Is It Illegal to Spend Medicare Set Aside Money?

Spending Medicare Set Aside money on the wrong things is not illegal in the criminal sense, but it triggers financial consequences that often cost more than the misspent funds themselves. If you use MSA money for anything other than Medicare-covered treatment tied to your work injury, Medicare will deny every injury-related claim until you can prove the full set-aside amount was spent correctly, and it can demand repayment of any conditional payments it made in the meantime.¹ For a claimant with a serious injury, that can translate into tens or hundreds of thousands of dollars in medical bills paid out of pocket.

The term “Medicare Set-Aside” doesn’t appear in any federal statute. It’s a policy construct CMS uses to enforce the Medicare Secondary Payer Act, which says Medicare shouldn’t pay for care when another source, such as a workers’ compensation settlement, has already provided money for it.² So the enforcement isn’t a criminal statute against misspending. It’s Medicare withholding coverage and clawing back money until the arrangement is made right.

What Counts as Misspending

MSA money can pay for two categories of expenses. The first is medical treatment and prescription drugs that are both related to your workers’ compensation injury and the kind of expense Medicare would normally cover.³ Both conditions have to be met. Treatment that relates to your injury but isn’t Medicare-covered doesn’t qualify, and Medicare-covered care that isn’t related to the injury doesn’t qualify either.

The second category is a narrow set of costs for maintaining the account itself: document copying, postage for required attestations, banking fees on the MSA account, and taxes on the interest the account earns.¹

Everything else is misspending. That includes some things people assume should qualify:

Acupuncture, routine dental care, eyeglasses, and hearing aids, because Medicare doesn’t cover them.
Medicare premiums, copays, and deductibles.
Medigap or supplemental insurance premiums.
Professional administrator fees, if you hire someone to manage the account.
Attorney fees for setting up the WCMSA.
Any non-medical personal expense: home improvements, vacations, car payments, general living costs.

MSA funds also have to sit in a separate, interest-bearing account, ideally FDIC-insured. Commingling MSA money with personal savings or other settlement funds is itself a compliance problem, even if the money eventually gets spent on qualifying care.⁴

What Medicare Does When You Misspend

The first consequence is a coverage denial. Once CMS believes MSA funds have gone to impermissible uses, Medicare will refuse to pay any claim tied to your workers’ compensation injury until you can show the full WCMSA amount was spent on allowable expenses.¹ Every doctor visit, prescription, surgery, and therapy session related to that injury becomes your bill until you make the account whole.

The penalty is worse if your MSA was never submitted to CMS for review. CMS may, at its sole discretion, require you to demonstrate that you’ve exhausted the entire net settlement amount, not just the MSA portion, before it resumes paying injury-related claims.¹ A claimant who received a $200,000 settlement and set aside $50,000 could be told to prove appropriate exhaustion of the full $200,000 before Medicare pays anything more for that injury.

On top of the coverage denial, Medicare can recover money it already spent. Any payment Medicare made for injury-related care that should have been covered by your MSA is a “conditional payment,” which the government treats as repayable.² CMS can pursue that recovery from the beneficiary, the primary payer, attorneys, insurers, or any entity that received a primary payment.⁵ Interest starts running if you don’t reimburse within 60 days of notice, and if CMS has to sue to collect, the statute allows double damages.

The government does litigate these rights. In Benson v. Sebelius, a court upheld CMS’s authority to collect reimbursement from a wrongful death settlement over the plaintiff’s objection.⁶

How CMS Finds Out

Compliance runs on annual attestations. Starting no later than 30 days after the one-year anniversary of your settlement, you have to sign and submit a letter to the Benefits Coordination & Recovery Center confirming that every payment from the account went toward Medicare-covered medical and prescription drug expenses related to your work injury.¹ Attestations continue every year until the account is fully depleted, and then you file a final one.

CMS doesn’t want your receipts with each attestation, but it can demand a complete accounting of every payment at any time.³ For each transaction, you should be able to produce the date, the provider or payee, the date of service, a description of the treatment or item, the amount paid, and the running balance, backed by itemized receipts, bank statements, and tax records.

Missing or incomplete records are treated the same as improper spending. If you can’t prove where the money went, CMS assumes it went somewhere it shouldn’t have, and the coverage denial follows.

If You’ve Already Misspent MSA Funds

Acting quickly limits the damage. Start with the bank statements and receipts for the MSA account and identify each transaction that doesn’t qualify. You need an exact figure for how much was spent incorrectly.

The cleanest fix is reimbursing the MSA account from personal funds for every impermissible transaction, restoring the balance the account should have had. Document each reimbursement carefully: which improper withdrawal it corrects, the date, and the amount. The standard CMS applies before resuming injury-related coverage is whether the full WCMSA amount was ultimately used for permissible expenses, so replenishing the account puts you back in position to meet that standard.¹

An attorney or MSA administrator experienced in Medicare compliance is worth the fee at this point. They can review the account, flag any expenses that might actually qualify under a category you overlooked, help you prepare documentation CMS will accept, and advise whether proactive disclosure to the BCRC makes sense in your situation.

Liability and Personal Injury Settlements Are a Different Question

Almost all of the CMS guidance on MSAs addresses workers’ compensation. For liability and personal injury settlements, the agency has issued informal memos suggesting Medicare’s future interests should be considered, but there are no formal review thresholds, submission processes, or approval procedures comparable to the workers’ comp framework. The Medicare Secondary Payer Act’s language does extend to liability and no-fault insurance, so the underlying obligation to protect Medicare exists even without a formal MSA in place.² If your set-aside came out of a liability settlement rather than workers’ comp, the specific rules discussed above may not apply the same way, and the safer path is to get advice tailored to that context.

1
Centers for Medicare & Medicaid Services. Workers’ Compensation Medicare Set-Aside Arrangement Reference Guide
2
Office of the Law Revision Counsel. 42 USC 1395y – Exclusions From Coverage and Medicare as Secondary Payer
3
Centers for Medicare & Medicaid Services. Self-Administration Toolkit for Workers’ Compensation Medicare Set-Aside Arrangements
4
Centers for Medicare & Medicaid Services. Self-Administration and You – A Beneficiary Toolkit for Workers’ Compensation Medicare Set-Aside Arrangements
5
eCFR. 42 CFR 411.24 – Recovery of Conditional Payments
6
Justia. Benson v. Sebelius