the option of funding the MSA with seed money and an annuity. Request a quote for an annuity in every case which requires a significant MSA especially if the injured worker has a life expectancy of at least 10 years. You might earn a bonus!