WASHINGTON (Legal Newsline) - The federal government will withhold more than $2.7 million from its next Medicaid appropriation to the State of West Virginia because of a settlement engineered by state Attorney General Darrell McGraw.

An Oct. 29 decision by the Departmental Appeals Board ruled that McGraw should have paid the federal Centers for Medicare and Medicaid Services its share of a $10 million settlement with Purdue Pharma in 2004. It is the second time this year that the Appeals Board has ruled McGraw wrongfully kept settlement funds from CMS.

CMS had sought more than $4 million, but the Appeals Board adjusted its calculations to consider the more than $3 million in attorneys fees earned by private attorneys hired by McGraw to pursue the case, which alleged Purdue Pharma misrepresented the addiction capabilities of painkiller OxyContin.

McGraw has used the money from the settlement on substance abuse programs around the state, as well $500,000 to the University of Charleston for a pharmacy school. The withhold will be $2,732,968.

Chief Deputy Attorney General Fran Hughes admitted to the Legislature that the money was not given to the state's Department of Health and Human Resources, which administers the Medicaid program, because 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 more than $3.3 million in the settlement. CMS arrived at its original amount of $4,143,075 million by taking 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 argued that there was a fourth plaintiff - the affected individuals in his state he was representing in his parens patriae capacity.

"We find no merit in this argument," the Appeals Board wrote.

"It is not evident from the record that the State was, at the time of settlement, seeking damages on behalf of individual consumers."

The board wrote that McGraw's attorneys had prepared at least one witness from each of the three plaintiff state agencies but none were mentioned as being designated to testify on the behalf of the class of individual consumers.

"Even assuming the State was seeking damages on behalf of individual West Virginia consumers, DHHR has provided no valid estimate of those damages," the decision says.

When McGraw divvied up the settlement, he gave DHHR only $250,000 and the other two plaintiff agencies received nothing. Del. Jonathan Miller, a Republican, has asked through a Freedom of Information Act request why the financially strapped PEIA is not seeking a share of the settlement.

"There are budgetary issues," Miller said in July, noting the future looks bleak for the state budget. "The attorney general is affecting our bottom line as we're approaching a budget cliff.

"(McGraw) is well known for his antics. That's an issue we've gotta address. If he goes off base and takes these settlements in the wrong direction, it causes problems we'll have to address in the Legislature.

"We haven't really wanted to get too involved with the issue. It's the big elephant in the room."

The Appeals Board also decided this year that CMS was entitled to $446,607 of McGraw's 2004 settlement with pharmaceuticals manufacturer Dey, Inc.

That case, which alleged the company improperly inflated the cost of its drugs and ripped off the state's Medicaid program (largely funded by the federal government), resulted in an $850,000 settlement. That money went to McGraw's Consumer Protection Fund and three state agencies.

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