RICHMOND, Va. (Legal Newsline) - A federal appeals court has ruled that the federal government was right to withhold Medicaid funds from West Virginia because it was shortchanged in a lawsuit by state Attorney General Darrell McGraw.

A three-judge panel on the U.S. Court of Appeals for the Fourth Circuit ruled Wednesday for the Centers for Medicare and Medicaid Services, affirming prior decisions by the Departmental Appeals Board and U.S. District Judge Joseph Goodwin. CMS has argued that it is owed more than $400,000 from McGraw's 2004 settlement with pharmaceutical company Dey Inc.

The court ruled that a "straightforward application of the Medicaid Act" shows that the feds had the right to withhold funds and that the amount was properly decided. The decision should have an impact on a similar case in which McGraw is protesting a $2.7 million withhold.

"Even if the federal government is entitled to a portion of the Dey settlement, West Virginia argues that CMS arbitrarily calculated the proper amount of the disallowance," wrote Judge Albert Diaz, a recent appointee of President Barack Obama.

"Notably, however, the state has not come forward with an alternative estimate ... CMS's calculation of the disallowance was elegantly simple. Drawing on West Virginia's own damages estimate from the Dey litigation, CMS merely multiplied the amount of loss suffered by West Virginia's Medicaid program by the percentage of funds that the federal government contributes to the state's Medicaid program.

"The resulting figure was $446,607. We fully endorse the (Departmental Appeal) Board's rejection of West Virginia's argument."

In 2004, the year of the settlement, the federal government supplied 78 percent of the money West Virginia used on Medicaid. CMS 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 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 feds are claiming $2.7 million of McGraw's 2004 settlement with Purdue Pharma, worth $10 million, should have gone to them, since the lawsuit alleged harm to the state's Medicaid program. A stay was ordered in that case until the Dey issue was resolved.

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. Private attorneys received more than $3 million in the settlement.

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.

McGraw recently announced his intention to run for a sixth term. He can appeal the Fourth Circuit's decision either to the entire roster of Fourth Circuit judges or to the U.S. Supreme Court.

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

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