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Can Classifying Third Party Settlement Monies for Future Medical Expenses Effect an Employer’s Right to Subrogation Pursuant to Section 319?

Pennsylvania
September 12, 2019
May 2, 2019
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In Marshall v. Workers’ Compensation Appeal Board (Easton Coach), No. 541 C.D. 2018 (April 5, 2019), the Commonwealth Court examined whether the classification of third party settlement monies, for future medical expenses, resulted in the exclusion of those monies against the employer’s right to subrogation.  

On September 16, 2005, the claimant was involved in a motor vehicle accident that resulted in injuries to his neck and low back.  As a result of the work incident, the claimant began to receive ongoing indemnity and medical benefits.  

The claimant filed a third party lawsuit arising out of his work related motor vehicle accident, which resulted in a settlement of $35,000.00.  The claimant also filed an UIM (underinsured) claim from which he recovered $1.3 million.  Out of the UIM settlement, one-third, or $413,333.33 was paid to the claimant’s wife for loss of consortium.  The remaining two-thirds, or $886,666.67, was payable to claimant.  Additionally, the claimant received from the UIM carrier “$30,788.45 as seed money and $123,194.00 in the funding of an annuity to fund claimant’s portion of a proposed. . . MSA.”  The future value of these payments totaled $167,937.00.  

Notably, the Center for Medicare and Medicaid Services (CMS) issued a letter that stated that any MSA had to be funded in the amount of $335,874.00, which would result in a seed amount of $68,377.00 plus fourteen annuity payments of $19,106.00.  

After receipt of the CMS letter, claimant requested that the proposed MSA be reviewed by an organization called Garretson Resolution Group (GRG).  GRG determined that, in conjunction with the settlement of a workers’ compensation claim, the funding of a MSA would be necessary.  They noted that the UIM carrier monies totaled 55% of the proposed MSA amount and that, in conjunction with any workers’ compensation settlement, the remaining 45% would need to be funded by the workers’ compensation insurance carrier.  

Following the settlement of the UIM claim, the employer requested that the claimant execute a Third Party Settlement Agreement; however, claimant refused to do so and a Modification Petition was filed by the employer.

While the parties did not dispute that the employer was entitled to subrogation against the claimant’s $35,000 settlement, along with the additional $886,666.67 that was received by the claimant (subject to the third party counsel’s fee), the parties disputed whether the employer was entitled to subrogation against the monies that were classified for the funding of a MSA.  

The WCJ found that the claimant’s monies that were classified for the funding of a MSA were to be included as part of the monies subject to subrogation.  Accordingly, the WCJ found that the employer was entitled to reimbursement of its lien, pursuant to a Third Party Settlement Agreement, along with a reduced liability for 43.62% of claimant’s future indemnity and medical benefits until the Balance of Recovery was exhausted.  

The claimant appealed and the WCAB affirmed.  The claimant then petitioned the Commonwealth Court for review arguing that the disputed amount was to be used to establish a valid MSA under federal law that was intended to protect Medicare’s interests.  Claimant further alleged that federal law should preempt state law subrogation under these circumstances.   Claimant further argued that the employer should not be entitled to subrogation against the annuity payments as the claimant would not be appreciating the full benefit from those payments until years into the future.

In rendering its decision, the court looked to Section 319 of the Act and the Pennsylvania Supreme Court language that explains that the language of Section 319 “is clear and unambiguous” and “written in mandatory terms” that convey a right to the employer that is automatic.  The court further noted that the purpose of Section 319 is to: (1) prevent a claimant from double recovery; (2) ensure that an employer is not required to make compensation benefits due to the negligence of a third party; and (3) prevent a third party from escaping liability from his/her negligence.  

The court further noted that, when determined whether funds are subject to subrogation under Section 319, the manner in which the parties to the third-party settlement characterized the settlement funds is not conclusive.  For example, a claimant and third party cannot interfere/evade the right to subrogation by characterizing monies as damages for pain and suffering.  

Furthermore, the court noted that, in workers’ compensation matter, Medicare is deemed a “secondary payer” of medical expenses and, it is not until there is a settlement of a workers’ compensation claim that Medicare’s interests need to be protected in remaining the secondary payer.  

Applying the foregoing in the instant matter, the court noted that while the disputed monies were classified for the funding of a MSA, no MSA was actually funding.  Rather, the employer remained liable for the payment of ongoing medical expenses since the claimant’s workers’ compensation claim remained opened.  Accordingly, since the employer remained primarily liable for the claimant’s medical treatment, Medicare’s interest were adequately protected without the need for a MSA.  Therefore, the court found that the designation of monies pursuant to the UIM settlement agreement did not remove those funds from the Third-Party Settlement amount available for employer’s subrogation.  

The court further noted that, where a third-party settlement results in an annuity, it is the cost, or present value, of the annuity that is subject to subrogation under Section 319.  Since the WCJ below properly utilized the present value of the annuity, no errors of law were made.  

Despite the foregoing, the court remained the matter to the Board, with the instructions that the Board remain the matter to the WCJ, for the WCJ to correct its error in granting an offset against future medical benefits in light of the recent decision in Whitmoyer (wherein the Supreme Court of Pennsylvania held that an employer cannot take a credit against ongoing medical benefits for the remaining balance of recovery after a third party lawsuit).  

The decision in Marshall is a good reminder that a third party settlement should be closely examined to ensure that the parties of the third party lawsuit are not evading potential subrogation by classifying monies as “pain and suffering” or future medical expenses as noted above.