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
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
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
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.
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
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:
A(2)(A) The Secretary shall then pay to
the State, in such installments as he may determine, the amount so estimated, reduced or
increased to the extent of any overpayment or underpayment which the Secretary determines
was made under this section to such State for any prior quarter and with respect to which
adjustment has not already been made under this subsection.
(2)(B) Expenditures for which payments were made to the State under subsection (a)
shall be treated as an overpayment to the extent that the State or local agency
administering such plan has been reimbursed for such expenditures by a third party
pursuant to the provisions of its plan in compliance with section 1902(a)(25)...."
"(2)(3) The pro rata share to which
the United States
is equitably entitled, as determined by the Secretary, of the net amount
recovered during any quarter by the State or any political subdivision thereof with
respect to medical assistance furnished under the State plan shall be considered an
overpayment to be adjusted under this subsection."
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
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.
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.
We want to work with you and States to find a resolution of Federal taxpayers' claim to tobacco settlements that we all agree is
fair to all Americans. I thank you for holding this hearing, and I am happy to answer your