RICHMOND, Va. (Legal Newsline) - West Virginia Attorney General Darrell McGraw's last chance to prove he didn't shortchange the federal government in a 2004 settlement will be before the U.S. Supreme Court.

On Sept. 7, judges on the U.S. Court of Appeals for the Fourth Circuit voted not to hear McGraw's appeal of a decision that says he owes more than $400,000 to the federal agency that administers Medicaid. That decision likely means McGraw will lose another case in which the feds allege he owes them $2.7 million.

A three-judge panel of Fourth Circuit judges ruled in July that McGraw structured a settlement with pharmaceuticals manufacturer Dey Inc. in such a way that it prevented the federal Centers for Medicare and Medicaid Services from claiming $446,607. CMS is part of the federal Department of Health and Human Services.

McGraw's final appeal, if he chooses to file it, would be to the U.S. Supreme Court. He had asked the entire roster of Fourth Circuit judges to review the three-judge panel's decision.

"(T)his case presents a matter of exceptional importance," McGraw's petition for en banc review, filed in August, says. "The requirement 'that federally imposed conditions be stated unambiguously-emanates from the very structure of our system of governance.'

"Additionally, many other states are pursuing and perhaps wish to pursue the kind of action that West Virginia initiated against Dey and to hold such companies accountable for their misconduct. The decision of this court may readily have nationwide impact."

In 2004, the year of the Dey 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.

The U.S. Supreme Court is also currently deciding if it will hear another case involving McGraw. Drug stores have unsuccessfully argued that he filed a class action against them, and it should be heard in federal court.

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

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