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Joseph B. Mason, Individually and On Behalf of All Persons v. Kathleen Sebelius

March 23, 2012


The opinion of the court was delivered by: Hon. Jerome B. Simandle


SIMANDLE, Chief Judge:


This matter is before the Court on the motion of Defendants Kathleen Sebelius, United States Department of Health and Human Services, and the United States of America ("Defendants") to dismiss Plaintiff Joseph Mason's putative class action Complaint or in the alternative for summary judgment [Docket Item 10]. Specifically, Defendants move to dismiss for lack of subject matter jurisdiction Plaintiff's second cause of action for violation of his due process rights, pursuant to Rule 12(b)(1), Fed. R. Civ. P., and Defendants move to dismiss Plaintiff's other two causes of action for failure to state a claim or alternatively move for summary judgment. The principal questions raised by this motion are (1) whether the Court has subject matter jurisdiction to hear Plaintiff's unexhausted due process claim; (2) whether the Medicare as a Secondary Payer ("MSP") provisions codified at 42 U.S.C. § 1395y(b)(2) authorize reimbursement to Medicare from Plaintiff's lump sum tort settlement; (3) whether such reimbursement is prohibited by the New Jersey Collateral Source Statute ("NJCSS"), N.J. Stat. Ann. § 2A:15-97; and (4) if such reimbursement is prohibited by the NJCSS, whether the state statute is therefore preempted by the federal MSP statute and regulations.

As explained below, because the Court concludes that it lacks subject matter jurisdiction to hear Plaintiff's unexhausted due process claim, and that reimbursement of Medicare Benefits was authorized under the MSP and was not prohibited by the NJCSS, the Court will grant Defendants' motion to dismiss and for summary judgment.


This action relates to the interaction of two statutes that are both intended, in part, to prevent double recovery by a beneficiary of preliminary health care benefits who later receives a tort liability judgment or settlement. Plaintiff claims that, rather than receiving a double recovery in this matter, he has fallen into a gap between the two statutes such that he has been denied any recovery for his medical costs at all. Defendants maintain, by contrast, that Plaintiff initially received a double recovery for his medical costs: first through his provisional Medicare benefits and second via a tort settlement, which was only rectified by Medicare seeking reimbursement from him.

The following facts are taken from the parties' undisputed statements of material facts and, unless otherwise noted, are supported by the administrative record.

On August 19, 2004, Plaintiff Joseph Mason was injured when he slipped and fell at the Showboat Hotel and Casino ("Showboat") in Atlantic City, New Jersey. AR at 21.*fn1 Medicare paid for Plaintiff's medical expenses incurred as a result of his injuries in the amount of approximately $2,503. Id. at 52. On July 20, 2006, Plaintiff and his spouse filed suit against, inter alia, Showboat in the Superior Court of New Jersey, Atlantic County, seeking damages for Plaintiff's pain and suffering, medical costs, and for his wife's loss of consortium. Id. at 74-77. In Plaintiff's Superior Court tort complaint, Plaintiff expressly included his medical costs in his claim and sought damages on that basis. Id. at 76 ¶ 12.

A contractor for Medicare contacted Plaintiff by letter dated June 6, 2008, notifying Plaintiff that the Medicare benefits paid to Plaintiff for his injuries would be subject to reimbursement should Plaintiff settle or obtain a judgment of damages from the tort defendant. Id. at 249-50. The letter stated that "[i]t would be in your best interest to keep Medicare's payments and the statutory obligation to satisfy Medicare in mind when the final dollar amount is negotiated and accepted in resolution of the claim with the third party." Id. at 250.

On September 25, 2008, Plaintiff and his wife signed a release agreement settling the tort action with Showboat, releasing all claims against it for its liability stemming from Plaintiff's fall, including his wife's claim, in exchange for a lump sum payment of $40,000. Id. at 221-222. The release did not specifically allocate the settlement funds between Plaintiff's medical costs, his pain and suffering, or his wife's loss of consortium claim, but Plaintiff agreed to indemnify Showboat against, inter alia, any liability for Medicare liens or claims for reimbursement. Id.

Thereafter, Plaintiff sought an order from the Superior Court apportioning the settlement proceeds, declaring that no portion of the settlement was attributable to medical expenses. Id. at 25; Plaintiff's Ex. A. The Superior Court denied Plaintiff's motion on November 7, 2008, concluding that under 42 U.S.C. § 405(g), such a determination must be made first through the Medicare administrative review process. Plaintiff's Ex. A at 5.

On April 16, 2009, based on Plaintiff's settlement recovery, the Medicare Secondary Payer Recovery Contractor, on behalf of the Centers for Medicare and Medicaid Services ("CMS") demanded reimbursement of a portion of the Medicare funds provided for Plaintiff's medical care. AR at 209. Specifically, the recovery contractor demanded reimbursement of $1,423.43, which was discounted from the $2,503.71 paid by Medicare, pursuant to 42 C.F.R. § 411.37, a regulation stating that CMS's reimbursement will be reduced by taking into account the proportion of the total settlement or award expended in legal fees and costs ("procurement costs"). Id. at 210.

Plaintiff paid the reimbursement demand under protest and then sought a waiver and refund from CMS through the Medicare administrative appeals process. Am. Compl. ¶¶ 17-18. Plaintiff argued that Medicare was not entitled to a reimbursement because Plaintiff's settlement included no recovery attributable to his medical costs by operation of the NJCSS. AR at 21-32. Plaintiff appealed the initial determination on May 11, 2009, and the initial appeal was denied on September 17, 2009. AR at 177. Plaintiff thereafter sought reconsideration on October 2, 2009, id. at 169, which was again denied on December 4, 2009. Id. at 129. Plaintiff then appealed to a Medicare Administrative Law Judge on January 12, 2010. Id. at 102. The ALJ held a telephone hearing on Plaintiff's appeal on March 9, 2010 where she heard Plaintiff's attorney present his argument for reconsidering the initial determination. Id. at 92. The ALJ issued a decision affirming the initial determination on March 15, 2010. Id. at 50-65. Finally, Plaintiff appealed the ALJ's decision to the Medicare Appeals Council on April 14, 2010. Id. at 21. The Appeals Council denied the appeal in a final adverse decision on February 18, 2011. Id. at 1-9. Plaintiff did not raise any constitutional due process claim throughout the administrative appeals process.

On April 22, 2011, Plaintiff filed his original Complaint in this matter; he then filed his First Amended Complaint on May 12, 2011 [Docket Item 5]. Plaintiff's Amended Complaint seeks, on behalf of himself and a class of others similarly situated, relief under three causes of action. The first cause of action seeks a declaratory judgment that Medicare is not entitled to seek reimbursement of medical expenses from lump sum tort settlements in New Jersey due to the NJCSS, and Plaintiff seeks an injunction barring Defendants from pursuing such reimbursement. Am. Compl. ¶¶ 38-44. The second cause of action seeks damages for violating the due process rights of Plaintiff and the purported class as a result of Defendants' violations of the MSP provision and various Medicare regulations and policy guidelines. Am. Compl. ¶¶ 45-56. The third cause of action seeks recovery of the fees reimbursed to Medicare. Am. Compl. ¶¶ 57-62.

Defendants subsequently filed, in lieu of an answer, the instant motion to dismiss for lack of subject matter jurisdiction (as to the due process claim) and for failure to state a claim upon which relief can be granted, or, in the alternative, for summary judgment. [Docket Item 10.] Plaintiff filed opposition [Docket Item 13] to which Defendants filed a reply [Docket Item 16] and Defendants subsequently filed a notice of supplementary authority. [Docket Item 17.}


A. Subject Matter Jurisdiction

Defendants move to dismiss Plaintiff's second cause of action, his due process claim, under Fed. R. Civ. P. 12(b)(1), on the ground that the Court lacks subject matter jurisdiction to hear the claim because it arises under the Medicare Act and was not channeled through the agency review process.

1. Standard of Review

The Supreme Court instructs that this Court's jurisdiction is limited:

Federal courts are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute, see Willy v. Coastal Corp., 503 U.S. 131, 136-137 (1992); Bender v. Williamsport Area School Dist., 475 U.S. 534, 541 (1986), which is not to be expanded by judicial decree, American Fire & Casualty Co. v. Finn, 341 U.S. 6 (1951). It is to be presumed that a cause lies outside this limited jurisdiction, Turner v. Bank of North-America, 4 U.S. 8 (1799), and the burden of establishing the contrary rests upon the party asserting jurisdiction, McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 182-183 (1936).

Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994).

Challenges to subject matter jurisdiction under Rule 12(b)(1) may be "facial" or "factual." Facial attacks challenge the sufficiency of the complaint's allegations, so a court adjudicating a facial attack must accept those allegations as true and consider only facts alleged in the complaint. Emerson Elec. Co. v. Le Carbone Lorraine, 500 F. Supp. 2d 437, 443 (D.N.J. 2007). A factual attack, by contrast, looks beyond the allegations to attack jurisdiction in fact. Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977).

Defendants do not explicitly articulate whether their challenge to the Court's subject matter jurisdiction is a facial or a factual challenge, but the Court notes that the determination turns on the factual question of what transpired during the administrative review process and whether Plaintiff channeled and fully exhausted his due process claim through that process to a final determination. Plaintiff does not allege this fact in his Amended Complaint; it can be determined only by reference to the administrative record. Therefore, the Court will characterize Defendants' challenge as a factual one and will consider the factual material contained in the certified administrative record in making its determination.

2. Jurisdiction under 42 U.S.C. § 405(h) and 28 U.S.C. § 1331

The federal question jurisdiction statute, 28 U.S.C. § 1331, does not provide the federal courts with jurisdiction to hear claims "arising under" the Medicare Act. The Medicare Act, by operation of 42 U.S.C. § 1395ii,*fn2 incorporates 42 U.S.C. § 405(h), which provides in its third sentence:

No action against the United States, [the Secretary], or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter.

Plaintiffs generally cannot assert their claims against Medicare or its decisions in District Court under 28 U.S.C. § 1331 because the claims arise under Medicare. See Weinberger v. Salfi, 422 U.S. 758, 760-61 (1975) (even constitutional claims "arise under" Social Security Act, within meaning of 42 U.S.C. § 405(h), when Social Security Act "provides both the standing and the substantive basis for the presentation of [plaintiffs'] constitutional claims"). This is so even for Plaintiff's due process claim. As the Third Circuit has said, "If [plaintiff's] class action complaint asserts a claim that 'aris[es] under' the Medicare Act, then the third sentence of § 405(h) precludes the district court from exercising federal question jurisdiction over it." Fanning, 346 F.3d at 392. Thus, for claims arising under Medicare, 42 U.S.C. § 405(g) generally provides the exclusive basis for federal judicial jurisdiction and then only after exhaustion of agency appeals, as discussed below.

Section 405(h) of Title 42 is more than an exhaustion requirement; it precludes federal courts from relying on 28 U.S.C. § 1331 for exercising jurisdiction over claims arising under the Medicare Act. See, e.g., Heckler v. Ringer, 466 U.S. 602, 614-15 (1984); Fanning, 346 F.3d 386.

The third sentence of 42 U.S.C. § 405(h), made applicable to the Medicare Act by 42 U.S.C. § 1395ii, provides that § 405(g), to the exclusion of 28 U.S.C. § 1331, is the sole avenue for judicial ...

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