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Hensley brought a personal injury action after a motor vehicle accident against Marion who was insured by Erie Insurance Exchange.  The case was venued in Augusta County Circuit Court. A settlement of $45,000 was reached and then Erie refused to promptly pay the settlement amount.  Hensley filed a motion in state circuit court to enforce the settlement and compel Erie to pay the agreed upon settlement less the amount the parties anticipated CMS would seek to recover.  Erie removed to federal court.  Erie claimed that the motion to enforce was completely preempted by certain Medicare regulations. 

Erie refused to pay the $45,000 because CMS had previously made a conditional payment to Hensley and accordingly CMS would have a direct right of recovery for the entire amount of that payment against Erie.  Apparently the settlement agreement was drafted such that Erie was not required to pay until CMS sent written confirmation of the exact amount of the conditional repayment obligation.  Erie’s removal to federal court was based upon its claimed exposure to a direction right of action by Medicare under 42 C.F.R. 411.24(e) which states that “CMS has a direct right of action to recover from any primary payer.”  “See also 42 C.F.R. § 411.24(c)(2) (providing that the CMS may recover twice the amount the Medicare primary payment if it is forced to take legal action to recover) & § 411.24(i) (providing that the CMS can recover from an insurer even if the insurer has already reimbursed another party).”  Erie argued that the foregoing regulations completely preempted the claim by Hensely to enforce the settlement in state court and that the federal court had original jurisdiction over the case. 

Hensely argued that the case was not within the federal court’s remove jurisdiction and the matter should be remanded back to the state circuit court.  The federal district court agreed with Hensley finding it lacked original jurisdiction over a dispute involving a settlement agreement because it didn’t present a federal question and the Medicare regulations cited by Erie did not preempt Hensley’s claim.  The court articulated its rationale as follows:

“The resolution of these basic questions turns on the interpretation of Virginia contract law, not on any federal statutes or regulations governing Medicare payments. Marion appears to argue federal law comes into play in two ways. First, he contends that the finalization of the amount CMS seeks to recover is a condition precedent that must be satisfied before he has duty to pay the settlement proceeds under the agreement. But the court's inquiry into whether such a condition has been satisfied under this contract certainly does not require the interpretation of federal law. Second, Marion asserts the Medicare regulations render the settlement agreement illegal or unenforceable. However, this is simply an affirmative defense to Hensley's claim, which cannot provide the basis for removal jurisdiction. In neither case does Hensley's claim raise a substantial federal question that would justify removal.”

The court also addressed the argument regarding preemption of state law claims on enforcement of a settlement agreement.  The court laid out Erie’s argument that Medicare regulations completely preempted any state law regarding enforceability of a settlement agreement when CMS has a right to recover a conditional payment and then the court flatly rejected this argument.  The court stated that Erie “has not demonstrated that the Medicare regulations at issue completely displace … [its] state law claim to enforce a settlement agreement, and indeed they do not. Moreover, to the extent … [Erie] argues that the requirements of the settlement agreement and the Medicare regulations are inconsistent and that the Medicare regulations should control the resolution of the dispute, … [it] merely has alleged the presence of ordinary preemption, not complete preemption.”  Most importantly, the court held that “nothing about these Medicare regulations indicate that they were intended to displace all attempts to enforce a settlement agreement under state law simply because the CMS may have a right of recovery against one of the parties to the agreement.”

If you are running into issues where a defendant is refusing to pay a settlement because of Medicare conditional payments, this case may be very useful.  The lack of preemption in an action to enforce a settlement agreement under state contract laws is a big deal.  While defendants are going to insist upon resolution of conditional payments being a term of settlement, they can’t simply not pay the settlement proceeds to the injury victim and then hide behind federal regulations.