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Dear State Medicaid Director: 
It has been brought to our attention that some States have unique laws that we believe present 
compelling reasons to re-examine our third party liability policy concerning tort claims.  Some 
States authorize hospitals which participate in the Medicaid program  undertake collection 
efforts in order to recover the amount of benefits paid by Medicaid.  The hospital files a lien 
representing the  amount of its charges which includes the amount Medicaid has paid the 
hospital. Once the lien has been perfected, the hospital is required to reimburse Medicaid. In the 
event that the settlement exceeds Medicaids payment, the hospital is allowed to keep excess 
collections to cover its expenses. In the event that a provider determines, at some point, that it 
would no longer be cost effective to pursue a claim in its own  the provider generally 
withdraws its lien and it is  up to the State to pursue the lien on  of Medicaid. In 
consideration of such State laws, we are clarifying our policies on tort claims. 
We are broadening our policy interpretation which  allowStates to permit providers to pursue 
payment in excess of Medicaids reimbursement in tort situations as  ascertainconditions are 
met.  Specifically, States must assure that Medicaid is made whole before providers can keep any 
monies.  Secondly, the State must assure protection to its Medicaid beneficiaries by 
providers fiom receiving money that has been designated to go to the beneficiary.  Enclosed is a 
detailed analysis of this policy clarification. 
If you have any questions concerning this policy clarification, please contact your respective 
regional office. 
Sincerely.
I 
. 
Judith D. Moore 
Acting Director 
Medicaid Bureau 
Enclosure  -
Page 2  State Medicaid Director 
cc: 

All Regional Administrators 

All Associate Regional Administrators 

Division of Medicaid 

LeePartridge 

American Public Welfare Association 

Joy Wilson 

National Conference of State Legislatures 

National Governors Association 

Lloyd Bishop 

Office of Legislative and Inter-Governmental 
 HCFA -
PROVIDERS RIGHTSTO PAYMENT  TORT CLAIMS 
policy is that once a provider bills Medicaid, it must accept Medicaids payment as 
payment in  (42 CFR 447.15). It then becomes the responsibility  Medicaid agency to 
pursue reimbursement.  Section  states that where legal liability is found to exist 
after Medicaid payment is made  State . . .will seek reimbursement for such assistance to the 
extent of such legal liability. 
Furthermore, 42 CFR  to circumstances where a State has a waiver (of 
cost avoidance), provides that the State,  .. must seek recovery of reimbursement from the 
third party to the limit of legal liability (our emphasis).  Section  relates to 
situations where the State  . . learns of the existence of a liable third party after a claim is paid, 
or benefits become available fiom a third party  a claim is paid by Medicaid.  Although 
paragraph  omits the emphasized language, we contend that it is  contained  the 
reference to reimbursement which  simply a shortcut reference to the longer phrasing in 
paragraph (1).  This is  supported by preamble language found in 50 Federal Register 
46654 (November 12, 1985) which states that the  . . State would pay the entire claim and then 
seek reimbursement from any liable third party. 
There are certain circumstances whereby it is permissible for States to adopt a policy that would 
allow providers to accept a Medicaid payment and to subsequently return that payment to 
Medicaid in order to seek reimbursement fiom a third party. For instance, in the event that there 
is a third party liable for payment at the time services are rendered and the third party would have 
been billed had the provider known of its existence, the State may allow providers to return 
Medicaids payment thus invoking the cost-avoidance procedures. This is supportable as a 
correction of an erroneous payment, since the regulations cost-avoidance procedures could or 
should have been applied in the first instance. In the event that it was  until  Medicaid 
paid for the services that the third party was determined to be liable for payment, for example, as 
a result of a tort lawsuit, the statute and regulations would appear to require direct pursuit by the 
State. 
To put this issue in perspective, we will outline the various scenarios under which a provider 
receives payment for services rendered to a Medicaid beneficiary.  First, the provider could obtain 
compensation directly from the liable third party, bypassing Medicaid directly. Second, the 
provider could bill Medicaid, and thus is obligated to accept the Medicaid payment as payment 
full for services rendered. Third, the provider could bill Medicaid, discover the existence of a 
third party payer, and seek to bill that third party payer after refunding the Medicaid payment to 
the State agency. It is this latter situation that we nowaddress. 
The issue is whether the provider could abrogate its agreement with Medicaid (under which it has, 
by billing Medicaid, agreed to accept the Medicaid payment as  in  and seek 
compensation fiom a third party.  This a matter that is governed by State contract laws. 
Essentially, there are two kinds of provider agreements between a provider and the Medicaid 
program. One is where the provider submits claims on an individual basis  a claim form) to 
Medicaid, thus participating in Medicaid for that patient.  The second is where a comprehensive  - -
Page 2  Providers Rights to Payment  Tort Claims 
formal provider agreement is executed between the provider and Medicaid which governs the 
providers responsibilities and duties.  The provider is permitted to  Medicaid and seek 
from the third party payer so long as the contract or agreement does not violate 
existing Federal law and the intent of both parties is to abrogate the contract provisions on an 
individual patient basis. 
In non-tort situations, if the provider seeks reimbursement fiom a health insurer after refunding 
Medicaid, the provider will generally receive the health insurance contract rate. There is no 
to either party since the State is reimbursed to the extent of its medical expenditures, the third 
party is paying what it has contractually agreed to pay, and the beneficiary is not  in any 
way.  Therefore, States may permit a provider to first  the Medicaid payment, and then, 
seek reimbursement  a third party payer. This application, however, has historically extended 
to the non-tort situation  a health insurer is the third party payer) for the reasons given 
below. 
In the tort situation, the judgment or settlement will often contain more than just an element for 
medical services, such as pain and suffering or loss of consortium. Thus, the total amount will 
often exceed the medical expenses. Althoughthe beneficiary has claim to this amount, pursuant 
to section  and  of the Act, the beneficiary has assigned to the State any 
rights to medical support and to payment for medical care fiom the third party payer.  Thus, the 
State has claim to the entire judgment or settlement amount to the extent of its total payment. 
Once the  recovery amount has been identified and collected by the State, Federal law and 
regulations dictate the distribution of the amount collected. Based on section  of the 
Social Security Act (the Act), the beneficiary is entitled to any remainder once the Medicaid 
program (both Federal and State share) has been reimbursed. In addition, section 
of the Social Security Act (the Act) prohibits Medicaid providers from directly billing Medicaid 
beneficiaries and  establishes penalties for providers who violate this prohibition.  The 
statute does not offer any special exceptionsfor liability settlements. Therefore, in a tort 
situation, if the provider were to reimburse the Medicaid program, and then seek reimbursement 
for the  amount ofits charges which includes the amount Medicaid has paid the provider, this 
could have the effect of taking monies fiom the beneficiary. 
As long as States assure preservation of certain principles, Federal law would not preclude the 
practice of providers pursuing payment in tort situations in excess of Medicaids reimbursement. 
Mechanisms for securing such assurances must be binding on providers and could include State 
laws, regulations, or provider agreements. Specifically, the State must assure that Medicaid is 
made whole before providers can keep any monies. The State must also prohibit providers fiom 
pursuing money that has been awarded to the Medicaid beneficiary. In other words, the provider 
lien must be against the tortfeasor and not the general assets of the beneficiary,  the provider
would be entitled to reimbursement from a tort judgement or  when the settlement
a 	 specifically distinguishes a set amount of money for medical expenses  then only if this amount 
is above the amount owed to Medicaid.  The provider could be reimbursed only if the money has 
not been allotted to the beneficiary in a court judgement or settlement. This would mean that if 
the lien were not perfected, the tortfeasor would stand to retain the money.  -
Page 3  Providers Rights to Payment -TortClaims 
State does, in  assure protection of beneficiariesassets in thisway, then it  be 
permissible to allow the provider to abrogate its agreement with Medicaid and return Medicaids 
payment before pursuing its own lien.  Furthermore,  State also authorizes the provider to 
act onbehalf of the Medicaid agency, it  be permissible for the  to allow the provider 
to return Medicaids payment after the provider has received a  aslong asMedicaid is 
made whole.  In addition, Medicaids rights to pursue monies designated for pain and suffering 
and loss of consortium must be preserved.  Lastly,in accordance with section 3907of the State 
Medicaid Manual, it is permissible for the State to compensate the provider for legitimate costs 
in pursuing the third party on behalf of Medicaid.