Injury Settlements: Medical Liens, Subrogation, and Structured Payments

An injury settlement is not simply money paid to the injured person. Before anything is disbursed, a series of parties with legal rights against the recovery have to be identified and resolved: Medicare and Medicaid, which have statutory recovery rights; private health plans, which assert subrogation or reimbursement under the plan contract; hospitals and treating providers, which may hold statutory liens; and the claimant's own attorney, whose fee and costs come out of the same fund. What remains can be paid in a lump sum or spread over time through a structured settlement.

Some of these rights are federal and uniform. Others are state law and vary considerably. Disbursing funds before resolving them exposes the claimant, and often counsel, to personal liability.

1.The order in which a settlement is distributed

1. Gross settlement received. Funds are deposited into the attorney's trust account, not disbursed.
2. Case costs and fees. Attorney fees and litigation expenses are calculated under the fee agreement and any court approval requirement.
3. Statutory recovery claims. Medicare and Medicaid rights are quantified, disputed where appropriate, and satisfied.
4. Plan reimbursement and liens. ERISA plans, other health insurers, hospital liens, and provider balances are resolved.
5. Net to the claimant. The remainder is paid, either as a lump sum or into a structure or trust.

The order is not identical everywhere. Some states apply a common fund doctrine reducing a lienholder's recovery by its proportional share of attorney fees; others do not, or exempt particular lien types. Federal rights are governed by federal law regardless of state lien statutes.

2.Medicare and Medicaid recovery

Where Medicare paid for treatment related to the injury, those payments are conditional and the program has a statutory right to be repaid from a liability settlement. The process is administered through the Benefits Coordination and Recovery operation described at the CMS coordination of benefits and recovery pages, which set out how conditional payment information is obtained and how disputes over unrelated charges are raised.

• Settlements involving Medicare beneficiaries are subject to mandatory insurer reporting, so the program generally learns of the settlement independently.
• Conditional payment amounts should be requested early, reviewed for charges unrelated to the injury, and disputed before final demand where appropriate.
• Where future injury-related care is anticipated, parties may consider a set-aside arrangement; the practice is well established in workers' compensation and less settled in liability settlements.
• Medicaid recovery is administered by the state agency under federal requirements, and the agency must be notified in most states.

Two Supreme Court decisions frame the Medicaid side. Arkansas Department of Health and Human Services v. Ahlborn (2006) held that a state could not claim the entire settlement where only part represented medical expenses. Gallardo v. Marstiller (2022) held that a state may recover from settlement amounts allocated to future medical care, not only past care. Allocation in the settlement documents therefore has real consequences, and courts in several states will approve an allocation on motion.

3.Private health plans, ERISA, and provider liens

Private plan recovery depends on what kind of plan it is, which is the first question to answer and often the hardest.

Self-funded ERISA plan

The employer bears the risk. Federal law governs, state anti-subrogation and made-whole rules are generally preempted, and the plan document's terms largely control what may be recovered.

Insured plan

An insurer bears the risk, so state insurance regulation applies. State doctrines limiting recovery — made whole, common fund, or outright anti-subrogation statutes — may reduce or eliminate the claim.

Two federal decisions shape ERISA plan recovery. US Airways v. McCutchen (2013) held that the plan's own terms control and can override equitable defenses, though a silent plan may be read against the drafter on attorney fee allocation. Montanile v. Board of Trustees (2016) held that a plan seeking equitable relief cannot pursue a participant's general assets once identifiable settlement funds have been dissipated, which makes timing of disbursement consequential for both sides.

Caution: Hospital lien statutes exist in most states and typically require the provider to file the lien within a set period and to serve specified parties. A lien that fails those formalities may be unenforceable, but the provider usually retains an ordinary contract claim against the patient. Verify both the lien's validity and the underlying balance before paying it.

4.Structured settlements and how they are paid

A structured settlement replaces some or all of a lump sum with periodic payments funded by an annuity, usually through a qualified assignment to a third party that assumes the payment obligation. The design can be tailored — level monthly payments, deferred lump sums for anticipated expenses, or payments beginning at a future date such as college age or retirement.

Federal tax treatment is the principal attraction. Damages received on account of personal physical injuries or physical sickness are generally excluded from gross income under Internal Revenue Code section 104(a)(2), and that exclusion extends to the full periodic payments under a properly established structure rather than only to the principal. Punitive damages and interest are treated differently, and amounts attributable to emotional distress without physical injury follow separate rules. Because allocation language in the settlement agreement affects the analysis, a tax professional should review it before signing.

Nearly every state has enacted a structured settlement protection act requiring judicial approval before payment rights are sold to a factoring company, and model legislation in adjacent areas is catalogued by the Uniform Law Commission. Settlements involving minors or incapacitated persons generally require court approval regardless of structure.

5.Questions this raises

Can a settlement be disbursed while a lien is disputed?

Only carefully. The usual practice is to hold the disputed amount in the trust account while the dispute is resolved and to disburse the undisputed remainder. Releasing funds over a known federal recovery claim can expose the claimant and counsel to a direct action for the amount owed, and dissipation may also change what remedies a health plan can pursue.

Does the made-whole doctrine protect a claimant who settled for policy limits?

Sometimes, and it depends entirely on the plan type. In states recognizing the doctrine, an insured plan may not recover until the claimant has been fully compensated. A self-funded ERISA plan whose document expressly disclaims the made-whole rule will generally not be subject to it, because the plan terms control. Identifying the funding arrangement is therefore the first step.

Who pays the attorney fee out of a lien recovery?

Under a common fund approach, the lienholder shares proportionally in the fees and costs that produced the recovery, reducing its net claim. Whether that applies turns on state law for state-created liens and on the plan document for ERISA plans. Federal recovery programs apply their own procedural rules for reducing amounts owed to account for procurement costs.

What happens to a structure if the recipient dies early?

It depends on how the annuity was written. Payments guaranteed for a certain period continue to a named beneficiary or the estate for the remainder of that period. Life-contingent payments stop at death. Because the choice affects both cost and family security, it should be settled before the annuity is purchased rather than afterward, when it cannot be changed.

6.Closing a settlement in order

Resolution is a sequence of confirmations, and most problems come from doing them out of order.

Identify every payer that touched the treatment, including any government program, before agreeing to a number. Request conditional payment and lien statements early enough to review and dispute unrelated charges. Determine whether each health plan is self-funded or insured, since that single fact decides which body of law applies. Where allocation between past medical expenses, future care, and non-economic loss will affect recovery rights, address it in the settlement documents and consider seeking court approval of the allocation.

Then confirm the effect on any needs-based benefits, decide between a lump sum and a structure with tax advice, and obtain court approval where a minor or protected person is involved. The valuation framework behind the numbers is set out in the damages entry, the fault reductions that precede it in the comparative fault entry, and the distinct estate treatment of death claims in the wrongful death and survival actions entry. Where care was allegedly negligent, the separate proof requirements in the malpractice entry apply. General background is available in the LII damages entry and the tort overview, and court approval procedures are described generally at uscourts.gov.