CHARLESTON, W. Va. (Legal Newsline) - An appeals board recently told the federal Centers for Medicaid and Medicare Services that it is seeking too much of a controversial $10 million settlement by West Virginia Attorney General Darrell McGraw.

McGraw's office said Friday that the U.S. Department of Health and Human Resources Departmental Appeals Board ruled that CMS is entitled to some, but not all, of the more than $4.1 million it wants.

"We are pleased by the Appeals Board's decision," Chief Deputy Attorney General Fran Hughes said, "because it removes the long shadow cast by the original $4,143,075.00 disallowance and reaffirms most of the arguments we made with respect to allocation of the OxyContin proceeds."

In 2004, McGraw reached a $10 million agreement with Purdue Pharma, manufacturer of the prescription painkiller OxyContin. McGraw represented three state agencies, including the state's DHHR, in the suit, though he kept the settlement funds for his office.

He has used the money on substance abuse programs around the state, as well $500,000 to the University of Charleston for a pharmacy school.

Hughes battled with lawmakers, admitting to the Legislature that the money was not given to the state DHHR because the CMS would then be able to claim a share -- "We have arranged a methodology that has prevented the federal government from coming back and seizing money," Hughes said.

Hughes formerly served as general counsel for a national consulting firm that specialized in Medicaid financing.

Private practice attorneys hired by McGraw to represent the State earned $3.4 million in the settlement. CMS arrived at its total of $4,143,075 million by taking the 74.65 percent (the rate of federal payment to the state for every dollar spent) out of $5.5 million of the settlement.

That $5.5 million represents what the CMS feels should have been the equitable distribution of the settlement dollars among the three plaintiffs (the DHHR, the Public Employees Insurance Agency and the Bureau of Employment Programs) with respect to certain allegations involving Medicaid dollars.

McGraw's office is representing the DHHR in its appeal of that decision.Hughes said there is a "strong possibility" of a settlement, and that McGraw has a sum of money set aside for that purpose.

Part of the 2004 settlement stipulated that Purdue Pharma could recommend ways the funds could be spent. McGraw has not given any of Purdue Pharma's causes any of the money.

"We have a jaundiced opinion of Purdue Pharma," Hughes has said. "They are true criminals."

Purdue Pharma has settled similar allegations with more than 20 states and was ordered to pay more than $600 million in fines as a result of a criminal cause pursued by U.S. Attorney John Brownlee, now running for Virginia's Attorney General.

The CMS also notified the DHHR in December that it will keep $634,525 from a future Medicaid payment to the State, though McGraw's office has said it will appeal the decision.

That dispute stems from McGraw's 2004 settlement with Dey, Inc. He had claimed the company inflated the prices of the prescription drugs it manufactured, thereby defrauding the state's Medicaid program.

The two sides settled for $850,000.

From Legal Newsline: Reach John O'Brien by e-mail at john@legalnewsline.com.