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An United States Court House in New York CityOn April 18, 2017, the United States District Court for the Northern District of Florida, Tallahassee Division, published its opinion on Gianinna Gallardo v. Elizabeth Dudek, Secretary of Florida Agency for Health Care Administration, concluding that Florida’s Medicaid reimbursement statute is preempted by federal Medicaid law. The court indicates that by allowing the Agency for Health Care Administration (AHCA)—Florida’s agency charged with administering Medicaid—to satisfy its lien from settlement funds allocated to both past and future medical expenses, Florida has run afoul of the federal Medicaid statute. The court also determines that the same is true for Florida’s Medicaid reimbursement statutory formula. Specifically, Florida’s reimbursement statute—which only allows the Medicaid recipient to rebut that formula-based allocation by presenting clear and convincing evidence that it is inaccurate—amounts to a quasi-irrebuttable presumption and thus conflicts with and is preempted by federal law.

Facts of the Case

On November 19, 2008, Gianinna Gallardo (Gallardo), then a thirteen-year-old student, suffered severe and permanent injuries as a result of being struck by a vehicle after she was dropped off by her school bus. She is in a persistent vegetative state and is no longer able to care for herself. Gallardo’s medical expenses were paid by Medicaid and WellCare of Florida, which paid $862,688.77 and $21,499.30, respectively.

Gallardo’s parents filed suit in state court against those allegedly responsible for her injuries—the truck’s owner, the truck’s driver, and the Lee County School Board. Gallardo sought past medical expenses, future medical expenses, lost earnings, and other damages, while her parents sought loss- of-consortium damages. As required by Florida law, pursuant to § 409.910 (11)(a), AHCA was notified of that lawsuit and, in turn, it asserted a lien against that cause of action for the amount it expended for Gallardo’s past medical expenses: $862,688.77. Gallardo’s case eventually settled for $800,000, and the court approved that settlement. Thus, pursuant to Florida’s formula-based allocation, AHCA was due to be reimbursed $323,508.29 in medical expenses.

Shortly after the settlement was finalized, Gallardo’s counsel notified AHCA of the settlement by letter. In that letter, counsel explained that Gallardo’s damages were valued at over $20,000,000, and that the settlement amounted to a mere 4% recovery. Thus, according to Gallardo, only $35,367.52 of her $800,000 settlement represented past medical expenses. AHCA never responded to Gallardo’s letter.

Gallardo chose to contest AHCA’s lien through the state administrative procedure outlined in § 409.910(17)(b). She therefore followed the necessary requirements; namely, depositing the formula-based reimbursement of $323,508.29 into an interest-bearing account and filing a petition with the Division of Administrative Hearings in Tallahassee. In those proceedings, Gallardo argued that contrary to federal law, AHCA is endeavoring to recover its past Medicaid payments from settlement funds that do not represent compensation for past medical expenses. AHCA, however, argued that it is entitled to satisfy its lien from the portion of Gallardo’s settlement representing compensation for past and future medical expenses. AHCA further argued that Gallardo may successfully challenge the formula-based allocation only if she can prove by clear and convincing evidence that the amount of her settlement representing past and future medical expenses is less than $323,508.29.

Gallardo brought this case seeking an injunction and declaratory judgment that Florida’s reimbursement statute violates federal law to the extent it (1) allows ACHA to satisfy its lien beyond the portion of her settlement representing compensation for past medical expenses and (2) only allows her to successfully challenge the formula-based allocation by presenting clear and convincing evidence that that amount is more than the portion of her settlement that represents compensation for past medical expenses. After this case was filed, the parties moved the Administrative Law Judge to hold those proceedings in abeyance, and that motion was granted pending resolution of the instant case. In this case, the parties filed cross motions for summary judgment.

Federal Law

Medicaid is a joint federal–state program designed to help participating states provide medical treatment for their residents that cannot afford to pay. Although states are not required to participate in Medicaid, all of them do. The federal government pays a significant portion of the costs for patient care and, in return, the states pay the remainder and must comply with the federal statutory and regulatory requirements.

Two of those requirements are the so-called anti-lien and anti-recovery provisions. These requirements “express limits on the State’s powers to pursue recovery of funds it paid on the recipient’s behalf.” Ark. Dep’t of Health & Human Servs. v. Ahlborn, 547 U.S 268, 283 (2006). Specifically, the anti-lien provision states that “no lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under the State plan.” 42 U.S.C. § 1396p(a)(1) (2012). Similarly, the anti-recovery provision states that “no adjustment or recovery of any medical assistance correctly paid on behalf of an individual under the State plan may be made.” Id. § 1396p(b). Thus, considered “literally and in isolation,” the anti-lien and anti-recovery provisions prohibit states from reaching the proceeds from a Medicaid recipient’s settlement or judgment recovery. Ahlborn, 547 U.S. at 284.

But the third-party liability and assignment provisions of the Act temper that sweeping prohibition by providing narrow exceptions. The third-party liability provision, for example, requires states “to ascertain the legal liability of third parties to pay for care and services under the plan.” § 1396a(a)(25)(A). If third-party liability is found to exist, states must seek reimbursement for medical expenses incurred on behalf of recipients who later recover from those third parties. § 1396a(a)(25)(B) (“In any case where such a legal liability is found to exist after medical assistance has been made available on behalf of the individual and where the amount of reimbursement the State can reasonably expect to recover exceeds the costs of such recovery, the State or local agency will seek reimbursement for such assistance to the extent of such legal liability.”) Likewise, under the assignment provision, states must have in effect laws that, “to the extent that payment has been made under the State plan for medical assistance for health care items or services furnished to an individual,” give the state the right to recover payment “for such furnished health care items or services” from liable third parties. § 1396a(a)(25)(H). To help effectuate that requirement, states must require a recipient “to assign the State any rights to payment for medical care from any third party.” § 1396k(a)(1)(A).

State Law

Florida applies a statutory formula to determine how much of a recipient’s recovery constitutes medical expenses and is therefore available for Medicaid reimbursement.

First, the formula reduces the gross recovery by 25% to account for the recipient’s attorney’s fees. § 409.910(11)(f)(1), Fla. Stat. (2016) (deducting “attorney’s fees and taxable costs” from the “judgment, award, or settlement”); § 409.910(11)(f)(3) (deciding for purposes of the statutory formula that attorney’s fees “shall be calculated at 25 percent of the judgment, award, or settlement”). The already-reduced total is then cut in half, and AHCA is awarded the lesser of the amount it actually paid or the resulting number. § 409.910(11)(f)(1) (awarding AHCA “one-half of the remaining recovery” after accounting for attorney’s fees, “up to the total amount of medical assistance provided by Medicaid”). The remaining amount is paid to the Medicaid recipient. §409.910(11)(f)(2).

The Medicaid recipient, however, may challenge that formula-based allocation through an administrative proceeding. To do so, the recipient must either pay AHCA the formula-based reimbursement or place those reimbursement funds in an interest-bearing trust account and then file a petition with the Division of Administrative Hearings in Tallahassee. § 409.910(17)(b) (outlining the administrative procedure); (“Venue for all administrative proceedings pursuant to this subsection lies in Leon County, at the discretion of the agency.”) To successfully challenge the formula-based allocation and thus reduce the amount payable to AHCA, “the recipient must prove, by clear and convincing evidence, that a lesser portion of the total recovery should be allocated as reimbursement for past and future medical expenses than the amount” required by the statutory formula. § 409.910(17)(b).

Florida Medicaid Law Conflicts with Federal Medicaid Law

Gallardo contends that §409.910 conflicts with federal law and is therefore preempted to the extent that it allows AHCA to satisfy its lien from a Medicaid recipient’s recovery for future medical expenses. This Court agrees, as the Medicaid Act could not be any clearer. By its plain language, it prohibits AHCA from satisfying its lien from anything but a Medicaid recipient’s recovery for past medical expenses.

As a general matter, the anti-lien provision prohibits AHCA from imposing a lien against the property of a Medicaid recipient. § 1396p(a)(1). That includes liens against “medical assistance paid or to be paid.” And although the third-party liability and assignment provisions are exceptions that grant AHCA a restricted right of recovery, they are exceedingly narrow ones. A plain reading of the statutory text shows that AHCA’s right of recovery only applies to payments made for past medical expenses.

Ahlborn and Wos

Although the US Supreme Court has not addressed this precise issue, related cases suggest it would reach the same conclusion. Take Ahlborn, for example. There, the Court held that a state may satisfy its Medicaid lien only through the portion of a recovery allocated for medical expenses. Ahlborn, 547 U.S. at 281 (limiting reimbursement to “medical expenses—not lost wages, not pain and suffering, not an inheritance”). In reaching that conclusion, it reasoned that “the federal third-party liability provisions require an assignment of no more than the right to recover that portion of a recovery that represents payments for medical care.” Id. at 282. Likewise, the Supreme Court later emphasized that states may “seek reimbursement for medical expenses paid on the beneficiary’s behalf, but the anti-lien provision protects the beneficiary’s interest in the remainder of the settlement.” Wos v. E.M.A. ex rel. Johnson, 133 S. Ct. 1391, 1397 (2013) (citing Ahlborn, 547 U.S. at 284). The Supreme Court’s references to “past medical expenses” and “medical expenses paid” support the conclusion that state agencies may not seek reimbursement of their past Medicaid payments from portions of a recipient’s recovery representing future medical expenses.

This Court concludes that federal law prohibits state agencies from seeking reimbursement of past Medicaid payments from portions of a recipient’s recovery that represents future medical expenses. Florida’s statute is therefore preempted if and to the extent that it operates that way. Florida law does not prohibit AHCA from asserting a lien on portions of a recipient’s recovery representing future medical expenses; in fact, it explicitly allows it to do just that. § 409.910(17)(b) Accordingly, the Court finds that portion of the statute is preempted.

Florida’s Medicaid Recovery Formula Violates Due Process

Gallardo also asserts that § 409.910 and its one-size-fits-all statutory formula—which the Medicaid recipient may only rebut by presenting clear and convincing evidence to the contrary— violates due process and is preempted by federal law. Gallardo argues that Florida’s entire reimbursement statute conflicts with and is preempted by federal law. To the extent that Medicaid recipients must affirmatively disprove the arbitrary formula-based allocation with clear and convincing evidence to successfully overcome it, the Court agrees.

The Court concludes that Florida’s method of reimbursement is attempt to evade federal law by enacting a “rebuttable” one-size-fits- all statutory formula that by definition allows AHCA to obtain more than that which it is entitled to. And by setting a baseline wholly detached from any rational standard—for instance, the federal Medicaid statute, Supreme Court case law, or AHCA’s past medical expenditures in that specific case—it does so in a wildly arbitrary fashion.

Florida’s Arbitrary Formula Allows AHCA to Take Money It Is Not Entitled To

The Court indicates that when the Florida legislature amended the reimbursement statute, it had the benefit of Wos and knew what changes were required to comply with federal law. But rather than trying to adequately address Wos through thoughtful amendments, the Florida legislature simply slapped a band-aid on the reimbursement statute by calling the formula-based allocation rebuttable and requiring the recipient to meet a heightened burden to successfully challenge it. The Court here says that superficial response is simply not enough.

Moreover, the Court finds that Florida’s arbitrary statutory formula—which plucks a 25% figure for attorney’s fees out of mid-air—allows AHCA to take even more money than it is entitled to. The Rules Regulating the Florida Bar allow attorneys to set their fee on a sliding scale up to 40% of the plaintiff’s recovery. R. Regulating Fla. Bar 4–1.5(f)(4)(B)(i) (2017) (allowing an attorney to charge a contingent fee up to 33.3% of any recovery up to $1 million before the filing of an answer and up to 40% after the filing of an answer). Florida’s statutory formula, however, only reserves 25% of the judgment for attorney’s fees. That necessarily strips even more money from the recipient.

The Court Encourages AHCA to Seek Reimbursement from Responsible Third Parties

What makes Florida’s reimbursement statute and AHCA’s application of that statute even more pernicious is that AHCA has both the authority and the capability to seek its reimbursement directly from the responsible third party (or, as here, parties). § 409.910(11) (“The agency may, as a matter of right, in order to enforce its rights under this section, institute, intervene in, or join any legal or administrative proceeding in its own name in one or more of a variety of capacities.”). Yet in this case and many others, it simply chooses not to. And the effect of that choice should not be overlooked. Rather than paying its own attorneys to recover these funds, AHCA shifts a disproportionate share of the costs to the recipient—costs which come directly out of the recipient’s recovery. And to make matters even worse, AHCA then seeks its reimbursement directly from the recipient’s already-reduced recovery.


The Court therefore grants Gallardo’s Motion for Summary Judgment, and denies AHCA’s Motion for Summary Judgment. In so doing, the Court concludes that in its current form, § 409.910, Fla. Stat. (2016), is preempted by federal law; namely, 42 U.S.C. § 1396a, 42 U.S.C. § 1396k, and 42 U.S.C. § 1396p. 
The Court therefore orders the Clerk to enter judgment stating
”Gianinna Gallardo, an incapacitated person, by and through her parents and co-guardians, Pilar Vassallo and Walter Gallardo, successfully proved that portions of § 409.910(17)(b), Fla. Stat. (2016) are preempted by federal law. The State of Florida Agency for Health Care Administration is therefore enjoined from enforcing that statute in its current form.” 

The Court declares that the federal Medicaid Act prohibits the State of Florida Agency for Health Care Administration from seeking reimbursement of past Medicaid payments from portions of a recipient’s recovery that represents future medical expenses. It also declares that the federal Medicaid Act prohibits the State of Florida Agency for Health Care Administration from requiring a Medicaid recipient to affirmatively disprove Florida Statutes § 409.190(17)(b)’s formula-based allocation with clear and convincing evidence to successfully challenge it where, as here, that allocation is arbitrary and there is no evidence that it is likely to yield reasonable results in the mine run of cases.

It is no secret that Medicare and Medicaid are going broke. It is also no secret that courts throughout the US, including the United States Supreme Court, have time and time again restricted a state Medicaid agency’s authority to seek reimbursement of Medicaid payments from full settlement proceeds. Consequently, it is no secret that the Centers for Medicare and Medicaid Services (CMS) and state Medicaid agencies came together four years ago and were instrumental in getting Congress and the President to sign into law amendments to the Social Security Act that would allow full reimbursement of monies spent by Medicaid from all settlement proceeds, not just recovery proceeds allocated towards past medical expenses.

The 2013 Omnibus and Reconciliation Act, also known as the budget bill, which passed both houses of Congress and was signed into law by President Obama on December 26, 2013, contained provisions that significantly broadened states’ third party liability (TPL) recovery rights and therefore what states can recover from third parties when dealing with a Medicaid beneficiary. Effective October 1, 2017, state Medicaid agencies or the insurers/managed care organizations contracted with the state to provide benefits, will be able to seek reimbursement from any responsible third party of all payments made from the entirety of the settlement funds, not just a portion thereof.

This case is a perfect example of why state and federal tax payers and the state and federal Medicaid agencies they finance needed such amendments to pass and such laws to take effect as quickly as possible. Although it is unfair to the injured beneficiary and her family that in a case with damages valued at $20 million, the case only settles for $800,000, it also seems unfair to taxpayers that in a case that settled for $800,000, in which Medicaid paid over $862,000 in medical expenses associated with the liability claim, that a federal court would deny the state Medicaid agency reimbursement of $323,000, the reimbursable amount the state formula elicited.

It is cases like this one that makes CMS push for federal legislation allowing them to seek and receive full reimbursement from all settlement or recovery proceeds. It is situations like this one that makes all state Medicaid agencies interested in state legislation allowing them to seek and receive full reimbursement from all settlement or recovery proceeds.  For CMS and state Medicaid agencies, as well as the taxpayers financing these programs, this is yet another example of how the current system allows for the transferring of the responsibility of liability claims related expenses over to state and federal tax payers and the state and federal Medicaid agencies paying for such medical services.

Will the courts interpret the 2013 Strengthening Medicaid Third Party Liability Act changes, passed as part of the 2013 Omnibus and Reconciliation Act, effective October 1, 2017, differently? Will CMS and the state Medicaid agencies paying for such medical services related to the underlying claim get more aggressive and begin to seek reimbursement directly from third party liability entities? As we approach October 1, 2017, stay tuned.

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