Avoiding traps for the unwary: understanding U.S. government reimbursement rights.

• Author: Kohn, Steven M.
• Position: Personal injury in government-funded medical care

Defense counsel have to be alert to the provisions of two federal statutes giving the government broad rights

RELATIVELY few practitioners know that the United States government often has a right to share in the settlement of a personal injury case. But the Department of Justice has become increasingly active in pursuing reimbursement claims on behalf of the government when someone who receives federal medical benefits settles a tort claim against a third party. Many of these reimbursement claims have arisen in the context of toxic torts and in pharmaceutical and medical device lawsuits, particularly those involving class actions and mass torts, including breast implants, pacemakers, and pedicle screw implants.

These claims typically arise under two federal sets of statutes and regulations:

* Federal Medical Care Recovery Act (MCRA), 42 U.S.C. [sections] 2651 et seq.; 28 C.F.R. pt. 43 (1962).

* Medicare Secondary Payer Statute (MSP), 42 U.S.C. [sections] 1395y(b)(2)-(3); 42 C.F.R. [subsections] 411.20-411.37 (1980).

MCRA and MSP make the U.S. government only secondarily liable for payments it makes to medical providers on behalf of its beneficiaries. MSP empowers the government to seek reimbursement either from the beneficiary who received the medical benefits and later recovered from a third party, or directly from the third party responsible for paying the medical expenses. MCRA permits recovery only from alleged tortfeasors and their insurers.

These statutes should cause any defense counsel to pause before a client disburses settlement funds. This is especially true for defense counsel who represent pharmaceutical and medical device companies, since the very nature of litigation in those fields usually involves claims for medical expenses by the plaintiff in the underlying lawsuit. For this reason, whenever a plaintiff's medical expenses are paid by the U.S. government, a red flag is raised for counsel.

That warning cannot be ignored for four critical reasons.

First is a fact not well known to litigators: that the contractual terms of the settlement agreement will not provide full protection to the settling defendant. Absent reimbursement, the settling defendant may remain at risk of a direct action against it by the government.

Second is the severe penalties that can be imposed on settling defendants if the MCRA and MSP provisions are not satisfied. In certain circumstances, double or even triple payments can result for the settling defendant that fails to satisfy the government's rights.

Third is the extraordinary nature of the powers granted to the government by MCRA and MSP and their regulations. The government can claim 100 percent reimbursement of medical expenses, even if that means that the settling plaintiff receives a reduced amount once the government's claims are satisfied.(1)

Fourth, the U.S. government's rights are well protected by liberal statute of limitations periods--three years under MCRA and possibly six years under MSP.

These four problem areas can create tremendous difficulties for settling manufacturers and defense counsel who fail to resolve the government's rights in advance of settlement.

HOW MCRA WORKS

MCRA was enacted in 1962 to provide the United States with substantive rights against third parties responsible in tort for the costs of medical services the government is statutorily required to provide to injured persons. Congress was responding to cases such as United States v. Standard Oil Co. of California,(2) in which the U.S. Supreme Court denied the government recovery of medical costs against a tortfeasor who injured a U.S. soldier. The Court said recovery was not available absent statutory authority.

Congress did not take the Court's hint, however, until a 1960 audit showed how much money could be recovered--several million dollars annually--if only the government had the authority to do so.

The services covered by MCRA include medical services provided by the Veterans Administration, the U.S. Army, the U.S. Air Force, and the Department of Defense. MCRA's provisions, however, do not apply to medical care furnished by the Department of Veterans Affairs to an eligible veteran for a service-related disability.(3)

MCRA provides the government with several methods to enforce its substantive rights, including intervention, direct action, and subrogation. It may "intervene or join" in any action brought by the beneficiary, or if no action is commenced within six months of the time treatment began, it may "institute and prosecute legal proceedings against the third party who is liable for the injury or disease." The government also can require the injured persons to assign their claims to the United States.(4)

Not only does the government have this array of enforcement methods, it also has time to decide which to use. The three-year statute of limitations starts to run when the medical services are provided, not when the injury occurs. More important, the statute is tolled as long as "facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances."(5)

Perhaps most important, a personal injury defendant is not relieved of liability under MCRA just because the underlying lawsuit has been resolved. Indeed, even though MCRA does not provide for double damages, a defendant who fails to account for the government's MCRA rights before settlement may end up paying twice, since the government can still pursue its claims directly against the tortfeasor or insurer for the cost of medical services furnished to the injured party.

Manufacturers and their insurers can attempt to avoid such double damages by including an indemnity agreement in the settlement, under which the plaintiff would agree to reimburse the government's costs from the proceeds of the settlement. However, the extent to which such provisions offer protection depends largely on the solvency of the settling plaintiff, which in many cases is minimal.

It is important to note that MCRA defines the government's rights against third-party tortfeasors and their insurers for reasonable value medical services furnished. MCRA arises only "under circumstances creating a tort liability upon some third person."(6) Thus, recovery under MCRA depends on state substantive tort law.

This emphasis becomes critical when the underlying state law does not give rise to tort liability. Simply put, the government can recover under MCRA only where the injury creates tort liability under state law. If there is no state tort liability, there can be no government recovery under MCRA. This is especially important when a state has a statute that extinguishes certain tort liability. For example, in United States v. Allstate Insurance Co.,(7) a federal district court held that the government could not make a MCRA claim relating to a Michigan auto accident because Michigan's no-fault statute abolished tort liability. Similarly, because MCRA is effective only in tort situations, it does not apply when the source of the claim lies in workers' compensation.(8)

HOW MSP WORKS

The Medicare as Secondary Payer Act is not a separate statute but a set of amendments to the Medicare provisions of the Social Security Act. Medicare provides health care benefits to persons 65 and older, to persons who are disabled, and to persons with end-stage renal disease.(9)

Starting in 1981, Congress enacted a series of cost-saving amendments making third-party payers primary to Medicare for services provided to beneficiaries who also were entitled to Medicare. The purpose of the legislation, the federal district court in Zinman v. Shalala stated, "is to make Medicare's liability in certain instances secondary and thus to reduce the costs of the Medicare program,"(10) MSP therefore makes certain Medicare payments "conditional" and imposes duties of reimbursement for those payments. The reimbursement is due from any entity required to make payment under a "primary plan" or from any physician, hospital or other provider that has received payment from the entity primarily responsible.

A "primary plan" is defined as any "arrangement, oral or written, by one or more entities, to provide health benefits or medical care or assume legal liability for injury or illness." Clearly, this definition is intentionally broad, making Medicare a secondary payer to the extent possible. In case anyone doubted this breadth, however, the statute goes on to specify that the term includes a "workmen's compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan) or no fault insurance."

The government agency that goes after the primary plan for reimbursement--the real party in interest--is the Health Care Financing Administration (HCFA). Private litigants have brought actions under the MSP statute, but then they are obligated to reimburse the United States from any recovery.(11)

As under MCRA, the government has a lot of ways to seek reimbursement under MSP. It can file a direct action against any entity responsible to make payment(12) or any entity that receives such payment.(13) It can pursue its subrogation rights.(14) Or it can intervene in related actions.(15) Unlike MCRA, however, MSP does not give the government the power to force medical beneficiaries to assign their rights against the primarily responsible entity.

Although Congress did not provide a statute of limitations within MSP itself, courts have applied the six-year statute established by 28 U.S.C. [sections] 2415(a).(16) If the plaintiff bringing an action under MSP is an individual or health care plan, however, the statute of limitations is controlled by the most closely analogous state law.(17)

Key to applying the six-year statute of limitations is determining when a cause of action under MSP accrues, but again, the statute has no specific provision addressing...