Federal Medicaid System Pre-Empts State Statutes Allowing Medical Liens

Copyright 2003 Daily Journal Corp. Posted with permission. 

Health care providers participating in California's Medi-Cal program have relied on Welfare and Institutions Code Sections 14124.791 and 14124.74 in asserting liens for the value of their services against any judgment or settlement received by health care recipients.  In a unanimous decision, however, the state Supreme Court struck down these statutes as unconstitutional, holding that the federal Medicaid program pre-empts them.  See Olszewski v. Scripps Health, 2003 DJDAR 5822 (Cal. June 3, 2003).

California participates in the Medicaid program, which Congress enacted in 1965 to furnish states with financial assistance to provide health care to the needy.  See 14 U.S.C. §§ 1396-1396v.  The federal government rewards states that agree to establish a Medicaid plan by paying for a percentage of the amount expended by the state for medical assistance under the state plan.  While participation is voluntary “once a State elects to participate, it must comply with the requirements of Title XIX.” See Schweiker v. Gray Panthers, 453 U.S. 34 (1981).

Moreover, under Section 1396a(25)(C), “in the case of an individual who is entitled to medical assistance under the State plan with respect to a service for which a third party is liable for payment, the person furnishing the service may not seek to collect from the individual . . . payment of an amount for that service.”

The Medi-Cal program is California's implementation of the Medicaid program.  See Cal. Welf. & Inst. Code §§ 14000 to 14198 .  In implementing Medi-Cal, the Legislature also enacted statutes authorizing health care providers to recoup their expenses by filing and collecting on liens against settlement or judgment funds received by Medicaid beneficiaries.  Section 14124.791 provides that “a provider who has rendered services shall be entitled to file a lien for all fees for services provided to the beneficiary against any judgment, award, or settlement obtained by the beneficiary.”  Section 14124.74 provides for a lien “[i]n the event of a judgment or award in a suit or claim against a third party or carrier.”

The conflict between the state and federal programs came to a head in Olszewski, where the court considered the constitutionality of the lien-filing provisions.

Cimarron Olszewski was a Medi-Cal beneficiary who received emergency medical care from Scripps Health, a provider in the Medi-Cal program.  After Olszewski collected $400,000 from the driver of the vehicle who caused the accident, Scripps tried to recover on a $200,000 lien.  Olszewski brought a class action, claiming that the lien-filing statutes were unenforceable.  In addition to seeking tort damages and restitution under California's unfair-competition law (Cal. Bus. & Prof. Code §§ 17200 et seq.), Olszewski sought a declaration that the “liens asserted by defendants against her and the other class members were ‘unlawful, unenforceable and uncollectible'” and an order enjoining Scripps from asserting such liens in the future.

In an opinion by Justice Janice Rogers Brown, the court held that “federal law is not ambiguous and unequivocally prohibits California from authorizing provider recovery on liens against the entire judgment or settlement obtained by a Medicaid beneficiary from a third party tort-feasor.”  The court noted that, under the Supremacy Clause, “it has been settled that state law that conflicts with federal law is ‘without effect”'  See Smiley v. Citibank, 11 Cal. 4th 138 (1995).  “We therefore conclude that federal law preempts Welfare & Institutions Code sections 14124.791 and 14124.74,” Brown wrote.

The court next discussed various forms of pre-emption, including express pre-emption, field preemption and conflict pre-emption.  Settling on conflict preemption, Brown reasoned that the lien statutes frustrate congressional intent in enacting Medicaid and conflict with its statutory framework.  In reviewing the history and language of the statutes and regulations, the court concluded that Congress enacted Medicaid to provide medical assistance to needy people.  To carry out Congress' intent, federal regulations limit provider collections from Medicaid beneficiaries to, at most, minimal cost-sharing charges, such as co-payments and deductibles.  See 42 C.F.R. §§ 447.15, 447.20.  Further, these limits apply even where a third-party tort-feasor later is found liable for the injuries suffered by that beneficiary.

The court held that permitting providers to charge beneficiaries for services beyond these limited amounts would interfere with the beneficiaries' access to medical attention and, thus, run afoul of congressional intent.  “Because sections 14124.791 and 14124.74 allow the provider to recover more than these cost-sharing charges from the beneficiary, they cannot coexist with federal law and stand as an obstacle to the accomplishment of Congress' intent,” the court said.

Although the court held that the statutes were unconstitutional, thus invalidating the liens, it nevertheless concluded that Scripps was not liable for money previously collected from Medi-Cal accident victims.  Reasoning that hospitals had the right to rely on the statutes before they were declared unconstitutional, the court concluded that the “safe harbor” defense in Cel-Tech Communications Inc. v. Los Angeles Cellular Tele. Co., 20 Cal. 4th 163 (1999), barred Olszewski's claim under the unfair-competition law.  The court also dismissed the tort claims, reasoning that inasmuch as Scripps' conduct in filing liens amounted to publications authorized by law in furtherance of litigation, the litigation privilege barred these tort claims.  See Cal. Civ. Code §§ 47(b).

In so doing, the court may have tipped its hand on how it will rule in McMeans v. Scripps Health, 100 Cal. App. 4th 507 (4th Dist. 2002), another hospital lien case pending review.  While McMeans is not a Medi-Cal case, the litigation privilege arguably applies with equal force to the claims asserted in that case.

The decision to invalidate the lien statutes means that third-party tort-feasors will receive a windfall at the expense of the health care provider.  Indeed, inasmuch as providers participating in Medi-Cal no longer may assert a lien for the full cost of their services, the tort-feasor's liability for the injured party's medical expenses is limited to the amount payable under Medicaid.  See Hanif v. Housing Auth., 200 Cal. App. 3d 635 (3rd Dist. 1988).

Under these circumstances, the court noted, providers either must charge more to those who can afford to pay “or stop providing medical care to the needy.”  In concluding that this result “harms society as a whole,” Brown acknowledged that the court had reached its decision “reluctantly.” She noted, however, that legislative action may remedy this perceived harm and, thus, “urged the Legislature to remedy this anomaly in a manner consistent with federal law."