Ask almost any lawyer what part of negligence litigation they most despise, and the answer will almost certainly be liens.

Plaintiff’s lawyers spend a disproportionate amount of time tracking down potential liens. Once discovered, liens put the plaintiff’s lawyer in a position where they are working to get money for a party they don’t represent. Liens also increase the amount of money a case must settle for in order to net a fair recovery for their client. In turn, the need to satisfy a lien often frustrates defense attorneys and liability insurers, who now must ensure that any settlement proposal allows the plaintiff to satisfy liens. Of course, defense counsel also needs to make sure that any settlement protects their client and its insurer from any subrogation rights that might be advanced directly by a lienholder.

Liens and subrogation rights in negligence cases may be asserted by numerous entities including workers’ compensation carriers, private health insurance companies, governmental agencies, and companies contracted by government agencies. This article explains one very specific subrogation claim that can be made against tort recovery — claims made by the state of Michigan and health plans it contracts with to pay medical expenses under Michigan’s Social Welfare Act, more commonly known as Medicaid.

Since Medicaid is partially funded by the federal government, which imposes certain conditions on states, Medicaid liens or subrogation rights involve both federal and state laws.¹ In an effort to comply with these conditions, Michigan enacted MCL 400.106 as part of the Social Welfare Act to define the state’s subrogation and assignment rights related to a third-party liability for a Medicaid recipient’s medical care; create mandatory conditions for Medicaid recipients and their attorneys; and provide a framework to determine resolution of the state’s subrogation rights from a tort settlement or judgment.

This article summarizes what Michigan negligence lawyers should know about state and federal law relating to Medicaid subrogation rights.

RULES THAT MUST BE FOLLOWED BY THE PLAINIFF'S LAWYER

If a complaint is filed in a case in which the state or a contracted health plan may have Medicaid subrogation rights, plaintiff’s counsel must notify the state² or health plan by sending a copy of the complaint and all documents filed with it within 30 days after the complaint was filed.³ Plaintiff’s counsel must also certify on the summons that the notice has been given.⁴ The form summons issued by the state court administrator includes a box to check and states:

MDHHS and a contracted health plan may have a right to recover expenses in this case. I certify that notice and a copy of the complaint will be provided to MDHHS and (if applicable) the contracted health plan in accordance with MCL 400.106(4).⁵

Whether or not a lawsuit is filed, the state and contracted health plan must be notified about the claim before it is settled.⁶ Additionally, before any settlement is finalized, the state or contracted health plan must receive written notice of the settlement amount, attorney costs, attorney fees, and Medicaid or Medicare subrogation interest amounts.⁷ Attorneys knowingly failing to timely notify the state or contracted health plan of the case, claim, or settlement, may be fined by the state up to $1,000 for each violation.⁸

RULE THAT MUST BE FOLLOWED BY THE STATE AND CONTRACTED HEALTH PLANS

Within 30 days of receiving written notice of the case or claim, the state or contracted health plan must provide plaintiff’s counsel with a written itemization expenses paid for which subrogation rights may be asserted.⁹ Failure to do so excuses the plaintiff and their attorneys from any obligation to protect the subrogation interests of the state or contracted health plan.¹⁰ However, the state or contracted health plan may still pursue recovery through its own means.¹¹

CALCULATING STATE OR CONTRACTED HEALTH PLANS’ RIGHT TO REIMBURSEMENT

In order to receive federal Medicaid funding, states must comply with the requirements for the program.¹² One of those requirements is what is known as the Medicaid Act’s anti-lien provision, which states that “[n]o lien may be imposed against property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under a State plan.”¹³ Therefore, the challenge for states is enacting legislation that provides for subrogation rights for medical payments made on behalf of or for the benefit of Medicaid recipients without violating the anti-lien provision by asserting claims against the recipient’s property.

In 2006, the U. S. Supreme Court decided a challenge to Arkansas’ Medicaid subrogation statute in Arkansas Dept. of Health and Human Services v. Ahlborn.¹⁴ The plaintiff was injured in an automobile collision and received Medicaid payments for medical expenses totaling $215,645. In order to be eligible for Medicaid payments, Arkansas law required Ahlborn to give the state the “right to any settlement, judgment, or award” she might receive in medical benefits up to the amount Medicaid had paid for her treatment.¹⁵ The plaintiff’s tort case settled for $550,000 with only $35,581 of the settlement earmarked for medical treatment; the rest was for pain and suffering, lost earnings, and lost earning capacity. The state claimed it was entitled to be reimbursed the full $215,645, but in a unanimous decision written by Justice John Paul Stevens, the Court ruled that federal Medicaid statutes only allow states to assert subrogation rights against that portion of a third-party settlement earmarked for medical expenses.

Seven years later, the Supreme Court again found a state law violated the Medicaid Act’s anti-lien statute. In Wos v. E.M.A,¹⁶ the Court struck down a North Carolina statute that created an irrebuttable presumption that one-third of a Medicare recipient’s tort recovery was attributable to medical expenses since the statute had no mechanism to determine if a one-third allocation was reasonable.

In Neal v. Detroit Receiving Hospital,¹⁷ the Michigan Court of Appeals was presented with a case addressing application of Michigan’s Medicaid lien statute, MCL 400.106. In Neal, Meridian Health Plan, a Medicaid plan, incurred medical expenses totaling a little more than $110,000. Neal brought a medical malpractice lawsuit that resulted in a confidential settlement agreement that allocated $26,775 — 5% of the total settlement — for medical expenses. Like the state in Ahlborn, Meridian claimed it was entitled to reimbursement for the entire sum it paid from the medical malpractice settlement pursuant to MCL 400.106(5), which provided:

The state department or the department of community health has first priority against the proceeds of the net recovery from the settlement or judgment in an action settled in which notice has been provided under subsection (3). The state department, the department of community health, and a contracted health plan shall recover the full cost of expenses paid under [Michigan’s Social Welfare Act] unless the state department, the department of community health, or the contracted health plan agrees to accept an amount less than the full amount. If the individual [recipient] would recover less against the proceeds of the net recovery than the expenses paid under this act, the state department, the department of community health, or contracted health plan, and the individual shall share equally in the proceeds of the net recovery. As used in this subsection, “net recovery” means the total settlement or judgment less the costs and fees incurred by or on behalf of the individual who obtains the settlement or judgment.¹⁸

Citing Ahlborn, the Court of Appeals held MCL 400.106(5) was preempted by the federal anti-lien provision¹⁹ that prevented states from imposing liens against property on a recipient for medical expenses paid under the state plan.²⁰ However, the court agreed that Meridian was not bound by the allocation of 5% of the total settlement representing medical expenses. The case was remanded with instructions that the trial court conduct a hearing to assess the true value of the case and allocation of different types of damages (noneconomic, lost wages, loss of earning capacity, and medical expenses) before determining the subrogation rights of Meridian, which would only be applied to damages allocated for medical expenses.²¹

In 2018, Medicaid subrogation rights gained the attention of the Michigan Court of Appeals and the state legislature. That summer, the state filed an appeal in Byrnes v. Martinez,²² which involved a medical malpractice case where the trial court made a finding regarding the subrogation rights of the state following a settlement. The state objected to the trial court’s allocation of settlement proceeds on numerous grounds, including a ruling that the state was responsible for its pro rata share of litigation expenses and attorney fees. That fall, a bill amending MCL 400.106 was introduced; it moved quickly though the legislature and became law on Dec. 27, 2018. The amendments failed to correct the portion of the statute that the Neal court decided was a violation of the federal anti-lien law. However, it did address the issue of attorney fees by adding language clarifying that the state would not be required to pay fees for attorneys whose work resulted in the state being reimbursed for Medicaid expenses. The amended portion of the statute was renumbered section 106(8) and includes the following sentence: “The department or a contracted health plan is not required to pay an attorney fee on the net recovery.”

Ultimately, the Byrnes court held that the trial court committed reversible error when it made the settlement allocation because it failed to conduct an evidentiary hearing to determine what portion of the settlement was attributable to medical expenses.²³ However, the most controversial portion of the opinion was not the holding, but this somewhat gratuitous statement:

When calculating “medical expenses” the trial court should consider what amount, if any, can be attributed to future medical costs. ... Neither Ahlborn or Wos limit “medical expenses” to past medical costs as a per se rule, and nothing in the relevant statutory language indicates a Congressional intent to exempt plaintiff’s future medical expenses from recovery by the DHHS.²⁴

Following application for leave, the Michigan Supreme Court vacated the portion of the Court of Appeals opinion that discussed including future medical expenses in the amount of medical expenses subject to reimbursement, stating the issue should first be addressed by the trial court.²⁵

The issue of whether future medical expenses could be included in medical expenses subject to the state’s subrogation rights was addressed by the Court of Appeals not long after the Supreme Court issued its order in Byrnes. In Peterson v. Oakwood Healthcare, Inc.,²⁶ the Court of Appeals held that Medicaid and its contracted health plans can recover only the portions of tort settlement proceeds allocated to past — not future — medical expenses and that Medicaid’s lien could be reduced on pro rata basis. In other words, if the plaintiff’s settlement represented a small percentage of the total damages, the state’s lien could be reduced by that same percentage.

Peterson seemed to settle any dispute as to whether future medical expenses could be subject to state reimbursement until the United States Supreme Court granted leave in Gallardo v. Marstiller,²⁷ a case that would examine the same issue. In a 7-2 opinion authored by Justice Clarence Thomas, it held that despite the federal anti-lien statute, states can assert Medicaid liens over settlement amounts specifically allocated for an injured person’s future medical expenses — not just allocations for past expenses paid by Medicaid.²⁸

Justice Sonia Sotomayor wrote a dissent critical of the majority for restricting its analysis to only one section of the Medicaid Act.²⁹ She believed that by looking at the Medicaid statute as a whole, there are several textual signals indicating that Congress intended states’ subrogation rights to apply only to medical expenses it had paid. She also correctly noted that a future medical expense would not necessarily mean the state would pay for it through its Medicaid program for various reasons, including the fact that the individual may no longer be a Medicaid beneficiary when incurring that expense. As a result, allowing a state to subrogate against a settlement for future medical expense would be a clear violation of the federal anti-lien statute and “unfair to the recipient” because it would allow the state to “share in damages for which it has provided no compensation.”³⁰

While the U.S. Supreme Court decision seems to settle the question of whether states are permitted to assert Medicaid liens over settlement amounts specifically allocated for an injured person’s future medical expenses, whether it is allowable in Michigan pursuant to MCL 400.106 remains unsettled. Prior U.S. Supreme Court and Michigan Court of Appeals cases dealing with the right to seek reimbursement for future medical expenses only analyzed whether they are permissible under federal law. None of the opinions, including Peterson, decided whether Michigan’s statute allows the state to subrogate against future medical expenses. The relevant portion of the statute states:

“[t]he department and a contracted health plan shall recover the full cost of expenses paid ... ”³¹ (emphasis added)

This language seems to make it clear that the Michigan Legislature intended Medicaid subrogation rights to apply to only past medical expenses, particularly when one looks at the language of other subrogation statutes. For example, the Worker’s Disability Compensation Act gives workers’ compensation insurers subrogation rights in third-party liability claims for benefits “paid or payable.”³² Clearly, if the legislature had intended to allow for Medicaid subrogation rights to apply to past and future medical expenses, it would’ve included similar language in the Medicaid Act. Instead, it decided to limit the reimbursement rights to medical expenses it had already paid. Accordingly, even though Gallardo stands for the proposition that states can enact laws that provide them with subrogation rights on future medical expenses, Michigan law does not allow the state or its contracted health plans to be reimbursed from damages allocated as future medical expenses.

The author thanks Ted Larkin for his assistance with this article.