Morning Consult: Medicaid Third Party Liability and the Healthy Kids ACT – It’s Time

Among the many efforts to streamline and improve Medicaid, there has not been considerable focus over the past five years to improve the states’ Medicaid “third party liability” programs. Fortunately, Congress has the chance to correct that now by enacting the Medicaid TPL provisions of the Healthy Kids Act (H.R. 3921) that was recently approved by the House Energy & Commerce Committee.

Medicaid TPL – Simple in Theory, Complex in Practice

The principle of Medicaid TPL is quite simple — state Medicaid programs should not pay beneficiary claims that ought to be covered by others. Here’s how it works: imagine that a Medicaid beneficiary —we’ll call her “Ms. Smith” — was injured in a car crash in which her car was totaled, she broke her leg and incurred $10,000 of medical costs paid by Medicaid, and lost her minimum wage job. If Ms. Smith later sues and settles with the other driver, Medicaid is entitled to repayment from the settlement proceeds for some of the medical costs. Aside from settlement recovery, alternative “primary” funding may also come from Medicare (for dual eligible individuals) or private health insurance. Medicaid is the payer of last resort.

Unfortunately, implementation has not gone smoothly. In 2013, the Office of Inspector General studied the gaps in Medicaid TPL programs, documenting over $4.1 billion “left on the table” by states in their failure to collect available funds from existing coverage (such as group health and Medicare). The Government Accountability Office has also documented problems with the TPL system, focusing on how health insurers and pharmacy benefit managers obstructed states from identifying which Medicaid beneficiaries had alternative primary health insurance.

Where’s the Missing Money?

So who has the missing money that Medicaid is not collecting? The 2013 OIG Report shows that the vast majority (82 percent) of the estimated $4.1 billion in missing Medicaid dollars should have been paid by health insurers, Medicare or beneficiary probate estates. The report also looked at missed state recoveries from insurers and defendants in liability and no-fault cases, showing these amounts were less than one fifth (under $750 million) of the uncollected amounts, representing a relatively small pool of missed recoveries. The OIG did not consider the costs of collection, which in liability cases would be higher than from group health insurers, probate estates, or Medicare.

The Supreme Court Weighs In

Going back to our hypothetical, what if Ms. Smith had no health insurance but was at fault for causing her car crash, and her settlement only recovered a fraction of her claim for medicals, her car, and her lost wages? Historically, states took the view that no matter what the settlement, the state was entitled to recovery first, and only after the state was repaid in full from the settlement proceeds could Ms. Smith could keep the rest (if any funds remained). Beneficiaries, of course, viewed it differently and argued that Medicaid should only be allowed to recover funds associated with the health care portion of the settlement and that states had no claim on settlement proceeds attributable to the wrecked car or lost wages.

This question went before the United States Supreme Court not once but twice — and in each decision, the court sided with beneficiaries, ruling that in undifferentiated settlement cases, the states would need to undertake an “allocation” dividing the settlement between health care and other damages, and (most importantly) recovering only from the health care component.

While states complained that doing “allocations” would be difficult, the court disagreed, finding that the language of the Medicaid law limited Medicaid recoveries to the medical portion of the claim. Of course, there is an inherent fairness to the decisions, as to allow states to recover first would effectively mean that health care costs would not be able to be settled at all, which in turn would eliminate settlements (and any subsequent TPL recoveries) altogether.

The States, Wanting Everything, Risk Getting Nothing

In response to the Supreme Court, state Medicaid directors ran to Congress for help, and without any evaluation, stakeholder input, or debate, on Dec. 10, 2013, Section 202(b) was slipped into the Bipartisan Budget Act of 2013 — gutting the statutory language upon which the Supreme Court had relied, and replacing it with explicit language granting states the right to recover the first dollars of any settlement. The effect of the legislation was not only to eliminate most of the incentive for beneficiaries to pursue third party settlements in the first place, but to effectively eliminate the ability of the parties to settle at all. In other words, by wanting everything, the states risked getting nothing — if there was no claim and no settlement, Medicaid would remain the primary payer.

Congress did not anticipate this outcome in 2013, and when the implications eventually became clear, legislators reversed course and immediately delayed the implementation date of the provision from 2014 to 2015, and again in MACRA Congress delayed implementation from 2015 to 2017. However, time has run out on the latest extension, and Congress needs to act soon if it wishes to avoid the unintended consequence of the 2013 legislation.

Fixing Medicaid TPL – What Should Congress Do?

Congress has the opportunity to get Medicaid TPL right. First, Congress should focus on the data and follow the money by working to streamline TPL recoveries from Medicare and group health policies. Legislation introduced by Rep. Michael Burgess (R-Texas) (H.R. 938) takes on the issues to better coordinate coverage between Medicaid and group health insurers. Fortunately, the Energy & Commerce Committee included the legislation in the recent Healthy Kids Act. As representatives of the MARC Coalition, we are pleased to support this important legislation, and urge Congress to enact this important improvement to the Medicaid TPL process.

Second, Congress should re-extend MACRA Section 220, and either repeal the 2013 budget agreement provision or at least extend its implementation date another two years. Again, Section 201(a)(1) of the Healthy Kids Act included this important provision, and the Coalition applauds the Committee for advancing the legislation on Oct. 4.

Medicaid deserves recovery for its payments related to Ms. Smith’s car crash. And Ms. Smith deserves to recover something for her wrecked car and lost wages. If she has health insurance, Medicaid should never pay, period. And more needs to be done to ensure that states are aware of group health insurance, Medicare insurance, or available probate recoveries. But even if Ms. Smith doesn’t have health insurance, the incentives should be aligned so that Medicaid recovers at least something, rather than the nothing it will receive if the language in the 2013 budget agreement is not corrected. Congress has the chance to get this right. Congress should enact the Medicaid TPL provisions in the Healthy Kids Act, and seize the opportunity in front of us.

Greg McKenna is a vice president of Gallagher Bassett, Inc. and chair of the Medicare Advocacy Recovery Coalition. David Farber, a partner in the FDA and Life Sciences Practice at King & Spalding in Washington, D.C., is counsel to MARC. The views expressed in this article are the authors’ alone, and do not represent their organizations or their clients other than MARC.

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