SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-347-97T2
WILLIAM WALDMAN, Commissioner,
Department of Human Services,
State of New Jersey and VELVET G.
MILLER, Director, Division of Medical
Assistance and Health Services, State
of New Jersey,
Plaintiffs/Intervenors-Appellants,
v.
LISA ANN CANDIA, ROSE MARY CANDIA
and MICHAEL CANDIA,
Plaintiffs-Respondents,
v.
VITO FRANCIS PAKONIS and
CLARA MAASS MEDICAL CENTER,
Defendants.
___________________________________
A-681-97T2
WILLIAM WALDMAN, Commissioner,
Department of Human Services,
State of New Jersey and KAREN SQUARREL,
Acting Director, Division of Medical
Assistance and Health Services, State
of New Jersey,
Plaintiffs/Intervenors-Appellants/Cross-Respondents,
v.
AYANA MORRIS, an infant by her guardian
ad litem, JODI MORRIS and JODI MORRIS,
individually,
Plaintiffs-Respondents/Cross-Appellants,
v.
JOSEPH A. CALVETTO, FRANK A. COCCO,
OCEAN GYNECOLOGICAL AND OBSTETRICAL
ASSOCIATES, KIMBALL MEDICAL CENTER
and VIRGINIA POST,
Defendants.
__________________________________
Argued: October 27, 1998 - Decided: January 28, 1999
Before Judges Kestin, Wefing and Carchman.
On appeal from the Superior Court of New Jersey,
Law Division, Civil Part, Essex and Ocean Counties.
Mary A. Hurley, Deputy Attorney General, argued the
cause for appellants (Peter Verniero, Attorney General,
attorney; Joseph L. Yannotti, Assistant Attorney General,
of counsel; Ms. Hurley, on the brief).
William C. Slattery argued the cause for the Candia
respondents in A-347-97T2 (Slattery, McElwee & Jespersen,
attorneys; Mr. Slattery, on the brief).
Bruce D. Vargo argued the cause for the Morris
respondents/cross-appellants in A-681-97T2 (Budd Larner
Gross Rosenbaum Greenberg & Sade, attorneys; Cynthia A.
Walters, on the brief).
The opinion of the court was delivered by
KESTIN, J.A.D.
These appeals, consolidated for the purpose of decision, raise
the question whether, and to what extent, Medicaid payments made on
behalf of two disabled young women must be reimbursed to the State
after damages were recovered in settlements with tortfeasors for
injuries associated with the disabilities. Both cases involve
interpretations of federal Medicaid legislation, 42 U.S.C. §§
1396a-1396uSee footnote 1, and State counterpart provisions, N.J.S.A. 30:4D-1
to -19.1, including questions concerning State Medicaid liens and
the funding of special needs trusts (SNT).See footnote 2 We hold that each
trial court, in a different way, incorrectly applied the governing
federal and state statutes. Accordingly, in Candia, we reverse; in
Morris, we affirm in part and reverse in part. In both cases we
remand for modification of the trial courts' orders distributing
the proceeds of the settlements.
Lisa Ann Candia, twenty-two years of age when the State filed its complaint for reimbursement in 1996, is an adjudicated incompetent and thus disabled within the meaning of federal Medicaid legislation. 42 U.S.C. §1396d(g) (1992). She had received medical benefits paid for by the State since 1986. Her parents, Rose Mary and Michael Candia, brought a medical malpractice action against several defendants on behalf of their daughter and themselves. The Division of Medical Assistance and Health Services (DMAHS), the State's Medicaid agency, informed the Candias of their duty to contact DMAHS prior to settlement of their claim in order to establish the amount of DMAHS's Medicaid lien.
The malpractice claim was settled for $700,000, approved by an order filed on April 24, 1996, which provided, inter alia, that $28,112.94, the amount of the State's lien, was to be held by the Candias' attorneys in an interest bearing account subject to further order. The Candias were to notify DMAHS about the existence of these funds with a copy of the order, and DMAHS was to commence a Superior Court action within ninety days for a determination of its entitlement to these funds. If no such action was filed, the funds with accrued interest were to be turned over to Rose Mary and Michael Candia in further satisfaction of their claims.
The order also distributed the balance of the settlement. $400,000 funded an SNT, to be used for Lisa Ann Candia's benefit during her life or thirty years, whichever would be longer. The remainder paid attorneys' fees and expenses as well as Rose Mary and Michael Candia's damage claims.
When DMAHS was notified of the entry of the order, it moved to intervene in the malpractice litigation, arguing that N.J.S.A. 30:4D-7.1(b) obligated the Candias, upon settlement of the litigation, to fully reimburse the State for moneys expended on Lisa Ann Candia's medical care. DMAHS further argued that, according to N.J.S.A. 30:4D-7.1(c), Lisa Ann Candia was deemed to have assigned to the Commissioner of the Department of Human Services (DHS) any rights to support for the purpose of medical care and to payment for medical care from any third party.
After the Candias consented to DMAHS's intervention, the trial court granted summary judgment to the Candias, declining to apply the State's Medicaid lien to the settlement proceeds. The motion judge, in a comprehensive order disposing of the matter, held that 42 U.S.C. §1396p(a)(1) and (b)(1) preempt state law pursuant to 42 U.S.C. §1396a(a)(18), and that under these provisions a State may neither recover funds nor impose a lien against the property of an individual prior to her death on account of medical assistance correctly paid on her behalf. In addition, the judge held that the funding of a trust established by a court for the benefit of a disabled person under 65 years of age results in neither temporary nor permanent Medicaid ineligibility, according to 42 U.S.C. §1396p(c)(2)(B)(iv) and (c)(4). The judge also held on the basis of 42 U.S.C. §1396p(d)(4), however, that the State is entitled to all of the funds that remain in the trust upon the death of the Medicaid recipient, up to an amount equal to the total medical assistance paid on her behalf. He directed that the $28,112.94 was to be distributed to Rose Mary and Michael Candia instead of to the State, and otherwise approved the distribution of the settlement. It is from this ruling that the State appeals.
Ayana Morris had received medical benefits paid for by the State since her birth in 1982. Her mother, Jodi Morris, instituted a medical malpractice action against several defendants on behalf of her daughter and herself. DMAHS informed the Morrises that they were required to contact the Division prior to settlement of the claim in order to establish DMAHS's lien amount.
The claim against one defendant was settled for one million dollars prior to a no cause of action jury verdict. The trial judge, in an order approving the terms of the settlement, provided that $121,560.60, the amount of the State's Medicaid lien, was to be held in an interest bearing account until resolution of separate litigation over reimbursement of the Medicaid benefits. The remainder of the settlement was distributed to the Morris attorneys for fees and costs; to Jodi Morris individually for the purchase of a home in which Ayana Morris would be able to reside; and to an SNT established for the benefit of Ayana Morris.
The State's motion to intervene was granted. The judge ruled that the State was entitled to immediate satisfaction of its Medicaid lien in an amount to be determined by the court, after a plenary hearing. Apparently, the judge considered a hearing necessary because the settlement agreement did not specify how the proceeds were to be allocated in respect of the particular claims embraced in the suit. After the hearing, the judge awarded the State two-thirds of its lien, and directed that the remainder be added to the SNT. The judge reached this result by finding a part of the settlement attributable to "recovery for medical expenses," and the remainder related to "the child's future needs." Based on this distinction and on "the equities of the case," he held that DMAHS's lien attached only to the medical-expenses recovery, and that the remainder was to be reserved for Ayana Morris, subject to reimbursement to the State upon her death from any balance in the SNT then remaining. Thus, while the State's lien was enforced, it was only partially paid. The State appeals from the order to the extent it denied full reimbursement; the Morrises cross-appeal from the order to the extent it required any reimbursement exceeding two percent.
Medicaid is a medical assistance program for eligible low-income individuals, established by Subchapter XIX of the federal Social Security Act, 42 U.S.C. §§ 1396a-1396u. The program is administered jointly by the federal and state governments. While the Act gives state governments broad discretion to determine the extent of medical assistance provided, state programs must comply with federal criteria. 42 U.S.C. §1396a(a); Schweiker v. Gray Panthers, 453 U.S. 34, 37, 101 S. Ct. 2633, 2636, 69 L. Ed.2d 460, 465 (1981). State programs must also be approved by the federal government. Harris v. McRae, 448 U.S. 297, 301, 100 S. Ct. 2671, 2680, 65 L. Ed.2d 784, 794 (1980); County of Camden v. Waldman, 292 N.J. Super. 268, 278 (App. Div.), certif. denied, 149 N.J. 139 (1996).
Mandatory federal criteria include: (1) A state shall, by using reasonable measures, ascertain the liability of third parties to pay for care arising out of injury or disease and, where appropriate, seek reimbursement to the extent of such liability, 42 U.S.C. §1396a(a)(25)(A); and (2) A Medicaid recipient, as a condition of eligibility, must assign to the state any rights to support for the purpose of medical care and any rights to payment for medical care from any third party, 42 U.S.C. §1396a(a)(45). Subsequently,
[s]uch part of any amount collected by the State under an assignment made under the provisions of this section shall be retained by the State as is necessary to reimburse it for medical assistance payments made on behalf of an individual with respect to whom such assignment was executed (with appropriate reimbursement of the federal government to the extent of its participation in the financing of such medical assistance), and the remainder of such amount collected shall be paid to such individual.
[
42 U.S.C. §1396k (1992).]
New Jersey participates in Medicaid pursuant to N.J.S.A. 30:4D-2.
Medicaid benefits are "last resource" benefits. Ibid.
Accordingly, reflecting federal requirements, N.J.S.A. 30:4D-7.1(b)
provides that every Medicaid recipient or legal representative must
"promptly notify [DMAHS] of any recovery from a third party and
shall immediately reimburse [DMAHS] in full from the proceeds of
any settlement." Further, N.J.S.A. 30:4D-7(k) authorizes DHS to
take reasonable measures to ascertain the liability of third
parties to the recipient and to seek reimbursement where
appropriate. Finally, N.J.S.A. 30:4D-7.1(c) states that a Medicaid
recipient, as a condition of eligibility, is deemed to have
assigned to the Commissioner any rights to payment against a third
party.
Because Medicaid is a program designed for needy individuals,
the amount of an individual's financial resources determines
Medicaid eligibility. Under an older version of the federal
Medicaid statute, trusts were considered "available resources" for
the purpose of Medicaid eligibility, regardless of how they were
structured. However, a 1993 amendment to the federal statute
allowed recipients to establish an SNT, with funds recovered from
liable tortfeasors, without losing Medicaid eligibility.
42 U.S.C. §1396p(d)(4).
In the light of Medicaid eligibility criteria, the Candias and
Morrises question the extent to which DMAHS is entitled to recover
payments made on behalf of a beneficiary in the circumstances
presented. In support of their positions that DMAHS is not
entitled to recover any payments, they point to
42 U.S.C. §1396p(a)(1), which provides:
No lien may be imposed against the property of any
individual prior to his death on account of medical
assistance paid or to be paid on his behalf under the
State plan except....
(A) pursuant to the judgment of a court on
account of benefits incorrectly paid on behalf
of such individual . . . .
[
42 U.S.C. §1396p(a)(1).]
In addition, the Candias and Morrises maintain that
42 U.S.C. §1396p(d) puts SNTs beyond the reach of a recovery action by
DMAHS. That section reads, in relevant part:
(1) For purposes of determining an individual's
eligibility for, or amount of, benefits under a State
plan under this subchapter, subject to paragraph (4), the
rules specified in paragraph (3) shall apply to a trust
established by such individual.
(4) This subsection shall not apply to the following
trusts:
(A) A trust containing the assets of an
individual under age 65 who is disabled (as
defined in section 1382(a)(3) of this title)
and which is established for the benefit of
such individual by a parent, grandparent,
legal guardian of the individual, or a court
if the State will receive all amounts
remaining in the trust upon the death of such
individual up to an amount equal to the total
medical assistance paid on behalf of the
individual under a State plan under this
subchapter.
[
42 U.S.C. §1396p(d) (1992 & Supp. 1998).]
The State argues that it is entitled to recover expenditures
it has made on behalf of the beneficiaries. It maintains that,
contrary to the Candias' and Morrises' assertions, section 1396p(a)
does not apply to the instant cases because here, the liens were
imposed on the property of a third party tortfeasor under the third
party recovery rules of
42 U.S.C. §1396(k) (1992), rather than on
property already belonging to the Medicaid beneficiaries. The
State also argues that the Candias and Morrises interpret section
1396p(d) incorrectly. According to the State, that section merely
stipulates that funds in SNTs will not be considered "available
resources" for purposes of determining Medicaid eligibility. The
argument is that, while an SNT allows a Medicaid beneficiary to own
substantial funds without losing Medicaid eligibility, the statute
has no bearing on the State's right to recover payments it has
already made on the beneficiary's behalf from settlement proceeds
which become available before they are turned over to fund an SNT.See footnote 3
The Candias and Morrises counter with the argument that the
New Jersey Medicaid statute does not permit third-party recovery in
these cases. See N.J.S.A. 30:4D-7.1(b). They assert that a
finding of liability is a precondition for third-party recovery by
the State; and contend that, because the Candia matter was settled
before trial and the Morris matter was dismissed after being
settled, the precondition of liability was not satisfied, thus
barring recovery by the State under pertinent third-party
principles.
The State's position is correct. First, the argument that the
State is barred from imposing a lien on a beneficiary's own
property held in an SNT, even if correct, does not affect the
State's undisputed right to recover payments it has made from third
parties. The State's claim against the settlement proceeds is to
be satisfied first, before any of the proceeds are transferred to
an SNT. See Cricchio v. Pennisi,
683 N.E.2d 301, 304 (N.Y. 1997).
The New Jersey Supreme Court has held that the New Jersey Medicaid
law evinces an "unmistakable intent to afford the State every
opportunity to recoup its payments from third parties." Hedgebeth
v. Medford,
74 N.J. 360, 366 (1977). Pursuant to N.J.S.A. 30:40D-7, the State may recover payments made on behalf of a Medicare
recipient either through its right of subrogation to the
recipient's claims or through an independent action against the
third party tortfeasor. Id. at 365. The State's subrogation right
applies in both of the instant cases, for each claimant recovered
damages via the settlement of a cause of action for personal
injuries the treatment of which had been paid for by Medicaid
funds.
An adjudication of tortfeasor liability is not a prerequisite
to invocation of the State's lien rights. To hold otherwise in the
contexts presented here would be to elevate form over substance.
Patently, the settlements in both of these matters eventuated from
claims of injury for the treatment of which Medicaid funds had been
expended.
Further, the State is correct in its argument that the third-party recovery and SNT provisions of federal law must be considered
independently of each other. The United States Court of Appeals
for the Eighth Circuit, on the basis of a fact pattern similar to
the ones presented here, recently held that
the SNT amendments do not postpone the state's right to
enforce its vested and existing Medicaid lien. . . .
Thus, a state may require a Medicaid lien imposed on the
proceeds of a personal injury award or settlement to be
satisfied before the remaining funds are placed in an
SNT.
[Norwest Bank v. Doth,
159 F.3d 328, 333 (8th Cir.
1998).]
The District Court in its opinion, which the Eighth Circuit
affirmed, stated explicitly:
May a recipient of Medicaid funds avoid a statutory and
contractual obligation to reimburse Medicaid by placing
into trust proceeds from a personal injury action? The
answer to the question is no.
[Norwest Bank v. Doth,
969 F. Supp. 532, 532 (D. Minn. 1997).]
The District Court in Doth also pointed out that interpreting the
SNT provision as shielding recoveries in tort actions from a
state's recovery action would tend to render the state's right of
recovery meaningless. Id. at 534. This is especially true when
one considers that Medicaid, as a payor of last resort, is not held
responsible to pay for medical care that the Medicaid recipient
becomes able to afford. N.J.S.A. 30:4D-2.
Having stated the general principles which govern these
matters, we address some specific errors in the trial courts'
orders in both cases. In Candia, the motion judge awarded certain
funds to Lisa Ann Candia's parents instead of to Lisa Ann herself,
presumably to shield those funds from attachment by DMAHS. This
was error. For purposes of Medicaid recovery, an award to the
beneficiary's parents is considered an award to the beneficiary
herself. See Hedgebeth, supra, 74 N.J. at 373-74. Furthermore,
the motion judge's ruling concerning Lisa Ann Candia's continuing
eligibility for Medicaid was premature.
The trial judge in Morris also failed to follow Hedgebeth and
consider the funds awarded to Jodi Morris, Ayana's mother, as
"available funds" for Ayana's care. Ibid. Also, after the judge
held a hearing, he allocated Ayana Morris's recovery to specific
categories of damages, and compromised the State's lien on that
basis. The New Jersey Medicaid statute does not provide for such
a hearing; it does not authorize the courts to compromise a
Medicaid lien; and it does not distinguish between categories of
damages in respect of the State's lien rights. The procedure
employed by the trial judge and the result he reached had no basis
in law.
In reaching our conclusions, we are mindful of the need to
avoid derogating the system of joint Medicaid funding or the
manifest policies governing it. The third party liability
provisions in the federal Medicaid statute were clearly created to
permit recoupment of Medicaid payments.
42 U.S.C. §1396k(a)
(1992); cf. Marmorino v. Newark Housing Auth.,
189 N.J. Super. 538,
540-41 (Law Div. 1983). Because the Medicaid program is funded
both by the states and by federal financial participation, once a
third party payment has been made, the Health Care Financing
Administration (HCFA), the federal agency in charge of Medicaid, is
entitled to recover its share of Medicaid payments.
42 U.S.C. §1396k(b) (1992). If a state fails to repay HCFA its legitimate
share of a third party recovery before recovery proceeds are paid
to the Medicaid beneficiary, HCFA can withhold federal financial
participation from the state. The Departmental Appeals Board,
Appellate Division, of the United States Department of Health and
Human Services so held in Washington Dep't of Social and Health
Services, No. A-95-159, 1
996 WL 157123 (H.H.S., D.A.B., App. Div.,
Feb. 7, 1997). Accordingly, the states are bound by their duty of
repayment even if they compromise a lien, i.e., even if they
decide, based on the facts of an individual case, to allow the
beneficiary to retain a larger portion of the recovery proceeds.
42 U.S.C. §1396b(d)(2)(B). In both cases before us, the trial
courts paid insufficient attention to this statutory scheme.
The State is entitled to recover its Medicaid payments in
full. To the extent that the trial court judges decided otherwise,
their decisions are reversed. The matters are remanded to the
respective trial courts for the entry of modified orders conforming
with the requirements of this opinion.
Reversed and remanded.
Footnote: 1 All citations to these sections are to the 1998 Supplement, unless indicated otherwise. Footnote: 2 A "special" or "supplemental needs trust" is a trust designed for defraying costs of medical care that are not covered by any other public or private benefits program. See In re Lennon, 294 N.J. Super. 303, 306 (Ch. Div. 1996). Footnote: 3 We are not here called upon to address questions of continuing Medicaid eligibility or ultimate reimbursement rights.