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Negotiating a Medicaid Lien; How to limit government liens and preserve recoveries for injured parties

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August 3, 2007 | New Jersey Law Journal
Jane M. Fearn-Zimmer

Last year, the U.S. Supreme Court limited reimbursement of Medicaid liens to the fraction of the total recovery which corresponds to medical expenses. Arkansas Department of Health and Human Services et al. v. Ahlborn, 547 U.S. 268 (2006). Measures can be taken, however, which dramatically limit government liens, preserving recoveries to enrich the quality of life of a severely disabled individual. An attorney can limit the Medicaid lien on a personal injury or wrongful death claim, as well as other federal liens, such as those arising from receipt of federal insurance payments, i.e., Champus benefits.

In Ahlborn, a 19-year-old student severely disabled in an auto accident incurred an Arkansas Medicaid lien of about $215,000. She settled her claims for about $550,000, although her case had a stipulated value of over $3 million. After settlement, Medicaid sought the full lien amount. The Supreme Court limited Medicaid reimbursement to the portion of the settlement amount corresponding to the plaintiff's medical expenses, refusing to allow the lien on portions of the total settlement amount allocable to damages for pain and suffering or future lost wages.

A North Carolina case, decided nearly two months after the Supreme Court's decision in Ahlborn, reached a different result. Ezell involved a claim for full recoupment of an $86,540 Medicaid lien against the plaintiff's $100,000 settlement with the pediatrician. The North Carolina Supreme court, per curiam, restricted recovery to one-third of the full settlement amount. Ezell v. Grace Hospital, Inc., 360 N.C. 529 (2006). The court cited the appellate court's dissent, which stated that a subrogation right is in no way restricted to a beneficiary's right of recovery only for medical expenses.

Which procedures must now be followed? Generally, service of timely written notice to the lienholder of a potential claim for damages, and service of a copy of any complaint filed is required. The service of written notice of a claim is especially critical for minors, as to whom the statute of limitations may be tolled pending their legal majority. The lienholder should always be invited to participate in any mediation and any settlement proceedings and service of written notice should be well documented.

The only exception may be where an action for personal injuries is converted into a wrongful death claim in a jurisdiction that does not recognize the survival of the personal injury claim to the decedent's estate. See e.g., Dexter v. Ford Motor Co., 2006 WL 2129406, Med & Med G.D. (C.H.) P 301, 889 (D. Utah July 31, 2006) (directing state Medicaid agency to proceed against Ford Motor Company for recoupment of benefits paid under state subornation statute). As a matter of caution, the Dexter approach should be adopted only as a fall-back position.

What if notice is given but the lienholder does not participate in the determination of any recovery amount? In that situation, counsel should request an Ahlborn allocation hearing.

In a New York case, a minor plaintiff, afflicted with cerebral palsy and retardation due to medical malpractice during her mother's labor, received a $3.5 million settlement. Lugo v. Beth Israel Medical Center, 819 N.Y.S.2d 892 (S. Ct. N.Y. 2006). The plaintiff had a Medicaid lien of approximately $47,000. The trial court rejected the contention that the precise formula mandated by the Ahlborn court must necessarily be applied in the Lugo case and determined that a hearing must be conducted to "confirm the full value of the case, and the value of various items of damages, including the plaintiff's injuries and how they compare to verdicts awarded in other cases." The Lugo court also concluded that the parties were entitled to notice and an opportunity to be heard regarding the fair allocation of the settlement proceeds and the viability of the data offered regarding the "true value" of the case as compared with similar cases. The decision strongly suggests that discovery on the issue of the allocation of damages may be warranted in an appropriate case.

Generally, the Ahlborn allocation hearing will entail: (1) a determination of the full value of the case, which plaintiff's counsel must seek to maximize; (2) a determination of the respective values of the various items of damages, including plaintiff's injuries and how those injuries compare to verdicts awarded in other cases; and (3) the application of an appropriate formula to compute the amount of the Medicaid lien recoverable. See Lugo, 819 N.Y.S.2d at 897-898. Judicial notice may be taken of jury award amounts in similar cases. Expert medical testimony will be critical. Where disability results, any individualized developmental disability or individualized educational plans prepared will also be relevant. See, e.g., Lugo, 819 N.Y.S.2d at 898. Clearly, the Ahborn ratio is highly fact sensitive. For another example of its computation, see Chambers v. Jain, (Supreme Court, Queens County 2007, N.Y. Slip Op. 50776, April 13, 2007) (applying ratio of 28.3 percent to reduce amount of $141,638 Medicaid lien to $40,083).

Finally, plaintiff's counsel is also well-advised to demand prompt release from escrow of all settlement proceeds above the full monetary amount of any Medicaid lien before application of any allocation ratio. In appropriate cases, counsel should also request deduction of amounts allocable to attorney's fees and costs of special education services required to be provided free of charge under the IDEA to disabled plaintiffs from the amount of any Medicaid lien. See, e.g., In re Zyprexa Products Liability Litigation, 451 F. Supp.2d 458 (E.D.N.Y. 2006); Green v. City of New York, 438 F. Supp. 2d 111 (E.D.N.Y. 2006) (deduction of special education and related services).

Reprinted with permission from the “AUGUST 3RD” edition of the “NEW JERSEY LAW JOURNAL”© 2007 ALM Media Properties, LLC. All rights reserved.

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