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State v. Sebelius

June 22, 2009


The opinion of the court was delivered by: Gary L. Sharpe U.S. District Judge


I. Introduction

This action arises out of the Social Security Administration's ("SSA") failure to make proper Title II eligibility determinations since at least 1973, resulting in the inappropriate expenditure of State funds on Medicaid and State supplementary payments. Presently pending is defendants' motion to dismiss under FED.R.CIV. P. 12(b)(1) and (6). For the reasons that follow the motion is granted in part and denied in part.

II. Background

A. Statutory Background

This case involves four programs created under the Social Security Act (the "Act"): the federal Social Security disability insurance program ("SSDI"), administered under Title II of the Act, 42 U.S.C. § 401, et seq.; the federal supplemental security income program ("SSI"), administered under Title XVI of the Act, 42 U.S.C. § 1381, et seq.; the federal Medicare program, administered under Title XVIII of the Act, 42 U.S.C. § 1395, et seq.; and the joint federal/state Medicaid program, administered under Title XIX of the Act, 42 U.S.C. § 1396, et seq. It is necessary to briefly highlight aspects of each of these programs to lend clarity to the factual circumstances of this case.


SSDI is a federally funded cash benefit paid to persons "under a disability" who have "insured status" at the time of the disability's onset. See 42 U.S.C. §§ 423(a), (c); 20 C.F.R. § 404.131. To demonstrate "insured status" a claimant must have earned wages in a sufficient number of recent quarterly periods to qualify as an insured individual. See 42 U.S.C. § 423(c)(1). Qualification for SSDI does not turn on a showing of financial need. See 42 U.S.C. § 423. The SSDI program is administered by SSA. (See Compl. at ¶ 9; Dkt. No. 1.)

2. SSI

SSI is designed to assist aged, disabled and blind persons by setting a minimum guaranteed income for such persons. See 42 U.S.C. § 1381. The program is administered by SSA. Unlike SSDI, qualification for SSI is dependant on the claimant's income and financial resources. See 42 U.S.C. § 1382(a). SSDI is considered to be "income" for determining a claimant's need for SSI benefits. See 42 U.S.C. §§ 1382(a); 1382a(a)(2)(B). As such, an SSDI award may reduce or eliminate the SSI award the claimant receives. See id. An individual is ineligible for SSI if, after being informed of Title II eligibility, the individual fails to apply for Title II benefits. See 42 U.S.C. §§ 1382(a), (e)(2); 1382a(a)(2)(B). As a matter of policy, SSA has chosen to treat SSI applications as an application for SSDI benefits under Title II. (See Compl. ¶ 27; Dkt. No. 1.) See Social Security Administration Program Operations Manual System ("POMS") § GN00204.027.

In addition to federal SSI benefits, many States, including New York provide optional State supplementary payments ("SSP") to eligible citizens.*fn1 See 42 U.S.C. § 1382e. All New York residents eligible for SSI are also eligible for SSP. See 42 U.S.C. § 1382e(b). While SSP programs are optional, once a State has established such a program eligible individuals are legally entitled to SSP. (See Compl. ¶ 12; Dkt. No. 1.) Pursuant to a statutorily authorized "1616 agreement" SSA administers New York's SSP program and makes payments thereunder. See 42 U.S.C. § 1382e(b). New York reimburses SSA for these payments and pays an additional administrative fee for each payment disbursed. See 42 U.S.C. § 1382e. The terms of the 1616 agreement are dictated by federal law and require SSA to, inter alia, make SSP eligibility determinations and identify and recover SSP overpayments. (See Compl. Ex. 1; Dkt. No. 1.)

3. Medicare

Medicare is a federal health insurance program for the aged and certain disabled people which is administered by the Department of Health and Human Services through the Centers for Medicare and Medicaid Services (collectively "HHS"). See 42 U.S.C. § 1395, et seq. Persons who have been entitled to SSDI for 24 months are eligible for Medicare. See 42 U.S.C. §§ 426(b); 1395c. Eligibility for Medicare does not turn on a showing of financial need.

The original Medicare program consists of two basic parts, the Hospital Insurance Benefits program established under Part A of the Act and the Supplementary Medical Insurance program established under Part B of the Act. See 42 U.S.C. §§ 1395c, et seq.; 1395j, et seq. Under Part A the federal government covers "provider" (i.e., institutional) services. See 42 U.S.C. §§ 1395d(a); 1395f(a); 1395x(u). Only a "provider of services" -which includes hospitals, skilled nursing facilities and similar facilities - has the right to seek payment for Part A services, and such payment can only be made upon the provider's filing of a proper claim. See 42 U.S.C. §§ 1395f(a)(1); 1395x(u); 42 C.F.R. §§ 424.33, 424.51.

Medicare Part B establishes a voluntary supplemental insurance program which generally covers outpatient services and "medical and other health services." See 42 U.S.C. §§1395j; 1395k(a). Medicare Part A recipients may elect to enroll in Part B upon the payment of a monthly premium. See 42 U.S.C. §§ 1395o; 1395s. Additionally, many States, including New York, have entered into "State Buy-In Agreements" with HHS through which certain "coverage groups" among the State's Medicare-eligible residents - such as SSI recipients - are enrolled in Part B. See 42 U.S.C. § 1395v(a), (b). Under the Buy-In Agreement the State commits to paying the monthly Part B premiums on behalf of these enrollees. See 42 U.S.C. § 1395v(d)(1). Coverage is supposed to begin "the first day of the first month in which [the individual] is both an eligible individual and a member of a coverage group specified in the agreement." See 42 U.S.C. § 1395v(d)(2)(C).

Only a "provider of services," a "supplier" (i.e. physicians, other practitioners and entities other than a "provider of services"), or, rarely, a Part B beneficiary may file a claim and receive payment from Medicare for Part B services. See 42 U.S.C. §§ 1395l(e), 1395n; 42 C.F.R. §§ 424.33, 424.34, 424.53, 424.55.

4. Medicaid

Medicaid is a joint federal/state funded program federally administered by HHS which provides medical assistance to individuals whose income and financial resources are insufficient to meet the costs of necessary medical services. See 42 U.S.C. § 1396, et seq. States that participate in the program, such as New York, are required to comply with the requirements of the Medicaid statutes and regulations, which includes providing all SSI recipients with Medicaid coverage. See 42 U.S.C. § 1396a(a)(10)(A)(i)(II); Harris v. McRae, 448 U.S. 297, 301 (1980). New York and HHS have entered into a statutorily authorized "1634 Agreement" under which HHS or its delegee - now SSA - is obligated to make Medicaid eligibility determinations on behalf of the State, make Medicaid redeterminations as often as SSI or SSP redeterminations are made, and provide the State with information regarding such redeterminations. See 42 U.S.C. § 1383c (See also Compl. Ex. 2; Dkt. No. 1.)

The Medicaid program is intended to be a payer of last resort. Thus the State Medicaid agency is required to take "all reasonable measures to ascertain the legal liability of third parties" for care available under Medicaid. See 42 U.S.C. § 1396a(a)(25)(A). Where probable third party liability is established before a Medicaid claim is paid out, the State Medicaid agency must "reject the claim and return it to the provider." See 42 U.S.C. § 1396a(a)(25)(A); 42 C.F.R. § 433.139(b). Where third party liability is not established until after the Medicaid claim is paid out, the State Medicaid agency must seek reimbursement from the third party "to the extent of such legal liability" if the recovery efforts may reasonably be expected to be cost effective. See 42 U.S.C. § 1396a(a)(25)(B); 42 C.F.R. § 433.139(d).

B. Factual Background

At some point between 1990 and 1995 SSA learned that systematic problems were precluding it from properly ascertaining eligibility of individuals for SSDI benefits under Title II. (See Compl. ¶¶ 48, 49; Dkt. No. 1.) Such problems involved serious deficiencies in obtaining and entering appropriate SSI recipient information into SSA databases, as well as computer errors in retrieving such information. Id. Accordingly, for periods going back as far as 1973, large numbers of individuals were deprived of Title II benefits to which they were entitled, being afforded only SSI benefits. Id. at ¶ 50. As a result, many of these individuals received larger SSI and SSP benefits than they would have had their Title II eligibility been properly determined. Id. Additionally, many SSI recipients who should have been covered by Medicare due to SSDI eligibility were not, causing Medicaid to improperly cover such individuals health care costs. Id. at ¶ 61.

In 2001, SSA established a national database of those SSI beneficiaries who had been potentially eligible for, but did not receive, Title II SSDI benefits. Id. at ¶ 52. The database, which is known as the Special Disability Workload ("SDW"), was assembled as part of the process of identifying and tracking those individuals affected, determining whether they were eligible for Title II benefits retroactively, and making some recompense for errors if they were eligible. Id. at ¶ 53. Under SSA's procedure for addressing the SDW, the agency identifies individuals for whom sufficient information exists in SSA databases to make an "informal" determination that they are or were eligible for SSDI. Id. at ¶ 66. Multiple notifications are then sent to such individuals notifying them that they must apply for SSDI benefits or lose SSI eligibility. See POMS § SI00510.031; see also 42 U.S.C. § 1382(e)(2). However, the notice does not refer to the SDW or to the fact that erroneous eligibility determinations may have been made. (See Compl. ¶ 66; Dkt. No. 1.) Where SSA receives a new application, determines retroactive Title II eligibility and makes payments as are consistent with that retroactive eligibility, it is crediting States with SSP improperly paid as a result, as required under 42 U.S.C. § 1320a-6. Id. at ¶ 71. The remaining cases are closed without further action. Id. at ¶ 66.

Determination that an individual is entitled to retroactive SSDI for at least 24 months is effectively a determination that they were also eligible for Medicare. See 42 U.S.C. §§ 426(b); 1395c. Accordingly, where SSA has determined that an individual is retroactively entitled to Title II benefits it has informed HHS. (See Compl. ¶ 72; Dkt. No. 1.) HHS has then retroactively charged New York Medicaid agencies Part B premiums pursuant to the Buy-In Agreement. Id. at ¶ 73. However, SSA and HHS have failed to reimburse the State for expenses which should have been covered by Medicare, but were instead paid, at least in part, through State Medicaid funds. Id. at ¶¶ 74-76. Further, neither SSA or HHS have made redeterminations as to the eligibility for Medicaid of those individuals retroactively eligible for SSDI benefits, regardless of whether they submit new SSDI applications and despite the requirements of the 1634 agreement. Id. at ¶ 77-78.

Upon learning of the flaws in SSA's SSDI eligibility determination process, New York took steps to assess the effects of the problem on the State. Id. at ΒΆ 58. Based on an audit report issued by the NYS Office of Temporary Disability Assistance ("OTDA Report"), New York estimates that the expenses it incurred as a result of the federal errors exceeded $81 million in SSP and administrative fees, $1.7 billion in Medicaid overpayments, $9 million in public assistance payments, and $13 million in other expenses. (See OTDA Report, Compl. Ex. 3.; Dkt. No. 1.) It also found that the federal government had grossly underestimated the number of individuals within the State affected, that the SDW project was inadequate to address the problem, and that the flaws ...

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