IN THE COURT OF APPEALS
STATE OF ARIZONA
JAMES FLYNN, a single man,
ARIZONA HEALTH CARE COST
ADMINISTRATION, an Arizona state )
agency; ANTHONY D. RODGERS,
Director of AHCCCS; TODD J.
JENSEN, AHCCCS Administrative
Hearing Decision Administrator,
SOUTHWEST FIDUCIARY, INC., as
Conservator of RHONDA LUNDY, a
1 CA-CV 10-0300
1 CA-CV 10-0301
O P I N I O N
Appeal from the Superior Court in Maricopa County
Cause No. LC2008-000414-001DT
Cause No. LC2009-000531-001DT
The Honorable Crane McClennen, Judge
Goldberg & Osborne
By Allen D. Bucknell
Attorneys for Plaintiff/Appellee/Cross-Appellant
Southwest Fiduciary, Inc.
Ira W. Schiffman
Attorney at Law
Law Offices of David L. Abney
By David L. Abney
Levenbaum & Cohen
By Geoffrey M. Trachtenberg
Attorneys for Plaintiff/Appellee James Flynn
Deconcini McDonald Yetwin & Lacy, P.C.
By Gary F. Urman
Attorneys for Defendants/Appellants
Arizona Health Care Cost Containment
Anthony D. Rodgers and Todd J. Jensen
J O H N S E N, Judge
In these consolidated cases we address a question the
Supreme Court left open in Arkansas Department of Health and
Human Services v. Ahlborn, 547 U.S. 268 (2006), concerning the
lien rights of a state Medicaid plan after it has paid medical
expenses for a victim who subsequently settles with a tortfeasor
portion of the victim’s settlement that represents recovery of
the plan’s payments on behalf of the victim, less a deduction
for litigation expenses.
FACTS AND PROCEDURAL BACKGROUND
Southwest Fiduciary, Inc. was appointed conservator of
Rhonda Lundy after she was injured severely in an auto accident.
Lundy sued third parties in the accident and ultimately settled
value” of Lundy’s damages was between $3,000,000 and $4,000,000.
According to the mediator, Lundy agreed to compromise her claims
because of “difficult liability issues.”
The Arizona Health
Care Cost Containment System (“AHCCCS”), which had paid $268,080
toward Lundy’s medical expenses, filed a lien for that amount
against the settlement.
James Flynn was injured in a separate auto accident.
including billed medical expenses of $138,710, he settled his
third-party tort claim for $100,000.
AHCCCS, which had paid
$51,760 toward Flynn’s medical expenses, sought to enforce a
lien for that amount against his recovery.
The settlements that Lundy and Flynn entered into with
medical expenses, pain and suffering, lost wages and other outof-pocket costs.
As is customary, Lundy and Flynn did not limit
their medical-expense claims to the amounts they actually paid
or were paid on their behalf, but demanded reimbursement from
other medical providers that treated them. 1
During separate administrative proceedings, the issue
was whether AHCCCS’s lien rights were to be measured by what it
actually paid or by the victims’ total billed medical expenses.
Although the director of AHCCCS decided in favor of AHCCCS, on
appeal, the superior court in each case held AHCCCS’s lien for
payments it had made on behalf of the victim would be reduced by
the ratio that the settlement amount bore to the victim’s total
claimed damages. 2
We have jurisdiction over these consolidated appeals
pursuant to Article 6, Section 9, of the Arizona Constitution
(2007) and 12-120.21(A)(1) (2007).
Hospitals and other medical providers frequently negotiate
with government programs and private medical insurers to accept
lower amounts in satisfaction of their billed charges.
Banner Health v. Med. Sav. Ins. Co., 216 Ariz. 146, 150, ¶ 14,
163 P.3d 1096, 1100 (App. 2007); Lopez v. Safeway Stores, Inc.,
212 Ariz. 198, 202, ¶ 12, 129 P.3d 487, 491 (App. 2006).
Thus, if a hypothetical victim had settled with the
tortfeasor for one-half of her total claimed damages, the
superior court’s formula would allow AHCCCS to recover from the
settlement only one-half of the amount it had paid on behalf of
Standard of Review.
AHCCCS challenges the superior court’s interpretation
of Arizona’s healthcare lien statute, A.R.S. § 36-2915 (2009),
and related federal statutes. 3
Statutory interpretation is a
question of law that we review de novo.
Libra Group, Inc. v.
State, 167 Ariz. 176, 179, 805 P.2d 409, 412 (1991).
Medicaid, AHCCCS and Ahlborn.
Medicaid was established in 1965 to provide medical
care to qualified low-income individuals.
Each state administers its own Medicaid plan, which
must conform to federal requirements.
See 42 U.S.C. § 1396
See, e.g., A.R.S. §§ 36-
Arizona Ass’n of Providers for Persons with
Disabilities v. State, 223 Ariz. 6, 10-11, ¶ 4, 219 P.3d 216,
220-21 (App. 2009).
Federal law requires states to establish procedures by
tortfeasors for payments the plans make on behalf of injured
persons to whom tortfeasors are legally liable.
42 U.S.C. §
1396a(a)(25)(B), (H) (2006); see also Ahlborn, 547 U.S. at 275-
provides in relevant part:
[AHCCCS] is entitled to a lien for the
charges for hospital or medical care and
treatment of an injured person for which
[AHCCCS] or a contractor is responsible, on
any and all claims of liability or indemnity
for damages accruing to the person to whom
hospital or medical service is rendered, or
to the legal representative of such person,
on account of injuries giving rise to such
claims and which necessitated such hospital
care and treatment.
Ahlborn that when a Medicaid recipient settles with a tortfeasor
for an amount less than her full damages, Medicaid’s share of
the settlement may not exceed the portion of the settlement that
represents medical expenses.
547 U.S. at 280.
recipient in Ahlborn incurred damages of about $3,040,000, but
settled with the tortfeasor for $550,000.
Id. at 269, 274.
Arkansas Department of Health and Human Services stipulated that
medical expenses, but asserted a lien for $215,645, the amount
it had paid for the victim’s medical care.
Id. at 274, 280-81.
recover more than the portion of the settlement representing
payments for medical care.
Id. at 280-81.
Thus, it limited the
state’s recovery to the portion of the settlement attributable
to past medical expenses, $35,581.
In Ahlborn the issue was whether the state Medicaid
plan could recover the entirety of its lien against the victim’s
settlement, and the parties stipulated to the amount the state
would recover if the Court ruled against the state.
Id. at 280-
We address in this case an issue not presented in Ahlborn:
Whether a Medicaid lien may be enforced against the portion of a
tort settlement that represents medical expenses that are billed
but not paid because medical providers have accepted discounted
payments in full satisfaction of their bills.
Bolanos v. Superior Court, 87 Cal. Rptr. 3d 174, 186 (App. 2008)
(Ahlborn does not require specific formula in calculating amount
of Medicaid lien that is enforceable against settlement); Lugo
v. Beth Israel Med. Ctr., 819 N.Y.S.2d 892, 897 (N.Y. Sup. Ct.
recognizing the usefulness of the formula applied in Ahlborn).
This issue arises because of the rule in Arizona that
injured persons may sue in tort to recover the full amount of
their billed medical expenses caused by the tort, even though
they may not have paid that amount or (any amount) of medical
The stipulation in Ahlborn resulted in the equivalency that
the superior court applied in these cases:
settled her case for roughly one-sixth of her full damages, and
the state Medicaid plan was reimbursed for roughly one-sixth of
what it had paid for her care. 547 U.S. at 269, 274, 281.
This “collateral source rule” prohibits tortfeasors
from avoiding liability for damages in situations in which an
injured party has been compensated by a third party.
Safeway Stores, Inc., 212 Ariz. 198, 202, ¶ 13, 129 P.3d 487,
491 (App. 2006).
Accordingly, when a plaintiff in a personal
amount of those expenses, even though her health insurer (or
AHCCCS) may have negotiated to pay less than that amount on her
As noted, for example, supra ¶¶ 2-3, Lundy’s billed
medical expenses were $920,000; AHCCCS satisfied those expenses
$139,000, but AHCCCS satisfied those expenses by paying $52,000.
relevant formula, that case did not resolve whether the “medical
Medicaid actually made for medical services or by the billed
value of those services.
Depending on the facts of a particular
case, the difference may be significant.
In the Flynn case, for
example, the negotiated settlement represented 40 percent of the
estimated value of the case. 5
Under the formula applied by
stipulation in Ahlborn and now urged by Flynn, AHCCCS’s recovery
would be calculated by multiplying the amount AHCCCS paid in
AHCCCS, however, argues its lien should be
based on the proportion of Flynn’s total damages represented by
amount less attorney’s fees and costs), and arrives at a lien of
Federal and State Law Require that AHCCCS’s Lien Recovery
Be Calculated Based on What AHCCCS Has Paid,
Not on Total Billed Medical Expenses.
The statute under which AHCCCS asserted the liens at
issue, A.R.S. § 36-2915(A), limits the amount of any such lien
to “the charges . . . for which [AHCCCS] . . . is responsible.”
Consistent with 42 U.S.C. 1396a(a)(25)(B), which requires states
to enact measures by which a state may seek “reimbursement” for
AHCCCS does not dispute Flynn’s assertion that his total
damages (calculated pursuant to the collateral source rule) were
Applying the Ahlborn formula in the Lundy case would result
in a Medicaid lien of $35,221 (i.e., $842,696/$3,500,000 = 24%
times $268,000 = $64,320, reduced to account for litigation
By contrast, using the same formula it employed in
the Flynn case, AHCCCS asserts it is entitled to a lien of
$115,000 against Lundy’s recovery.
Medicaid assistance payments when a third party is found liable
for healthcare services, we interpret “charges . . . for which
[AHCCCS] . . . is responsible” to mean charges actually paid by
Applying that principle to a tort settlement, AHCCCS’s
share of a settlement should be calculated based on amounts it
has paid for the victim’s medical care, not based on larger
Our conclusion is supported by the statute the Supreme
Court labeled the Medicaid “anti-lien” provision.
547 U.S. at 284.
The Court pointed out that 42 U.S.C. § 1396p
(with exceptions not relevant here) bars states “from placing
settlement proceeds that represents payments for medical care.”
Id. at 284.
The Court concluded that the reimbursement allowed
by 42 U.S.C. § 1396a constitutes an exception to the general
exception allows only a lien that “encumbers proceeds designated
as payments for medical care.”
Beyond that, the Court
encumbrance of the remainder of the settlement.”
AHCCCS argues that Ahlborn allowed for the possibility
of a lien based not on payments made by a Medicaid plan but on
billed medical expenses incurred by the Medicaid recipient.
points to the Court’s description of the issue in that case as
“whether [the state] can lay claim to more than the portion of
Ahlborn’s settlement that represents medical expenses.”
From this, AHCCCS argues that the Court intended to permit
settlement that represents total billed medical expenses, rather
than some lower number represented by actual Medicaid payments.
Although the Court did not address the issue, we take
from its emphasis on the anti-lien provision the general rule
that a state plan may recover from a victim’s tort settlement no
more than the portion of the settlement attributable to payments
the plan has made on behalf of the victim.
The Court recognized
representing medical costs, but also lost wages and other forms
Id. at 280.
Given the Court’s refusal to permit the
state plan in that case to recover from the other components of
the settlement, we conclude federal law does not allow a state
Medicaid plan to enforce its lien against any portion of a tort
settlement not attributable to the plan’s actual payments.
AHCCCS argues that limiting its lien in such fashion
allows a Medicaid recipient an unfair windfall – the amount of
the settlement that represents billed medical expenses in excess
of AHCCCS’s actual payments.
Any “windfall” is a consequence of
the collateral source rule, however, and may exist whenever the
victim of a tort receives a judgment or negotiates a settlement
that includes a component for medical expenses.
See Lopez, 212
Ariz. at 206–07, ¶ 25, 129 P.3d at 495; Restatement (Second) of
Torts § 920A (1979) cmt. b.
Under this rule, a tort victim
arguably is entitled to recover two sums relating to her medical
expenses – the amounts actually paid (by the victim, her insurer
or, as in this case, a government payor) and the amounts billed
but not paid because medical providers have agreed to accept
less in payment.
We take Ahlborn’s warning that 42 U.S.C. §
1396p(a) bars any lien beyond “proceeds designated as payments
for medical care,” 547 U.S. at 284, to mean that a Medicaid lien
attributable to payments the state plan has made on behalf of
the victim. 7
According to the record, a hospital filed a lien against
the settlement negotiated in Lundy’s case but eventually agreed
to release the lien.
Our record does not disclose the extent,
if any, to which Lundy’s settlement included compensation for
any amount she herself may have paid toward her medical bills.
The parties’ briefs seem to assume that AHCCCS was the only
payor in both of these consolidated cases, and our analysis
presumes that to be true.
Cf. Ahlborn, 547 U.S. at 282
AHCCCS argues that while the collateral source rule
justifiably may favor an innocent victim over a tortfeasor, the
Arizona’s collateral source rule allows a victim whose medical
expenses are paid by a government payor to seek recovery of
those expenses from a tortfeasor.
Lopez, 212 Ariz. at 206–07, ¶
25, 129 P.3d at 495; see Restatement (Second) of Torts § 920A
(1979) cmt. b (“If the benefit was a gift to the plaintiff from
a third party or established for him by law, he should not be
deprived of the advantage that it confers.
The law does not
differentiate between the nature of the benefits, so long as
they did not come from the defendant or a person acting for
benefits are subject to collateral source rule).
benefit AHCCCS members may receive from the collateral source
rule when it complied with the federal directive by enacting
A.R.S. § 36-2915.
As we have said, that statute creates in
AHCCCS a right to a lien “for the charges . . . for which
[AHCCCS] is responsible.”
Thus, although the collateral source
(discussing state plans’ rights under 42 U.S.C. § 1396k(b),
which allows a plan to take an assignment of recipient’s right
to sue for “damages representing payment for medical care”).
rule would allow an injured person to keep for herself whatever
she recovers in a judgment or settlement for medical expenses
paid by her private insurer, the same is not true when those
medical expenses are paid by AHCCCS.
Compare Allstate Ins. Co.
v. Druke, 118 Ariz. 301, 304, 576 P.2d 489, 492 (1978) (private
insurer may not recover from insured’s tort recovery for medical
expenses incurred on behalf of insured), with A.R.S. § 36-2915.
But the limitation the legislature created in § 36-2915 only
applies to amounts that AHCCCS pays on behalf of a plan member,
see supra ¶ 14; it does not go so far as to include billed
medical expenses that AHCCCS has not paid.
To the extent that
state law affects the issue posed in this appeal, we decline to
rule to allow AHCCCS a greater share of the benefit the rule
reserves for a tort victim in the usual case.
AHCCCS argues In re Matey, 213 P.3d 389 (Idaho 2009),
supports its claimed lien.
The Medicaid recipient in that case
settled her personal injury claim for just six percent of its
Id. at 391 n.4.
At the time of the settlement,
Medicaid had paid $60,752 in medical expenses; according to the
court, other “past medical expenses paid” totaled $345,562.
priority to any amount received from a third party or entity
which can reasonably be construed to compensate the recipient
Id. at 393.
Enforcing that statute, the court
reimbursed from any settlement amounts designated for medical
expenses, past or future.
In holding that the federal anti-lien
allocated to other medical expenses, the court remarked that
“the Supreme Court specifically stated that damages received for
medical care did not constitute property subject to the antilien provisions.”
Id. at 394 (citing Ahlborn, 547 U.S. at 284). 8
“the exception carved out by §§ 1396a(25) and 1396(a) is limited
to payments for medical care.”
Ahlborn, 547 U.S. at 284-85
The Ahlborn court’s decision to limit the
medical payments supports our conclusion in these cases that
event, at issue in Matey were settlement amounts representing
paid medical expenses, not, as here, components of a settlement
attributable to billed but not paid medical expenses.
AHCCCS does not argue in these cases that it is entitled to
recover from any portion of these settlements that may have been
designated for future medical expenses, and we express no
opinion on the merit of such an argument.
AHCCCS’s reliance on Smith v. Agency for Health Care
plan’s payments, from a settlement of $2.2 million because the
tort victim did not show that the medical expense portion of her
settlement was less than what the state plan paid.
Id. at 592.
In a footnote, the court posed a hypothetical case in which the
Florida plan would be able to recover the entire portion of a
settlement attributable to medical expenses, even in excess of
persuaded by the Florida court’s suggestion because unlike in
Arizona, a tort victim in Florida may not recover damages for
medical expenses beyond those a provider has negotiated with
Medicaid to accept in full payment.
See Thyssenkrupp Elevator
Corp. v. Lasky, 868 So. 2d 547, 549 (Fla. Dist. Ct. App. 2003)
(citing Fla. Stat. Ann. § 768.76(1) (2003)).
Finally, AHCCCS argues that pursuant to 42 U.S.C. §
1396k(b), when a state Medicaid plan sues to collect payments
reimburse itself fully before remitting the remainder to the
But § 1396k is not at issue here.
requires states to require Medicaid recipients to assign their
cases, AHCCCS is not enforcing the victims’ rights by way of any
assignment; rather than sue the tortfeasors in the names of the
against settlements the tort victims negotiated for themselves.
Compare A.R.S. § 36-2915 (AHCCCS lien rights) with A.R.S. § 12962
person who is injured”). 9
In any event, the Supreme Court held
in Ahlborn that even under the federal assignment statute, “the
State’s assigned rights extend only to recovery of payments for
547 U.S. at 281-82 (emphasis added).
Resolution of These Cases.
Having held that AHCCCS may enforce its lien rights
only against that portion of a tort settlement attributable to
its payments on behalf of the victim, we must determine the
applicability of that rule to these cases.
AHCCCS directs us to Russell v. Agency for Health Care
Administration, 23 So. 3d 1266 (Fla. Dist. Ct. App. 2010), which
allowed a state Medicaid plan to recover the full amount of
medical costs it paid even though the tort victim’s settlement
As the Supreme Court observed, it is not clear that the
Medicaid assignment statute, 42 U.S.C. § 1396k, “applies in
cases where the State does not actively participate in the
litigation.” 547 U.S. at 281.
was only one-tenth of the full value of her damages.
As here, the Medicaid recipient in that case argued
the state should be entitled to recover only a tenth of its
lien, citing Ahlborn.
The Florida court observed that
Ahlborn ultimately approved but did not require the formula to
which the parties there stipulated.
Id. at 1268.
victim had negotiated her settlement “against the backdrop” of a
Florida statute that required Medicaid to be reimbursed up to 50
percent of the total settlement, the court concluded the state
plan should be fully reimbursed from the settlement.
1269 (citing Ahlborn, 547 U.S. at 272); see also McMillian v.
order fully reimbursing state Medicaid plan from settlement that
represented a tenth of full damages; in violation of state law,
victim should bear burden of proving allocation of settlement
proceeds because he had exclusive access to information about
In the cases before us, however, AHCCCS does not argue
that the settlements disproportionately undervalued the medical
payments AHCCCS made on behalf of Lundy and Flynn.
reimbursed from settlement amounts representing billed medical
expenses for which neither it nor the tort victims are liable.
Under the circumstances, we cannot conclude the superior court
erred in presuming that the settlements in these cases should be
Lundy’s case, the court concluded that because the settlement
represented 24 percent of the value of her case, AHCCCS was
medical expenses, and in Flynn’s case, 40 percent.
See Lima v.
Vouis, 94 Cal. Rptr. 3d 183, 195-97 (App. 2009) (application of
Ahlborn requires “past medical expenses [to be] distinguished in
the settlement from other damages on the basis of a rational
reasonable, “a fair approach” to allocation is to conclude that
proportion that settlement bore to total claimed damages).
When the proper allocation of the settlement amount to
the damage component represented by AHCCCS payments is disputed,
the better course is to seek the intervention of the court.
Ahlborn, 547 U.S. at 288 n.18; Price v. Wolford, 608 F.3d 698,
707 (10th Cir. 2010) (suggesting evidence sufficient to prove
Because AHCCCS did not challenge the allocation in
either of these cases, however, we adopt the superior court’s
presumption that the settlements in these cases include the same
Lundy’s and Flynn’s total claimed damages.
E. AHCCCS Did Not Abuse Its Discretion in Refusing
to Reduce Its Lien Against the Lundy Settlement.
Southwest argues on cross-appeal that the director of
AHCCCS abused his discretion by not eliminating the agency’s
2915(H) and (I).
These provisions require AHCCCS to consider
compromising its lien based on “[t]he nature and extent of the
sources of indemnity,” and “[a]ny other factor relevant for a
AHCCCS is required to compromise a claim “if,
after considering the factors . . . , the compromise provides a
settlement of the claim that is fair and equitable.”
We will reverse the director’s refusal to compromise
AHCCCS’s claim only if “it is arbitrary, capricious, or an abuse
Thompson v. Ariz. Dep’t of Econ. Sec., 127
Lundy’s injuries are extensive, it is undisputed that AHCCCS
likely will pay her future medical costs for the remainder of
director abused his discretion in refusing to compromise the
For the reasons stated, we hold that AHCCCS’s lien
rights pursuant to A.R.S. § 36-2915 are limited to that portion
expenses actually paid by AHCCCS.
AHCCCS does not dispute that
Accordingly, on the records presented, we affirm the superior
attorney’s fees pursuant to A.R.S. § 12-348(A)(2) (2003) and
grant Flynn and Southwest their costs on appeal contingent on
compliance with Arizona Rule of Civil Appellate Procedure 21.
DIANE M. JOHNSEN, Judge
DONN KESSLER, Presiding Judge
SHELDON H. WEISBERG, Judge