                               IN THE COURT OF APPEALS
                                   STATE OF ARIZONA
                                     DIVISION TWO


STEVEN EATON, a single person,                   )         2 CA-CV 2003-0068
                                                 )         DEPARTMENT A
                          Plaintiff/Appellant,   )
                                                 )         OPINION
                    v.                           )
                                                 )
ARIZONA HEALTH CARE COST                         )
CONTAINMENT SYSTEM,                              )
                                                 )
                         Defendant/Appellee.     )
                                                 )


             APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY

                                     Cause No. C20006425

                                Honorable Kenneth Lee, Judge

                                          AFFIRMED


Ibáñez & Wilkinson
  By Rose Marie Ibáñez                                                               Tucson

   and

Roy G. Spece, Jr.                                                                     Tucson
                                                            Attorneys for Plaintiff/Appellant

Johnston Law Offices, P.L.C.
 By Logan T. Johnston                                                              Phoenix
                                                           Attorneys for Defendant/Appellee


H O W A R D, Judge.
¶1             The director of appellee Arizona Health Care Cost Containment System (AHCCCS)

denied appellant Steven Eaton’s request that AHCCCS waive the entire Medicaid lien against

funds paid in settlement of his product liability suit. Eaton appealed to the superior court, which

affirmed the director’s decision. Eaton now appeals the superior court’s ruling, contending that

the director improperly found that 1) misrepresentations in a settlement negotiation did not

constitute fraud, 2) the state cannot compromise the federal portion of a Medicaid lien, and 3) the

misrepresentations could not be regarded as working an estoppel against AHCCCS. Because

AHCCCS was prohibited by federal law from compromising the federal portion of the lien and

Eaton did not show that fraud or estoppel should apply, we affirm.

¶2             We view the facts in the light most favorable to upholding the director’s decision.

See Empire West Cos., Inc. v. Ariz. Dep’t of Econ. Sec., 182 Ariz. 95, 97, 893 P.2d 746, 748

(App. 1995). Eaton is an Arizona resident and a Medicaid recipient. As a patient with

hemophilia, Eaton used medical infusion products manufactured by four pharmaceutical companies

to treat his illness. From using these products, he and many other sufferers of hemophilia

contracted the human immunodeficiency virus (HIV) and filed a class action lawsuit against the

manufacturers. Although a settlement offer was made to the class, Eaton declined that offer and

pursued his claim as an individual.

¶3             After a six-week trial that resulted in a defense verdict, Eaton entered into

settlement negotiations with the defendants. John Shirley, an employee of Public Consulting

Group (PCG), a corporation that is a contractual partner used by AHCCCS to perform third-party

liability recovery activities, attended the settlement conference. During negotiations, Eaton

expressed concern about the Medicaid claim of $17,645.05, which is the expense of the medical

                                                2
care Eaton had received. Shirley suggested that Eaton consider accepting the offer because Eaton

“could go before an ALJ and seek to have the lien reduced significantly, and possibly to zero.”1

In reliance on this statement, Eaton accepted the settlement offer of $50,000.

¶4             Subsequently, AHCCCS agreed to compromise the lien from $17,645.05 to

$11,200. AHCCCS explained that it had compromised Arizona’s share of the total Medicaid

payment in full and the residual amount represented the federal share, which AHCCCS could not

legally compromise. Eaton filed an administrative complaint challenging AHCCCS’s refusal to

compromise the entire lien to zero. The administrative law judge (ALJ) ruled that the remaining

$11,200 was the federal portion of the lien, which the state could not compromise under 42

U.S.C. § 1396k(b) and 42 C.F.R. § 433.154. The ALJ also acknowledged that Shirley had

misrepresented AHCCCS’s ability to compromise the lien and that these statements had misguided

Eaton. But the ALJ also found that the misrepresentations did not estop AHCCCS from ultimately

refusing to compromise the federal portion of the lien. The AHCCCS director found that the

ALJ’s decision was supported by sufficient evidence and accepted the decision in its entirety. On

appeal, the superior court affirmed the director’s decision, finding that substantial evidence

supported the factual findings and that the ALJ did not err as to the conclusions of law. This

appeal followed.




       1
        Although the opening brief suggests that the settlement conference was part of this court’s
Appellate Settlement Conference Program, Rule 30, Ariz. R. Civ. App. P., 17B A.R.S., neither
party has addressed the effect of subsection (n) of that rule, which pertains to confidentiality.

                                                3
                                        FRAUD CLAIM

¶5             Eaton first argues that Shirley’s statements constituted fraud and that AHCCCS is

liable for its “contractual partner’s” misrepresentation. In his argument, Eaton merely recites the

ALJ’s findings and the nine elements of fraud, stating, “[t]hese elements are obviously present.”

He does not analyze why AHCCCS would be liable for Shirley’s alleged fraud or provide any

supportive authority for that proposition. See In re 1996 Nissan Sentra, 201 Ariz. 114, ¶15, 32

P.3d 39, ¶15 (App. 2001) (argument not supported by authority waived). And regardless of

Shirley’s role in the settlement, Eaton did not actually sue Shirley, PCG, or AHCCCS for fraud.

Instead, Eaton requested that AHCCCS waive the Medicaid lien in its entirety and then filed an

administrative appeal when AHCCCS denied that request. Review of AHCCCS’s decision not to

reduce the lien is limited to whether the action was arbitrary and capricious. Havasu Heights

Ranch & Dev. Corp. v. Desert Valley Wood Prods., Inc., 167 Ariz. 383, 386, 807 P.2d 1119,

1122 (App. 1990). Eaton has not even argued that Shirley’s alleged fraud rendered AHCCCS’s

decision arbitrary and capricious or that the statutes required a compromise of the lien because of

the fraud.

¶6             In further support of his fraud claim, Eaton notes that any attorney who knowingly

makes a false statement of material fact or law to a tribunal is subject to disciplinary measures.

ER 3.3, Ariz. R. Prof. Conduct, Ariz. R. Sup. Ct. 42, 17A A.R.S. But Shirley was not an

attorney; he was an agent of the company that contracts with AHCCCS for third-party collection

work. Nor must we decide whether Shirley should receive administrative discipline. Therefore,

because Eaton has not brought a proper fraud claim, has failed to support his contention with



                                                4
authority, and has not explained how his fraud claim pertains to these proceedings, we reject his

argument.

                      COMPROMISE OF FEDERAL MEDICAID LIENS

¶7             Eaton next argues that the director of AHCCCS erred in deciding that the state is

prohibited from compromising the federal component of a Medicaid lien. On appeal from a

superior court’s review of an administrative decision, we must determine, as did the superior

court, whether the administrative action was illegal, arbitrary, capricious or involved an abuse of

discretion. Samaritan Health Servs. v. Ariz. Health Care Cost Containment Sys. Admin., 178

Ariz. 534, 537, 875 P.2d 193, 196 (App. 1994). The court will allow an administrative decision

to stand if there is any credible evidence to support it, but, because we review the same record,

we may substitute our opinion for that of the superior court. M & M Auto Storage Pool, Inc. v.

Chem.Waste Mgmt., Inc., 164 Ariz. 139, 143, 791 P.2d 665, 669 (App. 1990). And when

consideration of the administrative decision involves the legal interpretation of a statute, this court

reviews de novo the decisions reached by the administrative officer and the superior court. Jones

v. County of Coconino, 201 Ariz. 368, ¶10, 35 P.3d 422, ¶10 (App. 2001).

¶8             Medicaid is a medical assistance program for eligible low-income individuals,

established by subchapter XIX of the federal Social Security Act, 42 U.S.C. § 1396a-1396u.

Although a state’s participation in the Medicaid program is voluntary, any participating state must

comply with certain provisions of the federal Medicaid statute. Westside Mothers v. Haveman,

289 F.3d 852, 856 (6th Cir. 2002). One such provision requires the state agency to ascertain

whether any third party is legally liable for the medical services and goods furnished to the

Medicaid patient and seek reimbursement from the third party if the reimbursement that the state

                                                  5
reasonably expects to recover exceeds the cost of recovery. 42 U.S.C. § 1396a(a)(25); 42 C.F.R.

§§ 433.138, 433.139(d). Any reimbursement collected shall be retained by the state to reimburse

it for medical assistance payments made on behalf of the recipient, with appropriate reimbursement

of the federal government to the extent of its participation in the financing of such medical

assistance. 42 U.S.C. § 1396k(b). Any remaining funds will then be paid to the recipient. Id.

¶9               Several states, including Arizona, have enacted lien compromise statutes that allow

state Medicaid agencies to waive some or all of the lien in certain circumstances. Arizona’s lien

compromise statute mandates that AHCCCS compromise a lien claim if the “compromise provides

a settlement of the claim that is fair and equitable.” A.R.S. § 36-2915(H). When determining

what is fair and equitable, three factors must be considered: 1) the nature and extent of the

patient’s illness, 2) sufficiency of insurance and other sources of indemnity, and 3) any other

factor relevant for a fair and equitable settlement under the circumstances of a particular case.

§ 36-2915(I).

¶10              In response to these lien statutes, the Health Care Financing Administration2

(HCFA), the federal agency charged with administering Medicaid, released National Memorandum

No. 88-10 in 1988. This memorandum detailed HCFA’s interpretation of the lien compromise

statutes and stated that a recipient had the right to settlement funds only after the Medicaid

payments were fully funded. In 1990, HCFA further articulated its interpretation of the lien

statutes by amending the State Medicaid Manual to provide that “the Medicaid program must be

fully reimbursed before the recipient can receive any money from the settlement or award.” State



       2
           Now called the Centers for Medicare and Medicaid Services.

                                                  6
Medicaid Manual (SMM) § 3907. These memoranda are based, in part, on Congress’s intent that

Medicaid be the “payor of last resort.” See H.R. Conf. Rep. No. 99-453, at 542 (1985); see also

Wesley Health Care Ctr., Inc. v. DeBuono, 244 F.3d 280, 281 (2d Cir. 2001); Ariz. Health Care

Cost Containment Sys. v. Bentley, 187 Ariz. 229, 231 n.1, 928 P.2d 653, 655 n.1 (App. 1996).

¶11            HCFA’s interpretation was upheld as a reasonable interpretation of the statute in

two Department of Health and Human Services administrative decisions: California Department

of Social and Health Services, No. A-94-114, 1995 WL 66334 (App. Div., Jan. 5, 1995) (DAB

No. 1504 ), and Washington Department of Social and Health Services, No. A-95-159, 1996 WL

157123 (App. Div., Feb. 7, 1996) (DAB No. 1561 ). At issue in DAB No. 1504 was California’s

statutory scheme, which allowed the director to reduce a lien either by twenty-five percent, fifty

percent, or waive part or all of its claim if the director determined that to be appropriate. Cal.

Welf. & Inst. Code §§ 14124.71(b); 14124.72(d); 14124.78. Similarly, DAB No. 1561 involved

a Washington statute that gave the state director the discretion to compromise a lien based on the

circumstances of each individual settlement. Wash. Rev. Code § 43.20B.050(1). In both of these

actions, the ALJ upheld HCFA’s position as a reasonable interpretation of the statute that, when

a third party is responsible for paying a recipient’s medical expenditures, state agencies must fully

reimburse HCFA for the federal share of those expenditures before allowing the recipient to

receive money from a settlement or award. DAB No. 1504, 1995 WL 66334, at *4; DAB No.

1561, 1996 WL 157123, at *5-6. But both decisions specifically noted that, although the federal

share must be reimbursed, each state is free to reduce or waive its own share of the recoveries.

DAB No. 1504, 1995 WL 66334, at *8; DAB No. 1561, 1996 WL 157123, at *9.



                                                 7
¶12            Despite these administrative decisions, state courts have offered varying

interpretations of the effect of the federal Medicaid requirements on their own state agencies. In

California, which was the subject of DAB No. 1504, a state statute allowed a court to limit

reimbursement of Medicaid liens if undue hardship would occur to the recipient. Cal. Govt. Code

§ 985(g). Without referring to DAB No. 1504, a California appeals court upheld the statute,

reasoning that nothing in the statute prevents the state Medicaid agency from following its federal

mandate to vigorously seek reimbursement. Garcia v. County of Sacramento, 126 Cal. Rptr. 2d

465, 473-74 (Cal. App. 2002). Thus, allowing the courts to “deny reimbursement in extenuating

circumstances does not run afoul of a plan that requires [the agency] to seek reimbursement” under

42 U.S.C. 1396a(a)(25)(A)-(B). Id. at 472.

¶13            An Indiana court also upheld at least a limited right on the part of the state to

compromise the federal portion of the lien. Indiana’s lien statute provides, in part, that if a

subrogation claim or other lien or claim that arose out of the payment of medical expenses or other

benefits is diminished by 1) comparative fault or 2) uncollectability of full value of the claim, the

lien shall be diminished in the same proportions as the claimant’s recovery. Ind. Code § 34-51-2-

19. Although this statute is similar to California’s percentage reduction, the Indiana court in In

re Guardianship of Wade, using a preemption analysis, read the Medicaid statute not as mandating

full recovery, but as obtaining so much of a reimbursement as the state could “reasonably expect

to recover.” 711 N.E.2d 851, 855 (Ind. Ct. App. 1999) (citing 42 U.S.C. § 1396(a)(25)(B)). The

court then held that the amount the state could fully expect to recover was “subject to” the lien

reduction statute. Id. In its analysis, the court noted the recent decision in DAB No. 1504, but

dismissed its impact since it was not binding authority in Indiana. Id.

                                                 8
¶14            In contrast, a New Jersey appellate court in Waldman v. Candia, 722 A.2d 581

(1999), treated DAB No. 1504 as dispositive. The court first noted that because Medicaid is

funded both by state and federal financial participation, HCFA is entitled to recover its share of

Medicaid payment once a third-party payment has been made. Id. at 587. After citing to DAB

No. 1504 as a primary authority, the court then held as a matter of law that “the states are bound

by their duty of repayment even if they compromise a lien, i.e., even if they decide, based on the

facts of an individual case, to allow the beneficiary to retain a larger portion of the recovery

proceeds.” Id.

¶15            A New York court has also taken a restrictive view of the state’s ability to

compromise the federal portion of the lien. New York’s lien compromise statute allows the local

public welfare official to fix the amount of a Medicaid lien or release and discharge the lien

entirely. N.Y. Soc. Serv. §§ 104-b(1), (7). The court reasoned that the agency could reduce the

amount that it would accept in satisfaction of the lien in order to facilitate settlement between the

parties. See Calvanese v. Calvanese, 710 N.E.2d 1079, 1083 (N.Y. 1999). But when sufficient

funds are available from a responsible third party, this ability to settle will not affect the agency’s

entitlement to full recovery; otherwise, Medicaid’s status as a “payor of last resort” would be

jeopardized. Id.

¶16            We consider whether AHCCCS may compromise the federal portion of its Medicaid

liens in light of this varied and conflicting legal background. Federal law provides that, when a

state collects from a liable third party, any reimbursement collected will first be applied to pay the

state for its portion of the recipient’s medical benefits, and then to the United States government

“to the extent of its participation in the financing of such medical assistance.” 42 U.S.C.

                                                  9
§ 1396k(b). Nevertheless, as shown by the above cases, the Social Security Act is at least

ambiguous with respect to the specific issue of whether the states may compromise the federal

portion of the Medicaid lien. Accordingly, we give substantial deference to the authorized

agency’s interpretation of the statute, so long as its interpretation is based on a permissible

construction of the statute. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S.

837, 842-43, 104 S. Ct. 2778, 2781-82, 81 L. Ed. 2d 694, 703 (1984); State v. Turner, 175 Ariz.

256, 259, 855 P.2d 442, 445 (App. 1993); see also Holly Farms Corp. v. N.L.R.B., 517 U.S.

392, 398-99, 116 S. Ct. 1396, 1401, 134 L. Ed. 2d 593, 602 (1996) (when agency administrator

chooses among conflicting reasonable interpretations, reviewing courts must respect the agency’s

judgment). Such deference is particularly warranted with respect to interpretation of the Social

Security Act because of its intricate nature. Perry v. Dowling, 95 F.3d 231, 236 (2d Cir. 1996).

¶17            The authority to oversee and administer the Medicaid program has been delegated

to HCFA by the Secretary of Health and Human Services. See 42 U.S.C. § 1302; 49 Fed. Reg.

35,247, 35,249 (1984). Under this authority, HCFA has interpreted 42 U.S.C. § 1396k(b) to

require that the federal government receive reimbursement of its claim, even if the remaining

funds are inadequate to make the benefit recipient whole. See SMM § 3907; DAB No. 1504, 1995

WL 66334, at *4; DAB No. 1561, 1996 WL 157123, at *5. This interpretation is consistent with

Congress’s intent that Medicaid remain the payor of last resort. See H.R. Conf. Rep. No. 99-453,

at 542 (1985). Because HCFA’s interpretation that 42 U.S.C. § 1396k(b) requires that the federal

Medicaid program must be fully reimbursed before the recipient can receive any funds from the

settlement or award is reasonable, we must defer to that interpretation.



                                               10
¶18            We also conclude that the analysis in Waldman and Calvanese is more consistent

with our case law in related areas and more persuasive. In Waldman, the court held that once a

third-party payment was made, HCFA was entitled by statute to recover. Waldman, 722 A.2d at

587. Similarly, in LaBombard v. Samaritan Health System, this court upheld a health care

provider’s right to recover on its lien from third-party settlement proceeds, noting that “‘where

rights are clearly established and defined by statute, equity has no power to change or upset such

rights.’” 195 Ariz. 543, ¶17, 991 P.2d 246, ¶17 (App. 1998) (citations omitted).

¶19            Applying these principles here, federal law requires AHCCCS to use its best efforts

to collect from third-party tortfeasors the amount of Medicaid payments for Eaton’s medical care.

42 U.S.C. § 1396a(a)(25)(A). AHCCCS is subrogated to the recipient’s rights against a third

party and may also require the recipient to assign his claim against a third party to it, to the extent

of the medical payments. See A.R.S. § 12-962(B). HCFA is then entitled by statute to recover

its contribution to Eaton’s medical care from the third-party settlement. 42 U.S.C. § 1396k(b);

42 C.F.R. § 433.154. Accordingly, HCFA’s rights are “clearly established and defined by

statute.” LaBombard, 195 Ariz. 543, ¶17, 991 P.2d 246, ¶17. And, the federal statutes would

take precedence over any conflicting state laws. See US W. Communications, Inc. v. Ariz. Corp.

Comm’n, 201 Ariz. 242, ¶23, 34 P.3d 351, ¶23 (2001).

¶20            Based on the foregoing analysis, we conclude that the director did not abuse his

discretion in refusing to waive the federal portion of the lien because he was prohibited by federal

law from doing so. Consequently, the trial court did not err in upholding the director’s decision.

¶21            At oral argument, Eaton maintained that, even if the federal statutes prohibited

AHCCCS from compromising the federal portion of the lien, A.R.S. § 36-2915 allows AHCCCS

                                                  11
to do so and then bear the risk of HCFA auditing its records and withholding future funds. We

need not decide whether § 36-2915(H) allows AHCCCS to compromise the federal portion of the

lien because here AHCCCS, through its director, refused to do so; thus, this issue is not directly

before us. And we cannot say that the director acted arbitrarily or capriciously in refusing to

compromise the lien in the face of HCFA’s interpretation that Medicaid must be fully reimbursed

prior the recipient receiving any portion of the settlement.

¶22              Eaton argues that this interpretation will result in AHCCCS and HCFA actually

recovering less because recipients who may only recover the amount of the federal lien or less will

have no incentive to pursue the claim. But AHCCCS may pursue the claim against the third

parties directly if the claimant fails to do so. See A.R.S. § 12-962(B)(2). Thus, even when the

amount of the recovery is less than the federal lien, AHCCCS is still able to fulfill its duty.

Finally, the parties indicated that, despite HCFA’s general position against the states

compromising the federal portion of the liens, HCFA itself will sometimes compromise the federal

portion in certain circumstances.3 Therefore, even if the amount of the federal lien exceeds the

recovery, HCFA may still provide the recipient an incentive to pursue the claim.

                                ESTOPPEL AGAINST AHCCCS

¶23              Eaton also argues that the ALJ erred when he determined that Shirley’s

misrepresentations should have estopped AHCCCS from claiming that it could not compromise

the federal portion of the lien. Assuming, without deciding, that the ALJ was authorized to

consider the effect of estoppel in this proceeding, see Beazer Homes Arizona, Inc. v. Goldwater,



       3
           But such action was not requested from HCFA in this case.

                                                12
196 Ariz. 98, ¶11, 993 P.2d 1062, ¶11 (App. 1999) (jurisdiction and powers of any state agency

are strictly limited by the terms of the statute that creates the agency), we will examine the

propriety of the ALJ’s decision. We review the ALJ’s rejection of the estoppel argument for an

abuse of discretion. Carondelet Health Servs. v. Ariz. Health Care Cost Containment Sys.

Admin., 182 Ariz. 502, 504, 897 P.2d 1388, 1390 (App. 1995).

¶24            Generally, estoppel requires three elements: 1) the party to be estopped has

committed acts inconsistent with a position it later adopts; 2) reliance by the other party; and 3)

injury to the latter resulting from the former’s repudiation of its prior conduct. Valencia Energy

Co. v. Ariz. Dep’t of Revenue, 191 Ariz. 565, ¶35, 959 P.2d 1256, ¶35 (1998). But in order to

invoke estoppel against the state, a higher standard is required for each of these three elements.

Id. at ¶33 (citing Freightways, Inc. v. Ariz. Corp. Comm’n, 129 Ariz. 245, 248, 630 P.2d 541,

544 (1981)). As to the first element, it is rare that satisfactory evidence of absolute, unequivocal,

and formal state action will be found unless it is in writing. Id. at ¶36.

¶25            In order to satisfy the first element, Eaton was required to show that AHCCCS

committed acts inconsistent with a position it later adopted and that it had done so formally.

According to the findings by the ALJ, Shirley stated that Eaton “could go before an ALJ and seek

to have the lien reduced significantly, and possibly to zero.” This statement did not commit

AHCCCS to any position, nor did it constitute a promise to Eaton that the lien would be reduced

to nothing. Therefore, this statement is not the “absolute, unequivocal and formal state action”

required to estop the state. Id. It was an unwritten, “off-the-cuff” statement by a non-supervisory

employee of a contracting partner, which the court in Valencia stated would not have the degree



                                                 13
of formality necessary to estop the state. Accordingly, the director properly found that the state

was not estopped from refusing to compromise the federal portion of the lien.

¶26            We hold that, when a personal injury settlement or award provides sufficient funds

to the recipient to reimburse a Medicaid lien in full, absent an HCFA compromise, 42 U.S.C.

§ 1396k(b) requires that the federal portion of that lien amount be fully reimbursed before the

recipient can receive any funds from the settlement or award. Further, because Eaton neither filed

a proper fraud claim nor satisfied the Valencia test for estoppel, he has failed to show that the

director of AHCCCS abused his discretion or otherwise erred by refusing to compromise the

federal portion of the lien. Accordingly, the superior court’s decision is affirmed.



                                                 _______________________________________
                                                 JOSEPH W. HOWARD, Judge

CONCURRING:



_______________________________________
J. WILLIAM BRAMMER, JR., Presiding Judge



_______________________________________
M. JAN FLÓREZ, Judge




                                               14
