These articles have been published in "The Advocate", a monthly publication of the Arizona Association for Justice/Arizona Trial Lawyers Association, October and November 2009 issues, @2009 by Steven J. Bruzonsky, Esq.
The Cox Case and Its Implications for A.R.S. §12-962 and AHCCCS Liens - Part 1
(This is the first part of a two part series. The first part in this issue concerns how Division Two interprets A.R.S. §§ 12-962 $ 12-963 such that the state or political subdivision lien claimant, if its lien is large enough, is entitled to the entire liability settlement less a proportionate share of attorney's fees, and that no further lien reduction is required. The second part in the next issue will discuss that A.R.S. §12-962 liens are only for liability and do not apply to first party Uninsured and Underinsured Motorist claims, post-Cox strategies for handling A.R.S. §12-962 liens, and the impact of Cox on AHCCCS liens. For more A.R.S. §12-962 lien information, please see my February and March 2007 as well as my December 2008 "Liens Corner" articles concerning A.R.S. §12-962 state and political subdivision and school district lien claims.)
My December 2008 "Liens Corner" article discussed the Pima County Superior Court case of Arizona Dept. of Administration v. Cox, CV2007-2162. In that case, Judge Cornelio, after cross Motions for Summary Judgment, upheld the validity of the Arizona Department of Administration's (ADOA) A.R.S. §12-962 lien claim against liability settlement proceeds, but he also reduced the lien from the $25,012.22 paid by the fund to $2,475.
The lien claim was initially asserted by Ingenix, the lien collection company owned by United Healthcare. United Healthcare paid accident-related medical benefits from a "special employee health insurance trust fund. This fund was set up pursuant to A.R.S. §38-654 and administered by the Arizona Department of Administration and used to pay state employee health benefits. The trial court held that the A.R.S. §12-962 lien applied to the $30,000 liability settlement and that the lien didn't apply to the $200,000 Underinsured Motorist settlement. The trial court discussed and cited Ark. Dept. of Health and Human Services v. Ahlborn, 547 U.S. 268, 126 S.Ct. 1752 (2006) [a Medicaid lien case discussed in my June 2006 "Liens Corner" article] and LaBombard v. Samaritan Health Sys., 195 Ariz. 543, 991 P.2d 246 (App. 1998) [requiring a procurement cost reduction of an Arizona statutory hospital balance billing lien], and then reduced the ADOA's A.R.S. §12-962 lien claim accordingly. The trial court equitably apportioned and applied the procurement cost reduction: $230,000 was determined to be the full claim value, the total of the $30,000 liability and $200,000 Underinsured Motorist settlements. ADOA's full lien amount of $25,012.22, divided by $230,000 claim value, = 11 percent. The liability settlement subject to the lien is $30,000, which multiplied times 11 percent = $3,300. Then reducing that by 25% for attorney's fees equaled the $2,475.00 which the trial court awarded to the ADOA.
In Arizona Department of Administration v. Cox (2 CA-CV 2008-0198) (August 17, 2009), Division Two affirmed the trial court's summary judgment in favor of ADOA, but vacated the amount awarded and remanded to the trial court to enter an award of $21,746.45. The Court holds that the state's health insurance trust fund administered by the ADOA qualifies as a "state or political subdivision" within the scope of A.R.S. §12-962. The fact that the health insurance trust fund is made up partly of employee contributions doesn't make any difference to the Court. The Court further states that A.R.S. §12-962 doesn't require that the medical care be provided through a "self-funded plan" in order for the lien to apply, so long as the state (or political subdivision) administers the plan; that according to the Senate Fact Sheet, when the legislature amended A.R.S. §12-962 to remove the phrase "required by law" (and substituted "provide"), it did so in order to bring within the scope of the statute "[a]ll public entities that self-insure for medical care."; and that the legislative intent was to make the statute applicable to trust funds like the one in Lo Piano v. Hunter, 173 Ariz. 172, 840 P.2d 1037 (App. 1992). Senate Fact Sheet, S.B. 1346, 44th Leg., 1st Reg. Sess. (Ariz. 1999). In the Lo Piano case, a self-funded Arizona school district trust fund lien was void under Arizona anti-subrogation caselaw because Arizona law was not pre-empted by ERISA, as the latter federal law is not applicable to state or political subdivisions.)
However, Division Two in Cox fundamentally disagreed with the trial court's equitable apportionment Ahlborn style which drastically reduced the lien amount. The Court states that A.R.S. §12-962(A) only limits the state's recovery by subrogation to the entire "claim" against the "third party" (meaning that the lien does not apply to first party Uninsured and Underinsured Motorist claim – this will be discussed in more detail in Part 2 next month). The Court also discussed A.R.S. §12-963. Subsection (A) provides that the state or political subdivision may either compromise or settle, or waive, any claim in whole or in part either for its convenience or it if determines that collection would result in undue hardship to the injured person. Subsection (B) provides that the state or political subdivision in exercising A.R.S. §12-962 lien rights "shall not operate to deny the injured or diseased person any recovery for that portion of his damage not covered by this article.- - - " The Court states that A.R.S. §12-963 does not require (equitable) apportionment, and simply means that as long as the lien claim is less than the total amount recovered from the third party, then the injured person has not been denied "any recovery" under A.R.S. §12-963(B); that if the legislature wanted to require compromise of the lien claim, then it would have set forth the requirement in mandatory language and provided guidance on the factors to be considered, such as A.R.S. §36-2915 (AHCCCS liens) which lists three factors to be considered in determining the extent of compromise required; and that Ahlborn case required apportionment and concerned whether Arkansas statutes violated federal Medicaid laws but no such dispute is at issue here so the Ahlborn analysis is not controlling or instructive.
Division Two discussed the LaBombard case and the "common fund" doctrine, noting that "both equitable principles and a sensible reading of the statute favor imposing on ADOA a portion of the Coxes' attorney fees and costs by deducting those fees and costs from the settlement before determining the amount available to reimburse ADOA." But the Court failed to order a procurement cost reduction to reduce the lien by an additional 25% since attorney's fees were 25% of the settlement. Instead, the Court went on to simply deduct 25% of the $30,000 liability settlement as attorney's fees and award the remaining $21,746.45 to the ADOA without any actual procurement cost or any other equitable reduction. In this regard, the Court states that A.R.S. §12-962(B)(3) provides that the state may "[r]ecover the cost of care from the injured or diseased person or the person's estate to the extent that such person has received money in settlement of the claim or satisfaction of a judgment against the third party." The Court then notes that as a practical matter, injured persons do not receive the money that their lawyer earns by representing them; that the lawyer is entitled to those funds before the proceeds are disbursed to the client; and that the legislature clearly did not intend A.R.S. §12-962 to permit the state to recover anything other than what the injured person has recovered from the third party.
The Cox Case and Its Implications for A.R.S. §12-962 and AHCCCS Liens - Part 2
(This is the second part of a two part series. The first part was in last month's issue.)
A.R.S. §12-962 Liens Apply Only to Liability & Do Not Apply to First Party UM & UIM Claims
In Arizona Department of Administration v. Cox (2 CA-CV 2008-0198) (August 17, 2009), Division Two clearly holds that A.R.S. §12-962 state or political subdivision liens do not apply to first party Uninsured and Underinsured Motorist claims. The Court states that A.R.S. §12-962(A) only limits the state's recovery by subrogation to the entire "claim" against the "third party". Footnote 6 states that according to the plan and the "unambiguous language" of A.R.S. §12-962, the state's recovery is limited to "circumstances creating tort liability upon a third person. Underinsured motorist coverage arises from contractual liability. - - - We therefore reject any argument that ADOA could claim a portion of the $200,000 under §12-962". As discussed in the first part of this series, the Court determined the lien amount by considering the $30,000 liability settlement proceeds without any consideration to the $200,000 Underinsured Motorist settlement proceeds.
Status of Cox Case
As of October 13, 2009 (required date to submit this article for publication), Division Two had denied the Cox' Motion for Reconsideration, and was considering the ADOA's motion to delete ADOA as a party and add the State of Arizona as a party. Indications are that the Cox' are likely to file a Petition for Review to the Arizona Supreme Court and it is unknown whether the ADOA is interested in the same.
Post-Cox Strategies for Handling A.R.S. §12-962 Liens
At Footnote 7, the Court mentions that although the ADOA could have pursued the third party directly, see A.R.S. §12-962(B)(2), the ADOA did not pursue the claim during the time period allowed under A.R.S. § 12-542(1) (Arizona's two year tort statute of limitations), and therefore would have received nothing without the Coxes' litigation.
Actually, A.R.S. §12-962(B)(2) provides that the state or political subdivision may "institute and prosecute" an "action or proceeding " provided that it does so "within six months after the first day on which the medical care and treatment were furnished" provided that the injured party has not filed an action or proceeding. Thereafter, until the applicable statute of limitations has expired, if the injured party has filed an "action or proceeding", then A.R.S. §12-962(B)(1) provides that the state or political subdivision may intervene or join in any "action or proceeding" brought by or on behalf of the injured or diseased person, and A.R.S. §12-962(B)(3) provides that the state or political subdivision can recover its lien from any settlement or satisfaction of judgment received.
So if you have a case with a large A.R.S. §12-962 lien compared to the limited settlement proceeds, what can you do? Do not settle the liability claim within the six month period discussed above, and then the state or political entity is dependent upon you and your client to file litigation and/or to obtain a monetary settlement. And then let the state or political subdivision subrogation collection agent know that you and your client will walk away and "nobody gets nothing, no money" unless you can work out a reasonable lien compromise in advance of filing litigation or finalizing a monetary settlement with the defendant and/or the liability insurer. Another idea is that if the state or political subdivision doesn't file its litigation within the required six month period, then in a case where the non-medical damages alone exceed the liability (and umbrella if any) policy limits, how about the injured party filing a lawsuit within the statute of limitations period but not claiming medical expenses as damages? Or if the injured party is a minor, how about the injured party filing a lawsuit after the parent's applicable statute of limitations expires on the medical bills, such that the lawsuit only covers the minor's non-medical expenses damages?
My concerns about this approach are twofold. First, A.R.S. §12-962(B)(1) provides that the state or political entity can "Intervene or join in any action or proceeding" brought against the third party". So for an adult the above approach doesn't seem to work. And for a minor, at least prior to the expiration of the parent's statute of limitations, the state or political entity can intervene or join the litigation and assert its medical lien claim. Secondly, A.R.S. §12-962(B)(3) provides that the state or political subdivision can "Recover the cost of care from the injured or diseased person or the person's estate to the extent that such person has received money in settlement of the claim or satisfaction of a judgment against the third party." This statute could be interpreted by the court as a lien against any "money in settlement" that the injured party receives from the third party, even the money that a minor when injured receives later on when the medical claim is prohibited by the expiration of the parents' statute of limitation. Notwithstanding my concerns, certainly this approach might be worth considering in the right situation and might give you some negotiating power and might even work!
The Impact of Cox on AHCCCS Liens
An AHCCCS lien can be asserted pursuant to A.R.S. §36-2915. Unlike A.R.S. §12-962 which clearly includes only "third party" language, A.R.S. §36-2915 clearly has all inclusive language to apply A.R.S. §36-2915 to all third and first party settlement proceeds. However, A.R.S. §36-2915(A) requires that an AHCCCS lien be recorded "in the office of the recorder of the county in which the injuries were incurred" , and that in order to be perfected, the lien must be recorded "before or within sixty days from the date of notification to the administration of the hospital discharge or rendering of medical care and treatment".
If the AHCCCS lien is not timely filed and perfected as required by A.R.S. §36-2915, then there remains the A.R.S. §12-962 AHCCCS lien. But Cox essentially holds that A.R.S. §12-962 liens do not apply to first party settlement proceeds. And this necessarily includes AHCCCS liens under A.R.S. §12-962.
Keep in mind that a few years ago, A.R.S. §36-2956(B) was amended to require that the AHCCCS "member or the member's legal representative must provide written notice to the administration within twenty calendar days after the commencement of a civil action or other proceeding to establish the liability of any third party or to collect monies payable from accident insurance, liability insurance, workers' compensation, health insurance, medical payment insurance, underinsured coverage, uninsured coverage or any other first or third party source." There is as of yet no Arizona court decision interpreting whether this failure of timely notification excuses and gives AHCCCS additional time so that it can file and perfect an A.R.S. §36-2915 lien.