By Terry Baynes

(Reuters) - The U.S. Supreme Court on Wednesday struck down a North Carolina law that allowed state officials to seize one-third of a medical malpractice settlement paid to a Medicaid recipient.

At a time when many states are expanding their Medicaid programs under the Affordable Care Act, the high court's decision restricts how states can tap into Medicaid beneficiaries' lawsuit winnings and settlements to recover the state's medical expenditures.

In the case, Wos v. EMA, North Carolina claimed over $900,000 of a legal settlement won by the parents of a 13-year-old girl born with serious injuries that left her unable to live or work independently. The parents of the girl, who is identified in the lawsuit only as EMA, sued the delivery doctor and hospital for medical malpractice.

The case settled for $2.8 million, the insurance policy limit of the defendant physician, even though the suit had requested damages of $42 million. The settlement did not indicate what part of the $2.8 million was meant to cover EMA's medical expenses, which were paid, in part, by Medicaid.

North Carolina claimed over $900,000 of that amount under a law that allows the state to recover one-third of any legal verdict or settlement as a reimbursement for the state's Medicaid costs. EMA's family sued the state, arguing that the amount was disproportionately large and violated the federal Medicaid law, which limits a state's recovery to medical expenses.

The U.S. District Court for the Western District of North Carolina found the state's method for determining its reimbursement was reasonable, but the 4th U.S. Circuit Court of Appeal in Richmond, Virginia, disagreed in 2012.

The Supreme Court upheld the 4th Circuit's ruling in a 6-3 opinion, finding that North Carolina's law conflicted with the federal law's requirement that a state not claim more than what it paid for medical expenses, known as the anti-lien provision.

"The State provides no evidence to substantiate its claim that the one-third allocation is reasonable in the mine run of cases," Justice Anthony Kennedy wrote for the majority.

If a state could designate one-third of any recovery as being for medical expenses, it could "arbitrarily designate half or all of the recovery in the same way," he added. North Carolina's "one-size-fits-all statutory presumption" was incompatible with the federal Medicaid law, he concluded.

The North Carolina Department of Justice declined to comment on the decision.

A SIGNIFICANT WIN

Texas and 10 other states had supported North Carolina in an amicus brief, arguing that the federal Medicaid law was an agreement between the federal government and the states, and did not provide Medicaid beneficiaries with a legal claim.

The federal Medicaid Act requires states to recoup their medical expenses from beneficiaries' tort winnings. It does not specify what percentage of tort winnings should be allocated as medical expenses if the verdict or settlement does not say.

Several states, including North Carolina, Florida and Ohio, have laws that allow the states to recover a fixed percentage of the tort recoveries for Medicaid costs. Sixteen other states and the District of Columbia conduct administrative hearings on a case-by-case basis to determine what percentage of the verdict or settlement was for medical costs. The majority of the justices supported the case-specific hearing approach.

Three justices from the court's conservative wing dissented, siding with North Carolina.

"States define the contours of their own tort law all the time, setting rules about who may recover in particular circumstances," Chief Justice John Roberts wrote, joined by Justices Clarence Thomas and Antonin Scalia. He said there was no evidence Congress ever intended to strip states of their right to regulate tort recoveries.

Christopher Browning, a lawyer for EMA and her parents, said the North Carolina statute had made it difficult for parties to settle lawsuits, knowing that some of the money for pain and suffering or other injuries would be collected by the state's Medicaid program.

Advocates for Medicaid beneficiaries also called the ruling a significant win, given the expanded role of state Medicaid programs under the Affordable Care Act.

"This decision upholds the right of people who rely on Medicaid for their health insurance to go into court if the state is ignoring the requirements of the federal statute," said Rochelle Bobroff, a lawyer with the Constitutional Accountability Center who submitted an amicus brief on behalf of the American Association of Retired Persons.

The case is Wos v. EMA, U.S. Supreme Court, No. 12-98.

For North Carolina: John Maddrey of the North Carolina Department of Justice.

For EMA: Christopher Browning of Williams Mullen.

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