McKinney v. PHA - The Federal Court's

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McKinney v. PHA - The Federal Court’s “sweet spot” for identifying Medicaid Lien recovery rights

Abstract:  There has been a considerable amount of commentary among personal injury practitioners on listservs regarding the McKinney v. PHA decision and what it means for attorneys in Pennsylvania as well as for practitioners throughout the country.  The objective of this Practice Tip is to use McKinney to reference two familiar methods for determining allocation for past medical expenses, and illustrate how courts may not adhere to either due to a move toward a more equitable determination based on the thought that a settlement is a compromise for all.

A Memorandum and Order issued last week, on August 24th by Judge Schiller of the U.S. District Court, E. D. Pa. answered the question of how much the Department of Public Welfare (DPW) is to be reimbursed from personal injury settlements.

Some of the main points and key facts McKinney v. PHA are:

• A family filed suit against the Philadelphia Housing Authority claiming that the agency ignored complaints about mold in their housing unit that ultimately resulted in injury.
• A settlement was reached in June for just more than $11.9 million.
• DPW expended over $1.2 million to provide healthcare/ Medicaid benefits for the parties alleging injuries.
• The approved settlement only allocated for attorney fees, costs and amounts for those parties; there was no allocation for past medical expenses.

The Medicaid beneficiary argued for an employment of the ‘ratio theory,’ as derived from Arkansas Dept. of Health and Human Services v. Ahlborn, 547 U.S. 268 (2006), to determine allocation for past medical expenses by multiplying a ratio (the agreed settlement amount divided by case’s true value) to the whole DPW lien.

DPW argued that state statute established a means to determination allocation, 62 Pa. C.S.
 1409(b)(11)’s presumption of one-half of net or the actual Medicaid lien amount, whichever is less.

The Federal Court:

• Reasoned that the Ahlborn ‘ratio theory’ argued for by the Medicaid beneficiaries is not required to be used by courts in all cases;
• Bypassed the application and constitutionality of 62 Pa. C.S.  1409(b)(11) by his issuance of a court order to allocate the settlement proceeds;
• Found that 62 Pa. C.S.  1409(b)(11) ignores the reality of settlement, which by nature is a compromise for all parties, including DPW; and
• Based on the record, identified the factors and uncertainties leading the parties to settle, along with the reasonable portion of the settlement allocable to past medical expenses; attributing two-thirds of the total Medicaid lien as the portion of the settlement for past medical expenses.

Practice Tips: What does McKinney mean in light of Ahlborn and Tristani?

1. A new means of finding the sweet spot for Medicaid recovery?

The Court in McKinney found that Ahlborn did not require the ‘ratio theory’ be used in all events to determine allocation for past medical expenses.  If the parties are moving toward settlement, we recommend the parties take into account the court’s power to determine the parties’  (including DPW’s) equitable rights.  Following McKinney, in Pennsylvania, should the matter of the Medicaid lien be litigated, the courts of competent jurisdiction are more likely to consider the equities of settlement along with the statutory recovery construct.  If the record is sufficient, the court will also have the power to weight and consider factors.  For settling parties, when working with DPW to identify its recovery rights, it will be even more important to properly document the file, including the bases for settlement, along with the pros and cons of litigation.  Consistent with traditional recovery methodologies, information supportive of damages will still be highly relevant to determine, based on a good faith analysis, the reasonable portion of a settlement allocable for past medicals. 

The Court in McKinney also confirms that which we already knew – that Ahlborn was not intended to be a panacea for the Medicaid lien resolution process.  Rather than seeking an Ahlborn-allocation hearing, which can cost time and resources, the parties may be well-served in working to identify settlement factors, duly recognizing that the “black boarded” damage model (of recovery based on a pro rata share of settlement dollars when compared to total stipulated damages) may create one recovery pole star.  But, state statutes, such as the 50% net presumption under 62 Pa. C.S.  1409(b)(11) creates another one. Using settlement factors (such as risks of litigation, reasons for settlement, etc.) may help the parties find an answer that recognizes the inherent benefits of settlement for all the parties, including the DPW.  Failing to settle among the parties, a properly documented lien resolution process would provide a court of competent jurisdiction with the tools necessary to get the parties the rest of way, if needed, based on McKinney’s “compromise” standard.

2. The Influence on Tristani

Settling parties and their counsel, by now well aware, especially in Pennsylvania, of the Tristani v. Richman, 609 F.Supp.2d 423 (2009) interlocutory opinion (since its release last year), have been eagerly awaiting its ultimate fate to be determined by the Court of Appeals for the Third Circuit.  DPW third party recovery has created a flexible approach to cases in which a Tristani-type argument, essentially asking DPW to take a more proactive role in its own recovery based on an interpretation of the interplay of the federal Medicaid laws and those of Pennsylvania.  When considering the impact of Tristani (noting that story has not yet been completely told), a portion of that opinion found that the‘one-half of net rule’ for recovery in  1409(b)(11) is consistent with Ahlborn’s holding.  Now reading McKinney with Tristani, we can see a further refinement of a lien resolution methodology for Pennsylvania.  Clearly, the ‘one-half of net rule’ no longer guarantees DPW full reimbursement in a case that settles.  But that is still not the end of the lien story.

If it appears that the parties are going to settle, a court, if asked, may take the McKinney court up on its offer to use this new settlement tool - taking the nature of settlements and compromise factors into account to determine what portion of the settlement is attributable to past medical expenses.  As a result, the settling parties, when dealing with the DPW (Medicaid) lien may be able to reduce that lien beyond a one-half of net standard.  If the case proceeds to trial and results in a jury verdict, 62 Pa. C.S.  1409(b)(11) will still serve to identify the lien amount.  The parties would presume that where a total Medicaid lien remains less than one-half of the jury award, DPW is likely to be fully reimbursed.  However, where the lien exceeds the one-half amount, DPW’s reimbursement is likely to be capped at one-half of net.

3. A national shift towards an Equitable Model

It appears that McKinney, when read with Tristani, and taking into account the United States’ Supreme Court’s 9-0 ruling in Ahlborn, is signaling a potential shift towards the equitable model that is inherent in all compromises. 

Attorneys in North Carolina, Ohio and Florida will know that these states also have a statute for determining right to reimbursement based on gross settlement value.  These statutes operate on the presumption, much like that in Pennsylvania, that the portion of a settlement allocated to past medical expenses equals the one-half of net proceeds or the actual Medicaid expenditures, whichever is less.  When working with these statutes, however, equity also has to come into play, based on a reasonable allocation for past medical expenses. 

The Garretson Firm Resolution Group will continue to closely monitor how McKinney may affect the resolution of Medicaid liens in Pennsylvania, and also, any decisions that result in similar developments among other jurisdictions.