Medicaid’s Right of Recovery Against Legal Settlements

The United States Supreme Court recently answered an important question in Medicaid law:  can a state Medicaid plan recover funds from a legal settlement involving a Medicaid beneficiary to pay for that beneficiary’s future medical expenses?  This question required the Court to first unlock several interlocking provisions of federal Medicaid law.  And, in answering this question in the affirmative, the Supreme Court also likely affected the future structure of settlement arrangements negotiated by personal injury lawyers on behalf of Medicaid beneficiaries.

The facts of the case, Gallardo v. Marstiller, are relatively straightforward, but also incredibly tragic.  Gianinna Gallardo was a 13-year-old junior high school student in 2008 when she stepped off of her school bus in Lee County, Florida and was hit by a truck.  She was catastrophically injured and to this day remains in a persistent vegetative state.  In a lawsuit filed against the owner of the truck and Gianinna’s school district, her parents sought $20 million in damages, but ultimately settled the case for $800,000.  Although Florida’s Medicaid agency – which covers Gianinna – paid in excess of that amount for her medical expenses incurred as a result of the accident, the settlement agreement set aside only a little over $35,000 for her past medical expenses.  The settlement agreement also acknowledged that a portion of the settlement “may represent compensation for future medical expenses” but did not make a specific allocation for those future expenses.

Florida’s Medicaid agency sought to recover a portion of the remaining settlement to account for future medical expenses.  Under Florida law, after accounting for attorney’s fees, the state is entitled to 37.5% of a Medicaid beneficiary’s total recovery to account for future medical expenses.  The question before the Supreme Court was whether Florida’s law could be applied to permit the state to claim an additional $300,000 of the settlement (i.e., 37.5% of $800,000) as compensation for such expenses.

In reaching its conclusion, the Supreme Court had to grapple with multiple separate provisions of the federal Medicaid statute.  First, the Court addressed the “anti-lien” provision.  In general, that section prohibits a state from attaching a Medicaid beneficiary’s “property” to obtain compensation for medical expenses incurred by the beneficiary during their lifetime.  And an individual has a property interest in a tort settlement such as the one obtained by Gianinna’s family.  So:  why didn’t the anti-lien statute answer the question?

The answer is that there are exceptions to the anti-lien statute that permit a state to recover against a tort settlement, and Medicaid’s third-party liability statute is one such exception.  Specifically, in a 2006 Supreme Court case, Arkansas Dept. of Health and Human Services v. Ahlborn, the Court made clear that a state may seek payments from the portions of a tort settlement designated for “medical care.”

But the Ahlborn case didn’t decide one important aspect of the question before the court in Gallardo:  does the exception from the anti-lien provision permit a recovery for future medical expenses, or does it only permit a recovery for past medical expenses?  That was the question facing the Court in Gallardo.

In a 7-2 decision, Justice Thomas, writing for the Court, held that the third-party liability exception to the anti-lien provision permits recovery for both past and future medical expenses.  In reaching this conclusion, the Court relied on the plain language of a third-party liability provision, which requires a State to acquire from each Medicaid beneficiary an assignment of “any rights . . . of the individual . . . to support . . . for the purpose of medical care . . . and to payment for medical care from any third party.”  Justice Thomas notes that “[n]othing in this provision purports to limit a beneficiary’s assignment to payment for past medical care already paid for by Medicaid” and that “the grant of any rights . . . to payment for medical care most naturally covers not only rights to payment for past medical expenses, but also rights to payment for future medical expenses.” [Internal quotations and citations omitted].  The opinion also reiterated the distinction between medical and non-medical expenses set forth in Ahlborn.

We think that, as a result of the Gallardo decision, future tort settlements with Medicaid beneficiaries will need to require the establishment of medical set-aside accounts to cover the costs of future medical care.  Such arrangements are currently more common in the Medicare context, especially in the context of worker’s compensation arrangements.  But given that a portion of tort settlements may now be allocated for Medicaid beneficiaries’ future medical expenses, these arrangements will likely become more common under Medicaid as well.

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