ATLANTA (Legal Newsline) - A federal appeals court won't prevent the federal Medicaid agency from ever again issuing guidelines that permitted it to recover civil penalties from lawsuits brought by state attorneys general.

Former Alabama Attorney General Troy King brought a lawsuit challenging new rules implemented in a 2008 letter sent from the Centers for Medicare and Medicaid Services to each state's health official. Current AG Luther Strange continued it, receiving support from former Michigan Attorney General Mike Cox and current AG Bill Schuette.

Their efforts resulted in a ruling that the letter amounted to a new rule being imposed by the CMS that was never subject proper rule-making procedures like a notice-and-comment period. Strange sought an injunction against CMS ever attempting to institute the rules again.

"The basis for all remaining arguments appears to be Alabama's view that the vacatur of the SHO letter constituted a decision on the merits that compelled the district court to issue the injunction sought," a decision released Monday by the U.S. Court of Appeals for the 11th Circuit says.

"However, the district court did not address the merits, but based its ruling on procedural deficiencies regarding the manner in which the SHO letter was issued."

Congress allows CMS to collect from the states a portion regarded as medical assistance recovery from any lawsuit brought by a state, but does not allow CMS to collect any portion of the states' non-Medicaid recovery."

The letter, sent in October 2008, said CMS would begin claiming a percentage of civil penalties from settlements and verdicts. The federal government funds the majority of each state's Medicaid program and already asks for the corresponding percentage from funds designated as recovery for state Medicaid programs. In 2008, CMS provided 68 cents of every dollar Alabama spent on Medicaid.

The decision can have multimillion-dollar consequences. King was trying to protect millions of dollars from lawsuits filed against 79 pharmaceutical companies in 2005. The State has taken in at least $89 million in settlements.

Michigan's interest in the issue stems from CMS' decision to take more than $18 million from a $49 million settlement reached in 2006 by former Attorney General Mike Cox and Omnicare. Cox filed an amicus brief in August 2010 supporting Alabama when the case was before U.S. District Judge Mike Fuller.

Approximately one-third of the Omnicare settlement was classified as a recovery of Medicaid funds, while the rest was determined to be a civil penalty.

Schuette voiced his opinion in a brief filed with the court.

"Because CMS is only the 'sorcerer's apprentice,' it can only require the states to repay the 'medical assistance percentage' of the Medicaid payments they recover," Schuette's brief says. "CMS has no authority to require a state to pay a share of recoveries other than for medical assistance, shielding civil penalties collected under state law from CMS.

"Because the SHO letter exceeds CMS' statutory authority, CMS should be enjoined from applying it to the states."

One of the attorneys general who signed Schuette's brief is West Virginia's Darrell McGraw, who is currently fighting CMS over settlement funds it determined it was owed from two of his settlements. He filed a notice of the district court decision with the Fourth Circuit, which was deciding his appeal at the time. Ultimately, the court sided with CMS.

The other attorneys general are Beau Biden of Delaware, Lawrence Wasden of Idaho, Derek Schmidt of Kansas, Jack Conway of Kentucky, Buddy Caldwell of Louisiana, Jim Hood of Mississippi, Jon Bruning of Nebraska, Catherine Cortez Masto of Nevada, Gary King of New Mexico, Scott Pruitt of Oklahoma, Mark Shurtleff of Utah and Rob McKenna of Washington.

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

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