Hadden v. US – Federal District Court Rejects Ahlborn Approach for Medicare Conditional Payments

Posted date in Jason D. Lazarus, J.D., LL.M. Medicare, Medicare Secondary Payer Act, MSP Compliance

The Federal District Court decided this case back in August of 2009.  It really wasn’t an unexpected result given the arguments made by the injury victim.  The case is important because it was appealed to the 6th Circuit and oral arguments are scheduled for 10/13/10.  The briefs have been filed by both parties.  If the decision comes down in favor of CMS it will cause a split in the Circuits which may result in the US Supreme Court accepting certiorari. 

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.  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 is in direct conflict now with Bradley.  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 Hadden 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).”

As a starting point, the Hadden court discussed the statutory regulatory provisions governing waiver of recovery of conditional payments.  According to the 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 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.”

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.