Hadden v. US – 6th Circuit Affirms Federal District Court’s Rejection of Ahlborn Approach for Medicare Conditional Payments

Posted date in Medicare Secondary Payer Act

In an unsurprising opinion, the 6th Circuit Court of Appeals affirmed the Western District of Kentucky’s holding that Mr. Hadden must pay the full amount of the Medicare conditional payment.  Mr. Hadden had argued before the lower levels of appeal that his conditional payment obligation should be either reduced or waived based on principles of equity and comparative fault.  The 6th Circuit also rejected these arguments finding that the fact that Mr. Hadden had demanded payment for one hundred percent of his medical expenses meant that he was required to reimburse Medicare one hundred percent for those same claimed expenses.  The 6th Circuit focused on the fact that the 2003 amendments to 42 U.S.C. 1395y(b)(2)(B)(ii) fixes the responsibility for a primary plan to reimburse Medicare when there is a “judgment, a payment conditioned upon the recipient’s compromise, waiver, or release”.  The 6th Circuit’s decision in Hadden found that this new language left no room for interpretation and obligation to Medicare to reimburse was defined by the scope of the Medicare beneficiary’s claim against a liable third party.  In other words, if an injury victim claims 100% of his or her future medical expenses are due to actions of a third party that injured him, he can’t later tell Medicare that the same party was responsible for only 10% of them when it comes time to repay the conditional payment.  Below I will give a summary of the facts & procedural background and then summarize the important aspects of the 6th Circuit’s holding.  There was a dissent written in Hadden which offers some interesting points of views which I will touch on as well. 

In Hadden, the injury victim was struck by a public utility vehicle in Kentucky.  The accident was caused by a “phantom” motorist who ran a stop sign which caused the utility truck to strike the plaintiff.  The case was settled for $125,000.  Mr. Hadden was a Medicare beneficiary and Medicare made conditional payments since the primary didn’t pay promptly.  Medicare asserted a claim against the settlement proceeds for approximately $62k to recover the conditional payments it made.  The plaintiff paid CMS and then requested a waiver of the Medicare subrogation claim.  The request was denied.  A request for reconsideration was denied as well.  The plaintiff then requested a waiver of recovery arguing that the recovery by CMS should be reduced to ten percent of the principal amount based on equitable and comparative fault principles due to the phantom vehicle being ninety percent at fault.  In the alternative, the plaintiff also argued a complete waiver was appropriate because the plaintiff was not made whole with respect to the underlying tort claim.  CMS again denied the plaintiff’s request.  The plaintiff appealed the decision through the CMS administrative channels and lost at every level of appeal.  The plaintiff filed this action in federal court.  The federal court remanded the case to the Secretary of Department of Health and Human Services.

A final decision was rendered by the Medicare Appeals Council.  The council rejected the plaintiff’s arguments regarding a reduction to ten percent of the principal and the made whole doctrine.  According to the Council, “Medicare policy requires recovering payments from liability awards or settlements, whether the settlement arises from a personal injury action or a survivor action, without regard to how the settlement agreement stipulates disbursement should be made." The Council held that it would not reduce the recovery amount because Medicare recognizes allocations of liability payments only when payment is based on a court order or adjudged on the merits of the case and, in this instance, payment was based on a settlement. This was and is in direct conflict with the Bradley decision out of the 11th Circuit.  Additionally, the Council found that "the allocation of liability in this case is speculative since it was not determined by a judge or jury."  Lastly, the Council also held that Medicare does not recognize the "make whole" doctrine. 

The Western District of Kentucky court reviewed this final agency decision pursuant to 42 U.S.C. § 405(g). 42 U.S.C. § 1395ff(b)(1)(A).  As the court pointed out, “the findings of the Secretary are conclusive ‘if supported by substantial evidence.’ 42 U.S.C. § 405(g).”  On appeal, the district court discussed the statutory regulatory provisions governing waiver of recovery of conditional payments.  According to the federal district court, “CMS may waive recovery of conditional payments made by Medicare. See 20 C.F.R. § 404.506. Under the Social Security Act, waiver of recovery may be granted where (1) a claimant is without fault and (2) recovery would either defeat the purposes of Title II or would be against equity and good conscience. 42 U.S.C. § 404(b). A recovery would defeat the purposes of Title II if it caused the claimant to suffer financial hardship by depriving him ‘of income required for ordinary and necessary living expenses.’ 20 C.F.R. § 404.508. A recovery would be against equity and good conscience if the claimant (1) changed his position for the worse or relinquished a valuable right because of reliance upon a notice that a payment would be made or because of the overpayment itself; or (2) was living in a separate household from the overpaid person at the time of the overpayment and did not receive the overpayment. Id. at § 404.509(a). The claimant's ‘financial circumstances are not material to a finding of against equity and good conscience.’ Id. at § 404.509(b).”

The Western District court then addressed the two primary arguments made by the plaintiff.  The first argument pertained to equitable allocation principles similar to those used in the Ahlborn decision.  This argument was rejected with the district court finding the Ahlborn case wasn’t on point because it interpreted a state Medicaid statute which it ultimately found unenforceable whereas in the instant case it was dealing with the Medicare Secondary Payer Act governed by federal law.  The court also rejected an “equity and good conscience” argument based upon federal case law pertaining to Social Security overpayment waivers.  The rationale for rejection was the plaintiff’s failure to provide any evidence supporting  a finding that equity and good conscience warranted a waiver in this particular instance.

The second argument was based on the made whole doctrine.  The made-whole doctrine is an equitable defense to the subrogation or reimbursement rights of a subrogated insurance carrier or other party, requiring that before subrogation and/or reimbursement will be allowed, the insured must be made whole for all of its damages.  The district court rejected this argument as well indicating that current regulations and law do not recognize the made whole doctrine for Medicare conditional payments.  The court wasn’t unsympathetic to this argument.  It stated that “current law requires an adjudication on the merits, which is costly. While CMS essentially receives free representation for the collection of its claim and no offset for a fault allocation, Plaintiff must pay attorney's fees and costs for a settlement he perceived to be based on an exposure or fault allocation by the settling defendant. Nevertheless, the Court believes that its decision is correct based on the current status of the law.”

Hadden appealed the Western District Court’s decision to the 6th Circuit Court of Appeals.  The 6th Circuit conducted a de novo review of the district court’s decision.  Because the decision involves the interpretation of a statute administered by a federal agency, the 6th Circuit reviewed the agency’s interpretation of the statute under the Chevron standard.  Under Chevron, if “Congress has directly spoken to the precise question at issue” in the plain text of a statute, a court will give effect to the statutory words without regard to an agency’s interpretation of such.  However, if the “statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”  With that backdrop, the 6th Circuit delved into the issue at hand. 

There was no dispute that the settlement payment made to Hadden gave rise to an obligation on his part to reimburse Medicare.  The 6th Circuit recognized the dispute was whether the obligation was limited 10% of the total conditional payment due to liability issues related to the paying defendant or subject to 100% of the total claimed medical expense made by Mr. Hadden against the defendant.  The Hadden court addressed 42 U.S.C. 1395y(b)(2)(B)(ii) and the fact that the defendant was a “primary plan” and that Hadden was an “entity that receive[d] payment from a primary plan” within the meaning of the MSP provision in question.  According to the opinion, under 42 U.S.C. 1395y(b)(2)(B)(ii) “Hadden ‘shall reimburse’ Medicare to the same extent that [defendant] Pennyrile ‘had a responsibility to make payment’ with respect to those services.”  The key term to the Hadden court was “responsibility” which triggers the conditional payment obligation under 1395y(b)(2)(B)(ii).  Because “responsibility was defined by the 2003 amendments to 1395y(b)(2)(B)(ii) to include a payment made by a primary plan in exchange for a release of a claim, the court concluded that Hadden’s reimbursement obligation was “defined by the scope of his own claim against the third party.”  Accordingly, Hadden couldn’t claim his full medical expenses against the “primary plan”/defendant on the one hand and then tell Medicare that the same defendant was only responsible for 10% of those medical expenses. 

It is important to consider the reasoning employed by the majority in Hadden in its interpretation of “responsibility”.  The majority, as aptly pointed out by the dissent, concludes that the usage of the word “responsibility” in the MSP dictates that Medicare be reimbursed without regard to whether the recovery included full payment for the items and services paid for by Medicare.  The majority equates responsibility with the amount that must be paid so that “if a primary plan is responsible to any degree with respect to an item or service for which Medicare paid, it is responsible for the entire amount Medicare paid.”  The dissent raises an excellent point to illustrate the absurdness of the majority’s interpretation.  In the dissent, it poses the question of what happens when there is a settlement for less than what was owed to Medicare.  For example, if the settlement was for $22,000 would the defendant still owe the balance of $60,000 as the primary plan?  A more interesting issue raised by one commentator is whether Hadden could have completely avoided paying Medicare by just not claiming medical damages in the litigation.  What if every Medicare beneficiary who brought suit simply waived their claims for future medical to avoid repayment of Medicare?  While that probably isn’t realistic, it could in theory defeat the Medicare conditional payment recovery based on the majority’s reasoning.  In the real world though the primary plan (the defendant) would have to report the settlement if it involves a Medicare beneficiary under mandatory insurer reporting and likely would face a recovery action by the government for the full conditional payment amount. 

Getting back to the majority’s opinion, it goes on to reject application of statutes argued by Hadden as being similar to the MSP which allow for reduction due to fault.  Specifically, Hadden relied upon the Medical Care Recovery Act found at 42 U.S.C. 2651(a) and the Medicaid statute found at 42 U.S.C 1396a(a)(25) which provide, according to Hadden, “the government is entitled to recover only its proportionate share of a discounted settlement.”  The Hadden court found these provisions “inapposite” and would not use statutes as mere starting points to develop what Hadden referred to as “federal common law.”  According to the 6th Circuit, it was for Congress to decide whether Medicaid and Medicare beneficiaries should be treated differently in terms of repayment of medical bills.  Similarly, the 6th Circuit rejected applying Ahlborn by analogy to a Medicare conditional payment.  The Hadden court found that the US Supreme Court’s decision in Ahlborn was based upon interpretation of federal laws governing Medicaid and state provisions regarding third party liability recovery actions.  The 6th Circuit did draw a distinction to the important term “liability” as used in the federal statutes governing Medicaid and the term “responsibility” found in the MSP.  According to the decision, liability as used in the federal Medicaid provisions was interpreted to mean the portion of the recovery related to medical expenses.  Whereas “responsibility” has a “broader” meaning and as used in the MSP it was specifically defined by the 2003 amendments to 1395y(b)(2)(B)(ii). 

Hadden also argued that Medicare was limited to bringing an action under the subrogation provision found in 1395y(b)(2)(B)(iv) which was governed by general subrogation principles including a reduction for a proportionate recovery.  The 6th Circuit summarily rejected this pointing to 1395y(b)(2)(B)(iii) which states “the United States may recover under this clause from any entity that has received payment from a primary plan[.]”  Since Hadden is such an “entity”, the 6th Circuit concluded that the “government is therefore entitled to recover against Hadden under clause (iii), ‘separate and distinct’ from its rights of subrogation under clause (iv).  Lastly, the court addressed Hadden’s argument that waiver of the reimbursement obligation by Medicare was required because reimbursement would be against equity and good conscience under 42 U.S.C. 1395gg(c).  The Hadden Court found that the Medicare Appeals Council had adequately considered the factors present in Mr. Hadden’s situation and provided a careful, reasoned explanation for why a waiver of reimbursement was not warranted in this particular case. 

The problem with the Hadden decision is that it encourages litigation and discourages settlement.  This is so because had Hadden went to trial and gotten an adjudication on the merits with an apportionment of fault, the result would have been a reduction of the Medicare conditional payment.  As discussed above, the Medicare Secondary Payer Manual only allows Medicare to recognize allocations of liability when the allocation is based on a court order or adjudged on the merits of the case.  This puts the plaintiff into an untenable situation when considering whether to settle a case such as this.  He can settle like Hadden did, but he can’t get a reduction of the conditional payment amount leaving him with virtually no recovery despite significant injuries.  On the other hand, he can take the case to trial and get to the same recovery result but incur substantial additional costs to go to trial.  He can then get a reduction but the net effect may be zero.  A result such as the one in Hadden is bad for our legal system because it does run counter to the public policy notion of encouraging settlements.  A number of commentators have recognized this particular issue as it relates to personal injury settlements.  See generally Rick Swedloff, Can't Settle, Can't Sue: How Congress Stole Tort Remedies from Medicare Beneficiaries, 41 Akron L. Rev. 557, 599-602 (2008); Nicole Miklos, Note: Giving an Inch, Then Taking a Mile: How the Government's Unrestricted Recovery of Conditional Medicare Payments Destroys Plaintiffs' Chances at Compensation  [*29] Through the Tort System, 84 St. John's L. Rev. 305 (Winter 2010).

It is interesting that there was absolutely no mention of the Bradley v. Sebelius decision out of the 11th Circuit.  While that case isn’t on all fours admittedly, it seems to support the position taken by Hadden in terms of the fundamental underpinnings of his argument.  The dissent in Hadden is well reasoned and should be read for purposes of understanding the ridiculousness of the majority’s interpretation of the MSP.  Because of the Bradley decision and the fact that this decision was split, this case may well wind up finding its way to the US Supreme Court.  The fact of the matter is that the result in a case such as Hadden, as determined by the majority, runs counter to principles of fairness and equity when it comes to the parties at settlement as once commentator put it.  Even though the Hadden court rejected application of the Ahlborn decision, the public policy idea espoused by Justice Stevens that an “absolute priority might preclude settlement in a large number of cases, and be unfair to the recipient in others” is just as applicable to Medicare conditional payments if not more so than Medicaid liens which are typically negotiated down.   We will have to wait and see if the US Supreme Court takes Cert.