What a Medicare set-aside is and why it matters
A Medicare set-aside is money you must set aside from a lawsuit settlement or workers' compensation award before Medicare will pay for your medical care going forward. When you receive a lump-sum payment for an injury or illness, Medicare requires you to use that money to cover your own medical expenses first — up to the amount Medicare calculates you will need. Only after that money is spent can Medicare resume paying.
This rule exists because Medicare is a secondary payer in these situations. If you have just received $500,000 from a settlement, Medicare will not pay your doctor bills while you still have that money available. The set-aside amount depends on your age, the type of injury, and how long Medicare expects you to live — not on how much you actually won.
The practical effect is that a large settlement can delay or reduce your Medicare coverage for years. Many people do not realize this requirement exists until after they have already agreed to a settlement amount, which is why understanding it before you negotiate matters.
Key Takeaways
- Medicare requires you to set aside a portion of any lawsuit settlement or workers' compensation award to cover your future medical costs before Medicare will pay anything.
- The set-aside amount is calculated by Medicare or a may have access to professional, not by you or your lawyer, and is based on your age and medical condition — not the settlement size.
- You can request a Medicare Set-Aside Arrangement (MSA) review from Medicare before finalizing a settlement to learn the exact amount you must set aside.
- Failing to set aside the required amount can result in Medicare denying claims and demanding repayment from you or the defendant.
- Working with a settlement advisor or attorney experienced in Medicare set-asides during negotiations can help you structure a settlement that minimizes the impact on your benefits.
How Medicare calculates the set-aside amount
Medicare does not use a straightforward formula. Instead, it looks at your age, your medical diagnosis, the treatments you will likely need, and the cost of those treatments over your remaining lifetime. A 55-year-old with a spinal cord injury will have a much larger set-aside than a 78-year-old with the same injury, because Medicare assumes the younger person will need care for decades longer.
For workers' compensation cases, you can request a Medicare Set-Aside Arrangement (MSA) review from the Centers for Medicare & Medicaid Services (CMS). You submit information about the settlement, your medical history, and your prognosis. CMS then issues a letter stating the amount you must set aside. This letter is not binding on Medicare, but it is strong evidence of what Medicare considers reasonable.
For liability settlements (lawsuits against a third party), the process is less formal. Medicare may not issue a specific number ahead of time. Instead, you and the defendant's insurance company may hire a Medicare Set-Aside Arrangement professional — someone trained to calculate these amounts — to propose a figure. Medicare can still challenge it later, but having a professional calculation in writing protects you if a dispute arises.
Requesting a Medicare Set-Aside review before you settle
The best time to learn your set-aside amount is before you sign a settlement agreement. Once you have agreed to a number, changing it is much harder. Here is how to request a review:
- Contact your workers' compensation insurer or the defendant's liability insurer and ask them to initiate a CMS MSA review. They usually do this, not you.
- Gather your medical records, current treatment plan, and any prognosis from your doctor about future care needs.
- Submit the request to CMS through the official MSA review process. The address and current procedures are on the CMS website under "Workers' Compensation Medicare Set-Aside Arrangements."
- Wait for CMS to respond. This can take several weeks to several months.
- Once you receive the CMS letter stating the set-aside amount, you can negotiate your settlement knowing exactly what portion must be set aside.
For liability cases, the process is similar but less standardized. You may work with a settlement advisor to calculate the amount, then ask Medicare for a non-binding opinion. Not all liability cases go through this step, but doing so reduces the risk that Medicare will later demand more money.
Structuring your settlement to minimize the set-aside impact
Once you know the set-aside amount, you have options for how to structure the settlement payment. The goal is to separate the money that must be set aside from the money you can use freely.
One common approach is to negotiate a structured settlement, where the defendant or their insurer pays you in installments over time rather than in a lump sum. If the payments are spread over years, Medicare may calculate a smaller set-aside because you are not receiving all the money at once. This works best if you do not need the full amount when ready.
Another option is to have the settlement specify which portion covers past medical expenses (which Medicare does not require to be set aside) and which portion covers future care. Medicare only applies the set-aside rule to future medical costs, so clearly labeling past expenses can reduce the amount you must set aside.
You can also negotiate for the defendant to pay certain future medical bills directly to providers, rather than paying you a lump sum. If the defendant agrees to pay your doctor or hospital bills as they come due, those payments do not count as settlement money you must set aside.
Setting up and managing a Medicare Set-Aside Account
Once you have agreed on a set-aside amount, you must actually set the money aside in a separate account. This is not optional — it is a condition of Medicare paying anything else.
The account must be in your name and held in a way that keeps it separate from your other money. Many people use a dedicated savings account or a trust account managed by an attorney or financial advisor. You cannot straightforward promise to spend the money on medical care; Medicare requires it to be physically segregated.
You then use this account to pay for your medical expenses — doctor visits, prescriptions, therapy, medical equipment, and other health-related costs. Keep receipts and records of every withdrawal. Medicare may ask you to prove that you spent the money on legitimate medical expenses.
Once the set-aside account is empty, you notify Medicare and your coverage resumes normally. At that point, Medicare pays for your care as it would for any other beneficiary. The key is documenting that you actually spent the money on medical care, not on other expenses.
What happens if you do not set aside the required amount
If you receive a settlement and do not set aside the amount Medicare requires, Medicare will likely deny your claims for medical care. You will then owe the full cost of your treatment out of pocket.
Medicare can also demand repayment from you or from the defendant's insurance company. If the defendant paid you $500,000 and Medicare later determines that $300,000 should have been set aside, Medicare may pursue the defendant's insurer for the difference. This can trigger disputes and legal action.
In some cases, the defendant or their insurer will refuse to pay a settlement at all if you do not agree to set aside the required amount. They have a legal interest in ensuring Medicare does not later come after them for unpaid medical bills.
The safest approach is to work with your attorney or a settlement advisor to calculate the set-aside amount before you finalize any agreement. This prevents surprises and protects both you and the defendant.
Working with an attorney or settlement advisor
If you are involved in a lawsuit or workers' compensation claim, tell your attorney early that you have Medicare. Many attorneys who handle these cases are familiar with set-aside rules, but not all are. An attorney who understands Medicare set-asides can structure your settlement to minimize the impact on your benefits.
You can also hire a Medicare Set-Aside Arrangement professional independently. These are consultants trained to calculate set-aside amounts and help you manage the account. They charge a fee, usually a percentage of the settlement or a flat rate, but the cost is often worth it to avoid disputes with Medicare later.
If you cannot afford an attorney, legal aid organizations in your state may help. Some specialize in workers' compensation or personal injury cases and understand Medicare rules. Contact your local legal aid office or call 211 to find low-cost legal help in your area.
Frequently Asked Questions
Do I have to tell Medicare about my settlement?
Yes. You are required to report any settlement or workers' compensation award to Medicare within 30 days. Failure to report can result in Medicare denying claims or demanding repayment. Your attorney or the defendant's insurer usually handles this notification, but confirm that it has been done.
Can I use the set-aside money for things other than medical care?
No. The set-aside account must be used only for medical expenses — doctor visits, hospital bills, prescriptions, medical equipment, and similar costs. Using it for rent, food, or other expenses violates the agreement with Medicare and can result in claims being denied or repayment demands.
What if my set-aside amount seems too high?
You can request that Medicare reconsider the amount. If the calculation was done by a professional, you can ask them to review it or hire a different professional for a second opinion. You can also provide updated medical information to Medicare if your condition has changed. However, Medicare's decision is generally final unless you can show a clear error in the calculation.
Does the set-aside rule explore to all settlements?
No. The rule applies to workers' compensation awards and liability settlements (lawsuits). It does not explore to settlements from other sources, such as personal injury claims unrelated to work or medical malpractice cases in some states. Ask your attorney whether your specific settlement triggers the set-aside requirement.
What if I settle my case but do not have Medicare yet?
If you will become may be able to access for Medicare within 30 months of the settlement, the set-aside rule still applies. You must set aside the amount even if you are not yet on Medicare. Once you turn 65 or become may be able to access, Medicare will enforce the set-aside requirement. Plan ahead if you know Medicare may be able to access is coming.