<i>Hadden</i> and Medicare's 'Full Reimbursement' Rule

Last month, we began discussion of the U.S. Court of Appeals for the Sixth Circuit's decision in Hadden v. United States, 661 F.3d 298 (6th Cir. 2011), in which that court accepted the government's argument that it is entitled to seek full reimbursement of its Medicare payments (less procurement costs) from a settlement even when the beneficiary has obtained only a discounted recovery of her damages.

As observed previously, under the Sixth Circuit's opinion, a plaintiff settling a claim for Medicare-covered injuries may keep nothing from the settlement even if the settlement includes payment for the plaintiff's pain and suffering and lost earnings. Assuming the settlement involves a significant discount ' as is common in cases involving difficulties in proving liability or recovering from a penniless defendant ' the amount of the settlement might be less than the amount of the government's Medicare payments. The entire settlement (after procurement costs) might then be redirected to the government. See Nicole Miklos, Giving an Inch, Then Taking a Mile: How the Government's Unrestricted Recovery of Conditional Medicare Payments Destroys Plaintiffs' Chances at Compensation Through the Tort System, 84 St. John's L. Rev. 305, 319 (2010) (“Because plaintiffs are the last entity to receive funds from a settlement, they can easily be left with little or no compensation.”); Rick Swedloff, Can't Settle, Can't Sue: How Congress Stole Tort Remedies from Medicare Beneficiaries, 41 Akron L. Rev. 557, 598 (2008) (“[A] Medicare beneficiary settling a tort claim could find herself without any compensation after Medicare has taken its due.”).

By adopting a construction of the Act that allows the government to obtain full reimbursement of Medicare payments from a discounted settlement, even if the reimbursement exhausts the settlement, the Sixth Circuit's opinion chills settlement and undermines the efficient use of judicial resources.

Increasing Litigation
Costs and Harming
Reimbursement Efforts

The Sixth Circuit's Hadden opinion also undermines the Medicare Secondary Payer Act. Although Congress intended the Act to reduce the government's Medicare costs, the court of appeals' construction of the Act accomplishes the opposite ' it unnecessarily increases both the costs and risks of litigation, and by doing so, reduces the government's reimbursement of Medicare payments.

Congress passed the Medicare Secondary Payer Act to control skyrocketing Medicare costs. Zinman v. Shalala, 67 F.3d 841, 843 (9th Cir. 1995). If a primary payer does not pay promptly for medical expenses, Medicare can conditionally pay for the beneficiary's medical expenses. United States v. Baxter Int'l, Inc., 345 F.3d 866, 874-75 (11th Cir. 2003). But Medicare does so with the right to seek reimbursement from the primary payer (Id.), because under the Act, “if payment for covered services has been or is reasonably expected to be made by someone else, Medicare does not have to pay.” Cochran v. U.S. Health Care Fin. Admin., 291 F.3d 775, 777 (11th Cir. 2002). This reimbursement right “reflects the overarching statutory purpose of reducing Medicare costs.” Id. at 874 (quoting Zinman, at 845 (emphasis added)). Yet the Sixth Circuit's construction of the Act needlessly increases litigation costs and paradoxically undermines Congress's goal of limiting Medicare costs.

By deterring settlement, the Sixth Circuit's opinion will force more cases to trial ' with a corresponding increase in the cost of litigation (and the risk of zero recovery if the jury returns a defense verdict). See Miklos, supra, at 320 (“[T]here are higher costs associated with the representation because Medicare beneficiary cases are more likely to go to trial than to settle.”); see also Ehrheart v. Verizon Wireless, 609 F.3d 590, 595 (3d Cir. 2010) (“Settlement agreements are to be encouraged because ' the parties ' gain significantly from avoiding the costs and risks of a lengthy and complex trial.”). Since the government generally reduces its recovery to take into account the beneficiary's costs of procuring the judgment (42 C.F.R. ' 411.37(a)(1) (2011)), a beneficiary's increased litigation costs will diminish the government's recovery.

By encouraging Medicare beneficiaries to reject reasonable settlement offers and “roll the dice” in a jury trial, the Sixth Circuit's opinion puts the government's Medicare reimbursement at risk. “[T]he full reimbursement approach gives many beneficiaries little incentive to pursue valid claims or, if they do, to accept otherwise reasonable settlement offers, thereby tending to push them into uncertain litigation that burdens the courts and may result in little or no recovery for either the beneficiaries or for Medicare or Medicaid.” In re Zyprexa Prods. Liab. Litig., 451 F. Supp. 2d at 470.

Conflicts Among the Circuits

The Sixth Circuit's opinion conflicts with the Eleventh Circuit's opinion in Bradley v. Sebelius, 621 F.3d 1330, 1339 (11th Cir. 2010). In that case, a Medicare beneficiary died, allegedly as a result of a nursing home's negligence. The beneficiary's estate and survivors brought a wrongful death claim against the nursing home. 621 F.3d at 1332. The claim was settled for the amount of the nursing home's liability insurance policy limits, and a Florida probate court found the claim had been settled at a significant discount. Id. at 1332-34. But unlike the Sixth Circuit, the Eleventh Circuit held that the government could not recover the full amount of its Medicare payments from the discounted settlement. Instead, the government could recover only the same fraction of its Medicare payments as the plaintiffs recovered of their total claimed damages. Id. at 1333-34, 1340.

In Arkansas Department of Health & Human Services v. Ahlborn, 547 U.S. 268 (2006), the U.S. Supreme Court considered an analogous issue under the Medicaid statute. The Court held the Medicaid statute precluded a state from recovering all of its Medicaid payments from a discounted settlement. In doing so, the Court emphasized that “[t]he text of the federal third-party liability provisions ' focuses on recovery of payments for medical care.” Id. at 280 (emphasis added). As a result, the state could not “lay claim to more than the portion of [the Medicaid beneficiary]'s settlement that represents medical expenses.” Id.

The Sixth Circuit distinguished Ahlborn on the ground it involved a different statute and “did not divine principles of universal application.” Hadden, 661 F.3d at 303. But the Medicaid and Medicare statutes are not fundamentally different. As the Court explained in Ahlborn, the Medicaid statute provides that recipients must “'assign the State any rights ' to payment for medical care from any third party,' 42 U.S.C. ' 1396k(a)(1)(A), not rights to payment for, for example, lost wages.” Ahlborn, 547 U.S. at 280. Likewise, the Medicare statute states that a liability insurer or tortfeasor must reimburse the government “with respect to an item or service” provided by Medicare. 42 U.S.C. ' 1395y(b)(2)(B)(ii) (2011). Reimbursement under Medicare ' as under Medicaid' is thus limited to payment for medical care, not payment for lost wages or other claims.

Even before the Sixth Circuit's opinion, commentators debated the application of Ahlborn to Medicare. See, e.g., Miklos, supra, at 315 (“It is unclear whether Ahlborn will also govern Medicare reimbursement rights.”); Norma S. Schmidt, The King Kong Contingent: Should the Medicare Secondary Payer Statute Reach to Future Medical Expenses in Personal Injury Settlements?, 68 U. Pitt. L. Rev. 469, 484 (2006) (“While Ahlborn deals specifically with the state Medicaid liens, many of ' [the] arguments [in that case] also apply to Medicare liens under the MSP statute.”). The Sixth Circuit's narrow reading of Ahlborn only heightens this uncertainty.

Until resolved, the uncertainty regarding the government's right to full reimbursement from a discounted settlement will impact settlements in hundreds of thousands of cases annually involving Medicare beneficiaries.

Parties ordinarily enter into settlements to achieve certainty and finally resolve their disputes. In this regard, litigants in cases involving Medicare-covered injuries are no different than other litigants. Predictability fosters settlement.

About 15% of all Americans receive benefits through Medicare. See 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 4 (2011) available at www.cms.gov/reportsTrustFunds/downloads/tr2011.pdf (“In 2010, 47.5 million people were covered by Medicare.”). It handles more than 1 billion claims per year. See HHS: What We Do, U.S. Department of Health & Human Services, www.hhs.gov/about/whatwedo.html (last visited Apr. 19, 2012).

Each year, Medicare beneficiaries bring hundreds of thousands of cases against tortfeasors for Medicare-covered injuries. In 2010, for example, the Centers for Medicare & Medicaid Services (CMS) received notice of 413,000 such cases. See Protecting Medicare with Improvements to the Secondary Payment Regime Before the H. Comm. on Energy and Commerce, S. Comm. on Oversight & Inv., 112th Cong. 3 (2011) (statement of Deborah Taylor, Chief Financial Officer and Director, Office of Financial Management Centers for Medicare & Medicaid Services) available at http://republicans.energycommerce.house.gov/Media/file/hearings/oversight/062211/Taylor.pdf.

On average, about 97% of civil cases are resolved by settlement. See Bureau of Justice Statistics, Special Report: Civil Bench and Jury Trials in State Courts, 2005 1 (Revised 2009) available at http://bjs.ojp.usdoj.gov/content/pub/pdf/cbjtsc05.pdf. Thus, of the 413,000 cases reported to CMS in 2010, more than 400,000 would ordinarily settle.

But to settle these cases, the parties need certainty on the issue of whether the government can recover its full Medicare payments from a discounted settlement. Until this issue is resolved, the conflict between the Sixth and Eleventh Circuits will frustrate settlement in countless cases involving Medicare-covered injuries.

Conclusion

Counsel settling cases involving Medicare beneficiaries need to understand the ramifications of the Sixth Circuit's opinion. In many tort cases brought by Medicare beneficiaries, the full reimbursement rule adopted by the Sixth Circuit will create a strong disincentive to the acceptance of even reasonable settlement offers.

Even after a settlement that realizes for the beneficiary only a partial, proportionate recovery of medical expenses incurred, the government can seize amounts expressly paid to the beneficiary for her lost earnings, pain and suffering, and other non-medical damages, and use them to make up the difference and reimburse the government for the full amount of its Medicare payments. A beneficiary can protect against such overreaching reimbursement claims only by refusing to settle and instead proceeding to trial.

Compelling beneficiaries to reject reasonable settlement offers will undermine the strong public interest favoring the resolution of cases through settlement. Moreover, the Sixth Circuit's opinion will undermine the Medicare Secondary Payer Act's purpose of increasing the government's reimbursement for Medicare
expenses. By deterring acceptance of reasonable settlement offers, the opinion will increase litigation costs and thereby reduce the amounts received by Medicare, because the government generally reduces its recovery to take into account the beneficiary's costs of procuring the judgment. Indeed, the government may recover nothing if the beneficiary rejects a reasonable settlement offer but the jury later returns a verdict against the beneficiary.

Further, the Sixth Circuit's opinion in Hadden conflicts with the Eleventh Circuit's opinion in Bradley, which rejected the government's claim to full reimbursement from a settlement. Without certainty on this issue, litigants cannot meaningfully evaluate settlement offers in cases brought by Medicare beneficiaries. And because of Medicare's size, the uncertainty could impact hundreds of thousands of settlements annually. A petition for certiorari has been filed in the Hadden matter, but unless and until the Supreme Court grants review and resolves the conflict, counsel should be aware of the unsettled nature of the government's ability to seek full reimbursement of its Medicare payments from a discounted settlement.

Last month, we began discussion of the U.S. Court of Appeals for the Sixth Circuit's decision in Hadden v. United States , 661 F.3d 298 (6th Cir. 2011), in which that court accepted the government's argument that it is entitled to seek full reimbursement of its Medicare payments (less procurement costs) from a settlement even when the beneficiary has obtained only a discounted recovery of her damages.

As observed previously, under the Sixth Circuit's opinion, a plaintiff settling a claim for Medicare-covered injuries may keep nothing from the settlement even if the settlement includes payment for the plaintiff's pain and suffering and lost earnings. Assuming the settlement involves a significant discount ' as is common in cases involving difficulties in proving liability or recovering from a penniless defendant ' the amount of the settlement might be less than the amount of the government's Medicare payments. The entire settlement (after procurement costs) might then be redirected to the government. See Nicole Miklos, Giving an Inch, Then Taking a Mile: How the Government's Unrestricted Recovery of Conditional Medicare Payments Destroys Plaintiffs' Chances at Compensation Through the Tort System, 84 St. John's L. Rev. 305, 319 (2010) (“Because plaintiffs are the last entity to receive funds from a settlement, they can easily be left with little or no compensation.”); Rick Swedloff, Can't Settle, Can't Sue: How Congress Stole Tort Remedies from Medicare Beneficiaries, 41 Akron L. Rev. 557, 598 (2008) (“[A] Medicare beneficiary settling a tort claim could find herself without any compensation after Medicare has taken its due.”).

By adopting a construction of the Act that allows the government to obtain full reimbursement of Medicare payments from a discounted settlement, even if the reimbursement exhausts the settlement, the Sixth Circuit's opinion chills settlement and undermines the efficient use of judicial resources.

Increasing Litigation
Costs and Harming
Reimbursement Efforts

The Sixth Circuit's Hadden opinion also undermines the Medicare Secondary Payer Act. Although Congress intended the Act to reduce the government's Medicare costs, the court of appeals' construction of the Act accomplishes the opposite ' it unnecessarily increases both the costs and risks of litigation, and by doing so, reduces the government's reimbursement of Medicare payments.

Congress passed the Medicare Secondary Payer Act to control skyrocketing Medicare costs. Zinman v. Shalala , 67 F.3d 841, 843 (9th Cir. 1995). If a primary payer does not pay promptly for medical expenses, Medicare can conditionally pay for the beneficiary's medical expenses. United States v. Baxter Int'l, Inc. , 345 F.3d 866, 874-75 (11th Cir. 2003). But Medicare does so with the right to seek reimbursement from the primary payer ( Id .), because under the Act, “if payment for covered services has been or is reasonably expected to be made by someone else, Medicare does not have to pay.” Cochran v. U.S. Health Care Fin. Admin. , 291 F.3d 775, 777 (11th Cir. 2002). This reimbursement right “reflects the overarching statutory purpose of reducing Medicare costs.” Id. at 874 (quoting Zinman, at 845 (emphasis added)). Yet the Sixth Circuit's construction of the Act needlessly increases litigation costs and paradoxically undermines Congress's goal of limiting Medicare costs.

By deterring settlement, the Sixth Circuit's opinion will force more cases to trial ' with a corresponding increase in the cost of litigation (and the risk of zero recovery if the jury returns a defense verdict). See Miklos, supra , at 320 (“[T]here are higher costs associated with the representation because Medicare beneficiary cases are more likely to go to trial than to settle.”); see also Ehrheart v. Verizon Wireless , 609 F.3d 590, 595 (3d Cir. 2010) (“Settlement agreements are to be encouraged because ' the parties ' gain significantly from avoiding the costs and risks of a lengthy and complex trial.”). Since the government generally reduces its recovery to take into account the beneficiary's costs of procuring the judgment (42 C.F.R. ' 411.37(a)(1) (2011)), a beneficiary's increased litigation costs will diminish the government's recovery.

By encouraging Medicare beneficiaries to reject reasonable settlement offers and “roll the dice” in a jury trial, the Sixth Circuit's opinion puts the government's Medicare reimbursement at risk. “[T]he full reimbursement approach gives many beneficiaries little incentive to pursue valid claims or, if they do, to accept otherwise reasonable settlement offers, thereby tending to push them into uncertain litigation that burdens the courts and may result in little or no recovery for either the beneficiaries or for Medicare or Medicaid.” In re Zyprexa Prods. Liab. Litig., 451 F. Supp. 2d at 470.

Conflicts Among the Circuits

The Sixth Circuit's opinion conflicts with the Eleventh Circuit's opinion in Bradley v. Sebelius, 621 F.3d 1330, 1339 (11th Cir. 2010). In that case, a Medicare beneficiary died, allegedly as a result of a nursing home's negligence. The beneficiary's estate and survivors brought a wrongful death claim against the nursing home. 621 F.3d at 1332. The claim was settled for the amount of the nursing home's liability insurance policy limits, and a Florida probate court found the claim had been settled at a significant discount. Id. at 1332-34. But unlike the Sixth Circuit, the Eleventh Circuit held that the government could not recover the full amount of its Medicare payments from the discounted settlement. Instead, the government could recover only the same fraction of its Medicare payments as the plaintiffs recovered of their total claimed damages. Id. at 1333-34, 1340.

In Arkansas Department of Health & Human Services v. Ahlborn , 547 U.S. 268 (2006), the U.S. Supreme Court considered an analogous issue under the Medicaid statute. The Court held the Medicaid statute precluded a state from recovering all of its Medicaid payments from a discounted settlement. In doing so, the Court emphasized that “[t]he text of the federal third-party liability provisions ' focuses on recovery of payments for medical care.” Id. at 280 (emphasis added). As a result, the state could not “lay claim to more than the portion of [the Medicaid beneficiary]'s settlement that represents medical expenses.” Id.

The Sixth Circuit distinguished Ahlborn on the ground it involved a different statute and “did not divine principles of universal application.” Hadden, 661 F.3d at 303. But the Medicaid and Medicare statutes are not fundamentally different. As the Court explained in Ahlborn, the Medicaid statute provides that recipients must “'assign the State any rights ' to payment for medical care from any third party,' 42 U.S.C. ' 1396k(a)(1)(A), not rights to payment for, for example, lost wages.” Ahlborn, 547 U.S. at 280. Likewise, the Medicare statute states that a liability insurer or tortfeasor must reimburse the government “with respect to an item or service” provided by Medicare. 42 U.S.C. ' 1395y(b)(2)(B)(ii) (2011). Reimbursement under Medicare ' as under Medicaid' is thus limited to payment for medical care, not payment for lost wages or other claims.

Even before the Sixth Circuit's opinion, commentators debated the application of Ahlborn to Medicare. See, e.g., Miklos, supra, at 315 (“It is unclear whether Ahlborn will also govern Medicare reimbursement rights.”); Norma S. Schmidt, The King Kong Contingent: Should the Medicare Secondary Payer Statute Reach to Future Medical Expenses in Personal Injury Settlements?, 68 U. Pitt. L. Rev. 469, 484 (2006) (“While Ahlborn deals specifically with the state Medicaid liens, many of ' [the] arguments [in that case] also apply to Medicare liens under the MSP statute.”). The Sixth Circuit's narrow reading of Ahlborn only heightens this uncertainty.

Until resolved, the uncertainty regarding the government's right to full reimbursement from a discounted settlement will impact settlements in hundreds of thousands of cases annually involving Medicare beneficiaries.

Parties ordinarily enter into settlements to achieve certainty and finally resolve their disputes. In this regard, litigants in cases involving Medicare-covered injuries are no different than other litigants. Predictability fosters settlement.

About 15% of all Americans receive benefits through Medicare. See 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 4 (2011) available at www.cms.gov/reportsTrustFunds/downloads/tr2011.pdf (“In 2010, 47.5 million people were covered by Medicare.”). It handles more than 1 billion claims per year. See HHS: What We Do, U.S. Department of Health & Human Services, www.hhs.gov/about/whatwedo.html (last visited Apr. 19, 2012).

Each year, Medicare beneficiaries bring hundreds of thousands of cases against tortfeasors for Medicare-covered injuries. In 2010, for example, the Centers for Medicare & Medicaid Services (CMS) received notice of 413,000 such cases. See Protecting Medicare with Improvements to the Secondary Payment Regime Before the H. Comm. on Energy and Commerce, S. Comm. on Oversight & Inv., 112th Cong. 3 (2011) (statement of Deborah Taylor, Chief Financial Officer and Director, Office of Financial Management Centers for Medicare & Medicaid Services) available at http://republicans.energycommerce.house.gov/Media/file/hearings/oversight/062211/Taylor.pdf.

On average, about 97% of civil cases are resolved by settlement. See Bureau of Justice Statistics, Special Report: Civil Bench and Jury Trials in State Courts, 2005 1 (Revised 2009) available at http://bjs.ojp.usdoj.gov/content/pub/pdf/cbjtsc05.pdf. Thus, of the 413,000 cases reported to CMS in 2010, more than 400,000 would ordinarily settle.

But to settle these cases, the parties need certainty on the issue of whether the government can recover its full Medicare payments from a discounted settlement. Until this issue is resolved, the conflict between the Sixth and Eleventh Circuits will frustrate settlement in countless cases involving Medicare-covered injuries.

Conclusion

Counsel settling cases involving Medicare beneficiaries need to understand the ramifications of the Sixth Circuit's opinion. In many tort cases brought by Medicare beneficiaries, the full reimbursement rule adopted by the Sixth Circuit will create a strong disincentive to the acceptance of even reasonable settlement offers.

Even after a settlement that realizes for the beneficiary only a partial, proportionate recovery of medical expenses incurred, the government can seize amounts expressly paid to the beneficiary for her lost earnings, pain and suffering, and other non-medical damages, and use them to make up the difference and reimburse the government for the full amount of its Medicare payments. A beneficiary can protect against such overreaching reimbursement claims only by refusing to settle and instead proceeding to trial.

Compelling beneficiaries to reject reasonable settlement offers will undermine the strong public interest favoring the resolution of cases through settlement. Moreover, the Sixth Circuit's opinion will undermine the Medicare Secondary Payer Act's purpose of increasing the government's reimbursement for Medicare
expenses. By deterring acceptance of reasonable settlement offers, the opinion will increase litigation costs and thereby reduce the amounts received by Medicare, because the government generally reduces its recovery to take into account the beneficiary's costs of procuring the judgment. Indeed, the government may recover nothing if the beneficiary rejects a reasonable settlement offer but the jury later returns a verdict against the beneficiary.

Further, the Sixth Circuit's opinion in Hadden conflicts with the Eleventh Circuit's opinion in Bradley, which rejected the government's claim to full reimbursement from a settlement. Without certainty on this issue, litigants cannot meaningfully evaluate settlement offers in cases brought by Medicare beneficiaries. And because of Medicare's size, the uncertainty could impact hundreds of thousands of settlements annually. A petition for certiorari has been filed in the Hadden matter, but unless and until the Supreme Court grants review and resolves the conflict, counsel should be aware of the unsettled nature of the government's ability to seek full reimbursement of its Medicare payments from a discounted settlement.