MONTGOMERY, Ala. (Legal Newsline) - Alabama Attorney General Troy King and his lawyers called recent action by the federal Medicaid agency "balderdash" on Wednesday.

The State's response to the Centers for Medicare and Medicaid's motion to dismiss King's lawsuit says CMS never gave proper notice to states about policy changes that involved reimbursement from pharmaceutical lawsuits.

Those suits alleged harm to states' Medicaid programs, which are largely funded by the federal CMS. CMS usually earns a portion of the settlement or award.

At issue is an Oct. 28 letter sent by CMS to the states. King alleges it allows the CMS to grab portions of settlements and awards that haven't been collected yet by the State.

"CMS demanded that the States 'return' the monies despite the fact that not one cent of the monies had ever belonged to, or been in the possession of, CMS," the response says.

"To make matters worse, CMS was demanding its 'cut' up front, such that States were to 'return' the demanded amounts to the Federal Government even in cases where States had not yet received any monies from fraud-and-abuse defendants.

"No advance notice. No input from the public. Give us the money now."

Quoting another case, the motion says, "In a word, this is balderdash."

The Oct. 28 letter from the CMS to the states says they are not allowed to segregate portions of their recovery as out of the Federal Government's reach.

"The (Heath and Human Services) Departmental Appeals Board has long recognized the federal government's entitlement to its proportionate share of civil penalties assessed by states against providers or other entities," the CMS letter states.

It adds that recently enacted federal legislation "provides that the full amount of any State (False Claims Act) recovery serve as the basis for measuring the federal share."

In fiscal year 2008, the Federal Government provided nearly 68 cents of every dollar spent on Medicaid in Alabama. King wrote that the new requirements "will have a devastating impact on the State of Alabama and the low-income and disabled individuals served by the State's Medicaid program."

Potentially hundreds of millions of dollars are at stake, he said. The State sued 79 pharmaceutical companies in 2005.

Arising from those claims were a $2 million settlement with Takeda Pharmaceuticals and a $4 million settlement with Dey, L.P.

The Takeda agreement classified half the settlement as compensatory damages, and allocated the appropriate sum to the feds. The other half was classified as fees and expenses and allocated nothing for the feds.

The Dey agreement classified $750,000 to pay the outside counsel hired by the State to bring the suit.

Larger amounts could be in question. In February, a jury ordered AstraZeneca to pay $215 million, though the award was reduced to $160 million. The original verdict provided only $40 million in compensatory damages, while the remainder was punitive damages.

AstraZeneca has appealed, and the State has not received any money yet.

"A State may not seek to recover merely the 'state share' of computed fraud damages unless appropriate federal and state authorities formally agree to sever the federal and state portion of the overpayment and pursue them as separate actions," the CMS letter says.

"If there is no formal agreement to sever, a State may not claim in a State FCA case that it is only recovering damages incurred by the state, but not the federal government. Nor may a state return merely the federal portion of 'single' damages and retain all other amounts, such as double and treble damages. The Federal Government is entitled to the applicable FMAP share of a state's entire recovery."

The CMS is currently locked in a dispute with West Virginia Attorney General Darrell McGraw over his handling of settlement funds.

McGraw settled his 2001 suit against Purdue Pharma, the manufacturer of prescription painkiller OxyContin, in 2004. The settlement was worth $10 million, with more than $3 million going to the outside counsel McGraw hired to represent the State.

The rest of the money has been given by McGraw to substance abuse organizations, angering some members of the state Legislature who feel only they should be able to appropriate state funds.

Chief Deputy Attorney General Fran Hughes admitted before the Legislature that the settlement was structured in a way that prevented the Federal Government from getting a share. Nearly 75 cents of every dollar the state spends on Medicaid is provided by the Federal Government.

Two of the three state agencies named as plaintiffs never received a share of the settlement, and the CMS is planning to withhold funds from its next Medicaid appropriation to the State. Hughes said the state Department of Health and Human Resources received $250,000 from the settlement.

Originally, the CMS sought to withhold more than $4 million, but that figure has been rejected as too high by the HHS Appeals Board. Hughes said in July that a settlement may soon be reached.

King, meanwhile, said the requirements laid out in the letter will irreparably harm his state, and that they are invalid because they were never subject to a notice-and-comment period.

He also called them "an unconstitutional commandeering of state government."

Proskauer Rose is also representing the State of Alabama.

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