[CASE STUDY] Lump Sum vs. Structured Settlement

Lump Sum vs Structured SettlementThe combination of professional administration with a structured settlement (annuity) is often the best way to protect an injured party’s settlement dollars in the event of an unexpectedly very costly year due to higher-than-anticipated medical needs after settlement. The combination of these services in a costly scenario allows the injured party to access more coverage from Medicare and pay less out of their own pocket.

 

What Is Professional Administration?

 

Professional administration involves the use of a professional third party to help manage the injured party’s medical settlement funds or Medicare Set Aside (MSA) after settlement.

 

“Professional administration achieves two important goals,” says Marques Torbert, CEO of Ametros. “It saves the injured party significant money on their medical expenses by providing them with access to discounted medical network prices, and it ensures that all their reporting to Medicare for a Medicare Set Aside account is done properly.”

 

When an MSA account runs out of funds and reaches a zero-dollar account balance, as long as it is administered properly Medicare agrees to step in as the secondary payer covering the continuing and needed medical expenses. Medicare “highly recommends” the use of professional administration to make sure that funds are extended as long as possible through discounts, used appropriately for medical care and ultimately reported properly so that Medicare will know when to step in as the payer.

 

 

What Is a Structured Settlement?

 

A structured settlement is a stream of periodic payments paid to an injured party by the defendant primarily through the purchase of annuity (fixed and determinable) issued directly by highly rated life insurance companies. In the case of an MSA, the annuity will enable the issuance of annual payments that cover the entire MSA amount.

 

As Eric Vaughn, executive director of the National Structured Settlements Trade Association, explains, “Structured settlements provide an injured party with a reliable, stable source of income which can be critical to cover their ongoing medical costs. A structured settlement removes the variability of the markets and guesswork out of funding their future expenses.”

 

The Centers for Medicare and Medicaid Services (“CMS” or “Medicare”) is accustomed to the use of annuities with MSAs. Medicare has provided clear guidelines for how the MSA should be set up when annuities are involved, with two years of costs funded upfront and the rest of the cost broken out annually over the injured person’s lifetime. When an MSA is sent to Medicare for approval, Medicare will review and approve MSAs with structures.

 

When assessing future medical costs in an MSA, it’s important to take a very conservative approach.

 

Using a structured settlement and professional administration for the MSA can provide valuable protection to an injured party should they have a costly year. The combination of these services will allow the injured party to properly get coverage from Medicare in the event their MSA funds run out. That Medicare coverage can, in many cases, ensure that the injured person pays less out of their own pocket.

 

As Vaughn points out, “Annuities are a natural fit with MSAs, given the annual medical expenses are already budgeted over the individual’s lifetime.” Torbert adds, “Attorneys and adjusters alike are recognizing the power of combining the annuity with administration not only to assist the injured party in saving money, but also to provide them with support for their medical care over the long run.”

 

It’s important to keep in mind, not all professional administrators and annuities are the same. Choose an administrator that provides the best service and saves the injured party most on medical expenses. When choosing annuities, it’s important to work with a trusted broker and to select a reliable, highly rated life insurance company. Speak with experts in both administration and structures to make sure you and your client make the right selection to ensure you have the most financial protection.

 

 

Case Study

 

Let’s take a look at an example of how an injured party, Joe, can leverage these two important services to protect his settlement dollars in the MSA.

 

Let’s assume that Joe accepted a settlement with an MSA and has a life expectancy of 10 years.

 

Scenario #1

 

In the first, good scenario, Joe is doing well and is using professional administration to receive discounts so he has relatively low spending of a few thousand dollars a year on MSA medical items.

 

Both a lump sum and structured account would have the same amount spent at the end of Joe’s life expectancy.

 

 

Scenario #2

 

Let’s take a look at the unique protection that professional administration and a structured settlement together can offer Joe in the scenario where he undergoes a costly surgery or other adverse outcomes.

 

Let’s assume that Joe is offered the exact same MSA settlement amount and starts out on the same pace. Unfortunately, three years after settlement, Joe needs to pay for a complex surgery.

 

With a lump sum account, Joe ends up having to pay for the remaining cost of the surgery after using what funds he currently has in his MSA account. Unfortunately, with a lump sum settlement, he will never receive MSA funds again. If he is Medicare-eligible, Medicare will cover about 80% of the remaining balance, and Joe will have to pay 20% out of pocket for all future treatment costs for the rest of his life (such as Medicare premiums and his regular treatments).

 

If Joe has a structured account managed by a professional administrator, his funds will take a large hit at the time of his surgery, but the administrator will have ensured the funds were spent appropriately so Medicare will step in as the primary payor. Medicare will pay for 80%, and he will take care of 20% out of pocket for the remaining balance of the surgery only for that year. After that year, his account will continue to replenish annually, and he can use his MSA funds to pay for future treatment.

 

 

Summary

 

In summary, the outcomes for Joe can be strikingly different. With the lump sum settlement, he is losing personal funds, and he never again has the chance to build value in his MSA account. With the structured settlement, Joe is better off over time. The way Joe settles his case has a very powerful impact on his finances, and the combination of a structured settlement and professional administration protects the injured party more effectively.

 

 

 

Author Porter Leslie, President of Ametros. He directs the growth of Ametros and works with its many partners and clients. He built his career leading customer-focused businesses in the healthcare and financial services industries. Prior to Ametros, he worked in investment banking, private equity, and corporate development. Leslie earned a B.A. in economics from Columbia University, as well as an MBA from the Wharton School and an M.A. from the Lauder Institute at the University of Pennsylvania. He is fluent in Spanish and Portuguese.

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