• United States Court of Appeals Applies MSP's Private Cause of Action Right to Medicare Advantage Organizations
  • August 24, 2012 | Author: John V. O'Meara
  • Law Firm: Bremer Whyte Brown & O'Meara, LLP - Woodland Hills Office
  • Medicare was established by Congress in 1965 (part of President Lyndon Johnson's "Great Society" legislation) in order to establish Federal health insurance to pay medical expenses for persons over 65 years of age or having a specified disability.

    Initially, Medicare paid virtually all expenses for eligible participants. However, in 1980, in an effort to curb inappropriate Medicare spending, Congress passed the Medicare Secondary Payer Act (MSP). The MSP was designed to prevent cost shifting to Medicare from persons or entities who might be responsible for, or have caused, the beneficiary’s injury or illness that resulted in a Medicare payment.

    Under the MSP, responsible parties are called “primary payers.” The concept is simple. Whoever caused the Medicare beneficiary's injury (or their insurer) should pay the Medicare beneficiary's medical expenses before Medicare has the obligation to do so, and to reimburse Medicare when a payment has already been made. The "primary payers" include providers of liability insurance, self-insurance, and no fault insurance.1 Where Medicare was formally the primary payer, Medicare became the secondary payer.

    While the law was well intentioned, primary payers were not rushing to reimburse Medicare for the billions of dollars that it was paying Medicare recipients. There was simply no built-in enforcement and penalty mechanism to encourage voluntary compliance. In search of additional revenue to fund the rapidly depleting Medicare Trust Fund, on December 29, 2007, President George Bush signed into law the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA).2 Medicare’s recovery rights under the MSP remained unchanged, but Center for Medicare Services ("CMS") obtained the means to enforce its rights through a dramatic series of remedies and penalties.

    Under the recent ruling in In Re Avandia Marketing, Sales and Products Liability, No. 11-2664, 2-12 WL 2433508 (3rd Cir. June 28, 2012) the Third Circuit of the United States Court of Appeals found that the Medicare Secondary Payer Statute’s (MSP) private cause of action provision is available to Medicare Advantage Organizations (MAOs). The result of this ruling is that MAOs can now file actions seeking statutory damages against primary payers.

    Factual Background

    In 1965, Medicare was first enacted into law. In its original form, which at the time was just Medicare Parts A and B, all Medicare benefits were provided by the Federal government. In 1997, Part C was added, allowing beneficiaries to receive Medicare benefits from private insurers by way of HMOs, PPOs, and other related options. This new addition has since become known as “Medicare Advantage” (MA). A fourth part, Part D, was added in 2006, providing limited benefits for outpatient prescription drugs.

    Case Overview

    Avandia is a class action suit involving alleged injuries suffered by patients using the drug Avandia to treat diabetes. In relation to this claim, Humana, an MAO, filed an action against GlaxoSmithKline (“Glaxo”). As part of its claim, Humana requested double damages under the MSP’s private cause of action provision. In response, Glaxo filed a motion to dismiss Humana’s suit on the grounds that Humana was an MAO, and as such was not entitled to private cause of action rights under the MSP.

    Stating that the Medicare Act did not provide MAOs with a private cause of action right, the district court granted Glaxo’s motion to dismiss. Humana subsequently appealed to the United States Court of Appeals (Third Circuit).


    In its ruling, the United States Court of Appeals (Third Circuit) held that the Medicare Act, and the specific provision dealing with the private cause of action rights in particular, includes MAOs. As such, MAOs have the right to bring the same private cause of action against primary payers as Medicare can.

    The Court of Appeals applied statutory interpretation, and also made mention of a CMS memorandum which states that “CMS regulations at 42 C.F.R. §422.108(f) describes [sic] MSP procedures for MAOs to follow when billing for covered Medicare services for which Medicare is not the primary payer. These regulations also assign the right (and responsibility) to collect for these services to MAOs.” The court felt that this memorandum solidified that it was the belief of CMS that MAOs should have the private cause of action right.

    In addition, in reviewing the legislative history, the Court found that Congress’ main goal in creating the Medicare Advantage Program was to design a program that would “curb skyrocketing health costs and preserve the fiscal integrity of the Medicare system.”3 In the court’s view, preventing MAOs from having private cause of action rights would hinder this goal in that MAOs would be “unable to exert the same pressure [as Medicare] and thus [be] forced to expend more resources collecting from such payers.” Additionally, when an MAO recovers from primary payers it is able to save costs which it can then use to add further benefits to its members.

    Effect of this Ruling

    There are many important takeaways from the holding in Avandia. First, and perhaps most important, the Avandia holding expands the recognized recovery rights of MAOs. MAOs now have a stronger position from which to pursue legal action against primary payers. With the threat of double damages at the forefront, MAOs may become more tenacious in their quest to recover payments.

    Primary payers need to be mindful of this change and be sure to amend their procedures accordingly. Among these amendments, primary payers should be sure to identify all instances where an MA plan is involved and have a thorough comprehension of its compliance requirements as to MA plans, including all statutory regulations and case law.

    In light of the infancy of this legal issue and its potentially disastrous consequences, it is recommended that any primary payer consult with counsel that has a deep understanding of this arena and the ramifications of this new case law on the handling and resolution of personal injury litigation.

    1 Workers’ Compensation insurance has been a primary payer since the original 1965 Medicare Act.
    2 MMSEA Amended Section 1862(b) of the Social Security Act (42 U.S.C. 1395y(b)) by adding these requirements in paragraph 8.
    3 In re Avandia Marketing, No. 11-2664, 2012 WL2433508, at *8, citing Fanning v. United States, 346 F.3d 386, 388 (3d Cir. 2003).