Medicare Secondary Payer – Are State Judgments, Awards, Orders Binding on CMS?
Roy Franco
July 6, 2010

It was always assumed Medicare would abide by state rulings.   Consequently, my interest is always peaked when I hear CMS commentary on the topic.  For instance, at the Town Hall Conference Call for Mandatory Insurance Reporting on June 30, 2010 – the issue came up and what I took away from it was a CMS point of view that not all judicial rulings were created equal.  CMS will only consider judgments before a court of competent jurisdiction after a full hearing on the merits would be considered.  This deviates from CMS prior publications on the topic that has already drawn a constitutional challenge based on the full faith and credit clause.  Can a Federal Agency decide which judgments it will or will not respect?  It appears in a recent case on appeal in the 11th Circuit that CMS is winning.

The CMS written explanation about court rulings can be found at Chapter 7 of the Medicare Secondary Payer (MSP) Manual.

50.4.4 – Designations in Settlements

The only situation in which Medicare recognizes allocations of liability payments to nonmedical 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 designate 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.

Following this guidance, it would appear CMS would respect a variety of judgments, awards and orders so long as such rulings were based on the merits of the case.  In other words “rubber stamped” court orders and the like would not be honored.  CMS even felt comfortable with giving respect to “other adjudicator[s] of the merits,” which implied acceptance of private or court ordered arbitrations as well.  So long as there was hearing on the merits, and court involvement, the judgment would be honored.  That may no longer be the case, as CMS now requires a “court of competent jurisdiction” and a hearing on the merits before it will accept the court ruling.   Is this subtle change to mean that only certain courts have authority over MSP issues, i.e., Federal Courts or Administrative Appeal Judges?  Will any state court judgments be respected?  What about Arbitration Awards that are converted into judgments?  How these questions are answered may depend on the ruling of a pending case in Florida.

The case to watch is Bradley v. Sebelius (No. 09-13765-BB) on appeal from Florida District Court in the 11th circuit.   It was argued this past April and a decision is expected in the next few months.  The Government’s position is that CMS is not bound by a state probate court’s allocation order of settlement proceeds between the estate plaintiff and wrongful death plaintiffs.  Medicare must be reimbursed before any claimant.  The non-Medicare beneficiaries (wrongful death plaintiffs) took issue with that position and began the administrative appeal process which has led to this appeal.

Decedent died purportedly through the negligence of the nursing home where he was residing.  A $60,000 liability policy was available to cover the claims of both the decedent’s estate and the wrongful death claimants; but the policy limits were depleted by the cost of defense.  It made sense to settle quickly and claimants did for $52,500, the remaining balance of the policy after the deduction of defense costs.

The estate plaintiff recognized there was an MSP obligation owed to Medicare and promptly applied for the repayment information.  Medicare responded and after a deduction for procurement costs demanded $22,489.89.  The wrongful death plaintiffs disagreed and took the position that Medicare was owed a proportion of the settlement proceeds and sought protection from the state probate court.  A motion was filed by the wrongful death plaintiffs and adequate notice given to Medicare that sought a fair allocation between the Medicare and non-Medicare claimants.

Medicare did not appear at the hearing and the probate court proceeded with the motion without it.  To properly calculate the allocation, the court needed to establish the value of the wrongful death claims and arrived at a figure of $250,000 for each of the ten claimants.  The court then allocated to Medicare the sum of $787.50 based on the quotient of the Medicare value ($38,875.08) divided into the full settlement value ($2,538,875.08) multiplied by the settlement amount available ($52,500).  The remaining balance ($51,712.50) was left unallocated amongst the ten wrongful death plaintiffs.

Throughout administrative and court appeals, the decedent children have lost.  The probate order was voided and Medicare’s claim for its full value ($22,489.89) affirmed.  The crux of the appeal to the 11th circuit is the constitutional implications in allowing an Agency to disregard a state court ruling.

Aside from the obvious Equal Protection and Due Process arguments, the real issue this case presents is whether a state probate court’s findings must be given full faith and credit under Article IV, Section I of the Constitution of the United States. The concept that it would not is an interesting tightrope for the 11th Circuit to navigate.  Congress does not have the power to require states to govern according to Congress’ instructions. New York v. United States, 505 U.S. 144, 162 (1992).  The Bradley appellants argue by simple deduction that the Secretary cannot have more authority than Congress in this regard, and must therefore respect the rulings of the state probate court.

This issue was previously litigated in a remarkably similar situation in Denekas v. Shalala, 943 F. Supp. 1073 (S.D. Iowa 1996).  Mr. and Mrs. Denekas were involved in a head on collision and Mrs. Denekas died upon impact, but Mr. Denekas survived for 266 days incurring $106,325.70 in Medicare charges.  The Denekas estate was represented by the decedent’s two children and included their individual wrongful death claims by state statute. Settlement proceeds available were $125,000 ($100,000 from the responsible driver’s policy and $25,000 underinsurance coverage from the Denekas policy).  The plaintiffs sought declaratory relief from Federal District Court seeking a determination of their rights for apportionment to their wrongful death claims and the court agreed on due process and equal protection grounds.

The MSP provisions do not give Medicare the right to obtain reimbursement of conditional payments from the claims of other claimants who are not Medicare beneficiaries and whole claims are not for medical services to the beneficiary.  The settlement fund here is for the settlement of claims belonging ot the estate and claims belonging to the surviving children.  The estate is the only Medicare beneficiary.  “The government stands exactly in [the Medicare beneficiary’s] shoes when recovering from the available insurance funds.”  Waters v. Farmers Texas County Mut. Ins. Co., 9 F.3d 397, 401 (5th Cir. 1993).  It does not have a “a superior claim to community insurance funds beyond the beneficiary’s own share of those funds”  Id; see Foster, 926 F. Supp. At 864-65.

The Denekas Court went on to dismiss Medicare’s concerns that allowing such apportionments will reduce recoveries to the Trust Fund as not rationally based to pass Constitutional muster.

Medicare should not prevail “just because” it has concerns that “apportionment of insurance settlement payments short of a decision on the merits would allow beneficiaries and personal injury attorneys to reduce or eliminate Medicare reimbursements by weighting claims in favor of items of damage other than medical expenses.”   While understandable, “[a]dministrative convenience and the avoidance of contrived apportionments do not allow the government to take settlements proceeds to which others are entitled.  Id. at 1080.

CMS never appealed the ruling in Denekas and that decision should be persuasive with the matter before the 11th Circuit.  The only difference between Denekas and Bradley is that the Denekas court made the apportionment.  Under the Full Faith and Credit Clause of the U.S. Constitution that should not be the differentiator in the outcome of Bradley.  It makes plain sense that if a federal district court is able to allocate the settlement proceeds then the probate court’s allocation in Bradley should stand.  If not, how can any Estate even be finalized?  Is the answer to file declaratory actions in Federal District Court?  Is that a good use of judicial resources?  More importantly, does the implication of a ruling for Medicare spill over to other agencies as well?  For example, the IRS unhappy with a probate court’s distribution of an estate can the IRS reassess that distribution in order to maximize tax collection?  The example is absurd, I admit, but made to point out the slippery slope should the ruling go in that direction.  If there is no finality to state court rulings have we not made the Federal Courts the de facto court of jurisdiction to obtain such finality?

A great deal of questions are raised should the Bradley decision be sustained.  While administrative process for Medicare would be made simple, other complexities will surface and cause burden to Federal Courts to constantly sort out what was usually within the purview of the state court system.  This trade off may not be worth it and runs against constitutional principals.

Even if the Bradley decision is consistent with Denekas, another even larger issue remains for primary plans to grapple with.  It is important to keep in mind that this case would only resolve the MSP exposure for the Medicare beneficiary and his representative.  Medicare may still pursue its claim against the primary plan.  The Bradley appellants pointed this out as it criticized Medicare for ignoring such recovery actions under both MSP or Medical Care Recovery Act to make the Trust Fund hole.

I mention this issue because it again highlights the importance of the Release terms when resolving a case with a Medicare beneficiary.   Upon payment, the insurance carrier/self insured is now the primary plan and subject to recovery claims by Medicare.  Those recovery claims are not extinguished if Medicare is not successful against the beneficiary the way the statute is laid.  Franco Signor LLC can assist primary plans to make certain MSP contingent liability is mitigated.