Arizona Court of Appeals Division One Holds That When AHCCCS Pays for Medical Expenses of a Tort Victim, AHCCCS’s Lien Rights Under A.R.S. § 36-2915 Are Limited To That Portion of a Tort Settlement That Represents Recovery of Medical Expenses Actually Paid by AHCCCS.

Arizona’s Medicaid plan, the Arizona Health Care Cost Containment System (“AHCCCS”), “is entitled to a lien . . . on any and all claims of liability” against a tortfeasor when AHCCCS pays for the treatment of injuries caused by the tortfeasor.  A.R.S. § 36-2915(A).  In two consolidated cases, tort plaintiffs who suffered physical injuries settled their claims for less than the full amount of overall damages.  Before settlement, AHCCCS paid some amount for the treatment of the plaintiffs’ injuries.  After settlement, AHCCCS sought to enforce a lien for the amount it paid against the settlement amount. 

The dispute centered on whether AHCCCS’s lien rights should “be measured by what it actually paid or by the victim’s total billed medical expenses.”  Under the so-called “collateral source rule” in Arizona law, a plaintiff may recover from a tortfeasor the full amount billed for their medical treatment, even if – as is often the case – the amount actually paid is less because the provider accepted a lesser amount.  AHCCCS argued that its lien rights should be measured using the total billed expenses.  If, for example, the total billed expenses were 50% of the total overall damages, then the lien rights would be equal to 50% of the settlement amount.  The plaintiffs argued that the amount actually paid should be the measuring stick.  On appeal from administrative proceedings at the AHCCCS, the superior court agreed with the plaintiffs and AHCCCS appealed.  Southwest Fiduciary cross-appealed the AHCCCS Director’s administrative decision not to eliminate its lien entirely.

The Court of Appeals affirmed, holding that AHCCCS “may recover no more than the portion of the victim’s settlement that represents recovery of the plan’s payments on behalf of the victim.”

As a matter of federal law, the United States Supreme Court has held that “Medicaid’s share of [a] settlement may not exceed the portion of the settlement that represents medical expenses.”  Arkansas Department of Health and Human Services v. Ahlborn, 547 U.S. 268 (2006).  But in that case the parties had stipulated that the amount of settlement attributable to medical expenses was much lower than the amount the state had actually paid.  This appeal thus raises a question left open in Ahlborn: may a Medicaid lien be enforced “against the portion of a tort settlement that represents medical expenses that are billed but not paid because medical providers have accepted discounted payments?”  As a matter of state and federal law, the Court’s answer was that AHCCCS’s lien could not. 

First, the Court explained that the language of the lien statute limits AHCCCS’s lien rights to the amount “for which [it] . . . is responsible.”  See A.R.S. § 36-2915(A).  In the context of a tort settlement, the Court concluded that “AHCCCS’s share should be calculated based on amounts it paid,” not the larger amounts billed by providers for which it was not ultimately “responsible” because the providers agreed to discounted fees. 

Second, the Court rejected AHCCCS’s argument that Ahlborn implicitly approved of lien rights equal to the amount of a settlement attributable to medical expenses, not just paid expenses.  In Ahlborn, the state paid out more than the portion of the settlement attributable to medical expenses and sought to recover the full amount it paid.  Noting that 42 U.S.C. § 1396a generally prohibits liens against payments to Medicaid recipients, the Supreme Court held that the state could not recover from the non-medical-expense portions of the settlement.  Ahlborn and Section 1396a thus indicated that federal law likewise does not allow a Medicaid plan to recover from any portion of the settlement not attributable to its payments.

Third, the Court rejected AHCCCS’s policy argument that the collateral source rule should not apply to limit the recovery of a government payor like AHCCCS.  Noting that A.R.S. § 36-2915(A) already limits the collateral source rule by providing for any reimbursement right, the Court “declined to expand the legislature’s limitation on the collateral source rule.”

Fourth, the Court held that the superior court did not err when it presumed “that the settlements in these cases should be attributed proportionately to their various components.”  In part, because AHCCCS did not challenge the allocation calculation, if a settlement amount represented 40% of the full value of a case, it was a fair presumption to limit AHCCCS’s lien to 40% of the full amount it paid. 

Finally, the Court denied Southwest Fiduciary’s cross-appeal, concluding that the AHCCCS Director’s decision to maintain AHCCCS’s lien was not arbitrary, capricious, or an abuse of discretion.

Judge Johnsen authored the opinion; Judges Kessler and Weisenberg concurred.