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 other hospital groups ("the
Hospitals") each contracted with the Arizona Health Care
Cost Containment System ("AHCCCS") to serve AHCCCS
members. The plaintiffs in this case ("the
Patients") received settlements or damage awards from
third-party tortfeasors for injuries that required treatment
at the Hospitals. The Patients sued to enjoin the Hospitals
from enforcing liens on their tort recoveries for the balance
between the rates the Hospitals agreed to accept from AHCCCS
and what the Hospitals would have charged non-AHCCCS
patients. We hold that federal law preempts state statutes
authorizing the Hospitals to impose and enforce those liens,
and affirm the superior court's order enjoining the
liens. For reasons set forth below, we also reverse the
court's judgment against the Patients on their
third-party-beneficiary claim for breach of contract and
vacate and remand for further consideration a portion of the
attorney's fee award to the Patients.
AND PROCEDURAL HISTORY
The Hospitals recorded their liens pursuant to two statutes,
Arizona Revised Statutes ("A.R.S.") sections 33-931
(2019) and 36-2903.01(G)(4) (2019). The former allows 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 applies.
In their complaint, 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 federal law preempted the
Hospitals' liens. This court 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
(2016) ("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, holding that when a hospital has accepted payment
from AHCCCS for treating a patient, 42 Code of Federal
Regulations ("C.F.R.") § 447.15 (2019)
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) (2019) and -2101(A)(1) (2019).
In our initial opinion in the current appeal, we did not
address the superior court's order granting the
Patients' claim for a declaratory judgment that federal
law preempts the Hospitals' state-law lien rights. We
concluded instead that the Patients were entitled to
injunctive relief as third-party beneficiaries of the
contracts the Hospitals entered with AHCCCS. Those contracts
require the Hospitals to comply with applicable federal law.
Under that federal law, we held the Hospitals could not
enforce liens against the Patients' tort recoveries for
the balance between what AHCCCS paid the Hospitals and the
Hospitals' customary rates.
The Hospitals moved for reconsideration, arguing for the
first time that under Astra USA, Inc. v. Santa Clara
County, 563 U.S. 110 (2011), the Patients could not sue
as third-party beneficiaries of the contracts because the
federal law on which they based their claim affords no
private right of action. The Hospitals' argument under
Astra requires us to address the issue we deferred
in our initial opinion. For that reason, we withdraw that
opinion and issue this one in its place.
Federal Law Preempts the Hospitals' Lien
Federal law may preempt state law by 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 (2019). 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) (2019). The federal Center for Medicare
and Medicaid Services ("CMS"), a division of the
Department of Health and Human Services ("HHS"),
reviews the state's plan to ensure it 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) (2019) (HHS power to withhold funds if
changes to state plan do not comply with federal law); 42
C.F.R. § 430.10 (2019) (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 standards").
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 to 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) (2019);
see A.R.S. § 36-2946(A) (2019) (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 for
treating a plan member, the state Medicaid agency first tries
to determine whether a third party (insurer, tortfeasor) may
be liable for paying the claim. Olszewski, 30
Cal.4th at 811. When no third party is liable or liability
cannot be determined, the state agency pays the hospital its
negotiated rate for treating the patient. 42 C.F.R. §
433.139(c). If a third party is implicated, the agency
rejects the claim and returns it to the hospital to determine
the amount of the third party's liability. 42 C.F.R.
§ 433.139(b)(1) (2019). In such a case, the agency will
pay the hospital only the difference between the rate the
agency negotiated with the hospital and what the hospital
receives from the third party. Id. If a third
party's liability comes to light only after the state
agency has paid the hospital's claim, the agency must
seek reimbursement for itself from the third party when it is
cost effective to do so. 42 C.F.R. § 433.139(d).
Consistent with these rules aimed at limiting the costs that
the state Medicaid agency ultimately bears, Arizona law
grants AHCCCS a lien against a patient's recovery from a
tortfeasor so that AHCCCS can recover what it has paid to
treat the patient. A.R.S. § 36-2915(A) (2019). 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 it bills 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). And if a third party pays the
hospital more than AHCCCS's scheduled rate, the hospital
is not entitled to additional payment from AHCCCS. 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 rev.).
Under all these authorities, there is no dispute that 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 enforce a state-law lien
against a patient's tort recovery to obtain more for
itself than what it agreed to accept from AHCCCS for treating
The Hospitals' liens are based on two Arizona statutes.
As relevant here, A.R.S. § 33-931(A) states that a
is entitled to a lien for the care and treatment or
transportation of an injured person. The lien shall be for
the claimant's customary charges for care and treatment
[and] extends to all claims of liability or indemnity, except
health insurance and underinsured and uninsured motorist
coverage . . ., for damages accruing to the person to whom
the services are rendered . . . on account of the injuries
that gave rise to the claims and that required the services.
other statute specifically applies to hospitals that serve
AHCCCS members and states:
Payment received by a hospital from [AHCCCS] . . . is
considered payment by [AHCCCS] of [AHCCCS's] liability
for the hospital bill. A hospital may collect any unpaid
portion of its bill from other third-party payors or in
situations covered by [A.R.S. § 33-931].
A.R.S. § 36-2903.01(G)(4).
The Patients argue the Hospitals' liens are invalid under
42 C.F.R. § 447.15, a federal 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 Hospitals do not dispute
that this regulation bars a hospital that has contracted with
AHCCCS from billing a patient for the balance between what
AHCCCS has paid and the hospital's customary rates. We
hold the regulation likewise bars a hospital from imposing a
lien on the patient's tort recovery for that balance.
A lien is a means of securing a debt; without a debt, there
can be no lien. See Matlow v. Matlow, 89 Ariz. 293,
298 (1961) ("In the absence of an obligation to be
secured there can be no lien."). Once a hospital has
accepted payment from AHCCCS for treating a patient, the
patient owes the hospital nothing beyond a "deductible,
coinsurance or copayment." 42 C.F.R. § 447.15.
Because the patient does not owe the hospital the balance
between what AHCCCS has paid the hospital and the
hospital's customary rate, the hospital may not collect
that balance by imposing a lien on the patient's
property. The patient's property includes his or her
recovery from the tortfeasor that caused the injuries
requiring treatment. See Samsel v. Allstate Ins.
Co., 204 Ariz. 1, 7, ¶ 21 (2002) (noting insured
patient's "property interest in his or her tort
claim and eventual recovery"); Bowling, 410
F.3d at 317 (once judgment is entered against a tortfeasor or
tortfeasor agrees to a settlement, "proceeds are no
longer the property of the tortfeasor," but belong to
the patient.) Just as the hospital may not seize a
patient's car or impose a lien against the patient's
home, the hospital likewise may not use state lien laws to
seize the patient's tort recovery.
Although this is an issue of first impression in Arizona,
each court addressing the issue elsewhere has come to the
same conclusion. See Bowling, 410 F.3d at 315
("By accepting the Medicaid payment, the service
provider accepts the terms of the contract - specifically
that the Medicaid amount is payment in full.");
Taylor v. Louisiana ex rel. Dep't of Health & Hosps.,
7 F.Supp.3d 641, 644 (M.D. La. 2013) ("Congress did
not intend for providers to receive Medicaid reimbursement
for patient care and then intercept funds that the patient
would otherwise receive."); Lizer v. Eagle Air Med.
Corp., 308 F.Supp.2d 1006, 1009-10 (D. Ariz. 2004)
(§ 447.15 preempts right of provider that has accepted
payment from AHCCCS to assert lien against patient's tort
recovery under A.R.S. § 33-931); Mallo v. Pub.
Health Trust of Dade County, Fla., 88 F.Supp.2d 1376,
1387 (S.D. Fla. 2000) (provider may not balance bill by
imposing lien on patient's tort settlement; "health
care providers are not entitled to prey on an otherwise poor
patient's change in economic status");
Olszewski, 30 Cal.4th at 820 (Medicaid statutes and
regulations "are unambiguous and limit provider
collections from a Medicaid beneficiary to, at most, the
cost-sharing charges allowed under the state plan, even when
a third party tortfeasor is later found liable for the
injuries suffered by that beneficiary"); Pub. Health
Trust of Dade County, Fla. v. Dade County Sch. Bd., 693
So.2d 562, 566-67 (Fla. Dist. Ct. App. 1996) (Medicaid
preempts Florida regulation allowing provider to balance bill
by imposing lien on patient's tort
The Hospitals argue that "payment in full" under
§ 447.15 only limits a provider's right to payment
from the state Medicaid agency or the patient and does not
prevent them from intercepting the balance from a third-party
tortfeasor. As stated, however, that interpretation is
contrary to Arizona law, under which a patient has a ...