Court dismisses law firm’s attempt to interplead HHS to resolve Medicare’s conditional payment claim

May 11, 2020 / 23 min read

In a new case out of Missouri, the United States District Court for the Western District of Missouri in Fowler Pickert LLC v. Glasgow, et. al., 2020 WL 1955266 (W.D. Missouri, April 23, 2020) had to address whether it had proper jurisdiction to determine how much a Medicare beneficiary owed to Medicare from his settlement proceeds in reimbursement of Medicare’s conditional payments. The court ultimately concluded it did not have jurisdiction leaving the beneficiary to continue processing his dispute with Medicare through the administrative appeals process.

Case summary

In this case, a law firm filed a post-settlement interpleader action[1] attempting to have the court determine the amount its client owed to the Department of Health and Human Services (HHS) in reimbursement of Medicare’s conditional payment claim from his personal injury settlement. However, the court dismissed the law firm’s action finding it failed to establish a valid waiver of sovereign immunity permitting an interpleader action to proceed against HHS and the court otherwise lacked subject matter jurisdiction since the beneficiary had not fully exhausted his administrative appeal.

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In the bigger picture, this case highlights the continuing challenges parties can face in resolving and reimbursing Medicare’s conditional payment claim promptly which, in turn, can delay a Medicare beneficiary from receiving his/her settlement proceeds. Here, a portion of the beneficiary’s settlement proceeds remained disputed and undistributed some four years after settlement. Further, this decision serves as the latest example of how parties must first, in most situations, exhaust the administrative appeals process before the courts will hear their Medicare conditional payment disputes.

For those interested in a more in-depth review of this decision, and its larger claims considerations, the author presents the following:

Law firm files interpleader action to get Medicare’s claim resolved

Fowler Pickert, LLC (law firm or firm) represented Mr. Glasgow, a Medicare beneficiary, in his personal injury action arising from alleged negligence in filling a prescription. Mr. Glasgow resolved his claim through two confidential settlements for an undisclosed amount in 2016.[2] After reimbursing Medicare for conditional payments related to the first settlement, a dispute arose regarding whether Medicare’s claim for reimbursement related to the second settlement. [3] Mr. Glasgow challenged Medicare’s claim through the five-level administrative appeals process[4] and his appeal of an Administrative Law Judge’s decision (level three of that process) was still pending at this time of the court’s decision. [5]

Independent of Mr. Glasgow’s administrative appeal, the law firm filed an interpleader action under Rule 22 of the Federal Rules of Civil Procedure.[6] As part of its interpleader action, the firm was seeking to deposit $80,621.09 from the settlement proceeds into the court registry for the court to help determine the amount owed to HHS in reimbursement of Medicare’s conditional payment claim.

HHS moved to dismiss the law firm’s action, in part, on grounds that the firm had not properly established a valid waiver of sovereign immunity permitting an interpleader action to be filed against it under federal law, and that the court otherwise lacked subject matter jurisdiction.

Court dismisses law firm’s interpleader action

The court ultimately agreed with HHS finding the law firm had not established a proper waiver of sovereign immunity and that it lacked subject-matter jurisdiction to hear the matte, the rationale is as follows:

Sovereign immunity not waived

The law firm argued HHS was subject to an interpleader action per 28 U.S.C. § 2410 (a)(5) which, in part, permits the U.S. to be named as a party in an interpleader action where it “has or claims a mortgage or other lien.” (emphasis added).[7] In this regard, the firm contended that HHS had a “Medicare lien” on the settlement proceeds within the meaning of § 2410(a)(5), thus, making it subject to its interpleader action.[8]

However, the court disagreed and started its analysis by first noting that “[s]overeign immunity is a threshold jurisdictional matter and a jurisdictional prerequisite,”[9] and that “[t]he United States may not be required to interplead when it has not waived its sovereign immunity.”[10]

Further, the court rejected the firm’s argument that HHS’s claim was a “lien” thereby permitting interpleader under §2410 (a)(5) finding instead that the nature of Medicare’s recovery rights and its remedies under the Medicare Secondary Payer (MSP) statute “does not, by itself, establish a lien for purposes of the sovereign immunity waiver…”[11] On this point, the court explained that “[a]lthough lawyers often use the phrase ‘Medicare lien’ in a colloquial sense to refer to HHS’s rights under the MSPA, this is not accurate in cases like this, where there is an unresolved dispute about who is entitled to the settlement proceeds.”[12]

Based on this analysis, the court ultimately found that the firm failed to establish a valid basis for waiver of sovereign immunity and that “the United States [did] not have or claim a lien for purposes of § 2410 and [a]ccordingly the [firm] has not established a sovereign immunity waiver, and the case must be dismissed for this reason.”[13]

Court does not have subject matter jurisdiction

The court further noted that even if the law firm had established a valid sovereign immunity waiver, its interpleader attempt would be dismissed for lack of subject matter jurisdiction.

As part of its analysis, the court first noted that while Rule 22 of the Federal Rules of Civil Procedure[14] permits interpleader actions, it does not provide an independent basis for jurisdiction and, accordingly, “there must be some other statutory basis for the Court’s subject-matter jurisdiction, such as federal-question jurisdiction under 28 U.S.C. § 1331 … .”[15]

The law firm argued the court had proper jurisdiction since its action arose under the Medicare Act. However, the court, citing 42 U.S.C. § 405(h)[16] and § 1395ii,[17] rejected this position noting that the Medicare Act provides no action “shall be brought under § 1331 …to recover on any claim arising under” the Medicare Act. [18] Based on this authority, the court found these provisions basically demanded “the ‘channeling’ of virtually all legal attacks through the agency”[19] with judicial review permitted only after the exhaustion of the administrative process per 42 U.S.C. § 405(g).[20]

Accordingly, the court ruled that the firm’s interpleader action fell “squarely within”[21] the administrative channeling requirement finding that the dispute between Mr. Glasgow and HHS would require the court to resolve the same questions that were pending before the administrative agency and, as such, the dispute was “the type of action that … requir[ed] channeling through the administrative process.”[22]

In response, the firm argued that a narrow exception to the channeling requirement, known as the “Michigan Academy”[23] exception, as applied in the context of a conditional payment dispute in Haro v. Sebelius, 747 F.3d (9^th Cir. 2014), also applied in this instance. In Haro, the court found this exception applied because the lawyer, who HHS instructed not to disburse settlement proceeds to its client until after HHS had been reimbursed and threatened that he could be held personally liable if he did, had no avenue to pursue administrative remedies and judicial review for his claim.[24] However, as explained by the court, this narrow exception has been held to apply only when the administrative review requirements “would not simply channel review through the agency but would mean no review at all.”[25]

Thus, the court found the Michigan Academy exception inapplicable in this case and, thus, subject to the administrative process. In reaching this conclusion, the court distinguished Haro finding that the firm, unlike the lawyer in Haro who was seeking injunctive and declaratory relief, was attempting to deposit funds into the court registry to have the court distribute them. However, the court noted that this incorrectly assumed it subject matter jurisdiction to determine how the funds should be distributed.[26]

Based on these reasons, the court concluded that “the pending dispute … between Glasgow and HHS must be channeled through the administrative process” and “[a]ccordingly the Court lacks subject-matter jurisdiction over this interpleader action.”[27]

Exhausting administrative remedies and other considerations

In the bigger picture, this new decision brings to light several challenges parties can face in finalizing, resolving, and reimbursing Medicare conditional payment claims. For example, in general, the absence of a workable process to obtain and resolve Medicare’s final conditional payment amount before settlement often leads to uncertainty regarding the amount of Medicare’s alleged claim and the ultimate reimbursable amount from the settlement.[28] In turn, this can create a situation where the beneficiary is unable to access his/her settlement funds (either in whole or in part) in a timely fashion. On this point, Mr. Glasgow settled his claim in 2016 ,but four years later, roughly $82,000.00 of his proceeds remained disputed and undistributed.

Another key consideration highlighted by this decision is the continued adherence by courts to the principle that parties must first exhaust administrative remedies, in most cases, before courts have jurisdiction to address conditional payment disputes.[29] Courts have applied the administrative exhaustion requirement dating as far back as 1984, as reflected in the U.S. Supreme Court’s decision in Heckler v. Ringer, 466 U.S. 602 (1984). In Heckler, the court ruled, in part, that a final decision by the secretary may only be made after a claim has been presented to the Secretary, and all administrative remedies have been exhausted.[30] While a complete examination into the full body of case law on this issue is beyond the scope of this article, a few recent decisions underscore this principle.

For example, in Fortner v. Price, 2017 WL 117712 (E.D. Missouri, March 30, 2017), the plaintiff’s lawyer sought a court order allocating the settlement proceeds between him, his client, and Medicare in a case where Medicare’s claim exceeded the settlement amount. The plaintiff argued the court had jurisdiction to hear the case on grounds that MSP issues were “exclusively within the province of federal courts” affording the court federal question jurisdiction to hear the dispute. However, the court dismissed the claim explaining that legal claims against the government must first be channeled through the administrative appeals process “before such claims can be heard in federal court” and that “[o]nly after there has been a final decision by the Secretary…may a party seek judicial review.”[31] Further, the court stated that while the Secretary may “waive” the exhaustion requirement, a party must still first present a claim to the Secretary.[32] Accordingly, the court ruled it lacked jurisdiction since the plaintiff failed to first exhaust her administrative remedies stating that “[o]nly after these requirements are met may the plaintiff seek judicial review in this Court.”[33]

In a similar ruling, the court in Spencer v. Manes, 2013 WL 4007816 (S.D. Ohio, W.D., July 20, 2013) dismissed a plaintiff’s action seeking judicial review of her conditional payment dispute without first exhausting the administrative appeals process.

From another angle, even constitutional challenges to Medicare’s claims have met a similar fate. For example, in Taransky v. Sebelius, 953 F. Supp. 2d 563 (D. New Jersey, June 12, 2013), the plaintiff processed an unsuccessful conditional payment challenge through the administrative appeals process on various state law-based and other arguments. As part of her federal court appeal, the plaintiff, for the first time, alleged a constitutional due process challenge asserting that Medicare’s claim constituted a deprivation of property in violation of the Fifth and Fourteenth Amendments. The government moved to dismiss arguing, in part, that this claim had not been subject to administrative review. The court agreed, and dismissed the plaintiff’s due process argument finding, in part, that this was a “claim arising under the Medicare Act” therefore depriving it of federal question jurisdiction since the claim had not first been processed through the administrative appeals process.[34]

The above cases are by no means a complete review of all decisions on the issue. However, they illustrate the importance of the administrative exhaustion issue, and they can serve as a research starting point when considering if, and when, resorting to the courts to challenge a Medicare conditional payment claim may be applicable.

Addressing conditional payments proactively can be helpful

While the cases discussed above provide useful information on the various legal considerations involving the administrative appeals process when disputes arise, it is equally important that claims handling processes are in place to proactively obtain and dispute Medicare conditional payments before settlement. Having such practices in place could help prevent or minimize the type of problems, delays, and uncertainty that often arise by not starting the process until the claim has settled. While these steps may not always be able to prevent disputes from continuing after settlement (or requiring processing through the administrative appeals process), in many instances proactive measures can help parties get a better sense of their potential exposure as they approach settlement by allowing the time needed to dispute Medicare’s claim informally with the agency’s contractors and to help get inappropriate or unrelated charges removed.

Please do not hesitate to contact the author if you have any questions about this case or ISO Claims Partners’ various services and options to help you address, dispute, and resolve Medicare conditional payment claims.

[1] An interpleader can be defined as “a legal procedure by which two or more parties claiming the same money or property may be compelled to resolve the dispute among themselves in a single action rather than proceeding individually against the party holding the disputed money or property.” https://www.collinsdictionary.com/us/dictionary/english/interpleader Applying this definition to this case, as more fully outlined in the “Facts” section, the law firm in this action was attempting to place a portion of a personal injury settlement into the court’s registry for the court to then help decide how much of that sum, if any, was owed to HHS to reimburse Medicare’s conditional payment claim.

[2] The court opinion does not provide the settlement date. However, per the firm’s interpleader complaint, the firm alleges that Mr. Glasgow settled his claim through two separate confidential settlements both occurring in 2016. The firm notified Medicare of the first settlement and Mr. Glasgow paid Medicare’s demand of $13,483.65 in relation to the first settlement. This dispute then arose after the plaintiff notified Medicare of the second settlement. Specifically, the firm alleges that after notifying Medicare of the second settlement, Medicare then identified an additional $183,163.25 in conditional payments that it claimed were associated with the matter from prior to the date of the first settlement and that Medicare did not include in its demand after being notified of the first settlement. Thereafter, Medicare allegedly demanded another $105,621.09 from Mr. Glasgow despite both settlements arising from the same lawsuit and occurrence and involving the same injuries and date of incident. Medicare ultimately granted a partial waiver of overpayment and agreed to reduce its lien to $71,739.26 against the second settlement proceeds. Mr. Glasgow then filed a dispute through Medicare’s administrative appeals process regarding the remaining balance. In 2018, an Administrative Law Judge ruled against Mr. Glasgow and concluded that Medicare was entitled to recover the principal amount of $70,621.09, plus any interest accrued to date. Despite the ALJ’s ruling, Mr. Glasgow refused to authorize the payment of this amount prompting the firm to file this interpleader action. See, Law Firm’s Complaint for Interpleader, Case 4:19, CV 00319-RK, filed April 23, 2019, paragraphs 7 through 15.

[3] While a complete examination into Medicare’s five level administrative appeals process is outside the scope of this article, the process in general consists of the following levels with hyperlinks to CMS’s web page for each level: Level 1 – Redetermination; Level 2 – Reconsideration (Qualified Independent Contractor); Level 3 – Administrative Law Judge; Level 4: Medicare Appeals Council (MAC); and Level 5 – Judicial Review in U.S. District Court.

[4] Fowler Pickert LLC, 2020 WL 1955266, at *1. While the court’s decision indicates that the ALJ decision was still pending when it issued its decision, a review of the firm’s interpleader complaint indicates that the ALJ rendered a decision and that the firm then filed this interpleader action after Mr. Glasgow refused to authorize payment to Medicare following the ALJ’s ruling. See n. 2 above.

[5] The full text of Rule 22 states as follows:

(a) Grounds.

(1) By a Plaintiff. Persons with claims that may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead. Joinder for interpleader is proper even though:

(A) the claims of the several claimants, or the titles on which their claims depend, lack a common origin or are adverse and independent rather than identical; or

(B) the plaintiff denies liability in whole or in part to any or all of the claimants.

(2) By a Defendant. A defendant exposed to similar liability may seek interpleader through a crossclaim or counterclaim.

(b) Relation to Other Rules and Statutes. This rule supplements--and does not limit--the joinder of parties allowed by Rule 20. The remedy this rule provides is in addition to--and does not supersede or limit--the remedy provided by 28 U.S.C. §§ 1335, 1397, and 2361. An action under those statutes must be conducted under these rules.

[6] The full text of Rule 22 states as follows:

(a) Grounds.

(A) the claims of the several claimants, or the titles on which their claims depend, lack a common origin or are adverse and independent rather than identical; or

(B) the plaintiff denies liability in whole or in part to any or all of the claimants.

(2) By a Defendant. A defendant exposed to similar liability may seek interpleader through a crossclaim or counterclaim.

[7] Fowler Pickert LLC, 2020 WL 1955266 at *2.

[8] Id.

[9] Id.

[10] Id. citing 7 Charles Alan Wright, Arthur R. Miller, et. al., Federal Practice and Procedure §1721 (3d ed. Apr. 2020) (collecting cases).

[11] Fowler Pickert LLC, 2020 WL 1955266 at *2.

[12] Id.

[13] Id.

[14] See n. 4.

[15] Fowler Pickert LLC, 2020 WL 1955266 at *3. 28 U.S.C. § 1331 states: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.

[16] 42 U.S.C. § 405(h) states:

The findings and decision of the Commissioner of Social Security after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the Commissioner of Social Security, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter

[17] 42 U.S.C. § 1395ii states:

The provisions of sections 406 and 416(j) of this title, and of subsections (a), (d), (e), (h), (i), (j), (k), and (l ) of section 405 of this title, shall also apply with respect to this subchapter to the same extent as they are applicable with respect to subchapter II of this chapter, except that, in applying such provisions with respect to this subchapter, any reference therein to the Commissioner of Social Security or the Social Security Administration shall be considered a reference to the Secretary or the Department of Health and Human Services, respectively.

[18] Fowler Pickert LLC, 2020 WL 1955266 at *3.

[19] Id. citing Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1, 13 (2000).

[20] 42 U.S.C. § 405(g) states:

Any individual, after any final decision of the Commissioner of Social Security made after a hearing to which he was a party, irrespective of the amount in controversy, may obtain a review of such decision by a civil action commenced within sixty days after the mailing to him of notice of such decision or within such further time as the Commissioner of Social Security may allow. Such action shall be brought in the district court of the United States for the judicial district in which the plaintiff resides, or has his principal place of business, or, if he does not reside or have his principal place of business within any such judicial district, in the United States District Court for the District of Columbia. As part of the Commissioner’s answer the Commissioner of Social Security shall file a certified copy of the transcript of the record including the evidence upon which the findings and decision complained of are based. The court shall have power to enter, upon the pleadings and transcript of the record, a judgment affirming, modifying, or reversing the decision of the Commissioner of Social Security, with or without remanding the cause for a rehearing. The findings of the Commissioner of Social Security as to any fact, if supported by substantial evidence, shall be conclusive, and where a claim has been denied by the Commissioner of Social Security or a decision is rendered under subsection (b) of this section which is adverse to an individual who was a party to the hearing before the Commissioner of Social Security, because of failure of the claimant or such individual to submit proof in conformity with any regulation prescribed under subsection (a) of this section, the court shall review only the question of conformity with such regulations and the validity of such regulations. The court may, on motion of the Commissioner of Social Security made for good cause shown before the Commissioner files the Commissioner’s answer, remand the case to the Commissioner of Social Security for further action by the Commissioner of Social Security, and it may at any time order additional evidence to be taken before the Commissioner of Social Security, but only upon a showing that there is new evidence which is material and that there is good cause for the failure to incorporate such evidence into the record in a prior proceeding; and the Commissioner of Social Security shall, after the case is remanded, and after hearing such additional evidence if so ordered, modify or affirm the Commissioner’s findings of fact or the Commissioner’s decision, or both, and shall file with the court any such additional and modified findings of fact and decision, and, in any case in which the Commissioner has not made a decision fully favorable to the individual, a transcript of the additional record and testimony upon which the Commissioner’s action in modifying or affirming was based. Such additional or modified findings of fact and decision shall be reviewable only to the extent provided for review of the original findings of fact and decision. The judgment of the court shall be final except that it shall be subject to review in the same manner as a judgment in other civil actions. Any action instituted in accordance with this subsection shall survive notwithstanding any change in the person occupying the office of Commissioner of Social Security or any vacancy in such office.

[21] Fowler Pickert LLC, 2020 WL 1955266 at *3.

[22] Id.

[23] This exception, as noted by the court, originates from the U.S. Supreme Court’s ruling in Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667 (1986).

[24] Fowler Pickert LLC, 2020 WL 1955266 at *3.

[25] Fowler Pickert LLC, 2020 WL 1955266 at *4, citing Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1, at 10. 13 (2000).

[26] Fowler Pickert LLC, 2020 WL 1955266 at *4.

[27] Id.

[28] While beyond the scope of this article, there are provisions in the MSP and its supporting regulations setting forth a process through the Medicare Secondary Payer Recovery Portal (Web Portal) which, in theory, could help parties obtain Medicare’s final conditional payment amount prior to settlement. See generally, 42 U.S.C. § 1395y(2)(B)(viii), (I), (III), (IV), and (V) and 42 C.F.R. § 411.39. Very generally, this intricate and complex process provides that “up to 120 days before the anticipated date of a settlement, judgment, award, or other payment, the beneficiary, or his or her attorney, other representative, or authorized applicable plan may notify CMS, once and only once, via the Web portal, that a settlement, judgment, award or other payment is expected to occur within 120 days or less from the date of notification.” 42 C.F.R. § 411.39(c)(IV). From there, CMS has up to 65 days to provide a statement of reimbursement and “if the download or request is within 3 days of the date of settlement, judgment, award, or other payment, that conditional payment summary statement will constitute Medicare’s final conditional payment amount.” 42 C.F.R. § 411.39(c)(VII)(A). This process also provides for a dispute process, although this process is not “an appeals process” and does not establish “a right of appeal for a statement of reimbursement amount and there shall be no administrative or judicial review of the Secretary’s determinations under this subclause.” 42 U.S. 1395y(2)(B)(IV). For a variety of reasons, many have viewed this process, while perhaps well-intentioned, to be generally unworkable from a practical claims perspective. In addition, it is noted that CMS has established what the agency calls its Fixed Percentage Option and Self-Calculation Option for certain lower dollar physical trauma liability settlements where parties may be able to obtain Medicare’s final conditional payment amount prior to settlement. Parties interested in these options should check CMS’s website (cms.gov) for the most current information, and then carefully review the requirements and criteria, including assessing whether by participating in these options they could lose potential rights (such as the right to dispute CMS’s claim either informally or through the administrative appeals process).

[29] See the following levels with hyperlinks to CMS’s web page for a general overview of the administrative appeals process: Level 1 – Redetermination; Level 2 – Reconsideration (Qualified Independent Contractor); Level 3 – Administrative Law Judge; Level 4: Medicare Appeals Council (MAC); and Level 5 – Judicial Review in U.S. District Court.

[30] 466 U.S. 602, 617 (1984).

[31] Fortner v. Price, 2017 WL 117712 at *2, citing 42 U.S.C 405(g) and (h).

[32] Id. at *2.

[33] Id. at *3.

[34] Taransky v. Sebelius, 953 F. Supp. 2d 563, 569.