Frank C. Kilcoyne, CSSC

Hard Dollar Savings Thanks to Structures

Recently, I was contemplating the results of a study on how structured settlements are perceived by professionals in the claims resolution industry.(1) The researcher spent time exploring what led to an increase in structured settlement use over the past three years. The increase itself might surprise some veterans who associate structure value only with periods of high interest rates, but clearly other factors are at work. This month we’re going to discuss two contributing factors and delve into one of them more deeply.

Many of the study’s participants believed that structures added “intrinsic” value to the settlement regardless of where interest rates were. And if structure use is up when interest rates are not, then they must be on to something.

The most significant benefit this group identified was how structured settlements effectively address claims for future medical expenses and lost future wages. That aligns with my own experience over the past few years where the claimants who have structured their settlements have tended to be those with the most serious injuries and life circumstances. In effect, the benefits of structuring a settlement will appeal most to those with the greatest need for financial stability. Yet this alone does not account for the size of the increase in structure usage.

Another big factor is the growing awareness of the hard dollar savings that structures deliver when used to set up a Medicare Set Aside account (“MSA”). On average, one can save as much as 35% on the cost of an MSA when you structure it. And I think the full effect of this benefit is only just getting started; the majority of personal injury professionals do not yet have a clear understanding of how these savings are achieved. Further education and dialogue on this issue is going to lead to a lot of forehead-smacking and good, solid savings in the claim process.

Allow me to venture into just such a dialogue now: A “Medicare Set-Aside” begins with a detailed report that articulates how much money out of a proposed settlement must be “set aside” to satisfy the Medicare Secondary Payer Statute of 1980. Based on a review of relevant medical reports from recent years, this MSA “allocation” breaks down future medical and prescription drug expenses related to the subject injury for the expected life of the claimant which would normally be covered by Medicare. This is to separate those costs from ordinary health issues which might arise and for which the claimant should be covered.

Let’s look at an example using data from an actual case with names changed of course to protect me from my own dose of litigation:

John Doe, a 61-year-old male with a normal life expectancy of 17 years, sustained a debilitating injury in 2011, allegedly as a result of someone else’s negligence. He has applied for Social Security Disability Insurance (SSDI) and Medicare. MSAs are funded based on the recommendations of an “allocator”. In this case, the allocator documented Mr. Doe’s future lifetime “Medicare-allowable” expenses as follows;

Non-pharmacy $127,552.20
Pharmacy $  74,034.00
Total $201,586.20

There are two ways to fund this MSA. You could fund it with a single cash lump sum of $201,586 OR you could fund it with a lesser sum of cash plus a structured settlement:

 

Initial cash payment into the MSA $  22,398.20

Annual Funding of $10,540 for 17 years

(if living)

$179,180.00
Total $201,586.20

The total payouts of each method are the same, but the costs will not be. If you fund the MSA with a single cash lump sum the cost is of course the full sum of $201,586. But if you fund it with cash and a structure, the cost falls to $120,145. This produces an immediate hard dollar savings of $81,441.00. That is 40% of the MSA’s value!

With pressure to hold the cost of funding an MSA down, please show me ANY other area in claims resolution that can produce double-digit percentage savings. You won’t be able to. It flat doesn’t exist.

But the math here is real and so are the savings. How can this be? How could “the system” permit such an inefficiency to lurk unnoticed for so long? Well, it has not actually been lurking around; the requirement to set money aside to meet Medicare-related expenses is relatively new. And the savings are simply an efficiency that Medicare’s administrator (CMS) knows about and is willing to accept.

Since future expenses are incurred over time, CMS permits funding of those expenses to also be funded over time. And what is a more perfect vehicle to ensure payment of future expenses than a structured settlement? Nothing. With an over-thirty year experience of reliable payment and the ability to offload life expectancy (duration) risk, there is no more perfect vehicle. Due to the “time value of money” funding these expenses over time costs less, often times considerably less.

The obvious value of structured settlements to claims resolution is becoming apparent again. Want to know more about this technique? Do you have a case involving future lost wages, medical expenses or Medicare issues? If so, contact Frank C. Kilcoyne, CSSC at frank.kilcoyne@jmwsettlements.com or call 800 544 5533. I am here to help.


(1) Smith, Taylor. "Low Hanging Fruit; Executive Perceptions and Strategies on Squeezing the Most out of Structured Settlements." Claims Management, June 11, 2014.