Opinion
No. 99 C 3014.
September 29, 2000.
MEMORANDUM OPINION AND ORDER
Plaintiff seeks review of a final decision of the Commissioner of Social Security pursuant to 42 U.S.C. § 405(g). Both sides have moved for summary judgment. The sole issue is how to prorate a lump-sum workers' compensation settlement for purposes of determining whether to offset federal disability benefits pursuant to 42 U.S.C. § 424a. For the reasons set forth below, this court reverses the decision of the Commissioner and remands this matter for further explanation.
BACKGROUND
The facts are not in dispute. On June 27, 1991, while working on his job, plaintiff Richard Halle injured his back attempting to lift a 300-pound stove. At the time of the injury, plaintiff was 58 years old. For a little over a year, he received temporary workers' compensation payments at a rate of $577.33 per week. By late 1992, these temporary payments had stopped, and plaintiff was waiting a final settlement of his claims.
According to the settlement award, plaintiff was born on October 28, 1932.
In June of 1993, plaintiff filed an application for federal disability benefits. In October of 1993, the Commissioner determined that plaintiff was entitled to a monthly award of federal disability benefits with a beginning month of entitlement of April of 1993 at a rate of $869.90.
On June 23, 1995, plaintiff settled his workers' compensation claim with his employer for a lump-sum payment of $80,000. After the deduction of legal and other expenses, plaintiff received a net amount of $64,000. The settlement award is a two-page form entitled "Settlement Contract Lump-Sum Petition And Order." It also includes an attachment, which is a one-paragraph addendum setting forth the specific terms of the settlement. This addendum is a focal point of this case and states in its entirety as follows:
There are disputed questions of law and fact, and in order to avoid further liti[g]ation, the Respondents, DeJager Construction and Talon, Inc. have agreed to pay and the Petitioner, Richard Halle[,] has agreed to accept $80,000.00 or 47% man as a whole as a full, final and complete settlement of any and all claims of any kind, nature and description which resulted from the alleged injuries which occurred 6/27/91. Respondents dispute any causal connection between employment, the temporary and permanent disability. This is a purchase of peace to avoid litigation. All issues are in dispute including nature and extent. This amount represents past and present medical and hospital bills. Petitioner alleges a total disability which is specifically denied by Respondent herein. The sum of $80,000.00 which after taking into consideration the Petitioner's life expectancy of 16.9 years, based upon the table of vital statistics published by the U.S. government, Volume 2, Section 6, and after deducting attorney's fees (Donald W. Fohrman Assoc.) of $16,000.00; results in a monthly equivalent of $315.58 for the life expectancy of the Petitioner. This payment shall not be considered as a substitute for periodic payments and is made solely to terminate the within litigation. Review under section 19H is hereby expressly and mutually waived, as well as Section 8A under the Illinois Workers' Compensation Act.
On March 6, 1996, the Commissioner notified plaintiff that, based on his lump-sum settlement, he had been overpaid $19,132.00 in federal disability insurance benefits for the period from April 1993 through February 1996. The overpayment was based on the application of the federal offset provision set forth in 42 U.S.C. § 424a(a). This offset provision is designed to prevent a person from getting a double recovery from the state and federal governments. Hodge v. Shalala, 27 F.3d 430, 432 (9th Cir. 1994). To guard against this possibility, the Social Security Act places a ceiling on the total of the individual's monthly federal Social Security benefits and state workers' compensation benefits. 42 U.S.C. § 424a(a). The ceiling is 80% of the individual's pre-disability earnings (as defined by the statute). When the combined payments exceed this ceiling, the Commissioner must reduce the federal disability payment so that the total amount does not exceed the 80% ceiling.
When an individual receives a lump-sum settlement amount that is meant to be a substitute for periodic monthly benefits, the Commissioner is required by statute to "approximate as nearly as practicable" the offset as if the state benefits had been paid on a monthly basis. 42 U.S.C. § 424a(b). Stated differently, the Commissioner must convert, or prorate, the lump-sum into what is sometimes referred to as a "theoretical stream" of monthly workers' compensation payments. Sciarotta v. Bowen, 837 F.2d 135, 137 (3d Cir. 1988).
In this case, the Commissioner initially concluded that an offset should apply based on prorating the lump-sum at a weekly rate of $577.33. This weekly rate, when converted to a monthly rate of $2500, easily exceeded the 80% monthly ceiling of $1493.
This figure ($1493) is taken from the ALJ's ruling and has not been challenged by plaintiff in this court.
Plaintiff sought an administrative hearing to contest the Commissioner's determination. The Administrative Law Judge found in plaintiffs favor, concluding that the lump-sum should have been prorated based on plaintiff's life expectancy of 16.9 years. The ALJ based his ruling on Program Operations Manual System ("POMS") 52001.555C.4, which is an internal agency guideline for calculating a periodic rate when there has been a lump-sum settlement.
POMS 52001.555C.4 contains the following three-step hierarchy for calculating the periodic rate:
1. The rate specified in the lump-sum award. If the award specifies a rate based on life expectancy, that rate is used to prorate the lump-sum.
2. The periodic rate paid prior to the lump-sum award if no rate is specified in the award.
3. The state workers' compensation maximum in effect on the date of the injury.
The three steps operate in descending order of priority. In other words, if Step 1 applies, then that is the rate and there is no need to go to Steps 2 or 3.
The ALJ concluded that the Step 1 applied because the addendum stated that the lump sum should be prorated at a rate of $315.58 a month based on a life expectancy of 16.9 years. On its own motion, the Appeals Council reviewed the ALJ's decision and concluded Step 1 of the POMS was not applicable due to the fact that the addendum rate was not based on any underlying logic and therefore must have been inserted solely to circumvent the offset provision. The Appeals Council set forth its reasoning as follows:
In finding that the workers' compensation settlement which the claimant received should be prorated using a monthly rate of $315.58, the Administrative Law Judge relied on language in an addendum to the lump-sum settlement order that the sum of $80,000, after considering the claimant's remaining life expectancy and attorney fees of $16,000, would result in a monthly equivalent of $315.58 over his remaining life expectancy. While this language may represent a mathematically accurate statement, the addendum may just have well contained language that the $80,000, considering the $16,000 attorney fees, and the number of months until the claimant attained age 65, twenty-eight, would result in a monthly equivalent of $2271.50, another mathematically accurate statement. Neither statement bears any relation to specific information in the settlement agreement. The claimant's assertion that it was the intent of all parties that the settlement represent payment of $315.58 per month in workers' compensation payments to him over his remaining life expectancy is in direct contradiction with the further language in the settlement contract. The order was quite specific in its statement and declaration that periodic benefits were not being adjudicated and, moreover, that all issues, such as the nature and extent of disability alleged, were in dispute. The order further stated that the award represented consideration of past and present medical bills, a factor not related to anticipated life expectancy, and that payment was made solely as a "purchase of peace" to avoid continued litigation. Only the total sum awarded to and accepted by the claimant, $80,000, was therefore a relevant factor to the respondents, DeJager Construction and Talon, Inc., and any number of mathematical results could have been used to derive a monthly equivalent, a factor not material to the respondents, depending on the number of months used in that computation. The respondents had no more compelling reason to agree to use of the claimant's remaining life expectancy in that regard than any other length of time,
(3/2/99 Decision at 2-3.)
Because the Appeals Council believed that Step 1 was not applicable, based on its conclusion that the addendum rate was illusory, it applied Step 2 of the POMS. Under Step 2, the rate is the rate paid prior to the lump-sum award. Here, the plaintiff received temporary disability payments of $577.33 per week. The decision of the Appeals Council is the final decision of the agency.
DISCUSSION
In reviewing the Commissioner's decision, we ask whether it was supported by substantial evidence and we will not attempt to "substitute our own judgment for that of the Commissioner." Clifford v. Apfel, 2000 WL 1297717, *5 (7th Cir. Sept. 14, 2000). At the same time, we should not "simply rubber-stamp the Commissioner's decision without a critical review of the evidence." Id.
At issue are two methods for prorating the lump-sum settlement for purposes of the federal offset provision. Plaintiff argues that the lump-sum should be prorated at rate of $315.58 a month while the Commissioner concluded that it should be prorated at a rate of $2500 a month. There is obviously a large difference between these two amounts. In addition to the difference in amount, the parties differ in their method of calculation.
The plaintiff uses as his starting point an estimate of how long the monthly payments would have lasted. He argues — without providing any underlying justification — that the proper estimate for the time period of payments is his expected lifetime, or 16.9 years. He then divides this number into the net settlement amount of $64,000 to get a $315.58 monthly rate.
The Commissioner, on the hand, starts with the weekly rate previously paid to plaintiff, $577.33. When multiplied by 4 1/3, this weekly rate converts to a monthly rate of approximately $2500. The Commissioner thus ignores the whole question of the likely duration of the workers' compensation payments. The implicit duration, however, can easily be calculated by dividing the $64,000 net settlement by the $2500 monthly rate, which yields a duration of approximately 25 months or 2.1 years. Again, there is a wide divergence here, as plaintiffs method assumes a time period of 16.9 years while the Commissioner's method results in a period of 2.1 years.
Plaintiff argues that the Commissioners s method of calculation is irrational and unfair because it is based on the maximum weekly rate and therefore results in a very short period for prorating the lump-sum which in turn results in a more severe offset. Plaintiff argues that the only rational method is to use his lifetime expectancy, which would mean that there would be no offset.
We start by discussing POMS 52001.555C.4, as each side believes its approach is mandated by this provision. "The POMS is a handbook for internal use by employees of the Social Security Administration." Parker v. Sullivan, 891 F.2d 185, 189 n. 4 (7th Cir. 1989). If we were to rely solely on the POMS, we would find that the plaintiffs (and the ALJ's) approach is indeed the correct one. Step 1, which is the first method that should be considered, states simply that the agency should use the rate set forth in the settlement award, even if that rate is based on life expectancy. Here, there is clearly a monthly rate set forth in the settlement award. Therefore, there is no need to go to Steps 2 or 3.
The Commissioner argues that Step 1 is not applicable because there is no rate set forth in the award. More accurately, rather than saying that there is no rate set forth in the award, the Commissioner is really saying that the rate set forth therein is illusory. The reasons can be summarized as follows. First, there is a structural incentive in this type of situation for the plaintiffs attorney to insert into the settlement award an unnaturally low monthly rate based on a long time period while, at the same time, there is no incentive for plaintiffs employer to contest the low rate since the employer is presumably only concerned about the bottom-line total settlement amount. Second, the addendum in this case is unreliable because it contains a number of contradictory statements. Third, plaintiff's suggested time period — his remaining expected life — is essentially an arbitrary figure without any factual foundation. The Commissioner suggested that the time period for prorating lump-sum could just as easily have been the time period until plaintiff reached the age of 65 (calculated by the Commissioner as 28 months). The Commissioner stated that neither time period — plaintiff's remaining expected life or his working lifetime — "bears any relation to specific information in the settlement agreement." (3/2/99 Decision at 2.)
In concluding that the time period until plaintiff's retirement was only 28 months, the Commissioner apparently used as a starting point June 1995 — the date of the lump-sum settlement. Plaintiff would have turned 65 in October 1997. It is unclear why the Commissioner did not use April 1993 as the starting point, as that is the date the offset took effect. If that date had been used, then the time until plaintiffs retirement would be 55 months and not 28 months. If we divide $64,000 by 55, then the monthly total is $1164 rather than the $2271.50 amount set forth in the decision of the Appeals Council.
We agree with the above reasoning and find that the Commissioner has provided sufficient evidence to disregard the monthly rate set forth in the addendum. The Commissioner has correctly pointed out that plaintiff has not provided any explanation for prorating the settlement over his expected lifetime. But all of the above reasons still do not avoid the literal application of Step 1 of POMS 52001.555C.4. Step 1 is straightforward and contains no exception for cases where it appears that plaintiff has inserted a low monthly rate solely for purposes of circumventing the offset provision. The better approach is to note that the Commissioner is not obligated to follow the POMS. See Parker, 891 F.2d at 190 ("The POMS manual has no legal force and therefore the standard cannot be controlling in this case."); see also Schweiker v. Hansen, 450 U.S. 785, 789 (1981).
In addition to relying on the POMS, plaintiff also relies heavily on the Third Circuit's decision in Sciarotta v. Bowen, 837 F.2d 135 (3d Cir. 1988). Contrary to plaintiffs suggestion, however, Sciarotta does not set forth a blanket rule that all lump-sum settlements should be prorated over a claimant's expected lifetime. Instead, it merely stands for the proposition that, if certain facts are present, it may be rational to prorate the lump-sum over a claimant's remaining lifetime. As discussed herein, plaintiff simply has not provided any basis for why the settlement in this particular case should be prorated in this manner.
We now turn to the question of whether the Commissioner's own approach is rational. The major portion of the Appeals Council decision was devoted to attacking plaintiffs method. However, the fact that the Commissioner has shown that plaintiffs method lacks a rational basis does not mean that the Commissioner's method is itself rational. The Commissioner argues that, since the rate set forth in the addendum is not reliable, then it is appropriate to fall back on Step 2 of the POMS, which uses the previous temporary disability rate. Because we have concluded that the POMS, if applied, would dictate a result in favor of plaintiff, we do not believe that the Commissioner can simply rely on Step 2 of the POM without more explanation.
Other than relying on the POMS, the Commissioner has not really offered any explanation for why the previous rate paid to plaintiff "approximate[s] as nearly as practicable" the offset had the state benefits been paid on a monthly basis. 42 U.S.C. § 424a(b). Many of the criticisms the Commissioner directed at plaintiffs method of calculation apply equally to the Commissioner's method. As calculated above, the Commissioner's approach results in a time period for prorating of approximately 2.1 years. Is there any relevance to this time period? Does it "bear any relation to specific information in the settlement agreement"? The Commissioner thought that 16.9 years was a "mathematically accurate" yet essentially arbitrary time period. Is 2.1 years less arbitrary?
Of course, the estimated duration of the disability payments is not the only variable in the equation. However, at least one district court has concluded that it is an important variable. See Arneson v. Heckler, 1984 WL 6592, *4 (N.D. Ill. Aug. 2, 1984) ("while the weekly rate variable was an important term of the settlement agreement, the primary factor which underlay the computation of the settlement amount was the length of time — the number of weeks — over which plaintiff would have been entitled to receive benefits"). Moreover, in assessing whether a particular method of prorating makes sense, the courts and litigants often have based their calculation on some logical period of time, such as the claimant's natural life, the claimant's working life, or a designated time period for a particular injury under the relevant state's workers' compensation law. See generally Sciarotta, 837 F.2d at 141 n. 10 (summarizing approaches). As an example, in Hodge v. Shalala, 27 F.3d 430 (9th Cir. 1994), the Ninth Circuit rejected plaintiffs argument that the lump-sum should have been prorated over his lifetime because, under Oregon law, the lump-sum was meant to substitute for payments over the claimant's working life, or age 65. Id. at 434-35.
In the final analysis, it may be the case here that Step 2 of the POMS — relying on the temporary rate previously paid to plaintiff — is "as close an approximation as is available." See, e.g., Bubnis v. Apfel, 150 F.3d 177, 182 (2d Cir. 1998) (noting that uncertainties in state law and "the compromise nature of the award, make it difficult and maybe impossible for the Commissioner to achieve a close approximation of the monthly benefits represented by the lump sum award"). However, before coming to this conclusion, we believe that the Commissioner needs to make some effort to see if there is a way to accurately approximate the monthly rate. See Hodge, 27 F.3d at 435 ("Where the monthly offset rate can be determined by the application of established state law, the clear statutory command governs. In such cases, there is simply no need to turn to the [POMS] guidelines for assistance, and their application is not warranted."). And if the Commissioner finds that Step 2 is indeed the only practical approximation, then he should give some explanation for why this is the case. See Green v. Apfel, 204 F.3d 780, 781 (7th Cir. 2000) (Commissioner must explain his decision by "build[ing] a bridge from the evidence to his conclusion.").
It is true as the Commissioner points out that several district courts have held that it was reasonable for the Commissioner to simply rely on Step 2 of the applicable POMS. See, e.g., Mann v. Heckler, 1986 WL 36270 (D. Me. March 17, 1986); Rodlin v. Secretary of Health and Human Services, 750 F. Supp. 146, 152-53 (D.N.J. 1990) (noting that Step 2 is a "reasonable bench mark"). However, in those cases, there appeared to be no practical basis for estimating the length of the disability payments. See Hodge, 27 F.3d at 435.
In particular, we note that neither the Commissioner nor plaintiff has discussed Illinois workers' compensation law nor have they discussed the specific facts of the settlement. See, e.g., Sciarotta, 837 F.2d at 141 (remanding case because the record was incomplete with no discussion of New Jersey law or the facts of the settlement: "The Secretary does not provide any explanation at all of how he concluded that [plaintiffs] settlement represented the maximum allowable payment under New Jersey law, nor does he explain why the settlement should not be prorated over a longer period than merely 4.3 years."); see also Bubnis, 150 F.3d at 182 ("It is useful to took to the state statute to understand the nature of a state workers' compensation lump sum award.").
As one possibility upon remand, we point out that the addendum to the settlement agreement states that the settlement was for "$80,000.00 or 47% man as a whole." The reference to "47% man as a whole" seems to indicate that the parties calculated the total settlement amount based on the Illinois man as a whole provision. See 820 ILCS 305/8(d)2. As explained by the Illinois Supreme Court, the man as a whole provision works as follows:
Section 8(d)(2) of the Workers' Compensation Act provides that an employee is entitled to compensation for permanent partial disability "for that percentage of 500 weeks that the partial disability *** bears to total disability." 820 ILCS 305/8(d)(2) (West 1998). Therefore an employee who receives an award of permanent partial disability representing 20% of the man as a whole is entitled to weekly compensation for 20% of 500 weeks (100 weeks).Segers v. Industrial Comm'n, 732 N.E.2d 488, 494 n. 1494 (Ill. 2000). Thus, if the parties here calculated the settlement based on 47% man as a whole, then they assumed a disability period of 235 weeks, which is 47% of 500 weeks. If we divide $64,000 by 235 weeks, we get a weekly rate of $272 and a monthly rate of approximately $1177.76. This monthly rate higher than plaintiffs suggested rate of $315.58 but lower than the Commissioner's applied rate of $2500.
We note that the Commissioners s stated concern that plaintiffs employer would have no incentive to contest certain statements in the settlement award would not necessarily apply to this statement because the 47% provision (presumably) was used to calculate the bottom-line settlement amount. It seems reasonable to assume that the parties applied some formula, or made some assumption as to the duration of the disability, in coming up with the $80,000 settlement figure. However, we are mindful that the parties did not have a chance to brief the merits of this latter method and that it is possible that we overlooked some other factor pertinent to the analysis. For this reason, even though the above method appears to us to be the closest practical approximation, we will remand this matter to the Commissioner so that he can reconsider this issue in the first instance and then provide us with a complete explanation.
CONCLUSION
For the foregoing reasons, the court denies both motions for summary judgment, reverses the Commissioner's decision, and remands this matter to the Commissioner for further proceedings consistent with this opinion.