What is a Medicare Set Aside

What is a Medicare Set Aside

Updated: October 22, 2026

Imagine that you suffered a serious back injury at work. After several years of treatment, your employer’s workers’ compensation insurance company offers to settle your claim. The settlement would provide a substantial payment, but there is a condition: you must give up your right to have workers’ compensation pay for future medical treatment.

You may still need prescription medications, injections, physical therapy, or another surgery. Perhaps you already receive Medicare, or you expect to qualify for Medicare because you are receiving Social Security disability benefits.

The insurance company is offering to close its responsibility for your medical care, but that does not necessarily mean Medicare will simply take over paying those bills.

This is where a Workers’ Compensation Medicare Set-Aside Arrangement, commonly called a Medicare Set-Aside or WCMSA, becomes important.

A Medicare Set-Aside is money allocated from a workers’ compensation settlement to pay for certain future medical expenses related to the workplace injury that would otherwise be covered by Medicare. Its purpose is to protect Medicare’s interests when the workers’ compensation carrier is paying money to end its responsibility for future treatment.

Understanding how a Medicare Set-Aside works is essential before agreeing to close your workers’ compensation medical benefits.

Why Doesn’t Medicare Simply Pay After My Workers’ Compensation Case Settles?

Medicare operates under federal laws known as the Medicare Secondary Payer provisions. These laws generally prevent Medicare from paying medical expenses when another responsible payer, including workers’ compensation insurance, is obligated to pay them.

Under Alabama law, an employer generally must provide reasonably necessary medical treatment for a compensable workplace injury. See Ala. Code § 25-5-77(a). That obligation can continue long after an injured worker’s weekly disability payments have ended.

For example, suppose you injured your knee at work and require a knee replacement several years later. If the replacement is reasonable, necessary, and causally related to the compensable injury, it may remain the responsibility of workers’ compensation; but suppose you accept a settlement that closes your right to future medical benefits. The workers’ compensation carrier pays money to resolve that responsibility and is no longer obligated to pay for treatment covered by the release.

You cannot necessarily spend that settlement money on other things and then expect Medicare to pay all future treatment for the same injury.

Federal law requires Medicare’s interests to be considered when a workers’ compensation settlement includes future medical expenses. A properly established Medicare Set-Aside is one recognized method of addressing those interests.

This is one reason injured workers should carefully consider the issues discussed in our article, Should You Settle Your Right to Lifetime Medical Benefits?, before agreeing to close medical benefits.

How Does a Medicare Set-Aside Work?

Consider an injured worker who suffered a serious neck injury and requires ongoing pain management. The treating physician anticipates future office visits, prescription medications, imaging studies, and possibly another surgical procedure.  The workers’ compensation carrier offers a settlement that includes closing future medical benefits. Before the settlement is finalized, the parties obtain an evaluation of the worker’s anticipated medical needs.

That evaluation may consider medical records, current treatment, physician recommendations, prescription costs, the worker’s life expectancy, and other relevant information. It is used to estimate the cost of future injury-related treatment that Medicare would otherwise cover.

Suppose the resulting Medicare Set-Aside allocation is $80,000.

That does not necessarily mean the injured worker receives an unrestricted $80,000 to spend however they choose. Instead, those funds are designated for qualifying future medical expenses associated with the work injury.

A Medicare Set-Aside can be funded with a lump sum or through an approved structured arrangement involving periodic deposits. The appropriate funding method depends on the settlement and applicable Medicare requirements.

The account may be administered by the injured worker or by a professional administrator. In either case, the funds must be handled according to applicable rules, including proper recordkeeping and payment of qualifying expenses.

The distinction matters. A Medicare Set-Aside is not ordinary settlement money. It is money reserved for specified future medical treatment.

Does Every Workers’ Compensation Settlement Require a Medicare Set-Aside?

No. Not every Alabama workers’ compensation settlement requires a Medicare Set-Aside, and not every proposed Medicare Set-Aside must be submitted to the Centers for Medicare & Medicaid Services (CMS) for approval.

Those are two different questions.

The first question is whether the settlement implicates Medicare’s interests in future medical expenses. The second is whether the parties should submit a proposed allocation for CMS review.

CMS has established a voluntary review process for certain workers’ compensation settlements. Under its published guidelines, CMS will review a proposed Medicare Set-Aside when either of the following applies:

• The injured worker is already a Medicare beneficiary, and the total settlement amount is greater than $25,000.
• The injured worker has a reasonable expectation of becoming entitled to Medicare within 30 months, and the anticipated total settlement amount is greater than $250,000.

These amounts are CMS review thresholds, not universal requirements to create a Medicare Set-Aside. Falling below a review threshold does not automatically eliminate the obligation to consider Medicare’s interests.

Likewise, meeting a threshold does not mean federal law requires the parties to submit a proposed Medicare Set-Aside to CMS. CMS expressly describes its review process as voluntary.

The total settlement amount used for these thresholds is not necessarily the amount allocated to future medical treatment alone. That distinction can be important when evaluating a proposed settlement.

An injured worker may have a reasonable expectation of Medicare enrollment for several reasons, including a pending Social Security disability application or appeal, or approaching Medicare eligibility based on age.

The correct approach depends on the worker’s circumstances, the medical benefits being resolved, and the anticipated future treatment.

What Happens if CMS Approves the Medicare Set-Aside?

When CMS reviews and approves a proposed Medicare Set-Aside, it determines that the proposed allocation is sufficient under its review process to account for anticipated Medicare-covered treatment related to the workplace injury.

Approval provides important protection, but it does not mean Medicare immediately begins paying for all future treatment.

The Medicare Set-Aside funds generally must be used first for qualifying injury-related medical expenses.

If the account is properly administered and its funds are appropriately exhausted, Medicare may then pay for otherwise covered treatment related to the work injury, subject to Medicare’s ordinary coverage rules.

Structured arrangements can involve additional annual accounting and funding considerations. Exhausting the funds available in a particular year is not necessarily the same as permanently exhausting the entire Medicare Set-Aside.

If the parties establish a Medicare Set-Aside without CMS approval, CMS is not necessarily bound by the amount they selected. That can create a risk that Medicare will decline to pay future injury-related medical expenses until its requirements are satisfied.

Consequently, the decision whether to request CMS approval deserves careful consideration even though the review process is voluntary.

Can I Spend Medicare Set-Aside Money on Anything I Want?

No.

Medicare Set-Aside funds generally must be used for treatment related to the workers’ compensation injury that is otherwise covered by Medicare. They are not a general savings account or an additional unrestricted settlement payment.

For example, if your Medicare Set-Aside was established because of a work-related back injury, the account may be used for qualifying treatment associated with that injury. It generally should not be used to purchase a vehicle, pay household bills, or obtain unrelated medical treatment.

The administrator must also maintain appropriate records showing how the money was spent.

Improper expenditures can have serious consequences. Medicare may refuse to pay injury-related medical bills until the account is properly accounted for and applicable exhaustion requirements are met.

An injured worker who is considering personally administering a Medicare Set-Aside should understand these responsibilities before accepting the settlement. Professional administration may be worth considering when future medical needs are complicated or substantial.

What If I Am Not Receiving Medicare Yet?

The fact that you do not currently receive Medicare does not necessarily end the inquiry.

A worker who is receiving Social Security Disability Insurance (SSDI) may become entitled to Medicare after the applicable waiting period. In general, Medicare eligibility based on disability begins after 24 months of SSDI entitlement, subject to special rules and exceptions.

Someone approaching age 65 may also need to consider how a settlement closing future medical benefits will affect treatment after Medicare eligibility begins.

This is particularly important for workers with permanent injuries who expect to require medical treatment for many years.

Workers’ compensation settlements can also affect the amount of Social Security disability benefits an injured worker receives. That is a separate issue from a Medicare Set-Aside.

The Medicare question concerns who will pay future medical expenses. The Social Security offset question concerns how workers’ compensation payments may reduce monthly disability benefits.

Both issues may arise in the same settlement, but they are governed by different federal rules and require separate analysis.

An injured worker can receive a settlement that adequately addresses Medicare’s interests while still experiencing an unexpected reduction in Social Security disability benefits because of the settlement’s payment terms.  That is why we believe workers’ compensation settlements should be evaluated with both Medicare and Social Security consequences in mind.

Recommended reading: Can I receive both Social Security Disability and Workers Comp?

Should I Close My Future Medical Benefits at All?

Before focusing exclusively on how much money should go into a Medicare Set-Aside, there is a more fundamental question: should you agree to close your future medical benefits?

Alabama workers’ compensation medical benefits can continue indefinitely when treatment remains reasonable, necessary, and related to the compensable injury. A settlement that closes those benefits can permanently change who bears the financial risk of future treatment.

For a worker with a relatively minor injury and little anticipated future treatment, closing medical benefits may be a reasonable option.  For someone with a spinal cord injury, serious orthopedic condition, chronic pain, or anticipated surgery, the decision may be much more consequential.

A Medicare Set-Aside addresses certain anticipated Medicare-covered expenses. It does not necessarily account for every future medical expense, particularly treatment or services Medicare does not cover.

The value of a settlement therefore cannot be judged simply by looking at the size of the check.

As we discuss in Are Alabama Workers’ Compensation Medical Benefits Really for Life?, the right to future medical treatment can be one of the most valuable protections an injured worker possesses.

Talk to an Alabama Workers’ Compensation Lawyer Before Closing Medical Benefits

A workers’ compensation settlement should provide financial security, not create an unexpected problem with future medical treatment.

Before accepting a settlement that closes medical benefits, an injured worker should understand the anticipated cost of treatment, whether Medicare’s interests must be addressed, whether CMS review is appropriate, and what responsibilities come with administering a Medicare Set-Aside.

At Powell & Denny, P.C., we represent injured Alabama workers in workers’ compensation and Social Security disability matters. We understand that decisions made in one case can have lasting consequences for the other.

If you are employed in Alabama and have suffered a job injury and you have questions about your right to Alabama Workers Compensation benefits, don’t hesitate to call and speak with one of the experienced attorneys at Powell and Denny today for a free consultation. Appointments are available in person, or virtually via Zoom if more convenient.

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What is a Medicare Set Aside