What Does the Ahlborn Decision Really Mean?
Medicaid Reimbursement in Personal Injury Cases after Arkansas Dept. of Health and Human Services v. Ahlborn
Matthew L. Garretson
You have a catastrophically injured client who receives Medicaid benefits. You have settled the case. Due to liability issues or policy limit issues, you believe you’ve gotten your client about 20 cents on the dollar for his true damages. Medicaid wants the entire settlement because it has paid $100,000 more for the client’s medical expenses than you recovered. What now? Ahlborn is a decision capable of creating more confusion and pitfalls than any case in recent history.
It appears that Monday, May 1, 2006, was a landmark day for plaintiffs’ rights in personal injury settlements. On that day the U.S. Supreme Court unanimously affirmed the Eighth Circuit’s decision in Arkansas Dept. of Health and Human Services v. Ahlborn. With this holding, a state’s Medicaid department will be limited to reimbursement from only that portion of a judgment or settlement that represents payment for medical expenses—states are now prohibited from seeking reimbursement for Medicaid costs from settlement proceeds that were intended to cover items other than medical expenses, such as pain and suffering and wage loss. The U.S. Supreme Court held that the federal anti-lien statute prevents states from attaching or encumbering the non-medical portion of the settlement or judgment.
In the slip opinion released May 1, 2006, the Court reasoned:
[t]here is no question that the State can require an assignment of the right, or chose in action, to receive payments for medical care. So much is expressly provided for by §§1396a(a)(25) and 1396k(a). And we assume, as do the parties, that the State can also demand as a condition of Medicaid eligibility that the recipient "assign" in advance any payments that may constitute reimbursement for medical costs. To the extent that the forced assignment is expressly authorized by the terms of §§1396a(a)(25) and 1396k(a), it is an exception to the anti-lien provision. See Washington State Dept. of Social and Health Servs. v. Guardianship Estate of Keffeler, 537 U.S. 371, 383–385, and n. 7 (2003). But that does not mean that the State can force an assignment of, or place a lien on, any other portion of Ahlborn’s property. As explained above, the exception carved out by §§1396a(a)(25) and 1396k(a) is limited to payments for medical care. Beyond that, the anti-lien provision applies."
(Emphasis added).
So where are we now?
In the U.S. Supreme Court’s own words, states may not demand reimbursement from portions of the settlement allocated or allocable to non-medical damages; instead, states are given only a priority disbursement from the medical expenses portion alone. Prior to this ruling, for example, if an Arkansas Medicaid recipient settled her entire action against a third party for $20,000, and the state (Medicaid Department) paid that amount or more to medical providers on her behalf, nothing in the state statutes would preclude the state from receiving the entire settlement and the recipient would be left with nothing.
Because of the aggressive collection/reimbursement practices in many states prior to Ahlborn, many attorneys may now—with Ahlborn in their quiver—be looking for, well, let’s just be honest and call it revenge. Perhaps the correct path forward, however, is to pause for a few moments, quietly reflect, and then tread carefully when trying to apply Ahlborn. I look at it like this—the atom has been split, but we have not yet built a stable weapon. If we become overly aggressive without a solid strategy, I believe the Ahlborn decision leaves open the door for states to seek a political solution, including, perhaps, a change in the state statute framework that may force a favorable allocation for the state. The Ahlborn victory could be short-lived.
Defining the Issues
Following a motor vehicle accident in which Ahlborn was seriously and permanently disabled, she applied and qualified for Medicaid benefits in the state of Arkansas. As a result of the accident, Medicaid paid approximately $215,645 for her care. Ahlborn received $550,000 as a result of her settlement with the third-party tortfeasor.
In order to receive Medicaid benefits, Arkansas law (like in other states) required Ahlborn to assign to ADHS her "right to any settlement, judgment, or award" she might receive from third parties, "to the full extent of any amount which may be paid by Medicaid for the benefit of the applicant." Ark. Code Ann. §20-77-307(a). Note the emphasis on the word "any"—Arkansas, like most states, takes the position that they get the first bite of the apple regardless of the type of damages being paid by the tortfeasor. Accordingly, ADHS attempted to recover the total $215,645.30 it paid on her behalf based on the assumption that the settlement award ($550,000.00) was their property to begin with, and not Ahlborn’s.
In contrast to the overbroad state statute, the Eighth Circuit found that where a third party is liable for the cost of a Medicaid recipient's health care, federal law assigns to the state plan "the rights of such individual to payment by any other party for such health care items or services." As the emphasized language denotes, federal law narrowly defines (and limits) the assignment to the state as the right "to payment for medical care from any third party." Thus, the Court found conflict between the Arkansas state law and the federal law.
In resolving the conflict, the Eighth Circuit agreed with Ahlborn’s argument that 42 U.S.C. §1396p(a)(1) prohibited (with certain exceptions not applicable here) the imposition of a lien "against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under the State plan[.]" Under the statute's implementing regulation, "property" is defined as "the homestead and all other personal and real property in which the recipient has a legal interest.""It is basic property law that a chose in action is personal property," and that "the right to sue for damages is property." Consequently, because Ahlborn had a legal interest in her right to sue, the Court held that Ahlborn's right to a settlement that may be received from a third-party tortfeasor (which, again, the Arkansas statute required her to assign to the state) was Ahlborn's "property" and not that of ADHS. Thus, ADHS could only impose their lien on payments for medical care from any third party and could not enforce their lien on the entire settlement.
As a matter of law, the court found that federal law trumped the Arkansas state law in that: (1) an individual’s right to sue and subsequent settlement is their property and not that of the state Medicaid Department; and (2) that federal law only allows Medicaid to recover third-party payments made to compensate the beneficiary for medical care. In Ahlborn, ADHS was only able to enforce its lien upon $35,581.47, or one-sixth of the total amount that ADHS paid in medical expenses on Heidi Ahlborn’s behalf. As noted previously, Ahlborn had been seriously injured in an automobile accident. Medicaid paid $215,645 of her medical bills. She later settled her case for $550,000. Medicaid thereafter claimed that it was entitled to repayment of the $215,645 that it had paid out on her behalf. It was stipulated that Ahlborn’s claim was worth more than $3,000,000 and that her settlement constituted about one-sixth of that amount. The Eighth Circuit Court of Appeals, affirmed by the U.S. Supreme Court, held that Medicaid was entitled to only $35,581.47, and was ineligible to receive any part of the award that was to compensate Ahlborn for pain and suffering, lost wages, or loss of future earnings. The remaining portion of the $550,000 settlement was Ahlborn’s property.
Although the Eighth Circuit found in favor of the plaintiff, such a decision has not been uniformly accepted among all the circuits. For example, the Second Circuit held in the 1999 case of Sullivan v. County of Suffolk that "[a]s a Medicaid recipient, Sullivan assigned his right to recover from a third party to Department of Social Services [DSS], up to the amount of medical assistance provided. DSS was entitled to any rights that Sullivan had to the third-party reimbursement. DSS pursued its right to recover from a responsible third party by placing a lien on Sullivan’s lawsuit against that party. Because the lien attached directly to the tort settlement proceeds, the tortfeasor owes that money to DSS." Essentially the court stated that Sullivan had no right to the proceeds prior to the DSS recovery of its lien, thus allowing the DSS to collect the entire value of its lien prior to Sullivan taking possession of any settlement funds.
The apparent split among the circuits forced the Supreme Court to hear the Ahlborn case and rectify any discrepancies in the law.
Does Ahlborn Apply to Medicare?
Ahlborn likely does not apply to Medicare. When third-party liability is alleged, Medicare makes a payment conditioned on being reimbursed from any recovery from an insurance policy (including a self-insured plan) covering the liable third party. The Medicare Secondary Payer (MSP) legislation does not limit The Centers for Medicare and Medicaid Services’ (CMS’s) right of reimbursement to its right of subrogation. The 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 is not limited by the equitable principle of apportionment (from which the benefits of Ahlborn flow) stemming from the subrogation right. See Zinman v. Shalala, 67 F.3d 841 (9th Cir. 1995).
In Zinman, certain Medicare beneficiaries argued that because CMS is a subrogee, its recovery must be limited to the pro rata share of an insurance settlement that includes payment for medical expenses. The Ninth Circuit Court of Appeals reasoned:
. . . [T]o define Medicare’s right to recover its conditional payments solely by reference to its right of subrogation would render superfluous the alternative remedy of the independent right of recovery contained in section 1395y(b)(2)(B)(ii). We decline to construe the statute in a way that would render clear statutory language superfluous.
In sum, the Ninth Circuit confirmed CMS’s position that MSP legislation allowed for the full reimbursement of conditional Medicare payments even though a beneficiary receives a discounted settlement from a third party.
The only situation in which Medicare may recognize allocations of liability payments to non-medical losses is when payment is based on a court order on the merits of the case. If the court or other adjudicator of the merits specifically designates amounts that are for payment of pain and suffering or other amounts not related to medical services, Medicare will accept the court's designation. Medicare does not seek recovery from portions of court awards that are designated as payment for losses other than medical services—that has always been the rule. However, the allocation must be supported by a court order (or perhaps an order by the administrator of a Qualified Settlement Fund as discussed below). As the Court reasoned in Zinman:
. . . [T]he injured victim alleged a variety of damages, some capable of precise computation, some not. Such allegations are not uncommon. [CMS’s] ability to recover the full amount of its conditional payments, regardless of a victim’s allegations of damages, avoids the commitment of federal resources to the task of ascertaining the dollar amount of each element of a victim’s alleged damages. . . . Apportionment of Medicare’s recovery in tort cases would either require a factfinding process to determine actual damages or would place Medicare at the mercy of a victim’s or personal injury attorney’s estimate of damages.
Because liability payments are usually based on the injured or deceased person's medical expenses, liability payments are assumed/considered to have been made "with respect to" medical services related to the injury even when the settlement: (1) does not expressly include an amount for medical expenses; or conversely, (2) when the allocation is done by the parties absent an order or other adjudication on the merits. Absent a court order, any intellectual or legal arguments directed to a lead contractor for Medicare might be met with the classic "huh?" or "what?" response. Those contractors hold the majority of the deck and, some would argue, display indiffence because they are governed by a clear statutory framework. If thrown a curve ball, some contractors might simply move your client’s file to the bottom of the stack and defer the matter until later. Thus, trying to use Ahlborn to assist in determining the amount of Medicare’s reimbursement is likely a dead end.
Practical Considerations
In the introduction to these materials, I encouraged the reader to heed caution before implementing any strategy. As practitioners form their game plans, two fundamental tenets must be embraced: (1) states are not going to sit idly by and allow parties to negotiate away their interest; and (2) defendants are not likely to cooperate in allocating damages.
In light of this reality, plaintiff’s counsel may be left on his or her own to seek a court order allocating damages. In cases involving minors or incompetents, the procedural mechanism is already in place. But what about cases involving a competent adult? The best recommendation this author has is:
- the plaintiff (ex parte) or parties (by joint stipulation) could move the trial court, prior to finalizing the settlement agreement, to establish a qualified settlement fund (discussed more fully below) and ask the court to appoint a neutral fund administrator (perhaps even the mediator from the case or a respected member of the bar) to make a reasonable allocation of damages that include the medical expense reimbursement amount;
- to ask the fund administrator to answer, based upon the demand packages or competing life care plans and economist’s reports, the following question: "If causation and liability were not a factor, if you were to black-board all the damages at trial—medical and non-medical—what percentage of the total would be for medical losses and what percentage would be for non-medical losses (pain and suffering, disfigurement, lost wages, derivative losses, etc.)?"
a. Example: There is a $350,000 settlement. After identifying all damages based on economic reports and/or life care plans (all the typical tools that attorneys use to show defendants what the measure of harm is/was), the plaintiff’s attorney can show that reasonable damages are $1,000,000. However, due to policy limits and / or comparative fault / contributory negligence, the parties settled for $350,000. Under traditional Ahlborn analysis, let’s say that medical provider payments by Medicaid were $100,000. However the, plaintiff accepted 35 cents on the dollar (of the black-boarded damages) to settle due to various factors. Ahlborn suggests that under equitable allocation theory, 35 percent of the $100,000 paid by Medicaid might be allocable to medical expenses as part of the settlement dollars. This brings the recovery amount to $35,000.
- allocating the settlement proceeds among the types of damages and/or claimants;
- verifying and negotiating liens and/or subrogation claims;
- determining the appropriate role and underwriting of a structured settlement annuity;
- evaluating the need to preserve governmental entitlement benefits (e.g. the need for the establishment of a special needs trust); and
- a host of other decisions which can best be made without the pressure associated with the litigation itself.
If a defendant and / or the state is not likely to cooperate in making good-faith classification of damages, the use of a 468B Qualified Settlement Fund (QSF) may become more important. QSFs uniquely introduce a degree of breathing space to a settlement that proves valuable as follows:
There are only three requirements for QSFs:
- It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
- It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability—
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law, or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
3. The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related parties)."
Since their creation, 468B Funds have provided a useful tool to resolve present and future claims arising out of personal injury, death, or property damage. Such funds have been used in settlements ranging in size and complexity from mass torts, such as asbestos or Fen Phen on one end of the spectrum, to smaller-scale cases involving a personally injured claimant with a derivatively injured spouse, child, or parent, on the other end. The use of the §468B mechanism in the situations at both ends of the spectrum above is not in dispute. There is, however, some debate about whether such funds should be used in a single-claimant case (i.e., one primarily injured claimant with no derivatively injured spouse, parents or children).
In some smaller cases, however, the expense and administrative burden of establishing a qualified settlement fund may be prohibitive. In those instances, perhaps the plaintiff’s counsel could obtain a court order on allocation of damages by asking for a post-settlement allocation via motion to the court (Minnesota and Wisconsin have this in place, via state Supreme Court cases—a mechanism for a post-settlement allocation hearing).
This author believes that states, however, are loath to participate in post-settlement allocation hearings because those hearings are not in the state’s best interest. Participating as the state in hearing in front of a judge where you (the state) appear adverse to a brain-injured child in a wheelchair is a loser’s game. Most judges will be more sympathetic to the injured party in that context.
If counsel and Medicaid departments are able to establish rapport, and if they both accept the "equitable allocation" rationale of the U.S. Supreme Court in Ahlborn, then court orders may not be needed. But let’s not be overly Pollyanna-ish – Both sides are called to advocate fiercely for its clients in any context in which they engage in allocation discussions. And, if these discussions take place outside the court setting, the states may soon have the upper hand - This author believes—after much discussion with Medicaid-related officials in various states—that state Medicaid departments will seek to ensure that their respective statutory framework dictates that no settlements occur with out Medicaid’s official "signoff." In Utah, for instance, "[a] recipient may not file a claim, commence an action, or settle, compromise, release, or waive a claim against a third party for recovery of medical costs for an injury, disease, or disability for which the department has provided or has become obligated to provide medical assistance, without the department’s (of Health) written consent."
I introduced this article with the rather alarming statement that "Ahlborn is a decision capable of creating more confusion and pitfalls than any case in recent history." I base that proposition on the fact that every effort to build damages on the front-end of a Medicaid beneficiary’s case may negatively impact the client’s net recovery on the back-end. Plaintiffs counsel must be prepared to deal with the following, as the department likely will not roll over on your construction of the "equitable allocation" at the time of settlement:
- Medicaid will place the onus on you to prove up your numbers. Keep in mind that the state clearly knows what their damages are. States will want to see your complaint, your life care plan, economist’s report, and other medical records to see whether your claim of equitable allocation on the back-end of the case is in line with what you have tried to plead and prove from the beginning.
- The state may be more proactive in pursuing a recovery directly from the third party, as many state statutes allow. If so, the state is likely to obtain all your correspondence with the defendant about your client’s case.
- In light of the above possibilities, crafty defense attorneys may begin playing Medicaid, you (the plaintiff counsel) and the Medicaid recipient (your client) off of each other, ultimately creating a rift between plaintiff’s counsel and Medicaid that will hinder the ability to have a meaningful discussion regarding equitable allocation on the back-end of the case.
- Defendants have little incentive to cooperate with you on the back-end of the case. If they are perceived by the state as participating in a process that "allocates away" the state’s interests, the state likely will become more aggressive in chasing defendants directly.
Conclusion
This suggestion (utilizing a qualified settlement fund and appointing a neutral to allocation damages) outlined above appears to be supported by the Supreme Court’s opinion. The Court addressed the "risk-of-settlement-manipulation" argument raised by ADHS (as well as by ADHS’s amicus in support) by reasoning that, "the risk that parties to a tort suit will allocate away the state’s interest can be avoided by either obtaining the state’s advance agreement to an allocation or, if necessary, by submitting the matter to a court for decision."
The U.S. Supreme Court has clarified to whom the pot of settlement money belongs. Now, it is up to plaintiff’s counsel to focus on a stable allocation strategy. Certainly you should advocate as zealously as possible for your client. Further, ABA Model Rule 1.1 addresses the cause and effect issues articulated above (i.e. the impact that your pleading on front-end of cases will have upon the net benefit to the Medicaid client on the back-end), stating that a lawyer "shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." Against this benchmark, clients who are Medicaid recipients reasonably will expect counsel not only to advocate for the substance (the dollar amount) but the "form-of-settlement" (the allocation) as well.
In this endeavor, I believe we do not want to implement a process that benefits our current clients while the states are wheeling to figure out how to equalize the balance of power – which they will - and leaves such discord in the wake that state’s will be difficult to work with when they level the field (if not obtain the upper hand). With the risk of being histrionic, I analogize the path forward to the "Assured Destruction" game theory I recall from the cold war era - Certain behaviors or choices are deterred because they will lead to the imposition by others of overwhelming punitive consequences. At times, rational self-interest hurts everyone.
