RICHMOND, Va. (Legal Newsline) - A federal appeals court has ruled that the federal government was right to withhold Medicaid funds from West Virginia because it was shortchanged in a lawsuit by state Attorney General Darrell McGraw.

A three-judge panel on the U.S. Court of Appeals for the Fourth Circuit ruled Wednesday for the Centers for Medicare and Medicaid Services, affirming prior decisions by the Departmental Appeals Board and U.S. District Judge Joseph Goodwin. CMS has argued that it is owed more than $400,000 from McGraw's 2004 settlement with pharmaceutical company Dey Inc.

The court ruled that a "straightforward application of the Medicaid Act" shows that the feds had the right to withhold funds and that the amount was properly decided. The decision should have an impact on a similar case in which McGraw is protesting a $2.7 million withhold.

"Even if the federal government is entitled to a portion of the Dey settlement, West Virginia argues that CMS arbitrarily calculated the proper amount of the disallowance," wrote Judge Albert Diaz, a recent appointee of President Barack Obama.

"Notably, however, the state has not come forward with an alternative estimate ... CMS's calculation of the disallowance was elegantly simple. Drawing on West Virginia's own damages estimate from the Dey litigation, CMS merely multiplied the amount of loss suffered by West Virginia's Medicaid program by the percentage of funds that the federal government contributes to the state's Medicaid program.

"The resulting figure was $446,607. We fully endorse the (Departmental Appeal) Board's rejection of West Virginia's argument."

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