Tobacco Documents Online

SENT BY: 1-12-99 ; 3:54PM ; ARNOLD & PORTER #7J +2023472685;# 6/ 7 Medicaid and Tobacco Settlements Page 1 of 3 ......, Medieare MetltealC Hel FeamacK searcTi FMs bILAILEMENTUF NANCY-ANN MIN DEPARLE ADMIIVISTRATOR HEALTH CARE FiNANCIPtG AnMNISTRATION ON "MEDICAID AND TOBACCO SETTLEMENTS" BEFORE THE ROUSE COMbII1TEE ON COMMERCE SUBCOMMITTEE ON IiE.A,LTH AND THE TNyIRONMENT DECEMBER 8, 1997 Good morning, Chairman Bilirakis and Members of the Health and Environment Subcommittee. Thank you for the opportunity to testify today on behalf of the Health Care Financing Administration (HCFA), and to clarify the ourrent statutory requirement that States reimburse the Federal Government's share of the sottlcmcnts they obtain from tobacco companies for the costs of treating tobacco-related illnesses of Medicaid beneficiaries. We in the Administration applaud the States for what they have achieved in their litigation with the tobacco companies. These are historic events, not only for the health care community, but for the American pcople, It has been estimated that nationwide, tobacco-related illnesses claim close to half a million lives annually and incur health care costs in the billions of dollars. By working together during the last five years, State and Federal officials have profoundly changed the legal landscape faced by the tobacco industry. For decades, individuals injured by tobacco usc had sued the tobacco industry and lost. In February 1994, the Food and Drug Administration (FDA) announced that it had begun an investigation of whether ntcotine-contAl tobacco products were subject to FDA regulation. In the following months, the FDA uncovered and placed in the public record a compelling volume of new evidence about the intent of the tobacco industry. We learned for the first time that tobacco companies viewed their own industry as "in the business of selling nicotine, an addictive drug." This powerful information enabled the Administration to put in place new rules designed to dramatically reduce youth smoking and helped the States unleash a torrent of new lawsuits against the tobacco industry. At the outset, Mr. Chairman, t would like to remind the Subcommittee that current law requires HCFA to work with the States to recover the Fcdcral portion of reimburscments for Medicaid costs that may be part of recent State tobacco settlements. We have no alternative, since the law requires the States to act to recover these cos[s from liable third parties and consequently, HCFA is not authorized to sue. We hope and expect that Congress will address the allocation of funds in the broad legislation that the President has called for, and we look forward to working with Congress and with the States, who are our partners in Medicaid, to reach a fair resolution. As Secretary Shalala explained to the House Commerce Committee in a hearing on November 13, 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 Goverttmcnt is cntitled. Specifically, this law states: "(2) (A) The Secretary shall then pay io 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 ehe Secretary determines was made under this section to such State for any prior quarter and with respect to whtch adjustment has not already been made under this subsection. (2)(Ii) Fspenditures for which payments were made to the State under subsection (a) shall be lreated as an overpa ment to the extent that the State or local agency administering such plan has been reimbursedr such expenditures by a thirdparty pursuant to the provisione of its plan in http://www.hcfa,gov/testmony/tobac 1 _htm 8/25/98

SENT BY: 1-12-99 ; 3:54PM ; ARNOLD & PORTER #7- +2023472685;# 7/ 7 Medicaid and Tobacco Settlements Page 2 of 3 compliance with section 1902(a)(25)...." "(2) (3) The pro rata share to which the United States is equitably entitled, a.r 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 sltall be considered an overpayment to be adjusted under this subsectfon. " These statutory requirements have been in existence for 30 years. Furthermore, 42 U.S.C. 1396a(aX25)(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® desuribes 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 Federall government a portion of the reimbursement determmcd in accordance with the FMAP [Federal medical assistance percentagc] for the State." lt is imporrant 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 Govemment'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. , While I certainly would not suggest that Congress enacted this provision with the multi-billion dollar tobacco settlements in mind, there is no basis in the law to suppose that Congress intended the current situation to be an exception to the statute. We have consulted with the lawyers at the Departments of Health and Human Services and Justice, and they have indicated that the law, as currently written, applies to this situation and that HCFA is obligated to seek recovery from the States of the Federal share of any recoveries or settlements relating to Medicaid expenditures, including tobacco-related settlcmcntts. It should be also noted that only Medicaid-related expenditure recoveries are subject to the Federal share requirement. To the extent that some non-Medicaid expenditures and/or recoveries were also included in the underlying lawsuits, HCFA will accept a justifiable allocation reflecting the Medicaid portion of the recovery, as long as the State provides ncccssary documentation to support a proposed allocation. Moreover, it should be emphasized that State administrative costs incurred in pursuit of Medicaid cost recoveries from tobacco firms qualify for the normal 50 percent FFP. In June 1996, HCFA contacted each of the five States (Florida, Louisiana, Massachusetts. Mississippi, and West Virginia) that had initially settled with the Liggett corporatlon and reminded them of their statutory obligation to report Medicaid recoveries in their quarterly statements to HCFA. Each of the five States has received two annual payments from Liggett. Two States, Massachusetts and Louisiana, have credited the Federal government with its share of both paymonts; Florida, to date, has credited the Federal government with one payment. tu 0 Given the prospect of all 50 States seeking entry to a national agreement with the tobacco industry, ~ last month HCFA sent a letter to all Governors, State Medicaid Directors, and related organizations ~ to explain and clarify HCFA's obligations and the financial obligations of the States in relation to N any potential settlements. We have encouraged a dialogue with the States on this issue, and we ~n expect to work closely with them to determine the a '~ ppropriatc share of any recoveries that should be ip credited to the Federal Government. As our letter to the States noted, we recognize that Congress will examine the issue of tobacco settlements as they relate to the Medicaid program in the context of any comprehensive tobacco legislation. We will look forward to working with the Members of this Committee at that time. http://www.hcfagov/testmony/tobacl.htm 8/25/98