On Monday June 6th, the U.S. Supreme Court interpreted the federal Medicaid Act to rule that a state, exercising its right of subrogation, can recoup not just past but also future medical expenses from Medicaid beneficiaries, when those beneficiaries have prevailed in tort. Here, Stanford Law Professor Nora Freeman Engstrom, an expert in tort law, and Graham Ambrose, a member of the Stanford Law School class of 2024, discuss the Court’s ruling in Gallardo v. Marstiller and its implications for the personal injury compensation system.
The plaintiff in this case is Gianinna Gallardo. Who is she?
On November 19, 2008, Gianinna Gallardo, a 13-year-old student from Florida, stepped off her school bus and was struck by a truck. She suffered catastrophic injuries. Florida’s Medicaid agency covered her initial medical expenses, which totaled $862,688. Today, Gallardo remains in a permanent vegetative state. An expert evaluated Gallardo and found that her pecuniary losses will exceed $20 million. But Gallardo’s parents eventually settled a lawsuit against the truck driver, the truck’s owner, and their local public school board for only $800,000.
Ultimately, litigation—not over who bears responsibility for the tragic November 2008 truck accident—but rather, to assess who actually pockets that $800,000 settlement, wound its way to the U.S. Supreme Court.
What did the $800,000 settlement say about medical expenses?
The settlement designated $35,367 as compensation for past medical expenses. No specific amount was expressly designated for future medical expenses, even though, logically, Gallardo will need care going forward.
So Gallardo filed a lawsuit and settled that lawsuit for $800,000. Did Gallardo receive all of that $800,000?
No. And one thing that’s important to note is that personal injury claimants almost never see everything they are formally awarded.
For starters, Gallardo’s lawsuit—like some 96% of personal injury lawsuits—was almost certainly pursued via a contingency fee. Contingency fees, which compel clients to pay attorneys if and only if the case succeeds, supply a “key to the courthouse.” Without contingency fees, personal injury litigation would be out of reach for all but wealthy Americans. But these fees aren’t cheap. In the United States, contingency fees typically entitle lawyers to 32-40% of the client’s total recovery. That means that roughly one-third of the $800,000 likely went to Gallardo’s counsel.
Then there’s the matter of recoupment. Under what’s called the “collateral source rule,” a personal injury victim can recover for medical (or other) expenses even if those expenses were actually borne by another (such as a private health insurer, Medicare, or Medicaid). But then the payer (here, Medicaid) can exercise its “right of subrogation.” When a payer exercises its right of subrogation, it essentially demands to be paid back, out of a portion of the plaintiff’s recovery. This case concerns that subrogation right.
So, under the law, a state that supplies medical care to a personal injury victim can recoup the cost of the care it supplied. How does that work?
That question is the heart of the case.
In this litigation, Florida argued that “medical expenses” should be retrospective and prospective. In other words, it should be able to reimburse itself by collecting parts of the tort settlement designated for past and future medical care. So in Gallardo’s case, the state believed it was entitled to receive not just $35,367 for past care (the amount actually designated in the settlement), but $300,000, including for Gallardo’s future medical expenses (an amount the state calculated based on a formula).
Gallardo’s parents (supported by the United States, as amicus) disagreed. They insisted that states should be able to recover only for past medical care—here, the $35,367, which the settlement expressly earmarked for that purpose. Gallardo’s parents argued “it would be absurd and fundamentally unjust” for the state to reimburse itself for damages it never compensated and for which the state might never provide compensation.
So, this case concerned a battle about future medical expenses which might be—but won’t necessarily be—borne by Florida’s Medicaid system. What did the Court conclude?
Siding with Florida, the Court rejected the parents’ and Solicitor General’s reading of the federal Medicaid Act. In an opinion by Justice Clarence Thomas, the Court held that states can recover payments for past and future medical care. The vote came out 7-2, with Justice Thomas joined by the other five conservatives and Justice Elena Kagan. Justices Sonia Sotomayor and Stephen Breyer dissented.
In his opinion, Justice Thomas zeroed in on the “plain text” of a subsection of § 1396k of the Medicaid Act. Medicaid has an anti-lien clause that limits a state’s power to seize a Medicaid recipient’s property to reimburse the state for care it furnished. Pursuant to that provision, everyone agrees that a state can’t seize a Medicaid recipient’s assets willy-nilly. But, at the same time, a state can—and indeed, must—reimburse itself in particular circumstances. In delineating between what’s permissible and impermissible, § 1396k is key. A long and dense provision, § 1396k authorizes states to condition Medicaid payments on recipients’ assignment to the state of “any rights . . . to payment for medical care from any third party.” Interpreting that language, alongside another provision that does, by its terms, reach only monies that had been paid, Justice Thomas read § 1396k to draw a line regarding substance but not time. He reiterated that a state is only entitled to recoup funds it furnished for medical care (not other things). But he rejected the claim that a state is limited to past medical care. In his words: “The relevant distinction is thus between medical and nonmedical expenses . . . not between past expenses Medicaid has paid and future expenses it has not.”
Is it clear that Florida’s Medicaid system will pay at least $300,000 for Gianinna Gallardo’s future medical care?
That’s an oddity about the case. It is clear—no question—that Gallardo will need expensive and intensive care in the future. But it’s not clear that that care will be furnished by Medicaid. Medicaid is means tested. It’s not available when individuals have resources. Here, after the settlement, Gallardo had some resources, and so it’s not at all obvious that she’ll continue to qualify for Medicaid. Florida might be pocketing funds for future medical care it won’t actually supply.
What does this decision mean for the future of tort suits?
This case—involving “subrogation” and complex, interlocking statutory text—may sound pretty esoteric and unimportant. But its implications could be profound.
That’s because damages are the fuel that powers the tort system. Without fuel, the system can’t run. Assuming other states follow in Florida’s footsteps, the Court’s decision is apt to reduce the damages that plaintiffs can (actually) pocket. In so doing, it will predictably reduce litigants’ incentives to bring personal injury lawsuits.
Here, it’s important to see: The back-end of tort litigation and the front-end of tort litigation are inextricably connected. If back-end awards are reduced (whether through traditional tort reform measures, like noneconomic damage caps, or via opinions like this one), then fewer personal injury victims will enter the system in the first place.
Litigation is very expensive, and even when tortiously injured, the vast majority of injury victims already choose not to take action. Now we can predict: Even fewer folks will bother. Here the state is effectively telling litigants: “If you go through the indignity and trouble of vindicating your rights, and if you’re fortunate enough to prevail, we’ll swoop in and pocket a substantial share of the proceeds.”
Will this decision financially benefit states?
Possibly, but not necessarily. The state could get a larger share of the pie—but the size of the pie could shrink considerably. If individuals bring fewer personal injury suits, then the state (via its subrogation rights) will not be able to collect as much.
Justice Sotomayor made this point in her dissent. She explained: “As a State’s right of recovery from any damages payout expands, a Medicaid beneficiary’s share shrinks, reducing the beneficiary’s incentive to pursue a tort action in the first place.” By chilling victims’ incentive to bring suit, the Court’s decision could “perversely cause States to recover fewer overall expenses.”
Scholars generally think that if the state imposes a heavy burden on a given action, society will see less of that action. That’s Economics 101. The same principle applies to litigation.
Nora Freeman Engstrom is the Ernest W. McFarland Professor of Law and co-director of the Deborah L. Rhode Center on the Legal Profession at Stanford Law School. A nationally recognized expert in both tort law and legal ethics, much of her work explores the day-to-day operation of the tort system and particularly the tort system’s interaction with alternative compensation mechanisms, such as no-fault automobile insurance, the Vaccine Injury Compensation Program, and workers’ compensation. Graham Ambrose is a member of the Stanford Law School class of 2024 and a research assistant working with Professor Engstrom.