RICHMOND, Va. (Legal Newsline) - West Virginia Attorney General Darrell McGraw is telling a federal appeals court that the federal government lacked the authority to take $450,000 from one of his settlements with a pharmaceutical company.

On Oct. 13, McGraw filed his reply to the government's response to his appeal of two lower rulings that said the feds were owed that amount from an $850,000 settlement with Dey LP that was reached in 2004. McGraw also argued that the $100,000 he set aside for his Consumer Protection Fund shouldn't have been subject to recovery.

A Departmental Appeals Board and a federal judge in Charleston, W.Va., have both sided with the federal Department of Health and Human Services in the dispute.

McGraw is claiming that there is no "explicit statutory authority and no implementing regulation" that requires him to pass on recovery from third parties on Medicaid damages claims. The federal government supplies the majority of funding for West Virginia's Medicaid program.

"The (DHHS) Secretary tacitly concedes that West Virginia had no duty to recover from Dey," McGraw's attorneys wrote, citing a portion of DHHS' brief that says "the State chose to recover from Dey rather than from the providers."

McGraw's brief continues, "West Virginia contends that, in accordance with the design of the Medicaid Act, in the absence of a duty to recoup there is no duty to pay over settlement funds that were not received by the State Medicaid Agency."

McGraw says Dey, for liability purposes, is not a provider or an entity that may be liable to pay for medical assistance furnished under a state plan.

"Third party pharmaceutical manufacturers, such as Dey, have no contractual relationship with the state Medicaid agency in connection with the administration of its Medicaid program," the brief says.

In their response to McGraw's appeal, the feds noted that McGraw and the private attorneys he hired to represent the State estimated that Dey caused more than $950,000 of damage to the state Medicaid program. Dey settled for $850,000.

"West Virginia did not reimburse HHS for the federal share of its Medicaid overpayments or inform HHS of its settlement with Dey," the federal government's attorneys wrote in the brief.

"Instead, the State gave $750,000 to (the Public Employees Insurance Agency) - i.e., roughly five times the State's own damages estimate for PEIA - and gave the remaining $100,000 to the Consumer Protection Fund of the West Virginia Attorney General's Office."

The private attorneys hired by McGraw also received $250,000 for their work in the settlement. The case will have implications in a nearly identical one worth $2.7 million that has been stayed. It involves a 2004 settlement with Purdue Pharma worth $10 million.

In 2004, the year of the Dey settlement, the federal government supplied 78 percent of the money West Virginia used on Medicaid.

To calculate the amount it wanted to withhold, the federal government took 67 percent of the amount of the settlement because the original Medicaid damages estimate was 67 percent of what McGraw claimed was the State's damages.

The feds then took 78 percent of that amount. The Departmental Appeals Board agreed with the amount and rejected McGraw's argument that the $100,000 set aside for the Consumer Protection Fund wasn't subject to recovery.

"Inasmuch as the $100,000 did not constitute compensatory damages for 'medical assistance,' it was not 'program income,' and, therefore, should have been excluded from the calculation of the Medicaid overpayment and federal share," McGraw's brief says.

Chief Deputy Attorney General Fran Hughes has admitted to the state Legislature that the Purdue Pharma money was not given to the state DHHR, which administers the Medicaid program, because the federal DHHS would then be able to claim a share -- "We have arranged a methodology that has prevented the federal government from coming back and seizing money," Hughes said.

Hughes formerly served as general counsel for a national consulting firm that specialized in Medicaid financing.

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

More News