Attorneys seeking to settle disputes under the MSP Act by including indemnification or hold-harmless agreements must exercise caution lest they inadvertently run afoul of ethical constraints or find the agreements themselves unenforceable.
Since its inception, the Medicare Secondary Payer Act (MSP) has created a number of headaches for legal practitioners. One of the emerging issues in this body of law is compliance with ethical opinions regarding the conduct of attorneys and settling legal disputes. While various jurisdictions have opined regarding the ethics of indemnification and hold-harmless agreements among parties to settlements involving the MSP Act, opinions differ, and questions remain whether such agreements are enforceable where Medicare’s interests are involved.
As any attorney has known since law school, being a part of this profession brings with it ethical obligations governed by the individual state supreme courts and their offices of professional responsibility. As a result of these professional obligations, attorneys need to be mindful of these responsibilities in every aspect of their practice, including the settlement of claims. As is the case with our federal system, these obligations are dependent upon the standards set forth in each individual state. As a result, attorneys should be aware that the standards governing their conduct in one jurisdiction may not be recognized in another.
Emerging Settlement Standards
Before the MSP Act became a major issue in workers’ compensation and other cases involving personal injuries, attorneys were often not mindful of their obligations under the act and its potential ethical ramifications. Prior to the year 2000, a number of jurisdictions issued advisory opinions regarding the conduct of lawyers with respect to the settlement of liability or workers’ compensation claims, or both, and the resolution of unpaid liens for medical providers as a condition of settlement. However, these advisory opinions were short and vague. For example, in 1996, the state of North Carolina issued a rather benign statement indicating that lawyers in a personal injury claim may not execute an agreement to indemnify the tortfeasor’s liability insurance carrier against unpaid liens for medical providers.1
In 1987, the Wisconsin Board of Professional Responsibility (Board) was asked to determine whether the Code of Professional Responsibility and the Rules of Professional Conduct for Attorneys precluded attorneys from proposing, demanding, or entering into settlement agreements that included indemnification or hold-harmless provisions binding an attorney to personally satisfy an unknown lien against the settlement funds or property. In their findings,2 the Board opined that the primary ethical problem posed by conditioning a settlement agreement on a lawyer’s becoming a guarantor against the lien is that it places that lawyer’s interest at odds with those of the client. In support of their opinion, the Board cited a number of sources, including Evans v. Jeff D., 106 S. Ct. 1531 (1986), which suggests that settlement proposals sometimes drive legal or ethical wedges between attorney and client. Based upon these factors, the Board opined that it was unprofessional conduct to enter into such hold-harmless or indemnification agreements. The Board also questioned whether such agreements gave the attorney a financial interest in litigation.3
Other state boards of professional responsibility have questioned other aspects of such agreements. The issues they addressed have included whether such agreements exceed the scope of representation of an attorney, conflicts of interest in general, prohibited transactions, the safekeeping of property, declining or terminating representation, the role of the attorney as an advisor, and misconduct in general.4
Settlement Ethics & the MSP Act
In 2005, the state of Indiana was one of the first states to specifically address the ethics of hold-harmless or indemnification agreements by attorneys under the terms of the MSP Act. In the first advisory opinion issued that year, the Legal Ethics Committee of the Indiana State Bar Association opined that such agreements are unethical.5 The committee noted that hold-harmless clauses involving attorneys violate several provisions of the Indiana Rules of Professional Conduct:
- Rule 1.2(a): Obligates an attorney to abide by a client’s decision whether to settle a matter and provides that this obligation may be compromised where an offer interjects the attorney’s own financial exposure into the settlement negotiations.
- Rule 1.7(a)(2): Prohibits an attorney from representing a client where there is significant risk that the issues involved in the representation may “materially limit” the attorney’s interest. The committee noted that acceptance of an otherwise favorable settlement may rest on an attorney’s assumption of an uncertain personal exposure that results in a conflict between the attorney and the client.
- Rule 1.8(e): Prohibits an attorney from providing financial assistance to a client that exceeds advancement of costs and expenses associated with litigation. The committee noted that a promise of indemnification may make the attorney essentially a guarantor of the client’s legal obligations.
- Rule 1.15(d): Obligates the attorney to promptly return funds or property of third persons who are entitled to receive upon settlement.
- Rule 1.16: Prohibits an attorney from representing a client if the representation violates the Professional Rules of Conduct.
- Rule 2.1(a): Requires an attorney to exercise independent professional judgment when representing clients. The committee observed that an attorney’s agreement to indemnify another places an inexcusable burden on the independent judgment of that attorney.6
In examining this issue, the Indiana Ethics Committee noted that under the MSP Act, conditional payments, or presumably Medicare’s future interests, are not necessarily a lien in the true sense of the word. Instead, the committee noted that Medicare possesses only a right to bring a cause of action against any entity responsible for primary payments for medical expenses.7
The Indiana Ethics Committee specifically did not address hold-harmless or indemnification issues in the context of Medicare and Medicaid claims or liens. Focusing narrowly, the committee determined only that settlement agreements that require counsel to hold another harmless violate the ethics rules.8
Following the issuance of this decision, several years elapsed before another state specifically examined hold-harmless or indemnification arrangements in settlements involving Medicare beneficiaries or Medicare’s interests. In 2010, the state of Tennessee addressed these issues.9 The specific inquiry addressed the propriety of asking plaintiff’s counsel to enter into agreements or releases that require the attorney to ensure the payment of medical bills or a lien, or more specifically, to indemnify another party or hold them harmless. The Tennessee Board noted that “requiring a plaintiff’s attorney to enter into agreements posed in an inquiry, particularly requiring that attorney indemnify or hold harmless any party being released or subrogation interest holder from medical expenses or liens, creates a conflict between the interests of the plaintiff’s attorney and those of the client.”10 The Board also noted that attorneys cannot ethically include such agreements or clauses in their settlements.11
The Tennessee Board made no specific findings with respect to the MSP Act. However, the Board did specifically note that
nothing in this opinion is intended to relieve any individual or any entity, including plaintiff’s counsel, of any obligations, including reporting and/or payment obligations, and posed by the MSP Act, 42 U.S.C. §1395y et seq. Counsel (defense or plaintiff) may be subject to a direct action suit by the Center for Medicare and Medicaid Services (CMS) recovering attorney’s fees collected through a settlement or release that has not been properly reported and negotiated consistent with the obligations of this statute.”12
In addition to specifically citing the MSP Act, the Board also noted the following regulations which speak to the subject of Medicare’s rights of recovery:
- 42 C.F.R. §411.24(g): Recovery from Parties that Receive the Primary Payments. CMS has a right of action to recover its payments from any entity, including a beneficiary, provider, supplier, physician, attorney, state agency or private insurer that has received a primary payment.
- 42 C.F.R. §411.26(a): Subrogation. With respect to services for which Medicare paid, CMS is subrogated to any individual, provider, supplier, physician, private insurer, state agency, attorney, or any other entity entitled to payment of a primary payer.
Further, the Board also emphasized Medicare’s other subrogation rights pursuant to 42 U.S.C. §1395y(b)(2)(B)(iv).13
Following the issuance of the decision in Tennessee, the Supreme Court of Ohio, Board of Commissioners on Grievances and Discipline, issued an opinion regarding this topic in early 2011.14 The question revolved around the ethical obligations of an attorney to propose, demand, or agree to personally satisfy any and all claims by third persons as to settlement funds. Unlike many authorities that had issued ethical opinions on this subject, Ohio specifically addressed Medicare and Medicaid “liens.” The Board determined that personal indemnification by a lawyer is essentially “an agreement by the lawyer to provide financial assistance to the client.”15 As such, these agreements were determined to be presumptively unethical.16
Most recently, the Florida State Bar issued an advisory opinion regarding indemnification issues in April 2011.17 Prior to the issuance of this opinion, the Florida State Bar was petitioned by two of its members who posed the following questions and issues for consideration:
- Whether an attorney representing a plaintiff in a personal injury matter can sign a settlement release containing a hold-harmless or indemnification agreement in favor of the opposing party related to any future liability under the MSP Act.
- That under the MSP Act, the plaintiff and their attorney are required to use settlement proceeds from a third-party recovery to satisfy Medicare’s subrogation rights (conditional payments), and are required18 to create from the proceeds of the settlement a Medicare set-aside to protect Medicare’s interest against claims for future benefits related to the personal injuries.
- That in workers’ compensation claims, the MSP Act requires19 the creation of a Medicare set-aside, but nothing in the MSP Act’s regulations or case law interpreting the act expressly requires a Medicare set-aside in the context of a third-party liability claim.
- That Medicare has failed to provide any formal written guidelines as to the need for a Medicare set-aside in the context of a liability claim.20
After examining its Rules of Professional Responsibility, as well as other states’ opinions and authorities, the Florida Bar staff opined that a defense lawyer should not request that a plaintiff lawyer enter into such an indemnification agreement as it would violate Florida’s rules, nor should such a lawyer knowingly assist or induce others to do so.21
Themes in Common
A number of themes run common through all opinions regarding the ethical obligations of attorneys when seeking to indemnify or hold harmless a party in settlement agreements. These include the professional role of the attorney, conflicts inherent to such agreements, and ethical limitations on financial assistance to clients.
Role of Attorney. The state ethical boards that have reviewed these issues take seriously the role of an attorney as an officer of the court, and the limits that such settlement agreements place on the role of an attorney. Attorneys wear a number of different hats throughout the course of their daily practice. These hats include the roles of an advisor, counselor, and most importantly, legal practitioner.
Inherent Conflicts. At this time, a majority of the state ethical opinions do not specifically discuss the role or impact of the MSP Act on the ability of one attorney to indemnify or hold harmless another. However, an underlying theme in all ethical decisions discussing this point is that once an attorney has a financial interest in a lawsuit, that interest ultimately affects the attorney’s ability to be a zealous advocate for their client and obtain the best settlement possible for that client.
In reaching these conclusions, various states have examined the impact of hold-harmless and indemnification agreements from different angles. For example, the state of Indiana correctly recognized that under the MSP Act, Medicare’s right of recovery is not by way of a lien, but instead under either a direct cause of action or through subrogation.
Similarly, the Board of Professional Responsibility in Tennessee went to great lengths to explain the nature of the MSP Act and the rights of recovery Medicare has. In its cautionary footnote, the Board also explained that a number of different parties are subject to adverse action taken by the federal government. While not explicitly making statements to this effect, the Board appears to caution legal practitioners that hold-harmless or indemnification clauses are unethical, or at the very least unenforceable, regardless of who may be involved.
The state of Florida has taken a very broad approach to its interpretation of the MSP Act and the ethical underpinnings of hold-harmless or indemnification clauses in settlement agreements. While the Florida Bar appears to have misinterpreted the “requirements” of the MSP Act, the decision it issued overall is consistent with those of other jurisdictions that have weighed in on the subject. Further, the Florida opinion suggests to some extent that hold-harmless and indemnification clauses involving parties other than counsel in the MSP Act context are unethical, or at least unenforceable.
Financial Assistance to Clients. Most states issuing ethics opinions have discussed this aspect of indemnification or hold-harmless agreements to some extent. At this time, the discussion is mainly limited to situations where defense counsel asks to have an indemnification or hold-harmless agreement provided by a plaintiff’s attorney.
However, attorneys should take note of the direction the state of Tennessee has taken regarding these matters, cautioning legal practitioners regarding the additional obligations imposed on parties and attorneys in cases that involve Medicare beneficiaries. This caution includes a warning regarding Medicare’s ability to bring a direct cause of action or to enforce their subrogation rights under the MSP Act, as well as MMESA/Section 111 reporting requirements. By not taking Medicare’s future interests into account or addressing those interests, attorneys could commit ethical violations by way of either malfeasance or nonfeasance.
At this time, there are a number of ethical issues involving indemnification and hold-harmless agreements involving plaintiffs counsel that are made at the request of defense counsel. The states that have addressed these issues to date have unanimously concurred that such agreements are unethical. With respect to issues concerning the MSP Act, the several states that have weighed in on this issue are again in complete agreement that due to various constraints, such agreements are also unethical when it comes to liens or subrogation interests under the MSP Act.
The real issue remains whether or not parties to the action can be constrained to indemnify or hold harmless other parties by agreement. To date, state advisory opinions have not specifically addressed this issue. However, there is some sense that such agreements very well could be considered unethical, or in the long term unenforceable based upon the rights of the federal government under the MSP Act and the nature of their “lien.”
The following recommendations may help attorneys safely navigate the area of MSP Act compliance, as well as practice within the bounds of state ethics opinions:
- Investigate all Medicare Secondary Payer issues early in the process. For plaintiff or petitioner attorneys, this can involve inquiring about your client’s Medicare status upon initial client intake. Defense counsel should consider measures such as requesting that the claimant execute a Section 111 Reporting Verification form as part of discovery, or at the very least, questioning the plaintiff or petitioner’s status under oath at a deposition.
- Place Medicare on notice early in the process through the Coordination of Benefits Contractor (COBC).
- Follow up and maintain regular contact with the Medicare Secondary Payer Recovery Contractor (MSPRC) regarding conditional payment information throughout the process. Given the time frame in which updated conditional payment letters can be generated, it is important to anticipate scheduling deadlines and make requests in a timely manner,
- Consider and protect Medicare’s past and future interests in all settlements. While Medicare set asides are not necessarily “required,” it is important to take note of the various regulations interpreting at least workers’ compensation settlements and to note that attempts to shift the burden onto Medicare may render your settlement agreement null and void. While federal regulations do not necessarily address other than workers’ compensation claims, it is important for practitioners practicing in these areas to take heed of existing regulations.
- Consult the ethical advisory opinions and rules of professional conduct regarding hold-harmless or indemnification agreements for the jurisdiction in which you are practicing. While most jurisdictions have taken the position that attorneys are limited in indemnifying or holding another attorney harmless for unknown medical liens, questions still remain as to whether this can be done regarding Medicare’s interests. Always be cautious when dealing with interests involving the MSP Act.
Aaron Frederickson has been practicing law since 2002 and consulting on Medicare Secondary Payer and MMSEA/Section 111 reporting requirements since 2004. He is the founder of MSP Compliance Solutions and enjoys solving complex problems for his clients. Aaron can be contacted at (651) 485-7036 or via email at aaron@mspComplianceSolutions.com. The author would like to thank attorney Donald G. Fernstrom for his assistance and comment on this paper.
1 North Carolina State Bar Ethics Op., RPC 228 (1996).
2 Wisconsin Formal Op., E-87-11 (1987).
4 State Bar of Arizona Op. 03-05 (2003). Numerous other decisions have also questioned similar ethical roles of an attorney.
5 Indiana Opinion No. 1 (2005).
9 Tennessee Formal Op. 2010-F-154 (2010).
10 Id., See also State Bar of Arizona Op. 03-05 (2003).
11 Tennessee Formal Op. 2010-F-154 (2010).
14 Ohio Board of Commissioners on Grievances and Discipline, Opinion 2011-2 (2011).
17 Florida Ethics Op. 30310 (2011).
18 The author questions the accuracy of the statement that CMS or the MSP Act “requires” a Medicare set-aside in any workers’ compensation, no-fault or general liability case.
19 See Footnote #18.
20 Florida Ethics Op. 30310 (2011).