U.S. Court of Appeals for Sixth Circuit Grants Oral Argument in U.S. v. Hadden
Roy Franco
September 18, 2010

Those of us who regularly handle claims involving Medicare beneficiaries are closely following Hadden v. U.S., 2009 U.S. Dist. LEXIS 69383. Medicare will not adjust its demand based on fault or other defenses to the case, and Medicare will always demand 100% of the services it provides. This is the principle laid out in the lower court of Hadden; but the 6th Circuit may decide otherwise as it has agreed to hear oral argument on 10/13/2010, which some in the industry view as sign that the Court is at least willing to keep an open mind.

Hadden v. U.S. – The Accident

Vernon Hadden was violently struck by a utility truck when while out walking in Todd, Kentucky. The Pennyrile Rural Electric Cooperative Corporation (Pennyrile) utility truck veered leftward, when an unidentified motorist ran a stop sign. Mr. Hadden sustained serious injuries, being hospitalized for a period of time and filed a claim against Pennyrile. Regrettably for Mr. Hadden, the motorist responsible for starting the chain of events was never identified.

Principles of Fault and Settlement Outcome

As with most liability claims, responsibility for the accident is not always clear. Precision on the question can only be answered by a trier of fact, a process which is costly and wastes precious judicial resources. Public policy therefore favors settlements or compromises as a conservation measure, but accuracy as to fault is sacrificed. Principles of economics drive settlements. From the plaintiff’s side of the equation it’s the expected recovery less the costs to prosecute that drives the amount that is acceptable to settle. Defendants arrive at a settlement amount by weighing the cost to defend against the probability index that a finder of fact would award a larger amount. When these values meet, settlements occur, but fault is never established as part of that process. See also Can’t Settle, Can’t Sue (2009) University of Akron Law Review by Rick Swedloff. http://www.judicialview.com/Law-Review/Torts/Cant-Settle-Cant-Sue/How-Congress-Stole-Tort-Remedies-From-Medicare-Beneficiaries/44/3883

Mr. Hadden and Pennyrile therefore used economics when an agreement to settle was reached for $125,000. There is no dispute the settlement value received was far less than the case was worth. The problem, of course, was that Pennyrile was not the primary party responsible for the accident. Mr. Hadden, on the other hand, knew he could not collect 100% of his damages from Pennyrile and reduced what he was willing to take. Mr. Hadden could have proceeded to trial, but the outcome would change very little. While a jury would have awarded Mr. Hadden more than the value of his settlement, most of the award would have been apportioned to the unidentified driver, leaving Pennyrile only responsible for its share, probably equivalent to the settlement it offered.

This is basic Settlement 101 for any that deal with the resolution of liability cases prior to trial. What causes Hadden to stand out, requiring an appeal to the U.S. Court of Appeals for the Sixth Circuit, is how the Medicare Secondary Payer Act encourages litigation and discourages the public policy of promoting settlements. How this occurs requires a few additional facts from Hadden.

Medicare Secondary Payer Issues

At the time of the accident, Mr. Hadden was a Medicare beneficiary and his treatment for accident related injuries was paid for by Medicare. Under the Medicare Secondary Payer Act (MSP) payments can be made by Medicare, but the payments are conditioned upon reimbursement to the appropriate Trust Fund. See 42 USC §1395y(b)(2)(B). In other words, Hadden was responsible to repay Medicare if he received compensation from what the MSP Act termed a “Primary Plan” which, in this particular case, meant the insurance carrier for Pennyrile.

Mr. Hadden was aware of this requirement and upon settlement with Pennyrile notified Medicare as he was required to do. In response, Medicare issued a conditional payment request in the amount of $62,338.07, less attorney fees and procurement costs. Mr. Hadden paid the demand, but timely filed administrative appeals seeking compromise and waiver based on principles of equity. Between 2005 and 2007, Hadden was denied relief at each step of his appeals. Adopting a literal reading of the statute, the administrative court held: “[t]he equitable arguments proposed by [Plaintiff] are beyond the plain language of the statute, regulations and policy, and there is no reason to go beyond that plain language.”

Mr. Hadden disagreed, filing an action with the U.S. District Court on January 22, 2008. However, the Court provided Medicare with another opportunity to rule on the matter and the case was remanded back to the Secretary. An amended decision was entered on August 28, 2008, but again Mr. Hadden failed to convince Medicare that it needed to look beyond the plain reading of the statute. The administrative body supplemented its original decision by holding: “The Council held that it would not reduce the recovery amount because Medicare recognizes allocations of liability payments only when payment is based on a court order or adjudged on the merits of the case and, in this instance, payment was based on a settlement. Furthermore, the Council found that “the allocation of liability in this case is speculative since it was not determined by a judge or jury.” See Hadden at pgs. 6-7.

The implication of the decision is opposite to long standing public policy favoring settlements. Had Mr. Hadden proceeded to trial, Medicare would have taken a reduction, because a jury would have allocated his settlement between Medical expense and other damages against each defendant. Since there was no trial, Medicare would take no reduction. Such a policy cannot be sustained and could paralyze courts as more than the 1 ½ million expected Medicare beneficiaries that file liability claims each year pursue Orders of Court to possibly protect from Medicare taking the entirety of their settlement. A level of fairness must be available to maintain public policy favoring settlements.

Equity, Good conscience and the Medicare Secondary Payer Act

Once a Medicare beneficiary has received benefit from a Primary Plan, by a settlement, award, or judgment, the beneficiary is obligated to reimburse Medicare within a specified period of time – 60 days from date of Medicare demand. See 42 USC §1395y(b((2)(V)(ii). The Medicare beneficiary can also file an appeal to seek waiver (§1870(c) of the Social Security Act) so long as the appeal is filed within the 60 day requirement.

If waiver is successful, Medicare will adjust what it is owed. However, under the Medicare Secondary Payer Manual, Chapter 7, §50.6.5, the definition for equity and good conscience is very narrow, limited only to the whether the beneficiary has an income or financial resources sufficient for more than ordinary and necessary expenses, or is dependent upon all of their current benefits for such needs.

In keeping with that narrow definition, the Medicare council denied Mr. Hadden’s waiver request during the administrative process because he never submitted any evidence of personal hardship. However, equity arguments for ruling otherwise go beyond personal hardship to Mr. Hadden and more appropriately to the sustainability of the process and the need for fairness in recovery for all sides.

In other words, is Medicare really allowed to take a wait-and-see position, then through the efforts of the plaintiff and plaintiff’s counsel, take 100% of its recovery from a settlement, award or judgment that Medicare never participated in? In Medicare’s eyes the answer is yes. However, if Medicare had participated in the action or filed its own claim as it certainly can under 42 USC §1395y(b)2(B)(iv) it would only receive a percentage of its recovery based on the fault percentage attributed to the negligent party. Equitably, this did not make sense to Mr. Hadden and he continued his case with the District Court.

The District Court correctly ruled on Congress’ intent for a broad reading of the definition of “equity and good conscience” under the waiver provisions. The Court looked to Quinlivan v. Sullivan, 916 F.2d 524 (9th Cir. 1990) where plaintiff, a convicted felon won his waiver case against Medicare because he had no income to live on and Medicare failed to provide an answer on the disposition of his settlement for over two years.

Congress intended a broad concept of fairness to apply to waiver requests, one that reflects the ordinary meaning of the statutory language and takes into account the facts and circumstances of each case. . . . It is unfair to have expected Quinlivan to hold the funds for more than two years after his release, without any prospect of steady income and with eligibility for general assistance dependent on his level of assets. Given this unusual set of circumstances, we conclude that requiring Quinlivan to repay the funds now would be against equity and good conscience as that phrase is commonly understood. Id. at 527

The District Court in Hadden focused on plaintiff Quinlivan’s clear presentation of evidence of no income to meet the equity and good conscience standard, but failed to recognize the other aspect of that case which was the inherent unfairness of Medicare not reaching a decision over the settlement proceeds for over two years. That focus by the Hadden District Court was regrettable and led to yet another defeat by Mr. Hadden. The larger fairness issue was never discussed.

Mr. Hadden was not able to persuade the Court with case law where the Government would be required to apply principles of fault to reduce what it would take. In re Dow Corning Corporation, 250 B.R. 298 (Bankr. E.D. Mich. 2000) was used to make the point. That particular case involved a bankruptcy by Dow. The U.S. filed a number of proofs of claim for several federal agencies, including the Health Care Financing Administration (“HCFA”). The HCFA was the agency that preceded the Centers for Medicare & Medicaid Services, and charged with oversight of the Medicare Secondary Payer Act. The original proof of claim sought reimbursement for an unstated amount of Medicare payments for medical care provided to 10,879 unidentified individuals for alleged defective breast implants manufactured by Dow. The proof of claim was disallowed because the U.S. had not established tort liability, even though a fund had been established as part of the proceeding to resolve claims with potential plaintiffs.

The Dow case demonstrates a situation where the U.S. sought subrogation under 42 USC §1395y(b)(2)(B)(iv). In Hadden, the Court used that as a point to distinguish the present case before it, as Medicare’s reimbursement was based on a different aspect of the Medicare Secondary Payer Act (42 USC §1395y(b)(2)(B)(ii)) that allows for reimbursement after settlement, award or judgment. The Court held that no deduction can be made for fault after reading from the Medicare Secondary Payer Manual at Chapter 7, §50.4.4.

The Medicare Secondary Payer Manuals are helpful to understand the purpose of the Medicare Secondary Payer Act, but they are not determinative. As it now stands, the MSP has two contrary recovery positions – one on subrogation that takes fault into consideration and another where fault is absent from the analysis. Under the principle of ejusdem generis a statute must be internally consistent. The MSP is not consistent and it is this inconsistency which has caused Mr. Hadden to file for appeal to the Sixth Circuit.

A way to make these provisions internally consistent is to allow Medicare to adjust recovery based on principles of fault, similar to the U.S. Supreme Court’s decision in Arkansas Department of Health and Human Services v. Ahlborn, 547 U.S. 268, 126 S. Ct. 1752, 164 L. Ed. 2d 459 (2006). The Ahlborn decision is based on a Medicaid recovery which is governed by state law within federal parameters. Medicare payments are governed completely by federal law and therefore easily distinguishable. Nonetheless, the result arrived in Ahlborn was based on federal law that placed express limits on a state’s power to pursue recovery of funds it paid on behalf of a recipient. Under Ahlborn, the State could not collect 100% and must adjust its value based upon the fault that is assessed to the paying parties.

It is easy to see how Alhborn is distinguishable, but it was Federal law that drove the result, requiring the application of fault principles to bring fairness to what the State recovered. Other Federal laws, such as the Medical Recovery Act, require fault considerations. Thus, the Ahlborn formula requiring the Government’s recovery to be in proportion to the settlement amount received by the parties, after determining fault, was a natural extension.

The Six Circuit Court of Appeals should render a favorable decision to Mr. Hadden.

On October 13, 2010, the matter will be argued before the Sixth Circuit Court of Appeals. The briefs have been filed and the Government has not changed its position from when the first administrative appeal was filed. Although Mr. Hadden has lost at every step, the arguments he presents are sound. For one, Federal law requires allocation of recoveries. Alhborn clearly demonstrates this principle. But even more so, the Medical Care Recovery Act leaves no ambiguity to how the Federal Government views recoveries. Two, the MSP does not insist on collection of full damages. The subrogation element, as clearly laid out in the Dow, as well as legislative intent, both require payment to the extent liability has been established. See 1984 U.S.C.C.A.N. 5752. A reading of each leads to the conclusion that fault must be considered.

A third reason Mr. Hadden’s arguments are sound concerns the public policy of favoring settlements over litigation. The current interpretation of the law on this point increases litigation. With over 44 million Medicare beneficiaries on the rolls today, and close to 80 million expected in the next ten years, courts will be adversely impacted if settlements are discouraged.

Finally, the fourth reason that Hadden’s arguments are sound involves the way the Trust Fund misses out on a good deal of money by being unwavering on its demand for complete, dollar-for-dollar reimbursement. The Trust Fund needs to be made whole and present policy does not carry the proper incentives to encourage the beneficiary to pursue a claim. Mr. Hadden was left with less than a few thousand dollars after he resolved his case and paid Medicare. In essence, the result of pursuing this claim only preserved the Medicare benefits he was already entitled to. Unless the incentives are properly aligned, not many Medicare beneficiaries will be as persistent as Mr. Hadden.

Fault is the primary driver in the liability case and it is a subjective concept. It can only be established by a trier of fact, after a full hearting on the merits. This process consumes an enormous amount of judicial and economic resources and thus not favored. Over time, the use of alternative dispute resolution methods have increased settlements and affectively avoided prolonged litigation. The continued success of such mediated process requires each side to compromise their position. In order for Alternative Dispute Resolution to work with a Medicare beneficiary, Medicare must be willing to adjust its recovery based upon the proportionate share to the total value that is being paid for the case. A favorable decision in Hadden will allow for rule making to develop that process.

Liability Medicare Set Asides and Medicare Secondary Payer

The liability industry is unsettled on whether or not a Medicare Set Aside is now required when a case is resolved with a Medicare beneficiary. It is clear CMS has not issued any regulations similar to those issued for worker’s compensation cases that define the process. However, it is clear that something is required after listening to Town Hall Conference Call discussions related to the implementation of Section 111 data reporting. Whatever that “something” is, will not work unless CMS directives, alerts, rules and regulations are consistent with public policy promoting settlements.

An insurance carrier or self insured will only pay what it believes the settlement value to be or what it is capable of paying based on limitations of coverage or assets. If it costs less to try the case then litigation will ensue. To solve this issue, some type of process to assess fault (beyond a trier of fact) must be included in any rules around this issue to encourage settlements.

If the 6th Circuit rules, consistent with the way the U.S. Supreme Court ruled in Alhborn matter on a similar issue with regard to Medicaid, then we believe rules can be created to encourage parties to set aside some money from a settlement for future medical expense. This will prevent the parties from shifting the burden to Medicare. If, on the other hand, the Court rules consistent with the present law, that Medicare is entitled to the monies it paid regardless of fault, then a lot of defendants will roll the dice and try more cases, because the value exceeds what they believe the settlement value to be.

This would make it an easy choice as the economics of litigation would be less than what would be necessary to satisfy Medicare’s 100% value and still have funds left over to give to the plaintiff. We predict plaintiffs will be challenged to pursue litigation if the fault issue is not considered by CMS. While Hadden deals with conditional payments, the fault issue affects not only past but future medical expense related to the case.

Mark your calendars for October 13, 2010. Franco Signor LLC will monitor the case and provide updates like this on our blog. We encourage you to provide feedback by leaving comments on the blog. If anyone would like to discuss this issue in more detail then do not hesitate to contact us.

For those interested in reading the lower court Hadden case follow this link: www.marccoalition.com/…/Hadden%20Case%20_U_S__Dist__LEXIS_69383%20(3).doc