This week, the U.S. Supreme Court decided that the state of North Carolina had over-reached and pried the states fingers away from a large portion of a medical malpractice settlement.


A little background.


In February, 2000, Emily Armstrong was born at Catawba Valley Medical Center. Emily was diagnosed with cerebral palsy following her birth by Caesarian section. Clinically, she was blind, deaf, and cognitively impaired. Without question, she has severe deficits.


The Armstrong family sued the obstetrician. The family also sued the medical center and others.


I make no comments on the legal merits of the underlying malpractice suit.


Expert testimony initially estimated damages at the $42M level. The family’s attorney secured a negotiated settlement for $2.8 million dollars (roughly in-line with insurance policy limits).


Emily received assistance from Medicaid.


Every state treats reimbursement obligations to Medicaid differently. Once a settlement is received, North Carolina state law mandates that Medicaid be reimbursed the lesser of (a) actual amounts disbursed by Medicaid for patient treatment; or (b) one-third of the malpractice payout. Here, North Carolina state officials estimated Medicaid had disbursed $1.9 million for Emily’s care (she’s 13 now). So, the state asserted a lien on 1/3 of the settlement – or $933k. Still a lot of money. Emily’s attorneys argued that amount was too high.

This case percolated up to the U.S. Supreme Court. This week it re-affirmed federal law prohibits states from attaching a lien on Medicaid beneficiaries. The long-standing exception- to recover money paying for medical care. Money for pain and suffering isn’t covered by the ban on liens. The Armstrong settlement was not explicit in describing how the $2.8 million was allocated; that is, how much was divvied up for actual past medical expenses – and how much was for pain/suffering or future medical expenses. Of course, that would still be an inexact art.

The Supreme Court ruled that the 1/3 claw-back was arbitrary. Justice Kennedy wrote “If a state arbitrarily may designate one-third of any recovery as payment for medical expenses, there is no logical reason why it could not designate half, three-quarters or all of a tort recovery in the same way.”

The Court understood that most of the settlement dollars would be use for long-term skilled home care (outside of the clawback envisioned by reimbursement of past medical expenses). The Court suggested North Carolina use a method employed by other states – a judicial hearing to allocate the apportionment on case by case basis; not one-size-fits-all.

Left unsaid is what would happen if the settlement did explicitly allocate money. For example, what if the settlement agreement stated $2.6 million was for pain and suffering with the remainder for past and future medical expenses. Wink-wink. I am guessing the agreed-upon allocation scheme between lawyers would have to pass some type of sniff test – otherwise a judicial hearing prompted by Medicaid could characterize the settlement as an intentional bad faith end-run around Medicaid statutes.