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In McKinney v. Philadelphia Housing Authority, a minor child living in low income housing was allegedly injured due to unsafe conditions in the house due to the presence of mold.  The child, Ebony Gage had asthma which tragically led to a respiratory incident as a result of the mold.  The child suffered severe and permanent brain damage from the respiratory incident.  The child’s medical bills were paid for by Medicaid and amounted to $1,265,896. 

A lawsuit ensued against the Philadelphia Housing Authority (“PHA”).  The case was settled for just under $12,000,000.  The Pennsylvania Department of Welfare (“DPW”) did not intervene in the litigation to assert their lien.  After settlement occurred but before it was approved, plaintiff counsel sent a letter to the DPW detailing the terms of the proposed settlement and offering to reach an agreement regarding DPW’s lien.  The settlement was approved prior to resolution of the lien and funds in excess of DPW’s full lien were placed in escrow.  DPW attempted to vacate the settlement or in the alternative intervene.  The Court denied DPW’s motion to vacate the settlement but granted its motion to intervene.  A hearing was scheduled to determine how much DPW could collect under its lien.

In McKinney, the plaintiffs argued that the portion of the settlement that can be considered compensation for medical expenses can be calculated by determining the ration of the plaintiff’s settlement to the true value of their underlying claim and multiplying that ratio by the lien.  Under this theory, the plaintiff argued that the claim was worth $45 million and that the $11.9 million settlement represented a recovery of less than a third of the claims value.  Therefore, after accounting for the reduction of DPW’s share of costs and fees, DPW was allegedly entitled to approximately $200,000.  During the hearing, several expert reports were offered into evidence supporting the true value of the plaintiff’s case.  The reports were a life care plan and an economic evaluation. 

DPW argued that the true value of the plaintiff’s underlying claim is irrelevant to determining what portion of the settlement was for medical expenses.  DPW made several arguments based upon the Pennsylvania statutes governing recovery of liens by Medicaid.  DPW argued that Pennsylvania state law establishes a presumption that half of a plaintiff’s settlement is properly attributed to compensation for medical expenses.  Accordingly, DPW could lawfully collect its full lien because that amount does not exceed half the total settlement in the case.  In addition, DPW argued that Ahlborn permits a state to assert a lien against any payment a beneficiary recovers as compensation for medical expenses, whether past or future.

The Federal Court in McKinney found both the plaintiff’s and defendant’s methods for resolving the issue problematic.  The court held that the ratio theory presented by the plaintiff was not required by Ahlborn.  The court also found fault with the plaintiff’s ratio theory because it required a “judicial ascertainment of the platonic “true value” of Plaintiffs’ claims. At best, this would convert Ahlborn hearings into mini-trials, replete with competing damages experts and witnesses testifying as to issues like humiliation, pain and suffering, and loss of enjoyment of life.  The court also criticized DPW’s suggestion “that the Pennsylvania legislature has created a binding legal presumption that the portion of a Medicaid beneficiary’s settlement with a third party tortfeasor representing medical benefits is the lesser of the full amount of the state’s lien or fifty percent of the beneficiary’s total settlement (the “full lien or half the settlement” presumption).”  It found this position was “incorrect.”  DPW also argued they didn’t have fair notice but that argument was rejected.  The McKinney court rejected the idea that Pennsylvania state law could dictate the allocation of a settlement among various categories of damages and have a court apply such a law.  The court stated “[s]everal federal courts sitting in different states have applied state laws similar to Pennsylvania’s statute in deciding that a state agency is entitled to the lesser of the full amount of their lien or a statutorily prescribed percentage of the beneficiary’s settlement.”

The Court’s rejection of this type of proposed rule (an arbitrary allocation of half of the settlement to medical expenses), is important.  The following is was the court said about that type of rule and reality of settlement:

DPW’s proposed rule ignores the reality of settlement. Settlement, by its very nature, involves compromise. In a legal system where outcomes are uncertain, parties settle to hedge against the risk of an unfavorable outcome. DPW’s proposed rule amounts to a “heads I win, tails you lose” scenario. Had Plaintiffs taken this case to a jury verdict and been awarded $1.26 million as compensation for past medical expenses, DPW would undoubtedly be entitled to that money (less attorneys’ fees and costs). DPW would also have it that if Plaintiff traded away some of its recovery prospects for certainty (and cash) via a settlement, DPW would reap the benefits without giving up anything. That is not the way settlement works. When parties settle, everyone sacrifices. DPW’s suggestion that it does not need to sacrifice (unless its lien is for more than half of a plaintiff’s total recovery) ignores this reality.

The McKinney court also rejected DPW’s argument that Ahlborn permits states to encumber settlement monies attributable to future medical expenses. 

The proper allocation, according to the Court, lay somewhere between the plaintiff and defense arguments.  In deciding the allocation, the Court found it was in the best position to asses the factors that influenced the parties to settlement and to make an ultimate determination of what portion of the settlement represented compensation for past medical expenses.  The Court held that the largest portion of the settlement that could be attributed to past medical expenses was the total amount of the DPW lien ($1,265,896.16).  The Court went on to assess the relative strengths and weaknesses of the parties’ cases.  Based upon the assessment of the case, the Court made a finding that the defendant paid two thirds of each element of damage which reduced the lien from $1,248,734 down to $843,930.77.  From there, the Court reduced the lien for DPW’s pro-rata share of fees and costs.  DPW’s recovery was reduced by $281,310.26 in fees and $25,172.09 in costs which entitled DPW to recover $537,448.43. 

The McKinney decision is an important victory and provides a road map of how a judge can use their discretion to allocate settlement proceeds based upon facts presented to them in an Ahlborn type of hearing.  Hopefully more decisions similar to the McKinney decision will come down and continue to provide ammunition to fight Medicaid liens under Ahlborn.