MONTGOMERY, Ala. (Legal Newsline) - The federal Centers for Medicare and Medicaid Services on Friday reiterated its desire to have Alabama Attorney General Troy King's lawsuit against it dismissed.

Its reply to the State's response said the issue -- how much the CMS can recover from settlements with or verdicts against pharmaceutical companies -- is not ripe for judicial review because no disallowance of any Medicaid funding to the State has taken place.

King's response had called CMS' recent actions "balderdash."

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.

The CMS can claim a portion of funds from any case that alleged harm to a state Medicaid agency because it largely funds the states' programs. If the CMS feels it has been shortchanged by a state, it could withhold the disputed amount from its next Medicaid appropriation.

"It remains to be seen to what extent, if any, CMS would rely on the (Dear State Health Official) letter, independently of the Medicaid Act and related regulations, as a basis for any such disallowance," the reply brief says.

"If CMS decides, in the exercise of its discretion, not to issue a disallowance, the controversy created by Alabama in order to bring this case will be eliminated. If CMS decides to issue a disallowance, but only after Alabama actually receives the judgment or settlement funds... the controversy will be narrowed significantly."

The brief adds that a disallowance can be disputed.

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 and recently reached settlements worth $89 million.

"These new requirements provide that states must 'return' to the Federal Government not only those amounts attributable to the federal share of payments made by a state's Medicaid program, but also a significant portion of amounts attributable to fines and penalties (such as punitive damages) obtained as a result of states' efforts to prosecute those who defraud their respective Medicaid programs, with little or no help from the federal government," the State's complaint says.

"Adding insult to injury, (a letter from CMS to the states) also requires states to make these payments to the Federal Government without regard to whether the state has actually received the amounts in question."

One such instance is a $160 million verdict against AstraZeneca that is being appealed. Of the verdict, $120 million is classified as punitive damages.

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."

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