RICHMOND, Va. (Legal Newsline) - West Virginia Attorney General Darrell McGraw is using a recent decision against the federal Medicaid agency to support his argument while he attempts to avoid causing a hole in his state's budget.

McGraw filed a notice of the decision from an Alabama federal court with the U.S. Court of Appeals for the Fourth Circuit, which he wants to overturn a lower court's decision that said McGraw should have paid more than $400,000 from a settlement with Dey LP to the federal Centers for Medicare and Medicaid Services.

Former Alabama Attorney General Troy King challenged a 2008 letter from CMS that was sent to state health officials and outlined a new procedure for paying CMS from monies recovered in state-filed Medicaid fraud lawsuits. One new rule said CMS would take a percentage of monies classified as civil penalties.

Much of a state's Medicaid budget is provided by the federal government through CMS, so the agency requests that percentage when a state secures a settlement or receives a jury award in Medicaid suits. If CMS feels it is shortchanged, it withholds that amount from its next appropriation to the state.

King alleged the agency did not go through proper rulemaking procedures, like a notice-and-comment period, when it issued the changes. A federal judge agreed earlier this year, and the federal government has appealed.

"The Alabama Decision confirms that because there was no statute, regulation, rule, written policy or guidance in existence at the time of the settlement in the underlying action imposing such (payment) duties upon the State, the (Departmental Appeals Board) exceeded its jurisdiction in upholding the disallowance against the West Virginia Department of Health and Human Resources and the District Court committed error in affirming the DAB," Assistant Attorney General Mary McQuain wrote May 3.

CMS, a part of federal Department of Health and Human Services, noted that McGraw and the private attorneys he hired to represent the State estimated that Dey LP, the defendant in the case, 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 a 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.

In 2004, the year of the 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 one of McGraw's other arguments.

"The Board also rejected the State's contention that the $100,000 that Dey paid to the West Virginia Attorney General's consumer protection fund 'should be treated as costs of legal work performed by attorneys of the West Virginia Attorney General's office in the lawsuit against Dey,'" the feds wrote.

"The Board explained that the consumer protection fund had not financed the State's lawsuit against Dey and, moreover, that Dey had made a separate payment of $250,000 in attorneys fees that CMS did not treat as funds subject to federal recovery."

The feds are also claiming $2.7 million of McGraw's 2004 settlement with Purdue Pharma, worth $10 million, should have gone to it, since the lawsuit alleged harm to the state's Medicaid program.

Rather than give the Purdue Pharma settlement funds to the state agencies named as plaintiffs, McGraw used the money from the settlement on substance abuse programs around the state, as well $500,000 to the University of Charleston for a pharmacy school.

McGraw argued that there was a fourth plaintiff - the affected individuals in his state he was representing in his parens patriae capacity.

"We find no merit in this argument," the Departmental Appeals Board wrote.

"It is not evident from the record that the State was, at the time of settlement, seeking damages on behalf of individual consumers."

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

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