Zinman v. Shalala

Zinman v. Shalala
67 F.3d 841 (9th Cir. 1995)

The Zinman case involved a class action law suit filed by Medicare beneficiaries challenging the amount of Medicare’s conditional payment recovery in the context of discounted third party tort (liability) settlements.

The beneficiaries sued the Department of Health and Human Services (HHS) arguing that under the Medicare Secondary Payer Statute (MSP) Medicare was required to accept a pro rata reduction of its Medicare conditional payment claim in situations where a beneficiary received a third party settlement for less than its full value.  HHS took the position that Medicare was entitled to a full recovery of its conditional payments in such situations, less applicable procurement costs and subject only to the possible full or partial hardship waiver under the MSP.

The Ninth Circuit Court of Appeals ruled in favor of Medicare holding that under the MSP Medicare was entitled to recover the full amount of its conditional payments (less procurements costs and subject to a possible waiver) even in situations where a Medicare beneficiary received a discounted third party settlement.

Although decided approximately 16 years ago, Zinman remains an important case that needs to be considered and understood in assessing potential challenges to Medicare conditional payment claims.  In this regard, the recent cases of Hadden v. U.S., Bradley v. Sebelius and Benson v. Sebelius each, to a certain degree, represented a challenge to the appellate court’s ruling and analysis in Zinman. (Note: Summaries of the referenced cases are contained under the “Conditional Payment” part of this blog).

With this backdrop, the author summarizes the Zinman case in greater detail as contained below.  Please note that all MSP statutory citations referenced below reflect the numbering of said sections as contained under the MSP as same existed at the time the Zinman case was decided.

Factual Background

This class action law suit was filed in 1990 by a class of Medicare beneficiaries (beneficiaries) involved in various tort (liability) cases.  This class of beneficiaries sued the Department of Health and Human Services (HHS) challenging that agency’s interpretation of the Medicare Secondary Payer Statute (MSP) with respect to the issue of Medicare conditional payment reimbursement.

In this action, the beneficiaries sought an injunction requiring HHS to reduce pro rata Medicare’s conditional payment recovery in situations where a beneficiary receives a settlement for less than full value of their total damages (i.e. a discounted third party settlement).  The beneficiaries argued that under the MSP Medicare was not entitled to full reimbursement of its claimed conditional payment amount in relation to discounted third party settlements.

HHS countered that under the MSP Medicare was entitled to a full recovery of its conditional payments in such situations, less applicable procurement costs per 42 C.F.R. § 411.37 and subject only to the possibility of a full or partial hardship waiver under 42 U.S.C. § 1395gg(c).

This dispute came before the United States District Court for the Northern District of California on HHS’ motion for summary judgment.  The federal district court agreed with HHS and, accordingly, granted the agency’s motion.

The beneficiaries then appealed this ruling to the Ninth Circuit Court of Appeals (appellate court) which analyzed the issue presented and ruled as follows:

Issue Presented/Court’s Ruling

The issue for determination by the appellate court was:

In situations where a beneficiary receives a “discounted” third party settlement, is Medicare entitled to a full recovery of its conditional payments, less applicable procurement costs per 42 C.F.R. § 411.37 and subject only to the possibility of a full or partial hardship waiver under 42 U.S.C. § 1395gg(c)?

The appellate court ruled that Medicare was in fact entitled to recover up to the full amount of its conditional payments (less procurements costs and subject to a possible waiver) in situations where a Medicare beneficiary received a settlement for less than his or her total damages. As part of its ruling, the appellate court deferred to HHS’ interpretation of the MSP finding same to be a “reasonable construction” of the statue.

In reaching its decision, the appellate court applied the “two step” analytical approach set forth by the United States Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,  467 U.S. 837, 104 Sup.Ct. 2778, 81 L.Ed.2d 894 (1984).

As the appellate court explained, under Chevron-Step One the focus centers on whether or not Congress’ intent can be determined from the textual construction of a statute. If so, the court and the parties are bound by same in addressing the presented issue.

If, on the other hand, it is determined that the statute is silent or ambiguous, then the analysis shifts to Step Two. Under Chevron-Step Two, the court must decide if a federal agency’s interpretation of the statute at issue is rational.

Utilizing the Chevron analysis, the court in Zinman addressed the presented issues as follows:

Chevron-Step One

The beneficiaries argued that the MSP “on its face” (that is, based on the clear wording and text of the statute) required that Medicare accept an apportioned and reduced reimbursement when a beneficiary received a discounted settlement. In support of this position, the beneficiaries advanced the following three arguments:

First, the beneficiaries argued that use of the phrase “item or service” as contained in 42 U.S.C. § 1395y(b)(2)(B)(i) and (ii) limited Medicare’s reimbursement right.  Specifically, the beneficiaries contended that by use of this phrase Congress intended to limit Medicare’s reimbursement to the extent that a beneficiary’s settlement actually covered the “items or services” for which Medicare paid. However, the appellate court rejected this argument stating as follows:

It is clear from the statute that the references to “item or service” are intended to define the payments for which Medicare has a right to reimbursement. Nothing in this language, however, compels the conclusion that Congress intended to limit the amount of recovery for a conditionally paid “item or service” to a proportionate share of a discounted settlement. Zinman, 67 F.3d at 844.

Second, the beneficiaries argued that Medicare’s right of subrogation under the MSP required it to accept a reduced recovery.  The essence of this argument was that subrogation rights being equitable in nature meant that the principle of equitable apportionment was applicable, which would limit Medicare’s recovery.

While the appellate court acknowledged the equitable nature of subrogation, it refused to limit Medicare’s reimbursement rights strictly to a subrogated interest.  In this regard, the appellate court noted that the MSP also provided Medicare with a separate and independent recovery right.  In rejecting the beneficiaries’ second argument, the appellate court stated:

The MSP legislation does not confine the HHS’s right of reimbursement to its right of subrogation. The statute grants HHS an independent right of recovery against any entity that is responsible for payment of or that has received payment for Medicare-related items or services, including the beneficiary herself. (citation omitted). This independent right of recovery is separate and distinct from HHS’s right of subrogation, see  United States v. Travelers Ins. Co., 815 F.Supp. 521, 523 (D.Conn. 1992); Provident Life & Accident Ins. Co. v. United States, 740 F.Supp. 492, 501 (E.D.Tenn 1990), and  is not limited by the equitable principle of apportionment stemming from the subrogation right.

Moreover, to define Medicare’s right to recover its conditional payments solely by reference to its right of subrogation would render superfluous the alternative remedy of the independent right of recovery contained in section 1395y(b)(2)(B)(ii).  We decline to construe the statute in a way that would render clear statutory language superfluous. (citations omitted). We reject the beneficiaries’ contention that HHS’s recovery is limited by the equitable principle of apportionment applicable to the right of subrogation.  Zinman, 67 F.3d at 844, 845.

Third, the beneficiaries argued that certain language contained in the MSP which permitted Medicare to issue payment for an item or service in situations where a primary plan did not issue full payment for said item or service can be interpreted as thereby requiring Medicare to proportionately reduce its conditional payment claim. However, the appellate court rejected this argument finding that “[n]othing in this language limits Medicare’s right of full reimbursement.”  Zinman, 67 F.3d at 845.

From these arguments and its review of the MSP, the appellate court concluded that the MSP did not address the issue of whether Medicare’s conditional payment claim could be apportioned.

As such, the appellate court stated that it had to move “to the second step of the Chevron analysis and consider whether HHS’s construction of the MSP statute is a permissible one.  If HHS’s construction is ‘rational and consistent with the statute,’ it is a permissible construction and we will uphold it. (citation omitted). Zinman, 67 F.3d at 845.

Chevron-Step Two

Under Step Two of the Chevron analysis, the appellate court concluded that HHS’ position that the MSP required full reimbursement of Medicare conditional payments, despite the fact that a beneficiary received a discounted third party settlement, was indeed a rational interpretation of the MSP statute.  The appellate court stated:

Reading the MSP legislation to allow full reimbursement of conditional Medicare payments even though a beneficiary receives a discounted settlement from a third party is a rational construction of the statute. It is also consistent with the statute’s purpose. The transformation of Medicare from the primary payer to the secondary payer with a right of reimbursement reflects the overarching statutory purpose of reducing Medicare costs. See also H.R.REP. NO. 1167, 96th Cong., 2d Sess. 352 (1980), reprinted in 1980 U.S.C.C.A.N. 5526, 5717 (congressional intent motivating MSP legislation was to reduce Medicare costs). A full recovery of conditional payments will reduce such costs.  Zinman, 67 F.3d at 845.

The appellate court further stated that “HHS’s construction [of the MSP statute] … provides a practical and economical way for Medicare to recover its conditional payments.”  Id.

Regarding this particular point, the appellate court found that quantifying the “variety” of damages an injured party may claim or be compensated for is not “capable of precise computation” and, accordingly, Medicare’s “ability to recover the full amount of conditional payments, regardless of a party’s allegations of damages, avoids the commitment of federal resources to the task of ascertaining the dollar amount of each element of a victim’s alleged damages.” Id.   The beneficiaries countered that determining the dollar amount of an injured party’s damages was not a prohibitive burden, noting that HHS accepted the apportionment provisions contained in 42 C.F.R. 411.47 pertaining to workers’ compensation cases.

However, the appellate court rejected this argument stating that there were significant differences between workers’ compensation and tort (liability) cases. Most notably, the appellate court noted that “[t]ort cases …  involve non-economic damages not available in workers’ compensation cases, and a victim’s damages are not determined by an established formula.”  Zinman, 67 F.3d at 846.  Accordingly, the appellate court stated that “[a]pportionment of Medicare’s recovery in tort cases would either require a fact finding process to determine actual damages or would place Medicare at the mercy of a victim’s or personal injury attorney’s estimate of damages.” Id.

Based on the foregoing, the appellate court affirmed the federal district court’s summary judgment in favor of HHS.

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