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Medicaid Clawback Ruling Threatens to Dash Personal Injury Suits

June 10, 2022, 9:45 AM

A Supreme Court ruling allowing state Medicaid programs to claw back a greater share of personal injury awards could close the courthouse door to beneficiaries with less-than-blockbuster claims.

The high court held that states providing care to Medicaid patients can seek reimbursement from personal injury settlement money allocated for the patient’s future medical expenses. Attorneys say the justices’ broad reading of the Medicaid statute will discourage beneficiaries from taking the risk of filing lawsuits in the first place.

“The Court’s decision absolutely will reduce litigants’ incentives to bring personal injury lawsuits,” said Nora Engstrom, a professor at Stanford Law School. “Damages are the fuel that powers the tort system. Without fuel, the system can’t run.”

The dispute centered on Florida’s share of an $800,000 settlement obtained by the parents of a girl who was left in a permanent vegetative state after being hit by a truck while getting off a school bus. Florida said it was entitled to 37.5% of the settlement—$300,000—the percentage set by the Medicaid statute for past and future medical expenses.

Gianinna Gallardo’s parents countered that the state can only tap into money allocated for past expenses. But Justice Clarence Thomas, writing for the court, held the state could take money from an award for future medical expenses in order to pay for expenses already incurred.

“This ruling will definitely have a chilling effect,” said Paul Cannon, a shareholder with Simmons Fletcher PC, a Houston personal injury firm. “Not necessarily on cases as big as the one in this ruling—you’re always going to bring a case that could lead to an $800,000 settlement, even if the state gets 37.5%. But most cases are much smaller, and that’s going to be a strong disincentive to take cases where Medicaid is involved.”

The result could also be a reduction in total recoveries by state Medicaid programs if cases that promise only modest settlement amounts—which make up the overwhelming majority of personal injury lawsuits—end up not being filed at all.

Third Party Recoveries

States are required under the Medicaid Act to seek reimbursement from third parties that are liable for a Medicaid recipient’s care, including jury awards and settlements from third parties.

The requirement has an important limitation that was part of the statute from its enactment in 1965: that a state can’t make claims against the property of Medicaid beneficiaries.

This has generally meant that the state could recover from jury awards for medical expenses, but not for lost wages or pain and suffering, according to Cannon.

The Supreme Court’s ruling that states can tap into future medical expenses as well as prior expenses could be devastating for plaintiffs in small-dollar personal injury cases, Cannon said. This is especially true in states such as Florida that only require motorists to carry $10,000 in liability insurance per vehicle. The amount of insurance a driver has is effectively the cap on recovery in many cases, he said.

“If I’m looking at a case with a maximum recovery of $10,000 or $20,000, there isn’t very much money available after you’ve paid the expenses and subtracted the state’s share for medical expenses that have already been paid,” he said.

“And now if the state comes in to take from the money for future medical, there’s even less. A lot of these cases will never be brought.”

‘Shrinking Pie’

The ruling could also mean less money for state Medicaid programs if they discourage the mass of Medicaid-involved lawsuits from being filed, Cannon said.

“They could pay dearly for the larger share of a shrinking pie,” he said. “It could mean less money overall.”

The Florida statute seems to put at risk a well-functioning system that offers real benefits to state Medicaid programs, which ride the coattails of personal injury lawyers to obtain recoveries from third parties, Cannon said.

“The state can always step in and file a lawsuit on its own behalf,” he said. “But then they’d have to hire lawyers to do it, whereas now they get the benefit of every personal injury lawyer in the country working for them for free.”

The ruling also leaves some open questions about how aggressive states can be in attempting to recover expenses already incurred, as noted by Justice Sonia Sotomayor in her dissenting opinion.

Such questions include whether the state could recoup money allocated for a future, unrelated injury to cover its costs related to a Medicaid beneficiary’s past injury, said Sara Rosenbaum, a professor of health law and policy at George Washington University’s School of Public Health and Health Services.

States could also begin stretching the definition of “medical care” to increase the amount of funds subject to recovery.

“They’ve just thrown open the door to the states to reach in and take money from Medicaid beneficiaries, and when that happens, the beneficiary is going to have to go to court to battle over the state’s authority,” Rosenbaum said.

“This is a ruling without a limiting principle, it doesn’t have a stopping point,” she said.

The case is Gallardo v. Marstiller, U.S., No. 20-1263, opinion 6/6/22.

To contact the reporters on this story: Christopher Brown in St. Louis at ChrisBrown@bloomberglaw.com; Ian Lopez in Washington at ilopez@bloomberglaw.com

To contact the editor responsible for this story: Alexis Kramer at akramer@bloomberglaw.com