Ethics Opinions Underscore Problems That Medicare Liens Create when Negotiating Settlements

In serious personal injury cases, a common issue arises in settlement talks that affect the course of negotiations – Liens; Specifically, health insurer liens and liens asserted by Medicare.  The problem is simple: a plaintiff with medical expenses often has those expenses paid for by his or her health insurer or through Medicare/Medicaid.  Medicare is entitled under the Medicare Secondary Payor Act to be reimbursed for any payments it has made for causally related medical care, and the health insurer has a subrogation interest in the proceeds it has paid.  The existence of these liens creates difficulty negotiating settlements.  Settlements are often much less than what could be a reasonably expected verdict if the plaintiff prevails, but going to trial involves risk, whereas a settlement eliminates risk.  In addition to the risk of a low plaintiff’s verdict or defense verdict, there are other factors involved in determining a reasonable settlement value, including limitations on the amount of insurance coverage available and the prospects of otherwise recovering a judgment from a defendant.  Because of these factors, the plaintiffs often have to engage in negotiations with the lien holders in order to settle the case because having to pay the full lien amount could negate any potential benefit of accepting a settlement or even continuing with the litigation.  For example, if the reasonable settlement value of a case is $100,000.00, but the plaintiff has liens in the amount of $80,000.00, the plaintiff is in a position where he or she cannot accept the settlement unless the lien holder takes less because the full settlement would otherwise go to the lien holder and the plaintiff’s attorney, leaving plaintiff with no recovery at all.  Given this reality, the plaintiff must often participate in a second negotiation with the lien holder to negotiate the lien down to a level where the lien holder will receive something, but the plaintiff will as well.  In effect, there are two separate negotiations: one between the plaintiff and defendant, and another between the plaintiff and the lien holder.

Problems arise because the settlement between the plaintiff and defendant often takes place before the settlement between the plaintiff and the lien holder.  This is not just a problem for the plaintiff, but also for the defendant and its insurer.  In particular, under the Medicare Secondary Payor Act, the defendant’s insurer has an obligation to protect Medicare’s interest in the proceeds.  Accordingly, the defendant/insurer should take steps to ensure that the liens are protected before making any settlement payments.  The plaintiff also has an interest in concluding the lien claim.  However, the attempts to protect the liens often conflicts with the parties’ (and the court’s) other desire to swiftly conclude the matter.  After all, the settlement has been reached in part to obtain closure and to stop incurring costs.

Unfortunately, there are no easy ways to balance these competing interests, and it has become increasingly evident that this issue creates ethical landmines for attorneys, of which they should be aware when trying to seal the deal.  Traditionally, any settlement release will require a plaintiff to protect and pay off any valid liens, and to indemnify and hold the defendant/insurer harmless if a claim is made against them for the plaintiff’s failure to do so.  The reality, however, is that in most instances, this release protection has no real value because the defendant/insurer cannot rely on plaintiff’s financial ability to actually indemnify it.  The indemnity/hold harmless provision will, in most cases, not provide any protection to the defendant/insurer at all.  Because of this, some defendants/insurers have requested that the plaintiff’s attorney also agree to indemnify and hold them harmless against any lien claims.  The theory behind this request is that it allows the defendant/insurer to distribute the settlement funds to plaintiff’s attorney, and the attorney will have an interest in ensuring that the liens are paid, after being negotiated down, before distributing any proceeds to the plaintiff.  After all, obtaining final lien information, particularly from Medicare, can take months, and the process of negotiating the lien can increase that time as well.  However, in recent years, many state’s ethics boards have issued rulings that have declared it is unethical for a plaintiff’s attorney to agree to indemnify and hold harmless the defendant/insurer because it creates a conflict of interest between the plaintiff’s attorney and the plaintiff.  In addition, these opinions often state that it is unethical for a defense attorney to request that the plaintiff’s attorney enter into such an agreement.

The Maryland State Bar Association’s Committee on Ethics has recently had an opportunity to address this issue, and it has agreed with its counterparts from other states.  Specifically, the Committee takes the position that such an agreement violates the ethical rule of prohibiting an attorney from providing the client with financial assistance, which in this scenario, is created by the attorney’s guarantee to pay the plaintiff’s debts.  The second ethical problem involved the Committee’s feeling that such an agreement creates a potential conflict between the client’s interest and the attorney’s interest.  An attorney could refuse to enter into such an agreement because it is against the attorney’s interest, but the attorney’s failure to agree could cause the settlement to break down, which is against the client’s interest.  This scenario places the two in conflict.  A third ethical dilemma identified by the Committee is similar, in that an attorney is ethically bound to abide by the client’s decision to settle or not settle a matter.  Finally, in cases where an attorney receives funds in which both the client and a third party claim an interest, the attorney must separately maintain the funds until the dispute is resolved.  This ethical obligation is inconsistent with the notion of an attorney agreeing to be personally responsible for the client’s obligations.  The Committee’s concerns are quite valid, even if in many instances the practice would result in no harm to anyone.  Nevertheless, if the ethics opinions from other jurisdictions did not already cause Maryland attorneys to reject the attorney-indemnity practice, the fact that the Maryland Committee has now spoken on the issue should cause them to stop the practice immediately.

In the absence of an agreement to indemnify from the plaintiff’s attorney, another alternative would be that the defendant/insurer would distribute the money to the plaintiff’s attorney, and the plaintiff’s attorney would agree to maintain an amount equal to or greater than the full amount of the lien until the final lien amount is negotiated.  In this scenario, the attorney is not taking on the client’s obligations, but rather is being held to his word that the lien will be protected, assuming the plaintiff consents to the withholding of some funds.  The plaintiff can receive some of the settlement funds immediately, but the defendant/insurer is assured that a sufficient amount will be held back to guarantee that the asserted lien is protected.  It is seemingly a better solution to the problem.  However, as may be evident, similar ethical concerns are raised by this scenario as well, and the MD Committee on Ethics has also had occasion to address it.  According to the Committee, it is questionable whether the plaintiff’s attorney can ethically agree to such an arrangement.  The Committee, in reviewing this practice, has expressed concerns that the plaintiff’s attorney would be violating the aforementioned ethical rules regarding the safekeeping of property of the client and/or a third party.  Under these ethical rules, the settlement funds belonging to a party may be placed in an interest bearing account, where the interest must be provided to the party.  However, the funds belonging to one person may not be placed in an interest bearing account where the interest will be credited to someone else.  The question, then, as the Committee sees it, is who do the funds belong to at the time they are given to the plaintiff’s attorney: the plaintiff, the third-party, or both?  Keeping in mind that the assertion of a lien is not the same thing as a ruling that the lien is valid, the Committee has decided that the plaintiff’s attorney must consider the legal question of when a lien holder has “ownership” of the funds.  Given the Committee’s Opinion on this matter, plaintiff’s attorneys are left to analyze when and whether the lien holder becomes the owner of the funds.  If it is the owner of the funds, then the attorney cannot ethically hold it.  Given this dilemma, and absent a controlling opinion from Maryland appellate courts, one would think that most plaintiff’s attorneys will be cautious and decline to agree to maintain the funds for “safe keeping” in order to avoid the risk of committing an ethical violation.

The dilemma remains – what can the defense attorney ethically recommend to his or her client and insurer to protect them from a potential Medicare or other lien claim?  The simple answer is to not distribute funds unless and until the defense receives written confirmation from the lien holder that it has reached an agreement with the plaintiff.  For general health care liens, this should not require too much additional time.  Even prior to engaging in settlement discussions, perhaps at the onset of litigation, the defense attorney should have a dialogue with the plaintiff’s attorney to make sure that the defense is aware of all liens and that any settlement would be conditioned on the final resolution of the lien claim.  Plaintiff’s attorneys should be able to engage the lien holder early so that each of them can have an understanding of the parameters of a fair resolution of the lien, if not an agreement in principal in place, prior to a mediation or settlement conference.  The plaintiff’s attorney should even be encouraged to have the lien holder available during the mediation.  With regard to Medicare, the delay will be longer.  As a government entity, Medicare works on its own time schedule.  The plaintiff generally has to submit a conditional payment letter to Centers for Medicare and Medicaid Services (“CMS”) to obtain information of any payments made by Medicare.  After receipt of this information, the plaintiff then must submit information to CMS relating to whether certain charges are unrelated to the occurrence, the settlement amount, the costs and fees incurred in obtaining the settlement amount, and any other information tending to demonstrated a hardship to the plaintiff that would convince CMS to accept a lower amount.  Only then will CMS issue a final demand letter.  This process can take months.  Unfortunately, waiting appears to be the best option for the defense.  Although it may not be a popular decision with the plaintiff and his or her attorney, it is in everyone’s interest that the settlement payment be delayed.  If the defense attorney communicates with plaintiff’s attorney early on in the litigation that these conditions will be a prerequisite to any settlement, the plaintiff should have sufficient time to accept the reality.