Developments in Medicaid lien law 2015

The Department of Health Care Services gets a break, maybe, but has to pay for it

Steven B. Stevens
2016 March

Aguilera v. Loma Linda Univ. Med. Ctr. (2015) 235 Cal.App.4th 831, marks a potentially significant change in Medi-Cal reimbursement law. This decision gives the Department of Health Care Services an argument to increase its reimbursement, but the decision also imposes new evidentiary hurdles. Also, in a significant setback for the Department, Aguilera also requires the Department to pay a portion of the litigation expenses associated with creating the fund from which the Department seeks its reimbursement.

The Current Medicaid Act:

  • Ahlborn and Congress’s restrictions upon Medicaid liens

Medi-Cal is California’s implementation of Medicaid, a federal medical assistance program. (42 U.S.C. § 1396; Welf. & Inst. Code, § 14000 et seq.; see generally Olszewski v. Scripps Health (2003) 30 Cal.4th 798. The federal Medicaid Act requires states to seek reimbursement for Medicaid payments from third-party tortfeasors who caused the injury for which benefits were paid. (42 U.S.C. § 1396a(a)(25).) The Department of Health Care Services, which administers the Medi-Cal program, usually asserts a lien against the injured plaintiff-beneficiary’s tort action, though it has the right to file an action against the tortfeasor. (Welf. & Inst. Code, §§ 14124.71, 14124.72(c).)

For years states, including California, asserted a first-dollar lien on a beneficiary’s tort recovery, asserting a right to reimbursement from the entire recovery, including portions of the recovery that were compensation for damages other than medical expenses. Welf. & Inst. Code, § 14124.74(a) (2006) (“the court . . . shall . . . allow as a first lien against the amount of the settlement . . . the reasonable value of additional benefits provided to the beneficiary under the Medi-Cal Program . . ..”).

Arkansas Dept. of Health and Human Services v. Ahlborn (2006) 547 U.S. 268, put an end to that practice. The United States Supreme Court held that a state seeking reimbursement of Medicaid benefits by lien on a third-party action cannot “lay claim to more than the portion of [the Medical beneficiary’s] settlement that represents medical expenses.” (Ahlborn, 547 U.S. at 280, 126 S.Ct. at 1760.) States are required to seek reimbursement for benefits paid “to the extent of such [third-party’s] legal liability” and are authorized to acquire only those “rights of such individual [beneficiaries] to payment by any other party for such health care items or services.” (42 U.S.C. § 1396a(a)(25)(A), (B), (H).) Congress did not “sanction an assignment of right to payment for anything other than medical expenses – not lost wages, not pain and suffering, not an inheritance.” (547 U.S. at 281) (emphasis added).

California’s statutory response to Ahlborn

The California Legislature in 2007 amended Welfare & Institutions Code section 14124.76. The Department still has a lien on a Medi-Cal beneficiary’s third-party tort recovery, but it is limited to that portion of the recovery that is compensation for medical expenses for which the Medi-Cal program paid:

Recovery of the director’s lien from an injured beneficiary’s action or claim is limited to that portion of a settlement, judgment, or award that represents payment for medical expenses, or medical care, provided on behalf of the beneficiary. . . . In determining what portion of a settlement, judgment, or award represents payment for medical expenses, or medical care, provided on behalf of the beneficiary and as to what the appropriate reimbursement amount to the director should be, the court shall be guided by the United States Supreme Court decision in Arkansas Department of Health and Human Services v. Ahlborn (2006) 547 U.S. 268 and other relevant statutory and case law.

What portion of the settlement “represents payment for medical expenses, or medical care…”

Neither Ahlborn nor amended Section 14124.76 directly addressed this critical next question. Settlements rarely allocate specific amounts to specific elements of damages. If the plaintiff-beneficiary obtains a lump-sum settlement from a tortfeasor, how should a trial court calculate the portion of the beneficiary’s lump-sum settlement that represents payment for “the extent of such [third-party’s] legal liability” for the medical expenses? (42 U.S.C. § 1396a(a)(25)(B).)

Ahlborn had the beginnings of a method for calculating the portion of an unallocated settlement that could be attributed to reimbursement of Medicaid expenditures. The plaintiff-beneficiary in that case settled for $550,000, undifferentiated by the various elements of damages to which she might be entitled if she prevailed at trial. The total damages were $3 million. The beneficiary recovered approximately one-sixth of her overall damages. Arkansas and Ahlborn agreed that, if Ahlborn’s interpretation was correct, Arkansas would get $36,000, approximately one-sixth of the $550,000 settlement.

A trio of California cases have endorsed this equitable apportionment – that is, using a ratio that is calculated by comparing the settlement to the overall damages and applying that ratio to the paid Medi-Cal benefits – as a reasonable method of apportioning an unallocated settlement for purposes of calculating the Department’s recovery or lien. In Lima v. Vouis, (2009) 174 Cal.App.4th 242, the minor plaintiff, using declarations from a life-care planner and economist, established that her overall damages were $14 million. The action settled for $950,000. The plaintiff recovered 6.75 percent of her overall damages. Medi-Cal spent $435,000 for her medical care and wanted $319,000 to satisfy the lien.

Based on the holding in Ahlborn . . . we conclude that the trial court was required to distinguish past medical benefits in the settlement from other categories of damage using a rational approach that takes into consideration the trial court’s various findings, including its findings concerning the total value of plaintiff’s damages and the reasonableness of the settlement amount in light of those total damages.

(Lima, 174 Cal.App.4th at 260.)

Thus, in Lima, the plaintiff-beneficiary’s recovery was 6.75 percent of her overall damages, so the Department recovered 6.75 percent of the benefits it paid, minus an allowance for attorneys’ fees and litigation costs.

Bolanos v. Superior Court (2008)169 Cal.App.4th 744, on similar facts, also endorsed equitable apportionment of a lump-sum settlement. “This is not to say that the Ahlborn formula is the only one to be followed; there is nothing in that decision that compels this. What matters is that past medical expenses are distinguished in the settlement from other damages on the basis of a rational approach . . .” (Bolanos, 169 Cal.App.4th at 754, Lopez v. Daimler Chrysler Corp. (2009) 179 Cal.App.4th 1373, on similar facts, relied upon Bolanos and reached the same conclusions about the reasonableness and equity of using a ratio based on settlement to overall value, and applying it to the paid Medi-Cal benefits.) See also Wos v. E.M.A. ex rel. Johnson, ___ U.S. ___, 133 S.Ct. 1391, 1401, 2013 WL 1131709 (2013) (rejecting North Carolina statute that presumed that one-third of Medicaid beneficiary’s recovery was intended to pay for Medicaid expenses, as violative of the Medicaid Act; endorsing judicial hearing to determine a prompt and fair allocation of damages; and citing Welfare & Institutions Code section 14124.72(a) as an example of such a procedure).

The Department tries to boost its lien recovery, promising to pay for everything

The material facts of Aguilera were identical to those in Lima. Ashlynn Aguilera, at two months, suffered severe brain damage as a result of a physician’s negligence. The overall value of her injuries was:

Past Medical Costs:.................................................................. $211,191

Future Meds and Attendant (Present Value):......................... $13,201,673

Loss of Earning Capacity (Present Value):.............................. $1,126,794

General Damages:..................................................................... $250,000

Total Value of Injuries:.......................................................... $14,789,658


The action settled for $950,000 (near policy limits). Using the Ahlborn-Lima calculations for equitable apportionment, the plaintiff in Aguilera asked the Court to determine that the Department’s net recovery on its lien (taking into consideration equitable apportionment of the litigation expenses), is $10,046.

The Department countered that it would be paying for all health-care expenses – including around-the-clock LVN care as well as medical expenses – for the rest of Ashlynn’s life. The Department had not paid for 16-hour per day LVN care at any time, but it insisted it would do so in the future. The Department had two of its collection representatives sign declarations saying, in effect, that they read the plaintiff’s life-care plan and that everything on it would be covered by Medi-Cal.

The Department thus urged that the present value for future medical and attendant care should be excluded from the calculation for purposes of determining its lien rights, because it would be paying for those items anyway. Applying the Ahlborn-Lima methodology, this would have the effect of increasing the Department’s gross recovery to over $140,000. The Department also insisted that it did not have to contribute anything to the litigation expenses if a Court uses the Ahlborn-Lima methodology, in effect providing the Department with free legal services to create the fund from which it sought reimbursement.

The Superior Court agreed that future medical expenses should be excluded from the calculation of overall damages, but future attendant care should not. The Superior Court also agreed with the Department that it did not have to share the litigation expenses that the child incurred to create the fund. The Superior Court awarded the Department $15,311 for its lien. The Department appealed and the plaintiff cross-appealed.

Aguilera reversed the Superior Court’s order on several points, rejecting most of the Department’s arguments but accepting, in theory, the notion that foreseeable future health-care expenses for which the Department will pay should be excluded from the total of overall damages.

Calculation satisfies burden of proof

The Department contended that, as a debtor, the plaintiff-beneficiary had the burden of proof to show an affirmative defense that the amount demanded by the creditor exceeds that permitted by law. The Department urged that its declarations were unrefuted so, it reasoned, the plaintiff-beneficiary did not satisfy her burden of proof.

Aguilera did not expressly agree with this allocation of burden of proof. The appellate court held, however, that by presenting evidence about the value of her overall damages and showing that Ahlborn-Lima applied, “Ashlynn satisfied her burden of proving the facts essential to her claim for relief.” (Aguilera, 235 Cal.App.4th at 830-831). Thus, regardless of whether the burden of proof is characterized as a burden to prove entitlement to relief, or to support an affirmative defense, a Medi-Cal beneficiary presenting evidence to support the applicable Ahlborn-Lima methodology has satisfied her burden of proof.

The devil is in the details

The appellate court agreed “in theory” that, if Medi-Cal is going to be paying for future health care expenses anyway, those expenses should not be included in the Ahlborn calculation. As is so often the case, however, stating the rule of law, and proving that the rule of law should apply, can be problematic.

We agree in theory with the Department’s contention that future health care expenses must be excluded, as a matter of law, in applying the Ahlborn formula to reduce the Department’s lien, because if future health care expenses were to be included, the Department would be forced to accept a lower percentage of its total lien based on the amount of future benefits that will be paid by Medi-Cal. However . . . excluding such expenses is contingent on the Department presenting sufficient evidence that it will in fact pay Ashlynn’s expenses as long as she qualifies for benefits that she is presently receiving.

(Aguilera, 235 Cal.App.4th at 831-832 (emphasis added).)

The Department’s argument was not new. It made a similar argument in Lima, but that appellate court rejected it, expressing doubt about its viability. Lima noted that Ahlborn appeared to assume that a state’s lien rights extended only to those amounts that it actually paid in Medicaid benefits on behalf of the recipient and caused by the tortfeasor.

Even assuming, however, that [the Department’s] contention concerning future medical expenses has arguable legal merit, it lacks factual support. The record contains no evidence on the issue of [the Department’s] responsibility for future medical expenses, much less a commitment by [the Department] to pay such expenses . . .

(Lima, 174 Cal.App.4th at 261-262.)

The declarations that the Department offered in Aguilera were intended to address the evidentiary gap that the Department faced in Lima. In a key ruling, Aguilera held that the Department’s use of declarations signed by collection representatives – who have no knowledge of benefits, eligibility or funding – was insufficient to establish that the Department would be paying for health-care expenses in the future. Aguilera explained:

[T]he Department’s evidentiary showing was lacking in a number of respects. [The collection representative] stated her duties included negotiating and collecting Medi-Cal liens. Nothing in her declaration suggested any expertise with regard to past or future benefit eligibility or benefit determinations. Additionally, [the collection representative] cited no statutes or regulations requiring that Medi-Cal pay for all her health-care needs, showing that Medi-Cal paid for these expenses in the past or that it is reasonably probable Medi-Cal will pay all of these expenses in the future.

(Aguilera, 235 Cal.App.4th at 832.)

Aguilera cautioned the Department that any evidence that it offers to support an exclusion of damages from the Ahlborn-Lima calculation must meet the standards for expert testimony.

Any declarations must establish the declarant’s expertise in Medi-Cal benefits, funding and eligibility determinations. (Evid. Code, § 720.) The declarations must also be supported with citations to applicable statutes or regulations regarding current Medi-Cal eligibility, the type of health-care currently available under Medi-Cal, past funding to pay for such health care, and estimated future funding to pay for the type of health care at issue.

(Aguilera, 235 Cal.App.4th at 833) (emphasis added).

The Department’s declarations may not be able to meet the standards imposed upon them by Aguilera. There is no statute that authorizes around-the-clock, LVN attendant care for all patients whose physicians prescribe it. Welfare & Institutions Code section 14132(s) provides for limited in-home medical services, but only when the cost of treating the patient at an acute care hospital would be higher. “In-home medical care services are covered when medically appropriate and subject to utilization controls, for beneficiaries who would otherwise require care for an extended period of time in an acute care hospital at a cost higher than in-home medical care services.” The typical life-care plan for even a severely injured patient does not require around-the-clock care at an acute hospital.

There’s no such thing as a free lien

In Aguilera, the plaintiff-beneficiary incurred attorney’s fees and costs to create the fund from which the Department sought its reimbursement. Relying upon the common-fund doctrine, 21st Century Ins. Co. v. Superior Court (2009) 47 Cal.4th 511, 520, the plaintiff-beneficiary in Aguilera argued that the Department should share in the litigation expenses. Under that doctrine, the Department would share in the litigation expenses in the same ratio as its gross recovery compared to the gross settlement.

The Department, however, insisted that Welfare & Institutions Code sections 14124.72, 14124.76, 14124.78 and 14124.785 are independent sources of reduction of a Medi-Cal lien. The Department reasoned that, if a plaintiff- beneficiary accepts the Department’s calculation of its recovery under Section 14124.72, she gets a twenty-five percent reduction for attorney’s fees and a pro rata reduction in litigation expenses. If the plaintiff-beneficiary exercises his rights under Section 14124.76 (the federal Medicaid statutes and Ahlborn-Lima) however, then she must bear all of the attorney’s fees and litigation costs, including those attributable to the Department’s equitable apportionment of the settlement.

Aguilera rejected both positions. It characterized the Department’s position as “nonsensical.” When the Department asserts a lien on a beneficiary’s tort recovery, Section 14124.72(d) “sets for the method for determining the Department’s share of the beneficiary’s attorneys’ fees and costs.” Also, because Section 14124.72(d) applies, the appellate court rejected application of the common law’s common fund doctrine. (Because Aguilera rejected the common fund doctrine, but enforced the Section 14124.72 reduction for litigation expenses, the Department’s share of Ashlynn’s litigation expenses increased.)

Current status of Medicaid Act amendment

The Bipartisan Budget Act of 2013 (Pub.L. 113-67, 2013 HJRes 59) that Congress approved in December 2013 included language that overturned Ahlborn and Wos. The Act amended three key provisions in the Medicaid statutes, Title 42, sections 1396a, 1396k, and 1396p, that were the foundation for Ahlborn’s analysis. The amendments permit a state to assert a lien on a Medicaid beneficiary’s third-party recovery for the full amount of the benefits paid, regardless of the other injuries and damages that the beneficiary suffered (and regardless of the beneficiary’s comparative fault).

As a result of these amendments, states will be able to assert a “first-dollar” lien against a Medicaid beneficiary’s third-party tort recovery. In essence, the federal amendments will make the law conform to prior state (including California) practice. The net effect of the law may make it unproductive for some Medicaid patients to pursue their rights against third-parties. This would leave it to the states to pursue the third-parties themselves (which they rarely, if ever, do).

The law was set to take effect October 1, 2014. In the Protecting Access to Medicare Act of 2014, Pub.L. 113-93, 2014 HR 4302, § 211, approved on April 1, 2014, Congress postponed the effect of the amendments until October 1, 2016.

Steven B. Stevens Steven B. Stevens

Steven B. Stevens concentrates his practice on appellate, writ and motion advocacy, with special emphasis on medical malpractice and major personal injury. Stevens is Of Counsel to Michels & Lew in Los Angeles. He is board certified in Appellate Law (State Bar of California) and in Medical Malpractice Law (American Board of Professional Liability Attorneys). He has handled a wide variety of appeals in medical malpractice, Medi-Cal lien reduction, insurance bad faith, employment, business litigation and civil procedure. Stevens is a member of the CAOC Amicus Curiae Committee and the AAJ Amicus Curiae Committee. He is a member of CAALA’s Board of Governors, and served as Editor-in-Chief of Advocate for eight years. He is a recipient of CAALA’s Appellate Lawyer of the Year Award.

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