Abbott v. Banner Health Network – 12/23/2014

January 5, 2015

Arizona Court of Appeals Division One holds that hospitals that accept payment from the Arizona Health Care Cost Containment System (“AHCCCS”) for services rendered to AHCCCS patients cannot seek to impose and enforce liens on funds the patients obtained from third-party tortfeasors related to services provided because such liens are invalid under federal law.

The hospitals accepted payments from AHCCCS for the treatment of patients for injuries caused by third-party tortfeasors.  The hospitals then recorded liens, pursuant to A.R.S. §§ 33- 931 and 36-2903.01, for the difference in the amount billed for services and the amount paid by AHCCCS.  Plaintiffs subsequently obtained personal injury settlements from third-party tortfeasors related to the medical care provided.  To access their settlement funds, the patients agreed with the hospitals to have the persons holding the settlement funds pay the hospitals reduced amounts in exchange for the hospitals releasing their liens.

The patients as well as other patients who had not settled hospital liens then filed suit against the hospitals, alleging that the liens were invalid and preempted under federal law.  In support of their argument, plaintiffs pointed to the “Provider Participation Agreements” between the hospitals and AHCCCS in which the hospitals agreed to comply with federal law.  The superior court granted the hospitals’ motion to dismiss, finding that the issue of whether federal law preempted the liens was irrelevant because the parties had reached an enforceable accord and satisfaction.

The court of appeals reversed.  Federal law provides Medicaid providers must accept the payment from Medicaid as payment in full and “may not seek to collect from the individual (or any financially responsible relative or representative of that individual) payment of an amount for that service.”  42 U.S.C. § 1396a(a)(25)(C).  The court held that because the liens are prohibited by federal Medicaid law and because such law preempts Arizona statutes authorizing the liens, both the liens and any accord and satisfaction agreements premised on the liens are prohibited and unenforceable.  

The court rejected the hospitals’ contention that the accord and satisfaction agreements should be enforceable regardless of whether there is a meritorious defense to the underlying contract.  The court distinguished cases involving a good-faith dispute regarding the merits of an underlying agreement, and situations such as these, where a federal statute affirmatively prohibits the parties from entering into the contract.  Because the lien agreements are void, rather than merely voidable, the court held that they could not be enforced indirectly through an accord and satisfaction agreement.    

Presiding Judge Kessler authored the opinion; Judges Norris and Portley concurred.