Payout or Pay Later?
Structured settlement strategies for workers’ compensation claims.
Workers’ compensation claims generally have a life of their own. Each one moves through stages, dynamically growing and evolving as it progresses. In some cases, the injured worker, through a mix of rehabilitative services and training, will return to work. These are your success stories. However, there are claims where the injured worker will never return to work, and thus benefits will not cease, or the worker passes away leaving payments to continue to their beneficiaries for life.
At first blush, an insurer may feel that there is no hope to the endless claims administration and risk of rising medical benefit costs unless an effective settlement can be reached. Getting to an agreement and eventually settling a claim can present many obstacles to even the most experienced claims professionals.
Structuring a Settlement
Simply put, structured settlements are periodic payment vehicles. Funded by the settlement monies, they provide a guaranteed stream of future payments to a claimant according to a schedule determined at settlement. In many states, structured settlements enable medical and indemnity portions of workers’ compensation claims benefits to be reduced to present value, or can often be used to beef up a settlement by offering future payments alongside upfront cash. Structures have long been used in the liability context, especially in cases involving serious injuries, which often include long-term medical needs by a claimant.
A structured settlement is a flexible tool, and its payment streams can be shaped to meet the needs of a claimant. It can consist of annual payments, lifetime monthly payments, lump sums in the future, or any combination of payment streams. Payment design is only limited by the imagination of those involved.
In the workers’ compensation context, a structured settlement can be designed to replace a portion of periodic benefits that a claimant may have grown accustomed to receiving over the years, thereby lessening fears that the claimant may have of running out of money—a common and valid concern of those who choose a lump-sum settlement.
Additionally, with the rise of Medicare Set-Aside (MSA) accounts to address the medical portion of the claim, structured settlements are routinely used to meet the annual funding requirements and have the effect of reducing an MSA’s upfront costs significantly.
Beware of Medicare
Medicare Set-Asides generally require an annual deposit to go into the account and a gross amount over the claimant’s life to cover Medicare’s “interests,” which include ensuring CMS’ secondary payer status on medicals. Often, individuals may be willing to settle their workers’ compensation claims but, because of pre-existing conditions, may be unable to receive private health insurance. Invariably, they seek out medical assistance, as few people outside of the independently wealthy would be able to pay for ongoing medical care on an out-of-pocket basis.
This creates a situation wherein if Medicare is not considered in the initial settlement, the claimant may attempt to use Medicare benefits to cover costs that should have been borne by the workers’ compensation carrier, potentially landing the claimant and the workers’ compensation provider in harm’s way. This is because the Medicare Secondary Payer Act wields tremendous power with regard to its ability to hold all parties to a suit liable for future Medicare liabilities. Care must be taken to avoid having the claimant pocket the medical portion of their workers’ compensation settlement, as they may try to have Medicare pay for the injuries stemming from the workers’ compensation claim. This not only causes Medicare to seek remedies aggressively to be made whole, but also adds stress to the thinly-stretched Medicare program.
The U.S. government, through CMS, has been very active in stamping out this type of behavior. MSAs provide the solution and are, thus, the required course, but they do not have to be funded via a lump sum. A structured settlement provides an attractive alternative by reducing expenses and, more importantly, providing a guaranteed stream of payments that will protect both the claimant and Medicare. The savings based on current interest rates can be high—we estimate it at around 40 percent—which is a substantial savings on any single claim. Imagine the impact if adopted on a company-wide level.
Structured settlements are applied in the following manner: Upon receipt of an MSA allocation, the structured settlement consultant reviews the document for appropriate allocation numbers (initial account seed money and future annual payments). The consultant then designs a structured settlement to match these payments. In doing so, the future annual payments to the MSA are reduced by the annual interest rate provided by the annuity to a present value or cost.
Making Your Case
The savings and efficiencies don’t stop with the medical portion of the settlement. Structured settlements used for the indemnity portion of a settlement also can deliver significant benefits to claimants when utilized properly. This proper utilization comes down to identifying the appropriate claims, building a settlement team with a clear and agreed-upon plan, and presenting a chosen few targeted options to the claimant based on their present and future financial needs as well as those of their dependents.
Structured settlements can be utilized on almost any claim in which a settlement makes sense, but generally, the settlement should be over $20,000. Two types of workers’ compensation claims, in particular, lend themselves well to structured settlements. First are claims involving serious catastrophic injuries and especially permanent total disability (PTD) situations.
In these situations, the medical benefits are generally quite high, often involving life care plans, future surgeries, attendant care, and large non-Medicare covered items. A structured settlement offer can be built that would include an MSA reduced to present value, a series of payments to meet future needs and wants of a claimant, and perhaps even revisionary language under which, in the event the claimant dies, the residual value in the annuity would be paid back to the company, the insurer, or self-insured defendant.
The revisionary language is key in PTD claims, as claimants do not always survive the complications related to their injuries and the fear of this high mortality may be an impediment to settlement for all parties involved. With the revisionary language, this concern no longer exists as the unused money—the money not yet paid out by the annuity—is returned to the insurer.
A second type of claim that lends itself to a structured settlement is a beneficiary or widow claim. This category generally provides for the survivors of a worker who has been killed as a result of injuries sustained on the job. These benefits often come with stipulations, including re-marriage clauses, (if the widow re-marries, his or her benefits will cease), or in the case of a minor beneficiary, benefits that terminate at the age of majority or upon completion of college. The structured settlement can be designed to keep these stipulations in place. The potential to keep a stream of benefits and re-marry or not worry about an impending deadline can often be a strong selling point for settlement of the claim.
Selling the structured settlement starts with support from the defense. Often, the largest hurdle with structuring can be when any member of the defense team does not fully understand the benefits to their company or the claimant. Dating back to the days when structure programs were not run by focusing on the claimant benefits, there is leftover sentiment in parts of the claims community that creates resistance to structures. Generally, this issue can be alleviated by utilizing a consultant whose aim is to aid not only in the settlement of the claim—thereby making the life of the claims professional easier—but also to do so in a way that benefits the claimant. Through obtaining a solid understanding of the claimant’s present and future financial needs and medical expenses, both goals can be accomplished. If you or your attorney is unsure if a structure is the best solution for your claim, a third party should be engaged.
Once the settlement team is on the same page, providing settlement offers in the form of a structured settlement can provide targeted and well-designed settlement offers. Designing plans to address the claimant’s specific needs indicates a willingness to settle and conveys that the insurer recognizes the demands and plight of the claimant. These uniquely designed settlement options can also open dialogue between the two sides and shed light on issues not previously discussed which may have been an impediment to settlement.
Finally, a structured settlement consultant can provide numerous additional services at no cost to the claims professional’s file. These include rated ages (adjustment of actual age due to the injuries of the claimants), which is vital to reserve setting, MSA allocation, and, ultimately, providing a better structured settlement offer. Present value calculations are also available to the claims professional if a worker is claiming future medical costs or wages.
Additionally, most structured settlement consultants can provide training and file review, travel to mediations, and meet with claimants at no charge. The key is to find the right consultant with the appropriate subject expertise and allow them to assist you in the settlement of your workers’ compensation claims.
One final caveat: Each state has different laws with regard to settling workers’ compensation claims. Some states allow full settlement; others partial settlement (indemnity or medical). Others prohibit settlement. States also have laws that dictate how the settlement can be designed. Be sure to check on the laws of the states you service.
Ronald Walters, Jr., is a settlement consultant with Structured Financial Associates, Inc. He has been a CLM Fellow since 2011 and can be reached at email@example.com.
MSA Funding Case Study
John Worker is a workers’ compensation claimant who is 44 years old, but due to the severity of his injuries, he qualifies for an age rating (an adjustment in his age to a more realistic age given his reduced life expectancy). The age he is rated at is 52, effectively reflecting a reduction in life expectancy of eight years. Average life expectancy for John would be projected at 83 years old.
The claimant has indicated he is interested in a settlement, so the claims professional orders a Medicare Set-Aside (MSA) allocation (this case study will not discuss the indemnity portion of the settlement). The allocation indicates that John must have an MSA fund of $530,000 over his life expectancy.
There are two funding options in this situation: an immediate cash funding of the MSA entirely; or funding the MSA with a structured settlement annuity. Here is how those two options stack up against each other:
Amount required: $530,000
Cost to fund with cash: $530,000
Structured Settlement Funding
Benefit Cost to Provide
Seed Money $61,000 $61,000
Annual Payments for Life $15,633.33 $226,000*
Total Annuity Cost $287,000
Annuity Benefits: $530,000
*cost to purchase an annuity to provide annual payments to the MSA of $15,633.33 for 30 years based on current market rates.
Structure Settlement vs. Cash Funding
Cash Cost: $530,000
Annuity Cost: $287,000
Total Savings $243,000
Percentage Savings 45.85%