Negotiating and Resolving Subrogation Claims with Medicare/Medicaid

ABA Model Rule 1.1 “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for representation.”

Medicare vs. Medicaid

Although Medicare and Medicaid sound similar they are very different programs. Medicare is an entitlement program entirely funded at the federal level for people 65 or older, people under 65 with certain disabilities, and people of all ages with end stage renal disease. The Medicare program provides a Part A which covers hospital bills, a Part B which covers medical insurance coverage, and a Part D which covers prescription drugs.

Relevant Statutory Language: State assigned “rights . . . to payment for medical care from any third party”

Medicaid is an entitlement program that is not solely funded at the federal level. Medicaid is a needs-based social welfare or social protection program rather than a social insurance program. Eligibility is determined by income. States provide up to half the funding for the Medicaid program. Medicaid covers a wider range of health care services than Medicare.

Relevant Statutory Language: Reimbursement from primary plans having “responsibility to make payment with respect to such item or service”

Medicaid Reimbursement After Ahlborn  

On Monday, May 1, 2006 the United States Supreme Court unanimously affirmed the Eighth Circuit’s decision in Arkansas Dep’t of Health and Human Services v. Ahlborn, 126 S. Ct. 1752 (2006). With this ruling State Medicaid agencies’ reimbursement claims out of tort settlements are limited to that portion of the settlement attributable to past medical expenses. This ruling means that the agencies are prohibited from seeking reimbursement for any part of the plaintiff’s recovery for:

•    lost wages;
•    pain and suffering; and
•    permanent disability.

The Court held that the federal anti-lien statute prevents states from attaching or encumbering the non-medical portion of the settlement orjudgment.

The Ahlborn Ruling

•    Heidi Alhborn was a 19 year old college student who suffered sever brain damage and permanent injuries following an automobile collision.

•    The Arkansas Dept. of Health, the state’s Medicaid agency, paid $215,645.30 for medical treatment.

•    In order to be eligible for Medicaid payments Ahlborn had “to assign [to] the State any rights . . . to payment for medical care from any third party” and “to assist the State in pursuing any third party who may be liable to pay for care and services available under the [State Medicaid] plan.” 42 U.S.C. § 1396k(a).

•    Ahlborn filed suit against the tortfeasor seeking damages for past medical expenses, past and future pain and suffering, mental anguish, permanent impairment, loss of earnings and permanent impairment of the ability to earn in the future.

•    The Arkansas Dept. of Health intervened in Ahlborn’s suit and asserted a lien against the recovery for the full $215,645.30 that it had paid for medical expenses.

•    Ahlborn then settled her suit for $550,000 with no allocation for each element of the damages claimed.

•    The Arkansas Dept. of Health did not participate in settlement negotiations and did not seek to reopen the case after it was dismissed.

•    Early in the litigation the parties stipulated that Ahlborn’s total claim had a reasonable value of $3.04 million, and that her settlement amount of $550,000 represented approximately 1/6 of that sum.

•    Ahlborn’s position was that the department was entitled to 1/6 of the settlement amount which is $35,581.47.

•    The District Court Judge sided with the Dept. of Health ruling that it was not unreasonable for the Dept. to require Ahlborn to repay it in full from her settlement even if the portion allocated for medical treatment was less than the amount demanded by Medicaid.

•    The Eighth Circuit reversed.

o    HOLDING: Federal Medicaid Law (42 U.S.C. § 1396k(a)(1)(A) and (42 U.S.C. § 1396a(a)(18)) does not authorize the Department to assert a lien on Ahlborn’s settlement amount beyond recovery for medial expenses, in the case, $35,581.74.

•    The United States Supreme Court Affirmed.

o    RATIONAL: The Supreme Court found that the language of the federal third-party liability provisions focused solely on “recovery of payments for medical care.” 126 S.Ct. at 1761. Moreover, the Court ruled, the State itself could not adopt more expansive reimbursement rules, because any reimbursement out of damages paid to plaintiff for lost wages or pain and suffering would contravene the anti-lien provision of the Medicaid Act. 126 S.Ct. at 1762-64.

The Court’s concern was that any rule granting “absolute priority” to the state’s reimbursement claim “might preclude settlement in a large number of cases,” and any concern that settlements would be manipulated to avoid repayment could be addressed through judicial procedures to allocate settlements when the state and the plaintiff cannot agree on a fair allocation. 126 S.Ct. at 1764-65.

Arguments for Extending Ahlborn to MCRA and MSPA(Medicare): Similar Statutory Obligation and Purpose

The text of the third-party liability provisions in the Medical Care Recovery Act
(MCRA), 42 U.S.C. §§ 2651-53, and the Medicare Secondary Payer Act (MSPA), 42 U.S.C. § 1395(y), are similar to the language in the Medicaid Act interpreted in Ahlborn.  The MCRA entitles the federal government to recover the cost of medical care from third party tortfeasors. Section 2651(a) of MCRA provides, in relevant part:

In any case in which the United States is authorized or required by law to furnish or pay for hospital, medical, surgical, or dental care and treatment . . . to a person
who is injured or suffers a disease . . . under circumstances creating a tort liability upon some third person . . . to pay damages therefore, the United States shall have a right to recover (independent of the rights of the injured or diseased person)
from said third person, or that person’s insurer, the reasonable value of the care and treatment . . . and shall as to this right be subrogated to any right or claim that the injured or diseased person . . . has against such third person to the extent of the reasonable value of the care and treatment . . .  The head of the department or agency of the United States furnishing such care or treatment may also require the injured or diseased person . . . to assign his claim or cause of action against the third person to the extent of that right or claim.

The MCRA gives the United States a right to enforce by allowing it to intervene or join in any action brought by the injured person and institute its own legal action against the liable third party. 42 U.S.C. § 2651(d). Moreover, the statute expressly authorizes the United States to “compromise, or settle and execute a release of, any claim which the United States has by virtue of the right established by section 2651” or to “waive any such claim, in whole or in part, for the convenience of the Government, or if [the head of the department or agency] determines that collection would result in undue hardship upon the person who suffered the injury or disease resulting in care or treatment.” 42 U.S.C. § 2652(b).

The act explicitly states: “No action taken by the United States in connection with the rights afforded under this legislation shall operate to deny to the injured person the recovery for that portion of his damage not covered hereunder.” 42 U.S.C. § 2652(c).

MSPA was enacted to address a somewhat different situation. It was intended to ensure that Medicare’s obligation to pay will be secondary to that of another insurer when both Medicare and the other insurer are responsible for the cost of medical treatment. Nevertheless, MSPA has been applied to tort litigation because many tortfeasors have liability insurance that covers the cost of injuries caused by their negligence. Where such “primary plan” insurance cannot reasonably be expected to make payment promptly (maybe because the insured’s liability is disputed), Medicare will make payments for the medical treatment, subject to a right of reimbursement. The repayment and enforcement provisions under MSPA mirror those under MCRA and Medicaid:

A primary plan, and an entity that receives payment from a primary plan, shall reimburse the appropriate Trust Fund for any payment made by the Secretary under this subchapter with respect to an item or service if it isdemonstrated that such primary plan has or had a responsibility to make payment with respect to such item or service. A primary plan’s responsibility for such payment may be demonstrated by a judgment, a payment conditioned upon the recipient’s compromise, waiver or release (whether or not there is a determination or admission of liability) of payment for items or services included in a claim against the primary plan or the primary plan’s insured, or by other means. . . . 42 U.S.C. § 1395y(b)(2)(B)(ii).

MSPA permits the Secretary of Health and Human Services to waive any provision of the
act when he or she determines that “waiver is in the best interests of the program.” 42 U.S.C. § 1395y(b)(2)(B)(v). The statutory language of MCRA and MSPA parallels that of the federal Medicaid Act. When the federal government pays for medical care or treatment for which a third party may be liable, the government acquires a right to recover payment from that third party. 42 U.S.C. §§1395y(b)(2)(B)(ii), 1396a(25)(H), 2651(a). It is subrogated to and/or assigned the program beneficiary’s rights to recover for the costs of that treatment. 42 U.S.C. §1395y(b)(2)(B)(iv), 1396k(a), 2651(a). And the government may bring an independent legal action to obtain reimbursement. 42 U.S.C. §§ 1395y(b)(2)(B)(iii), 1396a(a)(25)(B), 2651(d).

What is important is that the statutory scheme limits the government’s repayment
rights to payments for medical expenses, while leaving the injured plaintiff’s right to recover for other items of damages undisturbed. The Medicaid Act speaks of the State being assigned the “rights . . . to payment for medical care from any third party;” MCRA of “a right to recover . . . the reasonable value of the care and treatment;” and MSPA of reimbursements from primary plans that have “responsibility to make payment with respect to such item or service.” In Ahlborn, the Supreme Court read this language in the Medicaid Act not to reach portions of a tort settlementthat represent items of damages other than medical expenses. See, e.g., 126 S.Ct. at 1764 n.15. (“assignment of the right to compensation for lost wages and other nonmedical damages is nowhere authorized by the federal third-party liability provisions”).

Arguments Against Extending Ahlborn to MCRA and MSPA(Medicare): Differing Statutory Language

There are significant differences in the legislative language among these three statutes. For example:

•    MSPA places the legal obligation on the primary plan to reimburse the government, rather than codifying a governmental right to recovery;
•    MSPA also authorizes the government to collect double damages from a primary plan that does not fulfill this obligation;
•    Unlike Medicaid, the Medicare statute is not based on an assignment of rights, payments are made conditionally, and are subject to full recoverywhen a third party payer is held to be responsible for Medicare related services and items;
•    Medicare is not limited to recovering only from the portion of a settlement that is allocated to health care items and services;
•    The Medicare statute does not contain and anti lien provision;
•    The Medicare statutory framework provides CMS with an independent right of recovery against any entity that is responsible for the payment of or that has received payment for Medicare related items or services;
•    This independent right of recovery is separate and distinct from CMS’s right of subrogation; and
•    This right is not limited by the equitable principle of apportionment stemming from the subrogation right.

However, both the MCRA and MSPA expressly authorize the government to waive all or part of its claim to reimbursement. Also, remember that the primary legislative purpose of all three statutes is the same: to make the government the “payer of last resort” and thereby reduce the overall cost of government health care programs.

Guidance for Plaintiff’s Counsel

How should plaintiffs’ counsel respond to the Supreme Court ruling in Ahlborn, when
representing a client who has received medical care through a government-funded health care program?

1)  Provide timely written notification to the relevant governmental agency and include:

•    That you will be seeking recovery for tort damages, possibly including repayment of the government’s medical expenses;
•    Ask the government to provide an accounting of its medical costs;
•    Invite the government to participate in the lawsuit should you file;
•    Inform the government agency of your understanding, based on Ahlborn, that any tort recovery must be equitably apportioned between the plaintiff and the government;
•    Beneficiary’s Health Insurance Claim Number (HIC) or Social Security Number;
•    Date of the injury;
•    Name and address of the liability carrier;
•    Name and address of the beneficiary’s insurer;
•    Nature and extent of the beneficiary’s injuries;
•    A request that the statement of benefits be updated to eliminate claims not related to the injuries that are part of the recovery; and
•    A release (no release no information).

2) Make a tactical decision whether to seek recovery for medical costs paid by the government and be explicit about that decision in your pleadings so that notice is clear. If a decision is made not to seek recovery for the government’s medical costs, this fact should be made explicit in the pleadings, thereby putting both the government and the defendant on notice of the possibility of a separate claim by the government to recover its costs. Likewise, any settlement release should make clear that it is not waiving any claim by the government.

3) Seek to negotiate an agreement with the government over the equitable apportionment of any settlement and, if such an agreement cannot be reached, apply to the court for an order that equitably allocates any court settlement among categories of damages and invite the government to attend the hearing.

4) If the government agency asserts a right to priority reimbursement, be prepared to argue that the government’s claim of priority was rejected by  the rationale of the Supreme Court in Ahlborn.

Apportionment Methodologies

In researching how the Ahlborn decision has impacted Medicaid tort recovery around the country, I came across Matthew Garretson an attorney in Ohio who has done significant work with attorneys and state agencies in an attempt to find a uniform way to apply Ahlborn to settled cases.  The Garretson Law Firm found that successful approaches fell into three broad categories. To foster uniformity and consistency the firm coined these emerging methodologies: Proportionate Value/Adjusted Allocation (PVAA), Proportionate Value/Adjusted Lien (PVAL) and Equitable Apportionment (EA).

A. Proportionate Value/Adjusted Allocation (PVAA)

•    Step 1:  Total Damages – The first step is to determine the total damages that could be black-boarded at trial. In making this calculation, do so as if causation and liability are not a factor. Example: There is a $350,000 settlement. After identifying all damages based on economic reports and/or life care plans, the plaintiff’s attorney can black-board that a reasonable full value of damages is $1,000,000. However, due to policy limits and/or comparative fault, the parties settled for $350,000.

•    Step 2: What percentages are past medical expenses of the total damages? Determine the percentage of the total damages which are comprised of past medical losses (as opposed to other losses such as pain and suffering, disfigurement, future medical expenses, lost wages, derivative losses and so on). In completing this step, determine whether to claim at trial the actual medical expenses billed by the providers of care instead of the actual medical expense paid by Medicaid to the providers. Utilizing actual expenses paid by Medicaid to providers as opposed to actual medical expense billed by providers would greatly reduce the ratio of past medical expenses to the total black-board damages. Medicaid will want you to use what providers billed versus what providers were paid in both your calculation of total damages and your calculation of the percentage of past medical expenses. Example: The medical providers billed Medicaid a total expense of $200,000 for the injury-related care, or 20% of Total Damages. The payments to medical providers by Medicaid were $100,000, or 10% of Total Damages.

•    Step 3: Determine the initial allocation. Next, apply the appropriate past medical expenses percentage from Step 2 to the actual recovery by your client to determine the initial allocation to past medical expenses in your settlement. Example (using paid rate): Under Step 3, the initial allocation, based upon the “Paid Rate”, is 10% of $350,000 (i.e. $35,000).

•    Step 4: Adjust initial allocation to account for state’s proportionate share of attorney fees and case cost. After calculating the actual attorney fees and case costs, multiply that sum by the appropriate past medical expenses percentage from Step 2. Deduct that quotient from the initial allocation in Step 3 to yield the adjusted past medical expense allocation.  This further offset is done to recognize the proportionate sharing of fees and case costs (“procurement costs”). Example: Attorney fees and case costs totaled $150,000 (of the $350,000 settlement). If we multiply that amount by 10% (from Step 2, using “paid rate”), we yield $15,000. If that amount is now deducted from the corresponding initial allocation of $35,000 (from Step 3), we yield $20,000 for the adjusted allocation.

•    Step 5: Satisfy lien within the adjusted medical expense allocation. The state only can satisfy its claimed lien (i.e. injury-related expenditures) from the adjusted allocation determined in Step 4. To the extent that the claimed lien amount exceeds the adjusted allocation from Step 4, the Medicaid department’s recovery of the lien consequently will be reduced (i.e. they only can get up to the adjusted allocation amount from Step 4). Example: While the state’s lien is for $100,000, their recovery is capped at $20,000.

B. Proportionate Value/Adjusted Lien (PVAL). The primary difference between this second methodology and the first methodology is the manner (and timing) in which attorney fees and case costs (“procurement” expenses) impact the claimed lien.

•    Steps 1 thru 3 are identical to the first methodology (Proportionate Value/Adjusted Allocation (PVAA))

•    Step 4: Adjust the claimed lien by the percentage allowed by the New Mexico Medicaid recovery statute to account for state’s proportionate share of attorney fees and case costs (i.e. determine the amount of attorney fees and case costs – What percentage is the amount of the actual gross settlement recovered by your client?) Example: Attorney fees and case costs totaled $150,000 the actual gross settlement recovered by the client is $350,000. The state’s claimed lien is $100,000. The claimed lien can be fully offset by procurement costs $150,000 (fees/costs) is 43% of $350,000 (gross settlement). The claim lien of $100,000 is therefore reduced by 43%, yielding an adjusted lien of $57,000 (i.e. $57,000 is the claimed lien amount adjusted by cost of procurement).

•    Step 5: Satisfy adjusted lien within the medical expense allocation. The state only can satisfy its “adjusted” claimed lien (i.e. injury-related expenditures reduced proportionally by procurement expenses) from the appropriate initial allocation determined in Step 3 (recall discussion regarding “billed rates” vs. “paid rates”). To the extent that the adjusted claimed lien amount (Step 4) exceeds the initial allocation from Step 3, the Medicaid department’s recovery of the lien consequently will be reduced or capped (i.e. they only can get up to the initial allocation from Step 3). Example: While the state’s adjusted lien is for $57,000 their recovery is capped at $35,000.

C. Equitable Apportionment (EA). This third methodology is a fall back when the plaintiff and the state cannot agree on the allocation of the damages (between past medical expenses and other damages) pursuant to the first or second methodology above. For instance, in Ahlborn the parties stipulated to the full value of the case, but never engaged in substantive discussion concerning the true allocation or proportion of past medical expenses.

•    Steps 1 and 2 are identical to the methodologies listed above.

•    Step 3: Determine equitable apportionment. Next, determine what percentage the actual recovery is of the total damages. Alternatively, stated – What percentage of the full value of the case did plaintiff actually recover? Example: Plaintiff actually recovered $350,000. The full value of the case is $1,000,000. Plaintiff recovered 35% of the full value of the case.

•    Step 4: Adjust the claimed lien by the equitable apportionment percentage. Example: The payments to medical providers by Medicaid were $100,000 the lien should be reduced by the equitable apportionment percentage calculated in Step 3 the adjusted lien amount therefore is now $35,000.

•    Step 5: Satisfy lien with the “claimed lien adjusted by equitable apportionment percentage”. The state only may get the claimed lien adjusted by the equitable apportionment percentage (determined in Step 4) the Medicaid department’s recovery of the lien consequently will be reduced or capped.

D.  If the parties are unable to come to an agreement, you may be left to seek a court order allocating the settlement among the different categories of damages. Procedures already exist in cases involving minors or folks found to be incompetent. For competent adults the recommendation is:

•    Ask the court for a hearing on the allocation of damages;

•    Move the court prior to finalizing the settlement agreement to establish a 468B Qualified Settlement Fund (QSF) and ask the court to appoint a neutral fund administrator (possibly the mediator from the case) to make a reasonable allocation of damages.

•    Ask the court or fund administrator to apply one of the three allocation methodologies articulated above.