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Medicaid v. State Employees v. Medical Provider Liens: An Epic Battle

I recently received a great question from an attorney regarding the interplay of Medicaid, State Employee Helath Plan, and Medical Provider Liens.  With the recent developments in Medicaid subrogation law (The SCOTUS decision in Ahlborn and North Carolina Supreme Court ruling in Ezell) and the "new" amended statute for the State employee Health Lien, lawyers are left scratching their heads on hoow to address the competing liens of these entities.

The Question:

We recently settled a case on behalf of a minor.  There is a Medicaid, a SEHP and a hospital lien.  Medicaid lien is much greater than the other two, but payment in full of all three would be less than 1/3 of the total net proceeds to the minor. 

By way of example (not actual numbers): Assume a $100,000 settlement and attorney fees and costs of $30,000.  Liens total $30,000.  $15,000 Medicaid, $10,000 SEHP and $5,000 Medical providers.  Here's the catch: parent's claim had run prior to suit being brought, thus the entire settlement was for minor's pain and suffering, future lost wages, and future medical expenses.  Under Ahlborn it would seem that Medicaid has no right of recovery (a percentage of nothing is nothing) but that the SEHP and Medical Providers would get paid in full.

Have you seen an NC case like this go through the system post-Ahlborn or has the scenario been discussed at any of the meetings you have attended?

MY Answer:
You win the award for "best law school exam question on liens"!

No case like yours has come forward yet, but I was expecting one.  The folks at SEHP were sort of surprised when I told them this would happen, they seemed to think that if you had SEHP ALL your bills would be paid.  They never thought about people losing jobs, losing insurance coverage, etc.

MEDICAID
The analysis should start with Ahlborn.  Ahlborn tells us that Medicaid can not claim repayment from any portion of a settlement not apportioned to medical payments.  Clearly, the settlement in this case has no component of medical bills because the medical bill claim was that of the parents, and the statute of limitations for the parents claim (and therefore Medicaid's derivative claim) had run before the suit was filed.  The only possible argument that Medicaid could make would be to argue that the parents "assigned" the right of collection to Medicaid upon the child's receipt of Medicaid benefits under 108A-57.  As is noted in a recent publication by John Saxon at the UNC School of Government:

It is clear that both statutes involve the recovery of Medicaid payments from third parties who are liable to Medicaid beneficiaries. G.S. 108A-57, however, uses the term "subrogation" to define the state Medicaid agency's rights against third parties while G.S. 108A-59 defines the State's right as one arising by virtue of "assignment." Subrogation and assignment, though, are distinct legal concepts. So, it is not entirely clear whether the State's claim against a third party is a claim based on subrogation or a claim based on assignment, whether the State may assert a claim based on subrogation and assignment, whether the State must elect to pursue its claim based on subrogation or assignment, and whether the scope of the State's rights under G.S. 108A-59 is coextensive with, broader than, or narrower than the scope of its right of subrogation under G.S. 108A-57. Nor is it clear whether the "pro rata" and "one-third cap" provisions of G.S. 108A-57 apply if the State's claim is based on an assignment under G.S. 108A-59 rather than subrogation under G.S. 108A-57.

So at the outset, we have the argument that Medicaid has NO lien or right of subrogation pursuant to Ahlborn.  The Ezell case, of course, is directly contradictory to this, with Judge Steelman's dissent at the Court of Appeals (adopted per curiam by NCSC)saying:

Notwithstanding any other provisions of the law, to the extent of payments under this Part, the State, or the county providing medical assistance benefits, shall be subrogated to all rights of recovery, contractual or otherwise, of the beneficiary of this assistance, or of the beneficiary's personal representative, heirs, or the administrator or executor of the estate, against any person. . . .

N.C. Gen. Stat. § 108A-57(a) (2005) (emphasis added).

The above language contemplates a broad right of subrogation, which is indicated by the reference to "all rights of recovery." Subrogation is not limited to tort recovery, as the statute expressly covers contractual rights or "otherwise." See State v. Shade, 115 N.C. 757, 759, 20 S.E. 537, 537 (1894) (noting that when the words "or otherwise," follows an explicit example in a statute, the legislature intends to include every other manner of fulfilling the purpose of the statute, for example here, recovery, no matter what might be the attendant circumstances). The causation language discussed by the majority is from the portion of the statute dealing with the duty of a plaintiff's attorney to distribute settlement proceeds to DMA, not from the portion of the statute defining the scope of DMA's right of subrogation, which is set forth verbatim above.

STATE EMPLOYEE HEALTH PLAN
The next matter to address is the lien of the State Employee's Health Plan.   Of course, the SEHP lien will attach to the proceeds regardless of whether they are for medical bills or not:

§ 135-40.13A. Liability of third person; right of subrogation; right of first recovery.

(a) Whenever the Plan pays benefits for hospital, surgical, medical, or prescription drug expenses, with respect to any Plan member, the Plan shall be subrogated, to the extent of any payments under the Plan, to all of the Plan member's rights of recovery against liable third parties, regardless of the entity or individual from whom recovery may be due.

Though, one might argue that the logic of Ahlborn would apply and SEHP would not have a lien on the minor's damages (though it seems the statute allows the lien to attach to any proceeds).

The Plan's lien language gives SEHP the "right of first recovery" which would seemingly place SEHP in a higher priority than Medicaid, though Medicaid could argue that because they are federally funded, the state law would be preempted.

The Plan has the right to first recovery on any amounts so recovered, whether by the Plan or the Plan member, and whether recovered by litigation, arbitration, mediation, settlement, or otherwise.

The Plan's subrogation right is limited to recovering no more than 50% of the net settlement after "reasonable" attorney fees and costs (presumed to be 1/3) have been paid.

There is currently no guidance on how SEHP would "compete" with Medicaid if both have valid liens.  SEHP told me during our meeting that they were "working with the AG's office and Medicaid" on a way to handle this type of situation.  My best guess is that if both liens are valid, Medicaid and SEHP would devise some sort of pro-rata sharing.

SEHP and Medical Liens
SEHP claims to have priority over all Medical Provider liens.  Thus, because SEHP's lien formula is almost exactly the same as the Medical Provider lien formula, if SEHP's lien is equal to 50% of the NET settlement (after reasonable collection costs) then the Medical providers would not be entitled to any payment under the statute (though their balances would still be owed by the client).

If SEHP's lien was LESS than 50% of the NET (after reasonable costs of collection) then the question would first be to determine if there is a valid Medicaid lien.  If there is a valid Medicaid lien, AND Medicaid does NOT have to share with SEHP, then the Medicaid and Medical provider liens would be prorated up to 1/3 of the settlement (for Medicaid) or 50% of the net after Attorney Fees (for Medical providers).

MEDICAL LIENS
Finally, you have medical liens under NCGS 44-49 and 44-50. Medicaid must share "pro-rata" with any unpaid medical providers pursuant to the requirements of:

§ 108A-57. Subrogation rights: withholding of information a misdemeanor

(a)  . . . Any attorney retained by the beneficiary of the assistance shall, out of the proceeds obtained on behalf of the beneficiary by settlement with, judgment against, or otherwise from a third party by reason of injury or death, distribute to the Department the amount of assistance paid by the Department on behalf of or to the beneficiary, as prorated with the claims of all others having medical subrogation rights or medical liens against the amount received or recovered, but the amount paid to the Department shall not exceed one-third of the gross amount obtained or recovered. (emphasis added)

This was discussed in the previous section.  Further, SEHP claims that they do NOT pro-rate with medical providers within the 50% of Net after attorney fees limitation.

Thus, I see two scenarios that could result from your case:

1)  Medicaid Valid, SEHP Valid, Medical Liens Valid
In this scenario Medicaid and SEHP would first need to determine if one or the other had priority in payment or if they prorate within the 1/3 limitation set by medicaid.  If SEHP has first priority, then the question would be does Medicaid get 1/3 of what is left after SEHP is paid or are they limited to no more than 1/3 of the total settlement minus what SEHP has been paid.  Medical providers would receive the remainder, pro-rated with Medicaid up to the 1/3 limit of medicaid or the 50% after attorney fees of Medical Provider liens.
2.  Medicaid INVALID, SEHP Valid, Medical Liens Valid
If our courts apply Ahlborn as written, then Medicaid should have no lien on the minor child's pain and suffering or future medicals recovery.  Then SEHP would recover it's full lien, up to 50% of the net after "reasonable costs of collection" and then Medical providers would share among themselves, pro-rata, up to 50% of the net after attorney fees. (Which is essentially the same 1/3 that SEHP claims).  Medical providers could argue that their share should be 50% of the NEt AFTER SEHP is paid, but I don't see any real basis for that argument.
I think that you will probably need to litigate this matter.  In that regard, you need to give Medicaid notice of all hearings.  My guess is that you would make these arguments at the minor settlement hearing and that Medicaid (AG) would need to participate.

If you have not read my posts on these issue on my Blog, you might want to check it out: Ahlborn Resources
Chris Nichols
www.NicholsTrialLaw.com 1.800.906.5984

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