Under Medicaid’s so-called “anti-lien” provision, with certain exceptions states my notseek to recover from a living Medicaid recipient benefits paid on his/her behalf. “No lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf.” See Section 1396p (a). Medicaid is authorized to seek reimbursement from the recipient’s estate after his/her death. See Section 1396p (b).

However, personal injury attorneys are familiar with one significant exception to §1396p(a)’s anti-lifetime-lien provision. States must “take all reasonable measures to ascertain the legal liability of third parties … to pay for care and services available under the plan,” and to “seek reimbursement for such assistance to the extent of such legal liability.” To effectuate these requirements, New Jersey has enacted N.J.S.A. 30:4D-7.1, which provides that a Medicaid recipient “shall immediately reimburse [New Jersey's Division of Medical Assistance and Health Services (DMAHS)] in full from the proceeds of any settlement [or] judgment … against any such third party.” Other states have enacted similar provisions.

Plaintiffs’ attorneys across the country have long objected to the perceived inequity that arises when a claim is settled in an amount that represents less than the full value of plaintiff’s damages, yet Medicaid demands payment of its lien “in full.” One way they have sought to avoid paying the full lien is to allocate the compromise settlement recovery into separate categories of compensation — e.g., compensation for lost income, for medical bills, and for pain, suffering and disability — and then assert that Medicaid’s lien should be satisfied only from the portion representing compensation for paid medical bills.

Such efforts have been widely rejected in the courts. For example, in In re Kietur , 332 N.J. Super. 18 (App. Div. 2000), plaintiff’s attorney asserted that since the probable value of plaintiff’s damages was between four and seven million dollars, but the case was settled for just $400,000 because of “severe liability questions,” DMAHS should not receive its full lien. The court disagreed, holding that ” Hedgebeth [ v. Medford , 74N.J.360 (1971)] , Waldman v. Candia, 317 N.J. Super. 464, appeal dismissed166N.J.599 (2000)], and Lusby [ v. Hitchner , 273 N.J. Super. 578 (App. Div. 1994 ), ] dictate that all of the settlement proceeds, regardless of how they are characterized, are available to the State for its Medicaid reimbursement claim.” Similar holdings have been rendered in courts across the country, including in New York.

However, in Ahlborn v. Arkansas , 547 U.S. 268 (2006), the U.S. Supreme Court considered the validity of an Arkansas Medicaid lien statute which had been interpreted by the Arkansas Supreme Court in essentially the same manner as In re Kietur interpreted New Jersey’s statute. Ahlborn held that the Arkansas statute violated the anti-lien provision of federal Medicaid legislation and was thus unenforceable, stating:

There is no question that the State can require an assignment of the right … to receive payments for medical care. So much is expressly provided for by Sections 1396a(a)(25) and 1396k(a). But that does not mean that the State can force an assignment of, or place a lien on, any other portion of Ahlborn’s property. As explained above, the exception carved out by Sections 1396a(a)(25) and 1396k(a) is limited to payments for medical care. Beyond that, the anti-lien provision applies.

Ahlborn thus held that Arkansas could not “lay claim to more than the portion of Ahlborn’s settlement that represents medical expenses.”

It might seem obvious from the foregoing that New Jersey’s Medicaid lien provision, at least as interpreted in In re Kietur and its predecessor cases, is likewise unenforceable, as are the similarly interpreted statutes of other states across the country. However, in the wake of Ahlborn several state Medicaid agencies have refused to back down from their demands for access to the entire settlement to satisfy their liens. They have asserted, for example, that their Medicaid lien statutes differ from that of Arkansas because liens under their statutes are supposedly imposed on the property of the third party, not that of the living Medicaid recipient, thus saving their statutes from violation of the anti-lien provision and the effects of Ahlborn.

In limited instances they have met with success, but more often not. For example, Andrews ex rel. Andrews v. Haygood, 655 S.E.2d 440 (N.C. App. 2008), held that Ahlborn did not justify departure from a North Carolina Supreme Court decision which stated: “Our cases have consistently rejected attempts by plaintiffs to characterize portions of settlements as being for medical bills or for pain and suffering in order to circumvent DMA’s statutory lien.” Ezell v. Grace Hosp., Inc. , 631 S.E. 2d 131 (N.C. 2006).

In contrast, New York courts, starting with Lugo v. Beth Israel Medical Center , 819 N.Y.S.2d 892 (2006), have rejected attempts by New York’s Medicaid agency (DSS) to distinguish Ahlborn , holding instead that ” Ahlborn must be read to limit the DSS recoupment to the amount of the settlement proceeds allocated to past medical expenses,”, and “[t]o the extent [prior New York] decisions suggest otherwise, Ahlborn implicitly overrules them.” In addition, Lugo held that although Ahlborn did not mandate it, it was appropriate to hold an allocation hearing to determine the amount of the settlement representing compensation of paid medical bills. The formula used was to first find the ratio of the settlement amount to the actual value of the case, and then apply the same ratio to the Medicaid lien amount.

Although over two years have passed since Ahlborn was decided, New Jersey’s courts have not yet addressed its impact on existing case law, and of course DMAHS continues to pursue reimbursement of Medicaid liens. Experienced practitioners report success in individual cases convincing DMAHS to agree to settlement allocations and acceptance of payment only from the portion representing medical bills. But there has been no formal acknowledgement by DMAHS or its attorneys (the Attorney General’s Office) that DMAHS is required to do so. In fact, representatives from both offices responded to informal requests by indicating that no position is taken on the issue. The extent to which New Jersey plaintiffs’ attorneys may, in reliance on In re Kietur and its predecessor cases, be paying Medicaid liens without recognition of legal grounds for demanding compromise is unknown. To the extent they are, it is a matter of concern not just for plaintiffs, but for defendants interested in settling cases.

It appeared Ahlborn might remain unacknowledged in New Jersey when, in an unpublished 2008 Chancery Division decision, the court stated:

[N.J.S.A. 30:4D-7.1(b)] broadly permits the state to recover Medicaid payments from any and all tort actions initiated by the recipient, regardless of whether such action relates to the underlying cause which led to the need for Medicaid assistance. This is consistent with cases which obligated the Medicare or Medicaid recipient to reimburse the state regardless of the categorization of the settlement funds. See, e.g., Hedgebeth, supra, 74 N.J. at 374 (requiring reimbursement out of funds allocated to the recipient’s mother); In re Kietur, 332 N.J. Super. 18, 23-24 (App. Div. 2000) (requiring reimbursement out of funds “specifically earmarked” as for recipient’s pain and suffering).

Rincon v. State of New Jersey, DMAHS, BER-C-437-07, 2008 WL 693589 (Ch. Div. Jan. 11, 2008) (unpublished).

However, the same Court, expressing frustration that Ahlborn had not initially been brought to its attention, subsequently reversed itself on a motion for reconsideration, stating:

The Supreme Court in Ahlborn … explicitly held federal law conflicts with [the In re Kietur ] holding and prohibited reimbursement out of proceeds representing “pain and suffering” and other monies which are not allocated for medical expenses.

Rincon actually focused on DMAHS’s efforts to recover nonaccident related Medicaid benefits from the estate of a deceased Medicaid recipient, rather than from a third-party recovery obtained by a living Medicaid recipient. Thus, in addition to being unpublished, it did not squarely address the issue discussed herein. Nevertheless, it is the only New Jersey decision discussing Ahlborn ‘simpact, and probably foreshadows formal recognition of the demise of In re Kietur and its predecessors. Plaintiffs and defendants alike should recognize that Medicaid liens should not automatically be paid in full, and that there may be a basis for demanding an allocation hearing if DMAHS will not agree to a compromise.

Pessel is a partner with Fulginiti & Pessel in Princeton.