Guest Article

Federal Government Cannot Delay 'Phen-Fen' Settlement to Pursue Reimbursement Rights, Court Rules

(July 31, 2001) - A U.S. district court in Pennsylvania rejected an assertion on behalf of several federal government agencies that they were entitled to reimbursement for medical expenses from the proceeds of a class action settlement against a drug manufacturer by individuals who claim injuries due to the use of the so-called "phen-fen" diet drugs. The case is In re Diet Drugs: Brown v. American Home Products, 2001 WL 283163 (E.D. Pa., March 21, 2001).

These determinations were made in a class action against American Home Products (AHP) on behalf of phen-fen users. The litigation had been tentatively resolved by a settlement under which AHP would deposit some $2.5 billion from its own assets into a trust to be distributed under a complex schedule to class members who suffered significant heart valve damage allegedly due to the use of those drugs. This arrangement was adopted specifically to avoid delays previously experienced in resolving similar large-scale class action settlements.

Facts of the Case

The federal government made several demands to the trustees on behalf of the U.S. Departments of Health and Human Services (HHS), Defense (DOD), Veterans Affairs (VA) and the Indian Health Service (IHS) based on alleged rights under the federal Medical Care Recovery Act (MCRA) and the Medicare secondary payer (MSP) program. Specifically, the government:

AHP and the class members argued that any delay based on the government's claims would result in a breach of its settlement agreement, adding that the government had no sound legal basis for its demands.

Court's Dilemma

The court decided to review the government's claims as if they were being challenged in the context of a motion for preliminary injunctive relief. Under this approach, the court determined that the moving parties were able to show both that they were likely to experience irreparable harm without the relief sought and were reasonably likely to ultimately succeed on the merits.

The Issue of Irreparable Harm and the Public Interest

On the issue of irreparable harm and the public interest, the court noted that, in another case, the government made similar unilateral and imprecise declarations about its interest in settlement funds, which resulted in inordinate delays in the resolution of that class action.

The court then noted that, as an experiment, the trust provided the requested information for a small test group of 217 plan participants, subject to a limited confidentiality agreement by the government. Three weeks later, the government replied that it had paid some Medicare benefits to 43 of them at some point in time, but could not say if those payments had anything to do with the use of phen-fen, or what claims, if any, it might have on account of those individuals regarding the settlement proceeds. The government would only predict that it would take four to 18 months after it got all the information it demanded to come up with anything further.

This led the court to find that the government's demand would cause the trustees to materially breach their fiduciary obligations to the class, which would breach the terms of the settlement agreement. The court said that if this occurred, the time, money and effort spent to reach this settlement would be wasted. It said that the public's interest in resolving such mass tort litigation would be thwarted by granting the government's request.

The Issue of Likely Success on the Merits

Regarding the likelihood of success on the merits, the court concluded that under recent case law, it is highly unlikely that the government could recover benefits paid to beneficiaries under the Federal Employees' Health Benefit Act (FEHBA), since it had been previously determined that Congress did not intend the MCRA to be used as a mechanism to recover either Medicare or FEHBA costs. Therefore, it rejected the government's argument that it could recover from the settlement funds in this case.

Regarding the MSP Act, the government's claim was based on a determination that AHP qualified as a self-insured plan subject to the MSP under the definition of "self-insured plan" found in regulations issued by the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration). The court rejected this argument for three reasons.

1. The CMS regulations indicate that the mere absence of insurance does not necessarily constitute a plan of self-insurance.

2. The MSP Act created a cause of action only against insurers and their payees and does not mention a government right to recover from a negligent third party. The government's position would make its claim against any third party a potential liability under the MSP, and the court found no support for such a broad construction of the law.

3. Neither the term "self-insured plan" nor how the term is used in the MSP law extends to negligent third parties. Any other reading of the law would lead to the conclusion that Congress authorized double damages against alleged negligent third parties for merely contesting liability. Thus, the court found that the moving parties demonstrated that they are likely to prevail on the merits of an MSP claim in this case.

The Issue of Irreparable Harm to the Government

Finally, the court concluded that compelling the trust to commence distribution of the proceeds, as requested by the parties, is not likely to cause irreparable harm to the government for four reasons:

1. Any claim the government has against AHP under the MCRA would not be extinguished by the settlement between a negligent third party an injured victims.

2. Even if the government could successfully assert a claim to the settlement proceeds under the MCRA or MSP, it appears that the trust would not lack sufficient assets to satisfy such a claim.

3. The government is free to resolve its claims by using the settlement process by taking advantage of its reduced burdens of proof, as provided for in the settlement agreement.

4. To exercise extreme caution, the court directed the trustees to set aside a reserve of $7 million to protect any interest that the government might ultimately be entitled to.

Implications

Massive class actions based on product liability are very difficult to manage, and the government's approach to intervention through its demands could only serve, at best, to impose extensive delays on the ultimate resolution of the claims and, at worst, destroy the resolution entirely. The court's explanation of why the government stands very little chance of prevailing on the law is quite persuasive. The opinion is equally persuasive on why it is appropriate to proceed with the settlement now. There is likely very little risk of harm to the government and a great risk of harm to the parties to the settlement agreement. This issue is far from resolved. Too much money is involved for any party with a substantial potential financial interest to accept a determination of a district court, however persuasive it might be.

Excerpted from the July 2001 supplement to Coordination of Benefits Handbook, ©Thompson Publishing Group, Inc., 2001. All rights reserved.

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