Smalley v. Nebraska Dep't of Health & Human Servs., S–11–151.

• Decision Date: 23 March 2012
• Docket Number: No. S–11–151.,S–11–151.
• Citation: 811 N.W.2d 246,283 Neb. 544
• Parties: Edward M. SMALLEY, appellee and cross-appellant, v. NEBRASKA DEPARTMENT OF HEALTH AND HUMAN SERVICES, appellant and cross-appellee.
• Court: Nebraska Supreme Court

283 Neb. 544

811 N.W.2d 246

Edward M. SMALLEY, appellee and cross-appellant,

v.NEBRASKA DEPARTMENT OF HEALTH AND HUMAN SERVICES, appellant and cross-appellee.

No. S–11–151.

Supreme Court of Nebraska.

March 23, 2012.

Syllabus by the Court

1. Judgments: Appeal and Error. The trial court's factual findings in a bench trial of an action at law have the effect of a jury verdict and will not be set aside unless clearly erroneous.

2. Administrative Law: Statutes: Appeal and Error. To the extent that the meaning and interpretation of statutes and regulations are involved, questions of law are presented, in connection with which an appellate court has an obligation to reach an independent conclusion irrespective of the decision made by the court below.

3. Medical Assistance: Federal Acts: States. The Medicaid program provides joint federal and state funding of medical care for individuals whose resources are insufficient to meet the cost of necessary medical care.

4. Medical Assistance: Federal Acts: States. The Medicaid program provides federal financial assistance to states that choose to reimburse certain costs of medical treatment for needy persons.

5. Medical Assistance: Federal Acts: States. A state is not obligated to participate in the Medicaid program; however, once a state has voluntarily elected to participate, it must comply with standards and requirements imposed by federal statutes and regulations.

6. Medical Assistance: Federal Acts. Based in part on its third-party liability provisions, Medicaid has been characterized as a “payer of last resort.” Therefore, all other available resources must be used before Medicaid pays for the medical care of an individual enrolled in a Medicaid program.

7. Ordinances: Presumptions: Proof. In considering the validity of regulations, courts generally presume that legislative or rulemaking bodies, in enacting ordinances or rules, acted within their authority, and the burden rests on those who challenge their validity.

8. Administrative Law. Agency regulations that are properly adopted and filed with the Secretary of State of Nebraska have the effect of statutory law. Jon Bruning, Attorney General, and Michael J. Rumbaugh, Lincoln, for appellant.

William R. Settles, of Lamson, Dugan & Murray, L.L.P., Omaha, Dean T. Jennings, of Jennings Law Firm, and G. Michael Fenner, of Creighton University School of Law, Omaha, for appellee.

HEAVICAN, C.J., CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER–LERMAN, JJ.

STEPHAN, J.

This case arises from the settlement of a personal injury lawsuit filed by Edward M. Smalley, who was seriously injured in a motor vehicle accident in December 2007. Although Smalley qualified for Medicaid as a result of the accident, the Nebraska Department of Health and Human Services (DHHS), Nebraska's Medicaid administrator, took the position that it would not pay Smalley's outstanding medical bills prior to the disposition of his third-party liability claims. In order to facilitate a settlement of those claims, Smalley's attorney agreed that if DHHS paid the medical bills at the discounted Medicaid rate, Smalley would reimburse DHHS dollar-for-dollar out of the settlement proceeds. After DHHS paid the bills as agreed, Smalley objected to full reimbursement as contrary to federal law. The disputed funds were held in escrow, and the dispute was tried to the district court for Cass County. The court determined that under federal law, DHHS was entitled to reimbursement of only a portion of the Medicaid payments it had made. The court denied Smalley's requested relief under 42 U.S.C. §§ 1983 and 1988 (2006). DHHS appeals, and Smalley cross-appeals. We conclude that DHHS is entitled to full reimbursement and therefore reverse the judgment of the district court.

BACKGROUND

Accident

Shortly before 10 p.m. on December 20, 2007, Smalley was standing outside a vehicle parked on a snow- and ice-packed road in Cass County. Smalley was talking with the owner of the vehicle, who was giving him a ride home from a bar. Both were struck by a vehicle operated by Jerome G. Speck and owned by Mark Morehead Construction, Inc. (Morehead). Smalley was treated at a hospital in Omaha, Nebraska. He sustained serious injuries, including amputation of his legs. The other party also suffered injuries in the accident.

Submission and Denial of Medicaid Claim

Smalley was determined eligible for Medicaid during his hospital stay. In February 2008, he filed a personal injury lawsuit against Speck and Morehead, alleging they were responsible for his injuries. In March, the hospital submitted medical bills in excess of $400,000 to DHHS for payment under Medicaid. DHHS sets maximum reimbursement rates for Medicaid services, and pursuant to statutory regulations and its provider agreement with the hospital, DHHS could fully resolve Smalley's medical bills with a payment of approximately $131,000.¹ Emil Spicka, a medical claims investigator for DHHS, refused to pay the hospital bill on the ground that “third party resources” might be available, such as the liability insurance of Speck and Morehead. The total liability coverage available to satisfy the claim of Smalley and the other person injured in the accident was $1,025,000. At the time DHHS denied payment of Smalley's medical bills, Smalley's claims against Speck and Morehead had not been resolved.

Agreement Between Smalley's Attorney and DHHS

Speck and Morehead agreed to mediate the personal injury lawsuit. Prior to the mediation session, Spicka told Smalley's attorney that DHHS would pay Smalley's outstanding medical bills at the discounted Medicaid rate if Smalley would agree to reimburse DHHS for the full amount of its payments out of the settlement proceeds. After receiving a proffered settlement of $800,000, Smalley's attorney agreed to this proposal because it disposed of the medical bills at a substantially reduced rate, thereby maximizing Smalley's net settlement proceeds. However, the attorney testified that he had reservations about whether DHHS could legally insist upon full reimbursement and that he intended to seek a legal resolution of this issue before consummating the settlement. Smalley's attorney did not mention this portion of his strategy to Spicka when the agreement was reached. Sometime after May 15, 2008, DHHS paid approximately $131,000 to resolve Smalley's outstanding medical bills. DHHS anticipated it would be fully reimbursed out of the settlement proceeds pursuant to its agreement.

Disposition of Medicaid Subrogation Claim

On May 27, 2008, Smalley added DHHS as a defendant in his pending personal injury action against Speck and Morehead. Smalley asserted that fully reimbursing DHHS out of the proceeds of the settlement would be contrary to federal law as applied by the U.S. Supreme Court in Arkansas Dept. of Health and Human Servs. v. Ahlborn ² and that he could not accept the pending offer to settle his personal injury claim until this issue had been resolved. He sought both declaratory and injunctive relief against DHHS and asserted that DHHS was liable under 42 U.S.C. §§ 1983 and 1988. A few days after Smalley added DHHS as a defendant, the parties entered into a stipulation which permitted Smalley to settle his claims against Speck and Morehead for $805,000. A portion of the settlement amount was placed into a special needs trust for Smalley's benefit, and Smalley's attorney fees and expenses were paid. An amount just over $130,000, representing the reimbursement claimed by DHHS and disputed by Smalley, was deposited in escrow pending disposition of the issue by the district court. DHHS filed an answer and a counterclaim asserting it was entitled to $130,000, representing partial reimbursement of the Medicaid payments it made to Smalley's health care providers.

The district court conducted a bench trial at which Smalley was represented by new counsel. Smalley's original attorney testified, as did Spicka and another representative of DHHS. Over a foundational objection, Smalley's original attorney testified that in his professional opinion, Smalley's personal injury claim was worth at least $6 million. He admitted that he never intended to honor his agreement to fully reimburse DHHS and that he entered into the agreement in order to induce DHHS to pay Smalley's medical expenses at the discounted Medicaid rate. Spicka testified that based upon the representations of Smalley's counsel, he expected DHHS to be fully reimbursed for the Medicaid payments it made on Smalley's behalf. He further testified that in the absence of the agreement, DHHS would have continued its “cost avoidance approach,” leaving Smalley to negotiate with the hospital regarding the outstanding bill.

The district court held that DHHS' right to reimbursement was limited by Ahlborn,³ in which the U.S. Supreme Court held that a state Medicaid program is entitled to reimbursement from only that part of a personal injury settlement that represents payment for medical care expenses. Applying a formula used in Ahlborn, the district court concluded that Smalley's claim had a value of $6 million and that the settlement amount of $805,000 represented approximately 13.4 percent of the total value of Smalley's claim. Applying this percentage to the Medicaid payments made by DHHS, the court determined that DHHS was entitled to reimbursement in the amount of $17,420. The court determined that enforcement of DHHS' claim for any greater portion of the settlement proceeds would be inconsistent with Ahlborn and enjoined DHHS from pursuing such enforcement efforts. The district court denied Smalley's § 1983 claim and held that he was not entitled to attorney fees pursuant to § 1988.

Smalley filed a motion for a new trial with respect to the denial of his § 1983 claim and his request for attorney fees. The court overruled the motion. DHHS then perfected this timely appeal, which we moved to our docket on our own motion pursuant to our...