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Judges have free hand on Medicaid lien reduction

Nurse with patient

Virginia trial judges have broad discretion in reducing Medicaid liens when a personal injury case produces less than a full recovery, the Supreme Court of Virginia has ruled in a decision that refocuses attention on the complex Medicaid reimbursement issue.

Under the court’s ruling, a severely injured plaintiff was ordered to pay nearly a quarter of his settlement to reimburse the state for Medicaid payments, even though his settlement represented less than one tenth of his estimated claim value.

The Virginia high court agreed with state lawyers who said the lien reduction issue is controlled by a statute directing judges to reduce the lien “as the equities of the case may appear.”

But plaintiffs’ lawyers say that vague terminology hinders settlement of difficult cases because of uncertainty about what the final Medicaid lien will be.

The decision produced a victory for plaintiffs in one respect: The court said only the actual Medicaid payments, not the medical bills, should be used to calculate Medicaid repayment.

Extensive damages

Cab driver Amir Farah was permanently disabled in a head-on crash caused by another driver, according to the factual summary in the Supreme Court opinion. Left with devastating injuries, his medical bills totaled nearly $600,000, and lost wages were estimated at $832,000. His case settled for only $375,000, the sum of the insurance limit and a $25,000 personal contribution from the at-fault driver.

Virginia asserted a Medicaid lien of $96,481.40. Farah and the state Department of Medical Assistance Services, or DMAS, could not agree on a reduction of the lien to appropriately reflect the deficient settlement.

Farah had sued for $3 million, but he called on an experienced personal injury attorney who testified at trial that $4 million was a conservative valuation of his case. The state’s asserted lien represented about 2.4% of that value.

Fairfax County Circuit Judge Brett Kassabian rejected a specific formula for cutting the state’s lien. He ordered reimbursement of $85,500 to DMAS for its lien, about 23% of the settlement.

Barrier to settlement

Farah appealed, but the Supreme Court of Virginia affirmed Kassabian’s judgment as to the lien reduction. The court’s Feb. 17 opinion, written by Justice Stephen R. McCullough, is Farah v. Commonwealth (VLW 022-6-011).

Represented by Jeremy Flachs of Alexandria, Farah argued that the “equity” standard of Va. Code § 8.01-66.9 gives judges too much of a free hand. But that contention faced early resistance in oral argument.

“Our General Assembly says the formula is ‘equity,’” pronounced Justice D. Arthur Kelsey in the court’s January session.

Flachs responded that “the problem with the statute is that it leaves so much of the findings and the resolution of these Medicaid reduction hearings to the whim of the trial court.”

But Kelsey said using Farah’s formula would leave the case value to the whim of an expert. “The whole concept of the true value is incredibly, intrinsically amorphous,” he said.

McCullough, who later served as the opinion author, rejected Flachs’ suggestion that U.S. Supreme Court cases dictate at least an outer limit of what the state can expect in reimbursement when recovery falls short of damages.

“How can you credibly say the Supreme Court requires it when nowhere in the cases do they say this is the method that must be employed?” McCullough asked. “To the contrary, they say states have broad flexibility.”

In a friend of the court brief, the Virginia Trial Lawyers Association said a proportionate reduction formula is the only method ever expressly approved by the U.S. Supreme Court and adoption of that method would “provide much-needed guidance to circuit judges.”

“Adopting this method would encourage settlements between plaintiffs and defendants in tort lawsuits, because it would reduce uncertainty about what the final Medicaid lien will be. That uncertainty is a barrier to settlement discussions,” wrote John Davidson of Charlottesville on behalf of the VTLA.

Equitable standard urged

The lawyer for DMAS contended Virginia’s “equities” standard was appropriate. Farah’s approach would, in effect, shift money from Medicaid recipients “into the hands of attorneys and experts,” said then-Solicitor General Michelle Kallen, arguing in favor of Kassabian’s apportionment of the tort recovery.

“Any decrease in compensation to the department for medical services is ultimately paid for by the commonwealth’s taxpayers, and it also means that there’s less in the Medicaid pool for treatment of other Medicaid recipients,” Kallen told the justices.

“Nowhere does Ahlborn require this sort of rigid, formula-based inquiry … which is in conflict with the General Assembly-selected equitable approach,” Kallen added, referring to a touchstone 2006 opinion from the U.S. Supreme Court.

Court’s analysis

A unanimous Supreme Court said courts are not free to “simply choose a number that seems fair.” Reading the Virginia statute in conjunction with the U.S. Supreme Court decisions, the justices said courts “must examine the totality of a plaintiff’s damages, such as lost wages, and damages for pain and suffering, disfigurement, deformity, humiliation, and embarrassment, and make a reasonable allocation for what portion of the verdict, judgment or settlement is attributable to medical expenses paid for by Medicaid.”

The court said the allocation decision should be based on the amount Medicaid has actually paid, not on the medical bills themselves. That ruling is an “important procedural victory” for plaintiffs, according to appellate attorney Steve Emmert in his Virginia Appeals blog on Feb. 17, as “the amount paid is usually far lower than the ‘rack rate’ for medical services.”

In an April 19 interview with Virginia Lawyers Weekly, Flachs said “It is a clear victory for plaintiffs.”

Ultimately, the trial court is entitled to “great deference” in its factual findings, the Supreme Court said.

“Here the circuit court, acting as factfinder, benefits from … deference in making its factual findings to allocate damages under Code § 8.01-66.9,” the court concluded.

In a footnote, McCullough rejected any requirement that a court provide a breakdown of each specific type of damages, while acknowledging such specificity “might be helpful.”


Farah’s counsel said lawyers who had followed the case expressed disappointment at the decision.

“We’re kind of left with not much more guidance than when we started,” Flachs said.

Lynchburg attorney Ron Feinman, who has long experience dealing with government liens for medical payments, respectfully disagreed with the court’s analysis. He interprets the guidance from the U.S. Supreme Court as an endorsement of the proportionate reduction formula, and points to the Supremacy Clause of the U.S. Constitution as requiring states’ adherence.

“I think the attorney general’s office has misunderstood the federal law and its restraint on state law,” Feinman said in an April 18 interview.

“Both lawyers and courts face a level of complexity when dealing with this. It is not the most straightforward analysis,” Feinman added.

He pointed to language from a 1994 decision from the 4th U.S. Circuit Court of Appeals, where then-Chief Judge Samuel Ervin III wrote that “There can be no doubt but that the statutes and provisions in question, involving the financing of Medicare and Medicaid, are among the most completely impenetrable texts within human experience.”

He continued, “Indeed, one approaches them at the level of specificity herein demanded with dread, for not only are they dense reading of the most tortuous kind, but Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase.”