from the Superior Court in Maricopa County No. CV2012-007665
The Honorable J. Richard Gama, Judge, Retired The Honorable
Dawn M. Bergin, Judge
Levenbaum Trachtenberg, PLC, Phoenix By Geoffrey M.
Trachtenberg, Justin Henry Co-Counsel for
Entrekin Law Firm, Phoenix By B. Lance Entrekin Co-Counsel
Gammage & Burnham, PLC, Phoenix By Richard B. Burnham,
Cameron C. Artigue, Christopher L. Hering Counsel for
Presiding Judge Diane M. Johnsen delivered the opinion of the
Court, in which Judge Kent E. Cattani and Judge Jennifer M.
Banner Health Network and several other hospitals ("the
Hospitals") separately contracted with the Arizona
Health Care Cost Containment System ("AHCCCS") to
serve AHCCCS members. In those contracts, the Hospitals
agreed to accept payment from AHCCCS at rates below their
customary charges and not to bill members for the balance.
The plaintiffs in this case are a class of AHCCCS members
("the Patients") who received settlements or damage
awards from third-party tortfeasors for the injuries that
required medical treatment. The Patients sued to enjoin the
Hospitals from enforcing liens on their tort recoveries for
the balance between what AHCCCS paid and the Hospitals'
customary charges. We hold that the Hospitals' contracts
with AHCCCS incorporated federal law, which bars the
Hospitals from enforcing the liens. Accordingly, we affirm
the injunction the superior court entered and direct entry of
judgment in favor of the Patients on their third-party claim
for breach of contract.
AND PROCEDURAL BACKGROUND
The Hospitals recorded their liens pursuant to two statutes,
Arizona Revised Statutes ("A.R.S.") sections 33-931
(2018) and 36-2903.01(G)(4) (2018). The former is a general
statute allowing a health-care provider to file a lien for
its customary charges against a patient's tort recovery.
The latter specifically applies when a hospital has served an
AHCCCS member and allows that hospital to "collect any
unpaid portion of its bill from other third-party payors or
in situations" in which the general medical-lien statute
The Patients alleged federal Medicaid law preempts the
Arizona lien statutes in cases such as theirs, and sought an
injunction barring the Hospitals from recording liens on
their tort recoveries. The Patients argued the liens
constitute impermissible "balance billing, " a term
describing a health-care provider's effort to collect
from a patient "the difference in the amount paid by
Medicaid, or a state plan like AHCCCS, and the amount"
the provider typically charges. Abbott v. Banner Health
Network, 239 Ariz. 409, 412, ¶ 9 (2016).
Early in the litigation, the superior court dismissed a group
of plaintiffs who had settled their lien claims with the
Hospitals and entered partial final judgment as to those
plaintiffs pursuant to Arizona Rule of Civil Procedure 54(b).
Those plaintiffs appealed, arguing their settlements lacked
consideration because the Hospitals' liens were preempted
by federal law. We accepted that argument, Abbott v.
Banner Health Network, 236 Ariz. 436, 446, ¶ 30
(App. 2014) (" Abbott I "), but
the supreme court reversed, Abbott, 239 Ariz. 409
("Abbott II "). The supreme court
ruled the settlements were valid and made "fairly and in
good faith" because the validity of the Hospitals'
lien rights was not settled under Arizona law. Abbott
II, 239 Ariz. at 413, 414, 415, ¶¶ 12, 18, 20.
Meanwhile, the superior court certified the remaining
plaintiffs as a class, and both sides moved for summary
judgment on the preemption issue. The superior court ruled in
favor of the Patients on their claim for a declaratory
judgment under the Supremacy Clause that when a hospital has
accepted payment from AHCCCS for treating a patient, a
federal regulation, 42 C.F.R. § 447.15 (2018), preempts
the hospital's state-law right to a lien on the
patient's tort recovery for the balance between what
AHCCCS paid and the hospital's customary charges. The
court then enjoined the Hospitals from "filing or
asserting any lien or claim against a patient's personal
injury recovery, after having received any payment
from AHCCCS for the same patient's care." The court
granted summary judgment to the Hospitals, however, on the
Patients' third-party-beneficiary claim, which alleged
the Hospitals breached their contracts with AHCCCS by
imposing the liens. Finally, the superior court awarded
attorney's fees to the Patients under the private
attorney general doctrine and denied both sides' motions
for new trial.
The Hospitals appealed the preemption ruling and injunction,
and the Patients cross-appealed the judgment against them on
their contract claim. We have jurisdiction pursuant to
Article 6, Section 9, of the Arizona Constitution and A.R.S.
§§ 12-120.21(A)(1) (2018) and -2101(A)(1) (2018).
A superior court "shall grant summary judgment if the
moving party shows that there is no genuine dispute as to any
material fact and the moving party is entitled to judgment as
a matter of law." Ariz. R. Civ. P. 56(a); see also
Orme School v. Reeves, 166 Ariz. 301, 309 (1990). We
review a superior court's grant of summary judgment
de novo, viewing the evidence and reasonable
inferences in the light most favorable to the non-moving
party. Sanders v. Alger, 242 Ariz. 246, 248, ¶
The Hospitals argue the Patients' declaratory-judgment
claim under the Supremacy Clause fails because the Supremacy
Clause does not afford a private right of action. See
Armstrong v. Exceptional Child Ctr., Inc., 135 S.Ct.
1378, 1383-84 (2015). We need not address that issue, because
we conclude the superior court erred in denying summary
judgment to the Patients on their contract claim. In
addressing that claim, we conclude that (1) federal law
preempts the Hospitals' rights under Arizona law to
impose liens on the Patients' tort recoveries to recover
the balance between what AHCCCS paid the Hospitals and the
Hospitals' customary rates, (2) the Patients are
third-party beneficiaries of the contracts the Hospitals
entered with AHCCCS, and (3) those contracts require the
Hospitals to comply with the preemptive federal law.
Federal Law Preempts the Hospitals' Lien
Federal law may preempt state law in one of three ways:
Express preemption, field preemption or conflict preemption.
Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691,
698-99 (1984); White Mtn. Health Ctr., Inc. v. Maricopa
County, 241 Ariz. 230, 239-40, ¶ 33 (App.
2016). The issue here -conflict preemption -
arises when state law stands as an obstacle to the
achievement of Congress's full purpose, or when
compliance with both federal and state laws is impossible.
Crisp, 467 U.S. at 699; White Mtn., 241
Ariz. at 240, ¶ 33. A federal regulation has the same
preemptive effect as a federal statute. Crisp, 467
U.S. at 699. Thus, a federal regulation may render
unenforceable a state law that is otherwise consistent with
federal law. City of New York v. F.C.C., 486 U.S.
57, 63-64 (1988).
Medicaid is a "cooperative federal-state program"
that pays for health care for the needy and the disabled.
Douglas v. Indep. Living Ctr. of So. Calif, 565 U.S.
606, 610 (2012); 42 U.S.C. § 1396-1 (2018). A state that
chooses to participate must "comply with the Medicaid
Act and its implementing regulations."
Rehabilitation Ass'n of Va., Inc. v. Kozlowski,
42 F.3d 1444, 1447 (4th Cir. 1994). To receive federal funds
under the program, a state must create a detailed plan that,
inter alia, specifies "the nature and
scope" of the medical services it will cover.
Douglas, 565 U.S. at 610; see also 42
U.S.C. § 1396a(a) (2018). The plan must be approved by
the federal Center for Medicare and Medicaid Services
("CMS"), a division of the Department of Health and
Human Services ("HHS"), which determines whether
the plan complies with federal Medicaid statutes and
regulations. See 42 U.S.C. § 1396a(b) (plan
approval by HHS secretary); 42 U.S.C. § 1316(a) (2018)
(granting HHS power to withhold funds if changes to state
plan do not comply with federal law); 42 C.F.R. § 430.10
(2018) (describing contents of state plan); see also
Spectrum Health Continuing Care Group v. Bowling, 410
F.3d 304, 313 (6th Cir. 2005) ("state's plan must
comply with federal statutory and regulatory
A fundamental principle of the program is that "Medicaid
is essentially a payer of last resort."
Kozlowski, 42 F.3d at 1447. Toward that end,
patients must assign the state Medicaid agency their rights
"to any payment from a third party that has a legal
liability to pay for care and services available under the
plan." 42 U.S.C. § 1396k(a)(1)(A) (2018);
see A.R.S. § 36-2946(A) (2018) (patients must
assign "all types of medical benefits");
Olszewski v. Scripps Health, 30 Cal.4th 798, 811
(2003). Accordingly, when a hospital submits a claim, the
state Medicaid agency first tries to determine whether a
third party (insurer, tortfeasor) may be liable for paying
the hospital's fees. Olszewski, 30 Cal.4th at
811. If a third party is implicated, the agency rejects the
claim and requires the hospital to determine the amount of
the third party's liability. 42 C.F.R. §
433.139(b)(1) (2018). Once the amount of any third-party
liability is established, the agency will pay the hospital
the difference between the rate it has negotiated with the
hospital and what the hospital will receive from the third
party. Id. When third-party liability is unavailable
or unknown, the state agency pays the hospital its negotiated
rate for treating the patient. 42 C.F.R. § 433.139(c).
If a third party's liability comes to light afterward,
the state agency must seek reimbursement for itself from the
third party when it is cost-effective to do so. 42 C.F.R.
Consistent with these rules aimed at limiting the costs that
ultimately must be borne by a state Medicaid agency, Arizona
law grants AHCCCS the right to a lien on a patient's
claim against a tortfeasor to recover what AHCCCS pays to
treat the patient. A.R.S. § 36-2915(A) (2018). Moreover,
Arizona requires that a hospital that serves an AHCCCS member
must seek payment from any liable third party (insurer,
worker's compensation carrier, tortfeasor)
before billing AHCCCS. See AHCCCS,
Fee-for-Service Provider Manual at 9-1 (Mar. 2014 rev.)
("AHCCCS has liability for payment of benefits after
Medicare and all other first- and third-party payer benefits
have been paid. Providers must determine the extent of the
first- and third-party coverage . . . prior to billing
AHCCCS."); see also Arizona Administrative Code
("A.A.C.") R9-22-1005 (requiring providers to
identify and notify AHCCCS of potential sources of first- and
third-party liability). If a third party pays the hospital
more than AHCCCS's scheduled rate, AHCCCS will pay the
hospital nothing. A.A.C. R9-22-1003 (AHCCCS pays no more than
the difference between the scheduled rate "and the
amount of the third-party liability"); AHCCCS,
Fee-for-Service Provider Manual at 9-2 (Mar. 2014
There is no dispute that under applicable federal and state
law, if a tortfeasor's liability becomes apparent after
AHCCCS has paid a hospital, AHCCCS may demand reimbursement
from the tortfeasor. See 42 U.S.C. §
1396a(a)(25)(B). The issue here is whether federal law allows
a hospital that has accepted payment from AHCCCS to use state
lien statutes to recover additional monies from the
The Patients argue the Hospitals' liens are invalid under
42 C.F.R. § 447.15, a regulation issued in 1980.
See 45 Fed. Reg. 24889 (Apr. 11, 1980). Federal
regulations dictate the relationship between a state Medicaid
agency and the hospitals with which it contracts. As
applicable here, § 447.15 mandates that a state may
contract only with providers that agree to "accept, as
payment in full, the amounts paid by the agency plus any
deductible, coinsurance or copayment required by the plan to
be paid by the individual." The regulation plainly bars
a hospital that has contracted with AHCCCS from billing a
patient for the balance between what AHCCCS ...