Coordination of Benefits     Employee Benefits Series             THOMPSON            July 2011 | VOL. 19, No.3 

          This case involved the right of a state Medicaid agency to recover the Medicaid benefits paid for two individuals injured by third parties. Under federal law, when a Medicaid recipient settles with a tortfeasor for an amount less than the full damages suffered, Medicaid’s share of the settlement may not exceed the portion of the settlement that represents the Medicaid participant’s medical expenses. The court in this case ruled that the program would be limited to recovering discounted charges actually paid, and not the amount billed. But the court refused to eliminate the agency’s lien against future medical expenses the participant might incur that will be paid by Medicaid. Medicaid Refund Must Be Based On Discounted Amount Program Actually Paid 

We are familiar with the rule that the plan’s right of recovery will not be reduced through any common law rule (such as the made-whole rule, the common-fund rule or the collateral source rule) if the plan so provides. That’s based on long-standing interpretations of ERISA.

However, a different set of rules apply to Medicaid, which is governed by entirely different federal and state laws. Thus, it’s interesting to see how the tort settlement proceeds are handled in a recent decision of the Court of Appeals of Arizona (the state’s intermediate appellate court). The case is Southwest Fiduciary, Inc. v. Arizona Health Care Cost Containment System Administration, 249 P.3d 1104 (Ariz. App. Div., March 21, 2011). 

The Facts

This case involved the right of the Arizona Health Care Cost Containment System (AHCCCS), that state’s agency responsible for administration of Medicaid, to recover the Medicaid benefits paid for two individuals injured by third parties.

The first case involved Rhonda Lundy, who was represented by Southwest Fiduciary, Inc., her conservator. She was very seriously injured and permanently disabled by an accident. Her claim for damages against the third parties in the accident was settled for $842,696 because of “difficult liability issues.” The mediator involved in the settlement indicated that the “full value” of her damages was between $3 million and $4 million, which included her past medical bills of $920,000. However, since AHCCCS negotiated a very big discount from the medical providers, and paid only $268,080 for her medical expenses, it asserted a lien under applicable federal and state laws for that amount.

The second case involved James Flynn, who was injured in a different accident. His case was consolidated into the one involving Lundy. The estimated value of his damages was $250,000, including billed medical expenses of $138,710. He settled his third-party tort claim for $100,000. However, AHCCCS again negotiated a significant discount and it paid only $51,760 for his medical expenses, and asserted a lien for that amount.

The director of AHCCCS separately determined that its lien rights were to be measured by the total billed medical expenses in each case. However, on appeal, the superior court (the trial court in Arizona) held that the AHCCCS lien would be reduced by the ratio that the settlement amount bore to the total damages claimed by the injured Medicaid participants. AHCCCS appealed that determination to the Arizona Court of Appeals. 

The Decision

Although Medicaid is a federal program, each state administers its own Medicaid plan in conformity with federal requirements. AHCCCS, as well as all other state Medicaid programs, are entitled to a lien for charges for hospital or medical care for treatment of Medicaid participants. Under federal law, when a Medicaid recipient settles with a tortfeasor for an amount less than the full damages suffered, Medicaid’s share of the settlement may not exceed the portion of the settlement that represents the Medicaid participant’s medical expenses.

In the lead U.S. Supreme Court case dealing with this issue, Arkansas Dept. of Health and Human Services v. Ahlborn, 547 U.S. 268 (2006), the Medicaid recipient incurred damages of $3 million, but settled with the tortfeasor for only $550,000. Her billed medical expenses were $215,645, and while the Arkansas Medicaid agency paid only $35,581 for her past medical expenses, it asserted a lien for the $215,645 billed medical expenses.

Before that case was argued, the parties had stipulated that if the Supreme Court ruled against the state, Medicaid would recover only the amount it actually paid for the participant’s care. The issue in the Ahlborn case was whether the Arkansas Medicaid plan could recover the entirety of its lien against the tort settlement. The

Supreme Court held that the state Medicaid plan could recover no more than the portion of the settlement representing the actual payments for health care — that is, its recovery was limited to the $25,581 it paid; not the $215,654 that the providers billed for their services.

Because there was no such stipulation in the cases before the Arizona court, it did not consider the Ahlborn case to be a binding precedent. The Arizona court focused on whether a Medicaid lien could be enforced against the portion of the tort settlement representing billed medical expenses rather than the discounted amount the medical providers accepted.

          The Arizona court noted that under Arizona law, plaintiffs in personal injury cases are allowed to calculate their damages based on the full billed amount of their medical expenses even when their health insurers may not have paid that amount. The court noted that this “collateral source rule” is designed to prohibit “tortfeasors from avoiding liability for damages in situations in which an injured party has been compensated by a third party.” However, the Arizona court said that the applicable federal statute related to Medicaid recoveries (42 U.S.C. §1396(a)(25)(B)), “… requires states to enact measures whereby a state may seek ‘reimbursement’ for Medicaid assistance payments when a third party is found liable for healthcare services.” It concluded that, “we interpret ‘charges … for which [AHCCCS] … is responsible’ to mean charges actually paid by AHCCCS.”

The court went on to say: 

Given the [Supreme] Court’s refusal to permit the state plan in that case to recover from the other components of the settlement, [referring to things like pain and suffering and other non-medical damages] we conclude that federal law does not allow a state Medicaid plan to enforce its lien against any portion of a tort settlement not attributable to the plan’s actual payments. 

Applying its reasoning to the cases before it, the court concluded: 

Under the circumstances, we cannot conclude that the superior court erred in presuming that the settlements in these cases should be attributed proportionally to their components. In Lundy’s case, the court concluded that because the settlement represented 14 percent of the value of her case, AHCCCS was entitled to recover 24 percent of what it paid towards her medical expenses, and in Flynn’s case, 40 percent. 

Southwest Fiduciary (on Lundy’s behalf) argued that the director of AHCCCS abused his discretion by not eliminating the AHCCCS’ lien against the Lundy settlement based on Arizona law. Addressing that issue, the court said that it could reverse his refusal to compromise the AHCCCS claim “only if it is arbitrary, capricious or an abuse of discretion.” Since Lundy’s injuries were extensive, and it was “undisputed that AHCCCS will likely pay her future medical costs for the rest of her life,” the court was unable to conclude that the director abused his discretion by refusing to compromise the AHCCCS lien. Thus it refused to dismiss his refusal to eliminate AHCCCS’ lien against future medical expenses Lundy might incur that were paid by Medicaid.

However, the court did grant Flynn’s request for reasonable attorney’s fees, and also granted both Flynn and Southwest Fiduciary their costs on appeal. 

Implications

Medicaid, Medicare and self-funded ERISA health plans encounter the same problems when it comes to their rights to be reimbursed for the benefits they pay from tort settlements or judgments. However, those problems are not resolved in the same way because in each instance, the plans are governed by different statutes. That means different results will apply to each of those types of health plans. 

Most cases we see involve self-funded ERISA health plans. So, when we see cases involving Medicare and Medicaid, we should not expect to see the same results. Because Medicaid covers poor individuals, there is virtually no chance that that a Medicaid beneficiary will also be covered through an employer-sponsored health plan, either insured or self-insured. 

That is not necessarily true for Medicare beneficiaries. Most are retired, but many retirees have employer-sponsored retiree health coverage. Some Medicare beneficiaries are still working and may be covered by employer-sponsored health plans. In both of those situations, the Medicare secondary payer rules apply. 

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This entry was posted by cmonfils on Monday, August 22nd, 2011 at 8:26 pm and is filed under Medicaid. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.