You are involved in a case in which a Medicaid recipient is suing for personal injuries. (Whether you represent the plaintiff or defendant does not really matter.) The state Medicaid agency has paid over $70,000 for her medical treatment over the last year, all of it related to the injury in question. Trial is two months away. You want to settle the case.
You figure that the full liability value of the damages is about $250,000. Liability is a bit thin, with maybe a 20% chance of a verdict for the plaintiff, so both sides feel that the case should settle for $50,000 or so. But Medicaid's lien presents an obstacle. The state agency is insistent that it should be repaid in full. If you settle the case for $50,000, all of it will go to repaying the lien. If you try the case, the plaintiff will have to recover more than $70,000 before she will see a dime of the recovery. If the jury awards $100,000, and includes $30,000 for medical expenses (sure it is inconsistent, but the courts give juries a lot of leeway), the Medicaid agency will still demand that its $70,000 be repaid in full. And your state's Medicaid statute supports that position.
If you represent the plaintiff, you are in a quandary. If you represent the defendant, you are likely going to have to go to trial even if your client wants to settle the case.
The U.S. Supreme Court has come to your rescue. In the newly-decided case of Arkansas Department of Human Services v. Ahlborn, issued May 1, 2006, (link) the Court unanimously ruled that
• a State's Medicaid agency may recover against proceeds of a personal injury case only as to the part of the proceeds that compensates medical expenses, and
• (most significantly) when it is established that a settlement represents a particular percentage of the total value of the case, the State may recover only that percentage of the total amount it has paid.
Thus, if the jury awards damages in the amount of $100,000, and attributes $30,000 to medical expenses, Ahlborn means that the state agency will be repaid only $30,000. The jury's verdict provides a binding determination on the value of the medical damages.
What if you settle the case? Most pretrial settlements do not try to allocate between medical expenses and other expenses. If they involve a competent adult plaintiff, they do not even need court involvement, except to enter an order dismissing the case. Under the Ahlborn decision, you will now need to add one more step to the process. The Court's opinion in Ahlborn specifically sanctions approval by a court of an allocation between medical expenses and other elements of recovery as a way to ensure that plaintiffs and defendants do not collude to keep the medical expenses element artificially low, to the detriment of the Medicaid program.
In many cases following this pattern, we are going to see regular requests from litigants for a hearing before the trial court (which will inevitably be called "Ahlborn hearings") for a judicial finding allocating a settlement between medical expenses and other elements of damages. The Ahlborn case is silent as to whether the Medicaid agency would have to be given notice and an opportunity to address that issue (assuming that it has not joined the case as an intervening plaintiff to protect its interests), but it can be reasonably concluded that notice to the agency should be required if the judge's allocation is to be binding.
Under Ahlborn, you would be able to ask the court to make a finding that the full liability value of the case was $250,000, and that the $50,000 settlement represents an 80% discount. Based on that finding, the Medicaid agency should be able to recover no more than $14,000.
As we read Ahlborn, the court's finding on the allocation issue will be final and binding as to all parties.
Camera Lucida 