June 2006 Bulletin Supreme Court Third-Party Payor Decision: Arkansas Department of Health and Human Services v. Ahlborn

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1 June 2006 Bulletin Supreme Court Third-Party Payor Decision: Arkansas Department of Health and Human Services v. Ahlborn If you have questions or would like additional information on the material covered in this Bulletin, please contact one of the authors: Kevin R. Barry (Washington, D.C.) Colleen T. Davies (Oakland) Amanda B. Walker (Washington, D.C.) or the Reed Smith attorney with whom you regularly work. This bulletin is presented for informational purposes and is not intended to constitute legal advice. Reed Smith LLP All Rights Reserved. Reed Smith refers to Reed Smith LLP, a limited liability partnership formed in the state of Delaware. Introduction and Summary The U.S. Supreme Court s recent decision in Arkansas Department of Health and Human Services v. Ahlborn, 164 L. Ed. 2d 459,126 S. Ct (May 1, 2006), is not a products liability case. It is, however, a case involving a state Medicaid program s claim for recoupment of program funds expended for medical care provided to a Medicaid recipient who entered into a settlement agreement with a third-party tortfeasor alleged to be responsible for the recipient s injuries. Accordingly, we believe this decision provides useful guidance to medical drug and device manufacturers involved in products liability cases, including class actions. This decision addresses the scope of a state Medicaid program s right to recover, from a Medicaid recipient s settlement proceeds in a tort case, the health care payments it had made on her behalf. The court had to reconcile (i) several federal Medicaid third-party liability provisions, (ii) the Medicaid statute s anti-lien provision, and (iii) an Arkansas statutory lien provision authorizing the Arkansas Department of Health and Human Services ( ADHS ) (the state Medicaid agency) to collect from any settlement, judgment or award obtained against a third party the full amount of Medicaid payments made on behalf of a Medicaid recipient. In determining that ADHS right to recovery was limited to the portion of the settlement amount that represents payment for medical expenses, the court construed these Medicaid statutory provisions as protecting the recipient s settlement proceeds beyond the amount attributable to payments made for medical expenses. Accordingly, the court also determined that an Arkansas law permitting ADHS full recovery of all of its medical expenditures from the entirety of the patient s settlement proceeds was unenforceable (i.e., effectively preempted) under the federal Medicaid statute. This decision is significant for medical drug and device manufacturers in the context of assessing and structuring a potential settlement of a class action or a similar mass tort product liability case. The Supreme Court has drawn a bright line limiting a state Medicaid agency s recoupment rights against a Medicaid recipient s settlement proceeds to the amount attributable to payment for medical costs. The Medicaid agency cannot recoup from the settlement fund s payments for damages for other injuries such as pain and suffering, lost wages, future impairments and the like. A manufacturer should keep this important limitation in mind in future litigation settlement discussions to minimize the possibility of having to make double payment for medical expenses first to the settling Medicaid recipient, and possibly (depending on state law), again to a state Medicaid program that has been unable to recoup from that recipient full reimbursement of Medicaid expenditures stemming from the individual s illness or injury allegedly caused by the use of the manufacturer s product. This decision also will likely contribute generally to third-party payors increasing awareness and active pursuit of their statutory or contractual rights of recoupment NEW YORK LONDON LOS ANGELES PARIS SAN FRANCISCO WASHINGTON, D.C. PHILADELPHIA PITTSBURGH OAKLAND MUNICH PRINCETON NORTHERN VA WILMINGTON NEWARK MIDLANDS, U.K. CENTURY CITY RICHMOND r e e d s m i t h. c o m

2 of medical expenditures made on behalf of their insureds when a third party is deemed to be liable for causing the injury leading to these medical expenditures by a third-party payor. Background The Facts In 1996, Ahlborn suffered severe and permanent injuries, including brain damage, as a result of a car accident. She did not possess sufficient assets to pay for her medical expenses, so she petitioned the Arkansas Department of Health Services ( ADHS ) for medical assistance. ADHS determined Ahlborn to be eligible under the State s Medicaid plan and paid $215,645 to providers on her behalf. ADHS sent Ahlborn s attorney periodic letters advising him that, under Arkansas law, ADHS had a claim to reimbursement from any settlement, judgment, or award that Ahlborn may obtain from a third party who may be liable for her injuries. Arkansas law also mandated that no settlement could be satisfied without first giving ADHS notice and a reasonable opportunity to establish its interest. ADHS never took the position, however, that Ahlborn had a duty to reimburse it out of any other subsequently acquired assets or earnings. In 1997, Ahlborn filed a suit against her tortfeasors in Arkansas court for the injuries she sustained from the car accident. She sought damages for past medical costs, permanent physical injury, future medical expenses, past and future pain, suffering, mental anguish, past loss of earnings and working time, and permanent impairment of the ability to earn in the future. ADHS was not named as a party. However, in February 1998, ADHS intervened in Ahlborn s lawsuit to assert a lien on the proceeds of any third party recovery that Ahlborn might obtain. ADHS requested to be notified of any hearings that may take place in the Ahlborn case, but no hearings occurred. In 2002, the parties settled out of court for a total of $550,000, without allocating categories of damages. ADHS did not participate in settlement negotiations, nor did it seek to reopen the judgment after the case had been dismissed. ADHS did, however, assert a lien against the settlement proceeds in the amount of $215,645, the total cost of payments made by ADHS for Ahlborn. In September 2002, Ahlborn filed for a declaratory judgment that satisfaction of ADHS lien filed pursuant to Arkansas law would violate federal Medicaid law. Ahlborn claimed that ADHS lien would require depletion of compensation for injuries other than past medical expenses. The parties stipulated that Ahlborn s original claim, which had been settled for $550,000, was reasonably valued at $3,040,708 approximately six times the settlement amount. They also stipulated that the portion of the settlement that constituted reimbursement for medical payments made was $35,581 (i.e., approximately one-sixth of the Medicaid program s expenditures for Ahlborn s care). Ahlborn argued that under federal Medicaid law, ADHS was only entitled to the portion of the settlement that constituted reimbursement for medical payments made. The district court ruled that the Arkansas law, authorizing ADHS full medical expenditure recovery from Ahlborn s settlement proceeds, did not conflict with the federal law because Ahlborn had assigned her right to recovery from the third-party tortfeasor to ADHS to the full extent of ADHS payment for her benefit. The Eighth Circuit reversed, determining that ADHS was entitled only to the portion of the judgment representing payments for medical care. The Supreme Court unanimously affirmed the Eighth Circuit s decision. Supreme Court Reasoning Federal Medicaid Requirements Federal law requires states participating in Medicaid to comply with certain statutory requirements, set forth in the Medicaid provisions (Title XIX) of the Social Security Act, for making eligibility determinations, collecting and maintaining information, and administering the program. Among these requirements, states must take all reasonable measures to ascertain the legal liability of the third parties to pay for care and services made available to an individual under the state s medical assistance plan. In any case where such a legal liability is found to exist and the recovery exceeds the cost of seeking such recovery, the state must seek reimbursement from the third party for the assistance rendered to - 2 -

3 the individual to the extent of such legal liability. When proceedings are initiated by the state to recover from third parties, the recipient has a duty to cooperate, which includes identifying and providing information to assist the State. In addition, to facilitate this reimbursement from liable third parties, states must enact assignment laws. Specifically, states must have in effect laws under which, to the extent that payment has been made under the State plan for medical assistance for health care items or services furnished to an individual, the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services. The Social Security Act requires state Medicaid plans to condition an individual s eligibility to receive medical assistance on the individual s agreement to assign the State any rights to support (specified as support for the purpose of medical care by a court or administrative order) and to payment for medical care from any third party. Finally, in this regard, federal law provides that any amount collected by the State under an assignment made shall be retained by the State as necessary to reimburse it for medical assistance payments made on behalf of the Medicaid recipient; the remainder, if any, goes to the recipient. States retain flexibility in the methods they adopt to meet these third-party liability obligations. The court then reconciled these federal third-party liability provisions with the Medicaid statute s recipient-protective anti-lien provision. The court noted that these federal Medicaid provisions do not supply a recovery floor upon which States were free to build. Rather, federal law places express limits on the State s powers to pursue recovery of funds it paid on the recipient s behalf. Section 1396a(a)(18) requires that a state Medicaid plan comply with 1396p, which in turn prohibits states from placing liens against the property of any individual on account of medical assistance rendered to him under a state plan. Reading this broad prohibition in context with other federal Medicaid laws, the Supreme Court reasoned, There is no question that the state can require an assignment of the right, or chose in action, to receive payments for medical care. To the extent that forced assignment is expressly authorized by the terms of 1396a(a)(25) and 1396k(a), it is an exception to the antilien provision. That exception is limited, however, to payments for medical care. Arkansas Laws Implementing Federal Medicaid Standards As noted, in accordance with its understanding of federal Medicaid law, Arkansas had enacted laws conditioning an individual s eligibility for Medicaid upon automatic assignment of his or her right to any settlement, judgment, or award which may be obtained against any third party to the full extent of any amount which may be paid by Medicaid for the benefit of the applicant. Arkansas law also allows both ADHS and the Medicaid recipient, either independently or together, to recover the cost of benefits from third parties. If the recipient sues alone, the assignment described in (a) shall be considered a statutory lien on any settlement, judgment, or award received from a third party. Thus, the state claims entitlement to more than just the portion of a judgment or settlement that represents payment for medical expenses. It claims a right to recover the entirety of costs it paid on the Medicaid recipient s behalf. The Arkansas State Supreme Court confirmed this black letter interpretation of the Arkansas statute, refusing to endorse a nontextual interpretation in Arkansas Dep t of Human Servs. v. Estate of Ferrel, 984 S.W. 2d 807 (1999). Accordingly, the Arkansas statute authorized imposition of a lien on Ahlborn s settlement proceeds in the amount of $215,645. The issue before the Supreme Court then became whether Arkansas law is enforceable to the extent it authorizes ADHS to assert a lien on Ahlborn s settlement in an amount exceeding that allocated for medical expenses. The Supreme Court held that it is not. Arkansas statute finds no support in the federal third-party liability provisions, as they speak only to a state s right to payment for medical care from any third party or payment by any other party for such health care items or services. Moreover, Arkansas statute squarely conflicts with the anti-lien provision of the federal Medicaid law. The court concluded, At the very least, the federal third party liability - 3 -

4 provisions require an assignment of no more than the right to recover that portion of the settlement that represents payments for medical care ; they did not mandate the enactment of the Arkansas statutory scheme. Analysis Within the confines of the facts of this case, the ruling seems straightforward. A state can only recover its Medicaid payments for medical assistance from the portion of a third-party settlement in a tort case that is allocated for medical costs. * The implications of this rule, however, are potentially far-reaching. First, the court s decision indicates that statutory language for government payors and, coordinately, contractual language along with statutory language for private payors must be scrutinized to determine whether similar limitations on recoveries from settlement proceeds apply to such payors. This case turned on the limitations and construction of the federal Medicaid laws; it does not mean that in every case for every payor, costs may only be recovered from portions of settlement agreements allocated for medical costs. The controlling language whether found in statutes, contracts, or both will determine whether such limitations apply in a given case. In the context of a mass tort settlement, however, the assumption that at least some of the class members will present cases where government or private payor recoveries are limited to portions allocated for medical expenses will typically apply. Certainly that is true for Medicaid recipients. In that regard, there are two major concerns: (1) the risk of settlement manipulation, and (2) the settling defendant s exposure to additional liability to the government or private payor. In the opinion, the court touches upon each of these concerns in dicta. They are somewhat interdependent. Regarding the risk of settlement manipulation, the plaintiff will have an incentive, absent an express duty to appropriately apportion settlement proceeds or pressure to do so in settlement discussions, to minimize portions of the settlement designated as medical costs. State Medicaid programs do not impose any such express duty, and Ahlborn makes it clear that the recipient s duty to cooperate with the state program is not to be construed broadly. Consistent with its reasoning throughout the opinion, the court ties its analysis closely to text of the statute and relevant regulations, and states that [t]he duty to cooperate arises principally, if not exclusively, in proceedings initiated by the State to recover from third parties. Thus, the duty to cooperate involves such actions as providing information to assist the state in pursuing third parties, not appropriately apportioning settlement funds in a suit initiated independently by the recipient. The settling defendant has a greater interest in seeing that settlement proceeds are appropriately apportioned between medical and other expenses, but its interests are not wholly aligned with those of government or private-party payors. In fact, a settling plaintiff may attempt to minimize his or her medical payment proceeds, thereby forcing a state Medicaid program, if authorized by state law, and economically justified, to initiate separate litigation against the settling defendant. For instance, in Ahlborn in note 6, the court cites an Arkansas Supreme Court decision, National Bank of Commerce v. Quirk, 918 S.W. 2d 138, (1996), that held in favor of ADHS having an independent, nonderivative right to recover costs of benefits from a third-party tortfeasor. This notation leaves open the question of whether the state can independently sue the third party tortfeasor for recovery after the recipient has settled with the tortfeasor or whether the state, having received notice (and in Ahlborn, having intervened in the recipient s action), must make any and all recoupment claims against the tortfeasor in the recipient s action. Even though the settling parties may reach an agreement releasing the defendants and holding them harmless from liability for all medical expenses, hospital expenses, and liens incurred in connection with any medical treatment, absent a release by a state Medicaid program that has been brought into the settlement process, such an agreement may be trumped by applicable state law, like the Arkansas law providing for an independent, nonderivative right to recover the cost of benefits from a third-party tortfeasor. Thus, this case highlights the need for defendants in mass tort cases to carefully consider the protections that must be established in the settlement process to avoid double-dipping for medical costs by plaintiffs and their third-party payors, such as - 4 -

5 Medicaid. A close examination should be made of a third-party payor s rights under state or federal law, or by contract, to pursue full recoupment of its expenses independently. Finally, in Ahlborn, the court cited the brief submitted for the Association of Trial Lawyers of America and noted that some states have adopted rules and procedures for allocating tort settlements in circumstances where, for example, private insurers rights to recovery are at issue. The cited procedures call for a trial court to convene a hearing when the parties cannot agree to an appropriate allocation of settlement funds. This assumes, however, that all claimants, like a state Medicaid agency or private payor, have intervened and asserted their rights by assignment or subrogation. In the absence of intervention, the unique interest of the government or private payor, as explained above, will not be captured even in such a fairness hearing. Indeed, a trial court is not bound by an agreement reached by some but not all parties to allocate settlement funds to particular categories of damages, but those with such interests must be parties to be protected in this scenario. Conclusion Third-party payor recoupment actions against alleged tortfeasors are on the rise, under a wide variety of theories. The Ahlborn decision makes clear that state Medicaid programs can only recoup from the proceeds of a settling plaintiff that amount which is attributable to medical expenses. To the extent that amount does not fully reimburse the Medicaid program, or if no amounts are specifically allocated to different damage categories, a settling defendant must take careful precautions in structuring a settlement and its administration to minimize the chances that amounts it pays in settlement to individual plaintiffs will later have to be supplemented through payments to the third-party payors who covered these plaintiffs medical care, up to the total amount of those payments. * * * * * * Reed Smith LLP, a top-25 international law firm with 1,000 lawyers located throughout the United States and Europe, represents Fortune 100 as well as mid-market and emerging companies. Clients include financial services firms, life sciences companies, health care providers, technology companies and entrepreneurs, power generators and suppliers, manufacturers, universities, non-profit organizations, real estate developers, and municipalities throughout the United States and in 40 countries. For more information, visit * It is noteworthy that the settlement agreement in this case did not allocate the settlement proceeds to different categories of damages; rather, the parties stipulated to an allocation in the subsequent declaratory judgment action that was ultimately appealed to the Supreme Court. The allocation to which the parties agreed illustrates one potential avenue for manipulation. By asserting that the case s value was six times the settlement amount, the plaintiff was able to reduce the allocation of medical expenses to one sixth of the actual expenses