On December 18, 2013, the U.S. Senate passed the Bipartisan Budget Act of 2013 (H.J. Res. 59), which includes a provision that will fundamentally alter the way Medicaid Secondary Payer claims are resolved.  Under the new legislation, Medicaid recovery of funds from a Medicaid beneficiary’s settlement or judgment will no longer be limited to that portion of the award that was intended to cover health care items or services.

The Medicaid Secondary Payer statute (42 U.S.C. § 1396a(a)(25)) generally provides that Medicaid is a payer of last resort for a Medicaid beneficiary’s medical costs, so that if another primary payer with responsibility for a medical bill exists, that other payer is billed before Medicaid is billed.  The Medicaid Secondary Payer law allows the proceeds of a settlement or judgment to be considered a “primary payer,” and prior to the recent passage of the budget deal, it limited Medicaid recoveries to the portion of the settlement or judgment that was for “health care items or services.”  Moreover, the U.S. Supreme Court has twice held that the Medicaid Secondary Payer statute limited state Medicaid programs to recovering only their allotted share of medical costs, but the recent budget deal undercuts the Supreme Court’s decisions.

In Arkansas Department of Health and Human Services et al. v. Ahlborn (2006), a Medicaid beneficiary was involved in a car accident and sought damages against her tortfeasors for past medical costs and for other items including pain and suffering, loss of earnings and working time, and permanent impairment of her future earning ability.  The case was settled for an amount that was not allocated between categories of damages.  The Arkansas Department of Health Services (ADHS) asserted a lien against the settlement proceeds for the full amount it had paid for the beneficiary’s care.  The Supreme Court held that ADHS was only entitled to the portion of the beneficiary’s settlement that represented medical expenses, and could not claim any rights to payment for other expenses, such as lost wages and other non-medical costs.  Likewise, in Wos v. E.M.A. (2013), the Supreme Court recently struck down a North Carolina statute that required up to one-third of any damages recovered by a beneficiary for a tortious injury be paid to the state to reimburse it for payments it made for medical treatment on account of the injury.  The Supreme Court found that the state’s statutory presumption that one-third of a tort recovery is attributable to medical expenses was preempted by the Medicaid Secondary Payer statute and also could not be reconciled with Ahlborn.

However, the recently passed Bipartisan Budget Act of 2013 includes a provision, section 202(b), that effectively negates the requirement that Medicaid recoveries be limited to the medical portion of a settlement or judgment.  The legislation amends the language of the statute to strike the phrase “payment by any other party for such health care items or services” and to insert “any payments by such third party.”  This amendment greatly expands the Medicaid Secondary Payer statute to allow Medicaid to recover funds from a judgment or settlement beyond the costs of medical items or services, such as lost wages and non-economic damages, so that Medicaid is essentially allowed first dollar recovery off the top of any undifferentiated settlement with a Medicaid beneficiary.  The Congressional Budget Office estimates the provision in the budget deal will save the federal government $1.4 billion over the next ten years.

The amendment to the Medicaid Secondary Payer statute will take effect on October 1, 2014, and it will significantly complicate settlements involving Medicaid beneficiaries, including by making them more expensive to settle or by disrupting settlements altogether.  It is often the case that Medicaid beneficiaries may be partially responsible for an injury, and it is on the basis of those comparative fault principles that beneficiaries settle their claims.  The legislation, however, bars settlement of the Medicaid component of any claim, in that Medicaid can now recover 100% of its payment “off the top” of any settlement proceeds, which unfairly reduces the beneficiaries’ recoveries for non-medical expenses and creates barriers to settling cases in the first instance.  Ironically, the provision may be self-defeating in that the legislation may lead to fewer Medicaid beneficiary settlements, leaving less funds available from which Medicaid programs can recover.

Section 202(b) of the Bipartisan Budget Act is available here.

Reporters, David Farber, Washington, D.C., + 1 202 626 2941, dfarber@kslaw.com, and Jennifer S. Lewin, Atlanta, + 1 404 572 3569, jlewin@kslaw.com.