When a Medicare beneficiary receives a lump sum payment to compensate them for medical injuries from a personal injury claim, two things need protecting. The first is the beneficiary’s continued access to Medicare coverage for injury-related care. The second is the Medicare Trust Fund, which should not be paying for treatment that a settlement already accounted for.
A Liability Medicare Set-Aside serves both. It is not a penalty, a tax on the settlement, or a hoop imposed for its own sake. It is a documented allocation of settlement funds for future injury-related care that Medicare would otherwise cover — so that the money is there when the treatment is needed, and so that Medicare pays only what it should.
Where the obligation comes from
The Medicare Secondary Payer Act, at 42 U.S.C. § 1395y(b)(2), provides that Medicare does not pay for items or services where payment has been made, or can reasonably be expected to be made, under a liability insurance policy or plan, including a self-insured plan. The implementing regulations appear at 42 C.F.R. Part 411.
That is the source of the duty, and it is worth being precise about what it says. The statute establishes that Medicare pays secondary. It does not name a mechanism, and it does not use the term “set-aside.” CMS has been direct on this point in its own guidance: the law does not require a set-aside in any particular situation, but it does require that the Trust Fund be protected from paying for future services that a settlement covered.
What follows from that is the part most articles get backwards. A set-aside is not legally mandated. It is the method CMS has described as its preferred approach, because it produces a documented, funded, verifiable answer to the question of how future care was accounted for.
What CMS has — and has not — issued for liability cases
There is no formal CMS review process for Liability Medicare Set-Asides as there is for Workers’ Compensation cases. There have been instances historically where the CMS Regional Offices have reviewed and issued determination letters or decisions on Liability Medicare Set-Asides, but this is not common practice today.
This is not an oversight. CMS has twice moved toward formal rulemaking on future medicals in liability settlements and twice withdrawn it — first following an Advance Notice of Proposed Rulemaking in 2012, withdrawn in 2014, and again with a proposed rule titled Medicare Secondary Payer and Future Medicals, withdrawn from OMB review in October 2022. Neither was ever finalized.
So the obligation under § 1395y(b)(2) applies in full, while the mechanism for showing compliance has been left to the parties. Anyone who tells you CMS will approve a liability set-aside is describing a process that does not plainly exist today.
The practical consequence is significant: because there is no agency sign-off to rely on, everything rests on the quality of the analysis in the file. That is the entire ballgame in liability. A well-built allocation with sourced figures and record citations is what answers the question later. A number without support behind it is not.
When a set-aside is warranted — and when it isn’t
The question is not the size of the settlement. It is whether there is future injury-related care that Medicare would otherwise pay for.
CMS guidance addressing liability settlements has described a straightforward path where there is none: when the treating physician certifies in writing that all treatment for the released injuries was completed as of the date of settlement, that certification can be retained in the file in place of a set-aside. No allocation or set-aside is needed. Many liability files belong in that category. On those, funding a set-aside takes money from an injured person for care that isn’t projected to happen.
The files that do warrant one usually show some combination of a recommended surgery that hasn’t occurred, ongoing injections or pain management, injury-related prescriptions expected to continue, durable medical equipment or attendant care, catastrophic injury, or a client who hasn’t reached maximum medical improvement at settlement. Where the beneficiary is younger, duration alone can drive the projection more than injury severity does.
How should a set-aside be allocated
An allocation is only as strong as the record behind it.
- The physician’s documented recommendations drive the projection. Not speculation about what a beneficiary might eventually need — what the providers have actually recommended in the records. Historical treatment patterns are also heavily weighted.
- Only Medicare-covered items and services are included, consistent with national and local coverage determinations. Treatment Medicare doesn’t cover doesn’t belong in a Medicare set-aside.
- Life expectancy comes from a published table, or from an independent, properly documented rated age.
- Services are priced to a stated schedule for the jurisdiction, with surgical projections accounting separately for physician, facility, and anesthesia components.
- Medications are priced to a current published drug reference, drawn from the prescription history and provider medication lists.
- Every inclusion and exclusion carries a record citation, so the allocation can be walked line by line years later.
That traceability is what makes an allocation reasonable and necessary rather than arbitrary — and it is equally what makes a decision not to fund an MSA reasonable.
One more reason the file matters: Section 111
Liability insurers report settlements to CMS under Section 111 of the Medicare, Medicaid, and SCHIP Extension Act, including the settlement amount and ICD-10 codes describing the alleged injuries. CMS uses those codes to identify which future claims it should treat as secondary and what payments Medicare has already made and therefore should seek reimbursement for. It is a diagnosis-matched filter applied claim by claim, not a general suspension of benefits.
The practical effect is that a beneficiary can present for treatment he/she considers routine and receive a denial because the code matches what was reported. When that happens, the funded set-aside and the analysis behind it are what resolve it. Where no set-aside was warranted, the documented reasoning — the records, the MMI status, the physician’s certification — serves the same purpose to assist with the reinstatement of benefits and payment for the item or service.
Either way, the answer is in the file. The work of building that file happens at settlement, not two years later when a claim is denied.
Both interests, not one
The framing that pits the beneficiary against Medicare has always been wrong. A properly built set-aside means the beneficiary has funds available for the care he/she was injured into needing, and means the Trust Fund isn’t absorbing costs a settlement already provided for. Those aren’t competing goals. Getting the number right serves both.
Champion Settlement Services works exclusively on liability settlements, with plaintiff firms and directly with Medicare beneficiaries. That focus is deliberate. Liability is where the guidance is thinnest and the documentation matters most.
This article addresses federal Medicare Secondary Payer requirements of general application. It is not legal advice and does not create an attorney-client relationship. Coverage determinations, fee schedules, life expectancy tables, and CMS guidance are periodically revised, and the analysis of any settlement depends on its own medical records, release language, and jurisdiction. Beneficiaries and counsel should obtain advice specific to their matter.