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Testimony on the Medicaid and Tobacco Settlements by Mike Hash
Deputy Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Chairman Specter, Senator Harkin, distinguished Subcommittee members, thank you for inviting me to discuss the Health Care Financing Administration's obligation under current law to recoup Federal taxpayers' share of Medicaid funds from State tobacco settlements.

In November 1998, several State Attorneys General reached an historic settlement with the tobacco industry that provides reimbursement to the States for some of the health care costs associated with treating smoking-related illnesses. The Attorneys General deserve a great deal of praise for crafting this important agreement. The settlement follows and confirms an important principle established with the 1996 settlement with the Liggett tobacco corporation: tobacco companies must be held accountable for the damage their product does to our nation's health. Most importantly, the national agreement will help curb smoking among our nation's youth, a goal that the Administration and members of this Subcommittee share.

As the Subcommittee knows, the Administration began our tobacco efforts four years ago with the strong leadership of the President, Vice President, and the then Commissioner of the Food and Drug Administration (FDA). The FDA then put in place a strong crackdown on youth access to tobacco, the broadest and most significant effort to date to protect our children from the dangers of tobacco. Last year, the president sought comprehensive tobacco legislation and, while the 1998 State tobacco settlement was an important step in the right direction, more must be done to protect our children and hold the tobacco industry accountable.

We are here today to talk about Medicaid recoupment. Existing Federal law clearly requires States to share all Medicaid recoveries with Federal taxpayers. Nothing in the law creates an exception for tobacco settlements, regardless of their size. States routinely report and credit HCFA with the Federal share of third party liability collections. It is worth highlighting that three States -- Massachusetts, Louisiana, and Florida -- reported and credited to HCFA some of their tobacco collections as part of a settlement with the Liggett Corporation. Although the funds involved in the Liggett settlement are much smaller than those at stake in the comprehensive settlement, these initial payments indicate that the States understand their legal and fiduciary responsibility to credit the Federal government with its share of tobacco settlement proceeds.

Rather than having HCFA claim the full Federal share of the comprehensive settlement through current law procedures, the Administration has proposed an approach that gives States flexibility and discretion over how these funds will be spent. Specifically, the Administration proposes that States keep 100 percent of the tobacco settlement funds in exchange for a commitment to use a portion of the proceeds to reduce youth smoking, protect tobacco farmers, improve public health and assist children. The details of this arrangement would be worked out through negotiation with the States and Congress. Without such an arrangement, not a single penny of tobacco settlement funds would have to be used to reduce youth smoking.

Background

Medicaid is a joint Federal/State partnership, in which States run their own individual Medicaid programs within Federal guidelines, and the Federal government pays for, on average, 57 percent of State Medicaid costs. The Federal match rate is at least 50 percent in all States and as high as 77 percent. State administrative costs, including costs incurred in pursuit of Medicaid cost recoveries, qualify for Federal matching at a rate of 50 percent.

Federal law specifically requires States to pursue Medicaid recoveries from third parties. The law says States must report these recoveries to HCFA so that Federal taxpayers receive their fair share of such recoveries.

This dates back to the beginning of the Medicaid program. The Title XIX Medicaid chapter of the Social Security Act at section 1903(d)(2) specifically requires that Federal taxpayers be reimbursed for the Federal share of Medicaid expenditures that States recovered from liability cases involving third parties.

Section 1903(d) of the Social Security Act mandates that States allocate from the amount of any Medicaid-related recovery the pro-rata share to which the Federal Government is entitled. Specifically, this law states:

These statutory requirements have been in existence for 30 years. Furthermore, 42 U.S.C. § 1396a(a)(25)(A), which became effective March 31, 1968, establishes that it is the State's responsibility "to ascertain the legal liability of third parties . . . to pay for care and services available under the [State's Medicaid] plan."Regulations set forth in 42 CFR 433.136 define 'third party' as "any individual, entity or program that is or may be liable to pay all or part of the expenditures for medical assistance furnished under a State plan." Also, 42 CFR 433.140 describes the State's obligation clearly: "If the State receives FFP [Federal financial participation] in Medicaid payments for which it receives third party reimbursement, the State must pay the Federal government a portion of the reimbursement determined in accordance with the FMAP [Federal medical assistance percentage] for the State." It is important to recognize that unlike the States, the Federal Government is not authorized by the Medicaid statute to sue third parties directly. This does not mean, however, that Congress intended to abdicate its claim to such recoveries. Rather, the Medicaid statute protects the Federal Government's interests by explicitly making the States responsible for both pursuing these recoveries, reporting them to HCFA, and ensuring that the Federal Government receives its share. Thus, the State cannot pursue only State claims; it is obligated to pursue both State and Federal claims at the same time.

States routinely comply with this law. Three States -- Florida, Louisiana, and Massachusetts -- reported recoupments of more than $780,000 from tobacco settlements with the Liggett Corporation.

In fiscal 1998, States reported more than $642 million in recoveries for medical costs for which another party was liable, often because a judge ruled that the other party was at fault. Federal taxpayers' share of third party liability Medicaid recoupments reported from fiscal year 1994 through fiscal year 1998 totaled $1.5 billion.

HCFA passes savings from Medicaid recoupments back to Federal taxpayers by subtrActing the Federal share of Medicaid recoupments, minus costs incurred by States in obtaining the recoveries, from future Medicaid disbursements to States.

Just like in the tobacco settlements, States routinely undertake Medicaid recoupment actions without any Federal involvement. In fact, Federal law authorizes only States, and not the Federal government, to file lawsuits under the Medicaid statute to recoup Medicaid funds. It says it is States' responsibility "to ascertain the legal liability of third parties . . . to pay for care and services" under State Medicaid plans.

Determining Federal Taxpayers' Fair Share

The State tobacco settlements clearly include restitution for the costs to Medicaid of care for disease caused by tobacco. In fact, the Florida settlement specifically states that it in part covers Medicaid expenditures. In exchange for settlement funds, all the States gave up all present and future claims, including all Federal Medicaid claims. These settlements legally prohibit States from making any future claims for tobacco-related Medicaid expenditures, and the Social Security Act does not authorize the Federal government from bringing Medicaid recoupment suits.

That means Federal taxpayers are precluded from taking any other route for recouping their fair share of Medicaid expenditures for tobacco-related illnesses, and since their tax dollars went to States to cover these costs. Federal taxpayers are, therefore, clearly entitled to a share of the settlement for tobacco-related Medicaid expenditures.

Conclusion

We commend States for their historic achievement in obtaining settlements from tobacco companies. The Social Security Act does not authorize us to seek Medicaid restitutions from third parties, and only States could have done what they did. We are currently working with our colleagues at the Justice Department to secure a similar recovery from tobacco companies for costs of treating tobacco-related diseases incurred by Medicare and other Federal health programs outside of Medicaid.