Ala. AG will fight feds over Medicaid money recovered in pharmaceutical suits

John O'Brien Nov. 6, 2008, 5:17pm


MONTGOMERY, Ala. (Legal Newsline) - Alabama Attorney General Troy King is upset with new demands made by the federal Medicaid agency seeking to claim what it feels is its share of funds recovered from legal actions against pharmaceutical companies.

King filed suit in an Alabama federal court Monday against the Centers for Medicare and Medicaid Services, alleging that the CMS is trying to grab portions of settlements and awards that haven't even been collected yet by the State.

King is also mad at the new requirements regarding what amount must be returned the CMS when a state files an action seeking recovery of Medicaid funds, a move popularized in suits against tobacco companies in the 1990s.

"These new requirements provide that states must 'return' to the Federal Government not only those amounts attributable to the federal share of payments made by a state's Medicaid program, but also a significant portion of amounts attributable to fines and penalties (such as punitive damages) obtained as a result of states' efforts to prosecute those who defraud their respective Medicaid programs, with little or no help from the federal government," King wrote in the complaint.

"Adding insult to injury, (a letter from CMS to the states) also requires stats to make these payments to the Federal Government without regard to whether the state has actually received the amounts in question."

The Oct. 28 letter from the CMS to the states says they are not allowed to segregate portions of their recovery as out of the Federal Government's reach.

" The (Heath and Human Services) Departmental Appeals Board has long recognized the federal government's entitlement to its proportionate share of civil penalties assessed by states against providers or other entities," the CMS letter states.

It adds that recently enacted federal legislation "provides that the full amount of any State (False Claims Act) recovery serve as the basis for measuring the federal share."

In fiscal year 2008, the Federal Government provided nearly 68 cents of every dollar spent on Medicaid in Alabama. King wrote that the new requirements "will have a devastating impact on the State of Alabama and the low-income and disabled individuals served by the State's Medicaid program."

Potentially hundreds of millions of dollars are at stake, he said. The State sued 79 pharmaceutical companies in 2005.

Arising from those claims were a $2 million settlement with Takeda Pharmaceuticals and a $4 million settlement with Dey, L.P.

The Takeda agreement classified half the settlement as compensatory damages, and allocated the appropriate sum to the feds. The other half was classified as fees and expenses and allocated nothing for the feds.

The Dey agreement classified $750,000 to pay the outside counsel hired by the State to bring the suit.

Larger amounts could be in question. In February, a jury ordered AstraZeneca to pay $215 million, though the award was reduced to $160 million. The original verdict provided only $40 million in compensatory damages, while the remainder was punitive damages.

AstraZeneca has appealed, and the State has not received any money yet.

In July, a jury ordered Novartis Pharmaceutical to pay $33 million and GlaxoSmithKline $80.9 million. Though both included no punitive damages, they have both been appealed and the State has not received any money.

"A State may not seek to recover merely the 'state share' of computed fraud damages unless appropriate federal and state authorities formally agree to sever the federal and state portion of the overpayment and pursue them as separate actions," the CMS letter says.

"If there is no formal agreement to sever, a State may not claim in a State FCA case that it is only recovering damages incurred by the state, but not the federal government. Nor may a state return merely the federal portion of 'single' damages and retain all other amounts, such as double and treble damages. The
federal government is entitled to the applicable FMAP share of a state's entire recovery."

The CMS is currently locked in a dispute with West Virginia Attorney General Darrell McGraw over his handling of settlement funds.

McGraw settled his 2001 suit against Purdue Pharma, the manufacturer of prescription painkiller OxyContin, in 2004. The settlement was worth $10 million, with more than $3 million going to the outside counsel McGraw hired to represent the State.

The rest of the money has been given by McGraw, a Democrat who won re-election early Wednesday over Charleston attorney Dan Greear, to substance abuse organizations, angering some members of the state Legislature who feel only they should be able to appropriate state funds.

Chief Deputy Attorney General Fran Hughes admitted before the Legislature that the settlement was structured in a way that prevented the Federal Government from getting a share. Nearly 75 cents of every dollar the state spends on Medicaid is provided by the Federal Government.

Two of the three state agencies named as plaintiffs never received a share of the settlement, and the CMS is planning to withhold funds from its next Medicaid appropriation to the State. Hughes said the state Department of Health and Human Resources received $250,000 from the settlement.

Originally, the CMS sought to withhold more than $4 million, but that figure has been rejected as too high by the HHS Appeals Board. Hughes said in July that a settlement may soon be reached.

King, meanwhile, said the requirements laid out in the letter will irreparably harm his state, and that they are invalid because they were never subject to a notice-and-comment period.

He also called them "an unconstitutional commandeering of state government."

King is seeking a ruling that will hold the letter unlawful and a permanent stop to the enforcement of the requirements.

"We also are calling on President Bush to put an immediate stop to this power grab by the Federal Government," King said in a statement.

"In addition we are asking for the assistance of our two U.S. senators, Richard Shelby and Jeff Sessions, and all of our Congressional delegation, as well as Gov. Bob Riley, in our battle to protect Alabama taxpayers."

The letter can be viewed here, and the complaint here. Proskauer Rose is also representing the State of Alabama.

From Legal Newsline: Reach John O'Brien by e-mail at

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