CHARLESTON -- A growing number of West Virginians -- lawmakers, politicians and citizen groups -- say Attorney General Darrell McGraw needs to be held more accountable for a gaping hole in the state's Medicaid budget.

By all estimates, that hole is about $3 million -- $2.7 million from a 2004 settlement with Purdue Pharma and nearly $447,000 from a settlement with Dey Inc. the same year.

The Centers for Medicare and Medicaid Services, or CMS, says McGraw wrongfully kept the money from the two settlements.

CMS provides the bulk of dollars West Virginia spends on Medicaid and feels it should be repaid when a lawsuit alleging harm to the Medicaid program results in a settlement or award.

The U.S. Court of Appeals for the Fourth Circuit agreed in August, ruling that McGraw wrongfully kept $446,607 by not classifying the proper amount of the $850,000 settlement with Dey Inc. as Medicaid recovery.

The $2.7 million withhold had been stayed while that case was sorted out, since the arguments in the two cases are identical.

The question isn't when state lawmakers will have to face the impending deficit created by the attorney general's mishandling of the settlement monies -- it appears McGraw is ready to accept a ruling that he shortchanged the federal government.

Both McGraw's office and attorneys for the federal Department of Health and Human Services signed a joint motion earlier this week to lift the stay that has been in place in McGraw's challenge.

The attorney general still has the option to appeal to the U.S. Supreme Court, but voluntarily lifting the stay could mean that he will not.

Now, state lawmakers are concerned about exactly how much they'll have to come up with to fill the void.

"We want to make sure the people who need those funds are taken care of," said state Delegate Mitch Carmichael, a Republican from Jackson County. "If it's finally adjudicated that we do owe those funds, then as good citizens we want to pay our part."

Carmichael explained that the federal government's withholding of funds -- which is a standard practice when CMS believes it's been shortchanged -- will definitely affect the state's Department of Health and Human Resources budget.

But he said he's not sure how much at this point.

The topic most likely will be brought up during the Legislature's budget hearings in January, he said.

So how does the state go about filling that hole?

Carmichael, the minority vice chair of the House Finance Committee, said the state has the money to make up those funds, if needed.

But some argue that McGraw should pay out of his office's Consumer Protection Fund.

Carmichael, who also serves as the minority vice chair of the House Economic Development and Small Business Committee, said he has considered it, but as far as he knows the monies in the fund -- which was bolstered by the two settlements -- have already been spent.

"It's something we can make up if we have to," he said of the deficit.

What's more concerning, he said, is that an individual -- in this case, McGraw -- has the power to appropriate the settlement monies in the first place.

"I still feel it's not right for one person to have that kind of authority," Carmichael said. "Then there's an opportunity for mishandling those funds."

Legislation needs to be passed taking such authority away from McGraw's office, he said.

It's not like lawmakers haven't tried, he noted.

In 2008, the Legislature passed a bill that would require the Attorney General's Office or anyone else who entered into a settlement on behalf of the state to provide notification to the governor, secretary of Administration, Senate president and House speaker.

But the bill had no teeth otherwise.

Carmichael said he and other lawmakers have sponsored separate legislation the past three years specifically prohibiting the attorney general from unilaterally distributing funds. But it never goes anywhere, he said.

"It becomes somewhat political," he explained. "There's an overwhelmingly Democratic majority in the House, Senate and the Governor's Office. And, of course, McGraw is a Democrat. So they're hesitant to put any additional monitoring or constraints on his office."

Lawmakers in Mississippi are facing a similar situation.

State Attorney General Jim Hood -- mere days before the Nov. 8 election -- announced his office reached settlements with three pharmaceutical manufacturers, putting millions in the state's coffers.

Hours later, Gov. Haley Barbour, a Republican who is regularly at odds with his Democratic attorney general, sent a letter to joint legislative committee members saying September's revenue estimate included $20 million in so-called "revenue" from the settlement of such cases.

The State, he warned lawmakers, would only receive a fraction of those funds -- a significant portion still is owed to the federal government -- and to keep that mind in looking at the state's budget.

The budget is already a sticky spot and, no doubt, a very partisan issue in the state.

But Hood's characterization of the settlement monies have some lawmakers again questioning whether legislative action is needed to take away his authority to appropriate such revenue.

Still, something needs to be done in West Virginia, Carmichael said.

"I think the attorney general overstepped his bounds," he said. "We, as West Virginians, don't like the idea of ripping off the federal government. We want to pay our fair share, just like everybody else. And here it's construed that we have purposely withheld money from them."

Chief Deputy Attorney General Fran Hughes has admitted to the Legislature that the Purdue Pharma money was not given to the state DHHR, which administers the Medicaid program, because the federal DHHS would then be able to claim a share.

"We have arranged a methodology that has prevented the federal government from coming back and seizing money," said Hughes, who formerly served as general counsel for a national consulting firm that specialized in Medicaid financing.

Hughes did not return calls seeking additional comment for this story.

"It just makes the state look bad," Carmichael said of the office's reasoning.

"Those funds should come directly to the state treasury and not be within the purview of the attorney general -- or any individual -- to allocate based on his or her whims."

The Legislature, he said, is the one who represents the people.

"Regardless of party or politics, that money belongs to the people of West Virginia. Not in some fund that the attorney general can distribute based on his priorities."

But some argue the Legislature has waited too long to rein in McGraw's office.

Richie Heath, executive director of the state's Citizens Against Lawsuit Abuse, pointed to a legislative auditor's report done nearly 10 years ago.

"The auditor made recommendations back then on how the attorney general should handle these settlement funds. They made recommendations as far as accountability, making sure tax dollars were protected. But the Legislature hasn't passed a single one," he said.

"The leadership in the Legislature has shown no willingness to hold McGraw accountable for his actions."

And all it does is continue to tarnish the state's image and prevent job growth, he said.

"When people outside of West Virginia see that our attorney general is acting in this manner, it really makes them question whether they want to do business here. When people see that the rules don't apply, it makes them question whether they want to subject themselves to that sort of situation," Heath explained.

Given how McGraw's office publicly flaunted its "scheme" to withhold money from the federal government, he said it is its turn to pay.

"They intentionally structured these settlements to try to avoid paying money to the federal government," Heath said. "Now, in return, we've spent how many years and how much money trying to defend these actions.

"It seems only fair the AG's office would pay for the shortfall they've caused."

Mike Stuart, chairman of the state's GOP, said passing legislation limiting McGraw's authority isn't the solution.

In fact, he said it's a shame lawmakers have to consider taking away the attorney general's authority because of his incompetency.

"I find it unfortunate on so many levels that we are so troubled by the behavior of this attorney general that we are trying to further neuter the office itself," he said.

Plain and simple, McGraw needs to be voted out, Stuart said.

"We need to replace this AG with one who does have the confidence of the entire Legislature and the people of West Virginia," he said.

"But here we are, working in a bipartisan fashion to mitigate powers of that office."

The Legislature for the most part has worked hard to bring some transparency to the situation, he said.

But Stuart said if he were a Democratic lawmaker, he would not hesitate to demand a more extensive investigation of McGraw's office.

"This goes beyond partisanship," he said. "And I say shame on those people who stand in the way of better serving the great people of West Virginia. Shame on them for maintaining a conspiracy of status quo.

"I mean, how bad is it that even the federal government says we're not affording additional dollars to you because you're not representing your clients the way you ought to?"

Rather than give the Purdue Pharma settlement funds to the state agencies named as plaintiffs, McGraw used the money on substance abuse programs around the state, as well $500,000 to the University of Charleston for a pharmacy school. In addition, private attorneys received more than $3 million in the settlement.

But McGraw argued there was a fourth plaintiff -- the affected individuals in his state he was representing in his parens patriae capacity.

"We find no merit in this argument," the federal Departmental Appeals Board wrote.

"It is not evident from the record that the State was, at the time of settlement, seeking damages on behalf of individual consumers."

"The damaged parties never received any compensation," Stuart said.

"This almost has become a desk drawer of money for an AG who wants to use those dollars to build political patronage."

What's even worse about the situation, he said, is that McGraw's office essentially tried to take away money from the state's poor.

"We're talking about the poorest of the poor here. The people that most need help. It's just not right," he said.

To add insult to injury, Stuart said, real issues like President Barack Obama's federal health care law are being avoided.

McGraw has refused to join the multistate lawsuit challenging the reform, which is currently before the U.S. Supreme Court.

"I think we've gotten to a point where we've accepted that this AG is so bad that we've basically become immune to the damage being done by his office on a daily basis," Stuart said.

"It's just an ongoing car wreck for the state of West Virginia."

He said it's ultimately up to the voters to give McGraw the boot.

"He stands for reelection next year, and if we choose to allow this train wreck to continue, we're aiding and abetting the ongoing activity," Stuart said.

"We, the people of West Virginia, are going to have to stand on our own two feet and say we're not going to tolerate this type of behavior any longer. That's what it comes down to."

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