The Arizona Health Care Cost Containment System (AHCCCS) is Arizona’s Medicaid agency, which pays health care expenses for certain low-income patients. Hospitals in Arizona contract with AHCCCS to serve these patients. Under federal law, the hospitals must agree to accept the amounts paid by AHCCCS on behalf of the patients (plus any applicable deductible, coinsurance, or copayment) as “payment in full”—even if the hospital customarily charges a higher rate. 42 C.F.R. § 447.15.
Under Arizona law, a hospital that treats a patient’s injury may impose a lien on any tort recovery that the patient receives for the injury, such as a settlement or damages award. A.R.S. §§ 33-931, 36-2903.01(G)(4). Accordingly, some hospitals recorded liens on the tort recoveries of patients for whom AHCCCS had already paid, in an attempt to recover the balance between what AHCCCS paid and what the hospital customarily charged. The affected patients sued the hospitals, seeking to enjoin enforcement of the liens and claiming that the hospitals breached their contracts with AHCCCS. The trial court agreed that the liens were unenforceable and issued an injunction to that effect, but rejected the contract claim on the ground that the patients were not third-party beneficiaries of the hospitals’ contracts with AHCCCS.
The Court of Appeals affirmed the injunction. A lien cannot exist if there is no debt to be secured. Here, the patients owed no debt to the hospitals. Once the hospitals accepted payment from AHCCCS, the patients owed nothing (beyond a possible deductible, coinsurance, or copayment) because federal law required the hospitals to accept such payment as “payment in full.” To the extent that Arizona law authorized a lien to secure the balance between what AHCCCS paid and what a hospital customarily charged, federal law preempts Arizona law.
On the contract claim, the Court of Appeals reversed and directed entry of judgment in the patients’ favor. The hospitals’ contracts with AHCCCS incorporated federal law and therefore included the requirement that the hospitals accept AHCCCS payment (plus any applicable deductible, coinsurance, or copayment) as “payment in full.” The hospitals breached this requirement when they imposed the liens. Because this requirement was intended to directly benefit the patients, the patients are third-party beneficiaries entitled to enforce the contracts.
Judge Johnsen delivered the opinion of the Court; Judges Cattani and Perkins joined.
Posted by: Josh Whitaker