What Is the Medicare Secondary Payer (MSP) Rule?

James Wong — Founder & Pharmacist, LienScripts | April 12, 2024 | 7 min read

The Medicare Secondary Payer rule requires attorneys to identify and resolve Medicare's conditional payments before distributing any personal injury settlement. Failing to comply carries personal liability for attorneys and can result in double damages under federal law.

This post is for informational purposes only and does not constitute legal advice.

The Federal Rule That Cannot Be Waived

If your personal injury client was covered by Medicare during treatment, federal law follows that case all the way to settlement. The Medicare Secondary Payer Act (MSP) — a set of federal statutes found primarily at 42 U.S.C. § 1395y — establishes that Medicare is a "secondary payer" when another source of payment is available. In a PI case, the primary payer is the defendant or their liability carrier.

When Medicare pays for treatment that should have been covered by a liability settlement, it becomes a conditional payment — temporary coverage provided on the condition that Medicare is reimbursed when the settlement is reached. The MSP's enforcement mechanism is severe: the government can recover double damages from attorneys, insurers, or anyone else who receives settlement proceeds and fails to satisfy Medicare's recovery right.

Understanding MSP compliance is not optional for PI attorneys whose clients are Medicare beneficiaries.

[!KEY] The Medicare Secondary Payer rule requires PI attorneys to identify, resolve, and document Medicare's conditional payments before distributing any settlement funds — failure to comply can result in double damages under federal law.

What "Secondary Payer" Actually Means

Medicare was designed to be the payer of last resort. It steps in when no other primary payer is available. But in personal injury cases, the defendant's liability insurance is available — which means it is supposed to pay first.

In practice, cases take years to settle. Medicare cannot leave injured patients without medication access in the meantime. So it pays conditionally, under the explicit expectation that it will be repaid from settlement funds. These are conditional payments.

The moment a settlement is reached, Medicare's conditional payment obligation crystallizes into a reimbursement claim against the plaintiff's recovery.

How Conditional Payments Work

Step 1: Medicare pays during the case. As the client receives treatment and fills prescriptions, Medicare may cover some or all of those costs while the case is open.

Step 2: CMS tracks payments. The Centers for Medicare and Medicaid Services (CMS) — through its Medicare Secondary Payer Recovery Contractor (MSPRC) — tracks what Medicare has spent on a beneficiary tied to a reported accident or injury.

Step 3: The attorney reports the settlement. Federal law requires plaintiffs and their counsel to notify CMS when a settlement is reached involving a Medicare beneficiary. The statute of limitations for Medicare to pursue reimbursement is six years, but ongoing reporting obligations can extend the exposure window.

Step 4: CMS issues a conditional payment letter. CMS sends a demand letter identifying the amount it seeks to recover. This figure may be negotiated down under certain circumstances, particularly using a proportionate reduction argument (similar to the Ahlborn doctrine applied to Medi-Cal).

Step 5: Pay before distributing to client. The attorney should not distribute proceeds to the client until Medicare's claim has been resolved — either paid, reduced, or formally disputed.

MSP Reporting Requirements for Attorneys

Liability insurers are generally required to report settlements involving Medicare beneficiaries to CMS under the mandatory insurer reporting rules enacted in 2007 (Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007). This reporting obligation helps CMS track which cases involve Medicare patients and trigger the conditional payment recovery process.

As the plaintiff's attorney, your obligations include:

• Identifying Medicare enrollment at intake.
• Obtaining a current conditional payment summary from the MSPRC before finalizing settlement.
• Accounting for the conditional payment amount in the settlement structure.
• Satisfying or resolving the MSP claim before distribution.
• Maintaining records of the resolution in case of future CMS inquiry.

How Medicare's Recovery Right Differs from a Pharmacy Lien

[!KEY] Medicare's conditional payment summary routinely includes charges unrelated to the accident — requesting the summary early and disputing line-by-line before the final demand is issued is the only reliable way to reduce the Medicare claim before distribution, and that process requires weeks that cannot be created after settlement.

This is an important distinction for attorneys managing multiple claims at settlement.

Medicare conditional payments are a government reimbursement right — Medicare paid your client's treatment bills and now wants repayment from the settlement under federal law. This right applies to all Medicare-covered services: hospitals, physicians, and prescriptions covered by Medicare Part D.

A pharmacy lien, like those administered by LienScripts, is a private contractual arrangement under which a pharmacy provides medications on credit. The pharmacy was never reimbursed by Medicare or any other payer — it extended credit directly to the patient in anticipation of a settlement. The pharmacy's claim is governed by the lien agreement, not federal statute.

These two claims are independent. A patient who has both Medicare conditional payments and a pharmacy lien has two separate obligations at settlement, resolved through entirely different processes. For more on how pharmacy liens fit into the settlement waterfall, see our post on the pharmacy lien settlement waterfall.

[!TIP] For Attorneys: Screen for Medicare enrollment at intake and request a conditional payment summary from the MSPRC well before the settlement conference — the process is slow and you need time to dispute unrelated charges before the final demand letter is issued.

Steps Attorneys Take to Resolve MSP Before Settlement

A practical MSP compliance workflow for PI cases:

1. Intake screening. Ask every client whether they are enrolled in Medicare, Medicare Advantage, or a dual-eligible plan. See our Medicare and Medi-Cal intake screening guide.
2. Request a conditional payment summary early. Request from the MSPRC well before the settlement conference. The process is slow and you want time to dispute incorrect charges.
3. Dispute errors. Not every charge in the conditional payment summary relates to the injury at issue. Work with the MSPRC to remove unrelated treatment.
4. Negotiate a proportionate reduction. Where the settlement is less than total damages, a proportionate allocation argument may reduce what Medicare is entitled to recover.
5. Pay from settlement proceeds. Once the final demand amount is confirmed, include it in the settlement waterfall before distributing to the client.
6. Document the resolution. Keep a written record of the final payment and CMS confirmation.

Key Takeaway

[!KEY] A pharmacy lien from LienScripts is a private contractual claim for medications never billed to Medicare — it sits entirely outside the MSP framework and is resolved separately at settlement, so attorneys do not need to involve the MSPRC in pharmacy lien resolution.

The Medicare Secondary Payer rule is a federal compliance obligation, not a suggestion. For any PI client who is Medicare-enrolled, attorneys must identify conditional payments, engage the MSPRC, and resolve the claim before distributing settlement funds. Failure to comply exposes the attorney — and potentially the insurer — to double damages under federal law.