When Self-Administration of Medicare Set-Asides Goes Wrong

Last month, a Kansas bankruptcy court issued a ruling which can only be described as the Medicare Secondary Payer (“MSP”) compliance version of “use it [properly] or lose it.” In the case of in re Stutsman, 2025 Bankr. LEXIS 1067 (Bankr. D. Kan. May 2, 2025), a bankruptcy court analyzed whether a Medicare beneficiary’s purported Medicare Set-Aside (“MSA”) funds were exempt from recovery by creditors based upon her use of the designated MSA funds.

Factual Overview

On September 22, 2014, Linda Stutsman (“Ms. Stutsman”), a Medicare beneficiary, was injured in an employment accident. Ms. Stutsman retained an attorney for her workers’ compensation claim, but her workers’ compensation attorney failed to timely file the claim in accordance with the Kansas Workers’ Compensation Act. As a result, Ms. Stutsman retained a malpractice attorney to pursue a professional negligence claim against her former workers’ compensation attorney. Ultimately, Ms. Stutsman’s malpractice claim settled, and the terms of the settlement agreement confirmed that $23,560.06 would be set-aside for her Medicare-covered future medical expenses causally related to her employment accident.

Three weeks before receiving her $23,560.06 MSA check, Ms. Stutsman filed for Chapter 7 bankruptcy. Upon receiving her $23,560.06 MSA check, Ms. Stutsman cashed the check and fully exhausted it by purchasing a $20,000 certificate of deposit from her bank, spending an undetermined amount for a trip to visit her brother, and using the remainder of the funds on undocumented items. The bankruptcy trustee immediately filed a motion for turnover (i.e., arguing that the $23,560.06 MSA amount was property of the bankruptcy estate and should be turned over to Ms. Stutsman’s creditors).

The bankruptcy court agreed with the trustee, finding that Ms. Stutsman never had an actual or constructive $23,560.06 MSA trust given that she never used her funds for employment-related future medical care.

Sanderson Firm Commentary

The Stutsman case serves as a cautionary warning for Medicare beneficiaries who elect to self-administer their MSA funds. Not only did Ms. Stutsman forfeit her $23,560.06 fund to her bankruptcy creditors, but she also jeopardized her Medicare benefits due to her misuse of the MSA funds. What is even more disheartening is that her attorneys may have been aware that she did not possess the mental capacity to properly self-administer her MSA funds because she suffered from Alzheimer’s dementia and could not, at times, remember certain transactions or why certain dollar amounts appeared in her bank statements.

It is, of course, important to note that Ms. Stutsman’s MSA funds were part of her liability insurance settlement rather than as part of a formal workers’ compensation settlement under the Kansas Workers’ Compensation Act. Perhaps an MSA arising out of a true workers’ compensation settlement would be entitled to greater protection (and thus, not subject to turnover in a bankruptcy proceeding), but I believe that Ms. Stutsman’s gross mismanagement of her MSA funds through not contributing a single dollar towards her future medical care also would have resulted in turnover even if she obtained the MSA as part of a workers’ compensation claim.

If your organization has a question regarding this case or would like to discuss MSA administration options with our team, please contact us.