Supreme Court Preempts State Laws that Impose Medicaid Liens on Beneficiary Settlement Proceeds Greater than Proportion Attributable to Health Care Costs

The U.S. Supreme Court has ruled that a Medicaid program’s lien against a personal injury settlement is limited by federal law to the amount of the settlement attributable to the beneficiary’s health care costs.

The U.S. Supreme Court has ruled that a Medicaid program’s lien against a personal injury settlement is limited by federal law to the amount of the settlement attributable to the beneficiary’s health care costs.  Arkansas Dep’t of Health & Human Servs. v. Ahlborn, 126 S.Ct. 1752 (2006).  The unanimous decision is noteworthy not only because it resolved a heretofore contentious issue on terms favorable to beneificiary interests.  In addition, the Court (with no reference to the issue) applied the doctrine of preemption pursuant to the Supremacy Clause of the Constitution to enforce the Medicaid statute and invalidate an inconsistent state law.  The Court also rejected the federal agency's contrary interpretation of the Medicaid statute, with only a cursory reference to the need for deference.

Following Ms. Ahlborn’s serious injury in an automobile accident, the Medicaid program paid approximately $215,000 for medical care provided to her.  Ms. Ahlborn’s case against tortfeasors was settled for $550,000, even though Ms. Ahlborn and the Medicaid program subsequently stipulated that her claim had been worth approximately $3 million.

The Medicaid program assessed a lien for the entire $215,000, and Ms. Ahlborn challenged this lien in federal court.  She alleged that the Medicaid program’s claim against her settlement should have been reduced proportionally based on the extent that the settlement amount was short of the stipulated value of her claim.  Specifically, the claim was alleged to be reduced appropriately from $215,000 to approximately $35,000, because the total recovery had been reduced from its value of $3 million to the settlement of $550,000.

The Supreme Court invalidated an Arkansas law that had authorized the Medicaid program to seek repayment against an entire settlement or judgment, regardless to what extent such settlement or judgment was based upon health care expenses.  In doing so, the Supreme Court affirmed the Eighth Circuit.

The Court found that at most a Medicaid program was required by federal law to collect against the portion of a settlement attributable to payments for health care.  Furthermore, federal law did not allow a Medicaid program to go further.  Federal law generally does not allow a Medicaid program to place a lien against a recipient’s property.  The Court inferred an exception -- but only a limited exception --  based on the requirement that a Medicaid applicant assign to the Medicaid program her right to collect against a tortfeasor for any health care expenses that had been paid by the Medicaid program.  According to the Court, this assignment is, as relevant here, the extent of a Medicaid program’s right to reimbursement.

The state had claimed that the disputed money was not Ms. Ahlborn’s property for the purposes of the anti-lien statute, but the Court disagreed.  Assessment of a lien was nonsensical if it were assumed that the property already belonged to the state.

The Medicaid program had asked for an exception to the anti-lien rule in cases in which the Medicaid recipient had not cooperated, but again the Court disagreed.  The statutory duty to cooperate applies only in proceedings initiated by the state to recover from third parties.  In any case, the state had produced no evidence that Ms. Ahlborn had failed to cooperate with the Medicaid program.

The state also urged an exception to prevent manipulation, arguing that plaintiffs might structure settlements and verdicts to minimize the recognition of health care expenses.  The Court noted that this issue was not presented by Ms. Ahlborn’s specific situation – because the parties had stipulated on the portion of the settlement procedures to be designated for Medicaid-funded health care costs -- and found generally that problems could be avoided “either by obtaining the State’s advance agreement to an allocation or, if necessary, by submitting the matter to a court for decision.”

Neither the Court nor any party appears to have questioned the authority of the federal courts to entertain the suit.  All treated the issue as whether in fact the Arkansas statute was consistent or inconsistent with relevant provisions of the Medicaid Act.  This is thus the second occasion in three years in which the Court has implicitly accepted the point that the Medicaid Act may be enforced against states via preemption; the other occasion was Pharmaceutical Research & Manufacturers v. Walsh, 123 S. Ct. 1855 (2003) – though in that case, unlike Ahlborn, the Court declined to preempt the state law in question. 

The Court also rejected two decisions by the Departmental Appeals Board of the Department of Health and Human Services (HHS) that supported Arkansas' construction of the Medicaid Act.  The Court found that those cases "address a different question from the one posed here, make no mention of the anti-lien provision, and, in any event, rest on a questionable construction of the federal third-party liability provision."  The Court "recognize[d] that Congress has delegated 'broad regulatory authority to the Secretary [of HHS] in the Medicaid area, ... and that agency adjudications typically warrant deference.'"  But -- without claiming that the Medicaid Act is unambiguous -- "the Board's reasoning coupled internal inconsistency with a conscious disregard for the statutory text" and therefore was not controlling.

Thus, this new decision will lend support to the claim that preemption is available to enforce the Medicaid Act against inconsistent state actions, without regard to whether the challenged action may be challenged under 42 U.S.C. §1983, and even in the face of a contrary interpretation of the Act by HHS.