CHARLESTON, W. Va. - The federal Centers for Medicare and Medicaid Services is holding fast to its position that it is owed a share of a settlement designed by West Virginia Attorney General Darrell McGraw.

But CMS spokesperson Mary Kahn said Tuesday she doesn't believe the Office of the Inspector General will be investigating McGraw for Medicaid fraud.

"This is not an OIG issue," she said. "I don't think they will have a role."

But the relief available to the CMS will come in the form of a withhold on federal payments to the state's Medicaid budget. The federal government supplies 73 cents of every dollar spent on Medicaid in the state.

In question is the handling of a 2004 settlement between McGraw and Purdue Pharma, manufacturer of the prescription drug OxyContin. McGraw argued the drug's addiction capabilities were misrepresented and put a strain on the state's Medicaid system.

Purdue Pharma gave $10 million to settle the suit brought by McGraw on behalf of the DHHR and two other state agencies. Instead of turning the money over to any of the agencies he represented or the state Legislature, McGraw kept the money and appropriated it himself.

Controversy started when he gave $500,000 for a pharmacy school at the University of Charleston.

In February, Chief Deputy Attorney General Fran Hughes promised the Legislature that McGraw's office would stop appropriating the settlement funds on its own. She also said the money was not given to the DHHR because then the CMS could claim its share -- "We have arranged a methodology that has prevented the federal government from coming back and seizing money," Hughes said.

Hughes previously served as general counsel for Human Services Management, a national consulting firm specializing in Medicaid financing

After the promise, though, McGraw continued to hand out money. More than $1 million went mostly to day report centers that are checkpoints for non-violent convicts.

In a May 15 letter to the DHHR (a copy can be found here), the CMS took issue with Hughes admitting the settlement was structured to prevent it from earning its share. In the DHHR's response (a copy can be found here), it sided with McGraw.

"We will continue to pursue, or to rather maintain and standby our position that the state's actions don't have any bearing on its obligation to pay back Medicaid," Kahn said.

Kahn added that it is still unclear when a withhold might happen. In a report by the Charleston Daily Mail, Hughes said she will fight any such maneuver in court.

"The State is free to take whatever action it needs to take, and we will respond," Kahn said.

State watchdog group Citizens Against Lawsuit Abuse has been verbal on the matter as well. President Steve Cohen says the DHHR's response that supports McGraw doesn't add up, mostly because the DHHR is now claiming it did not pay for OxyContin prescriptions that were not medically necessary.

DHHR's lawsuit read, "as a result of the excessive and unnecessary prescriptions of OxyContin, Medicaid recipients in the State of West Virginia have been inappropriately and unnecessarily prescribed OxyContin, and the State and the (DHHR) have incurred excessive and unnecessary expenses as a result thereof."

The CALA also claims the Public Employees Insurance Agency expected money from the settlement, and Greg Burton, who was heading the Workers' Compensation system at the time, expected money and was never even told the case was settled.

In addition to that, Cohen argued that McGraw's office recently stated there was less than $2 million remaining in the settlement account, even though court records show his office will receive another $2.5 million payment this year.

"McGraw's pocketing these public dollars for his own pet projects has created an inconvenient truth, may jeopardize health care for West Virginian's neediest citizens and has brought out conflicting statements about what's going on here," Cohen said.

The Office of the Inspector General did not return requests for information on any possible investigations of the controversy.