Revised, December 11, 1997


The Tobacco Settlements:
Do All of the Medicaid Recoveries Belong to the States?

by Andy Schneider and Sara Thom



Forty states have sued the tobacco industry for a variety of reasons, including the recovery of the costs that their Medicaid programs incur in treating cancer, heart disease, and other illnesses caused by cigarette smoking. Two states — Florida and Mississippi — have settled their lawsuits. Florida has already received a payment of $750 million from the industry and is scheduled to receive yearly payments starting at $220 million. Mississippi has received its first payment of $170 million from the industry and will be paid $68 million next year and increasing amounts in following years. If Congress enacts legislation imposing a national tobacco settlement, these individual state settlements will likely be superseded. Until that time, however, the industry will continue to make payments to these states (and any other states that settle).

The states take the position that the federal government has no claim to any portion of these industry payments. They argue that the state lawsuits involve a variety of legal theories, not just the recovery of Medicaid payments for tobacco-related illnesses, and that not all of the industry's payments under the settlements are attributable to Medicaid costs. They also contend that because the federal government hasn't sued the tobacco companies itself, it has no right to "seize" any of the industry's settlement payments. Because the states took all the risks of this litigation, they argue, they should get all of the rewards — even if some or all of those payments represent compensation for Medicaid costs of tobacco-related illnesses.

The state position is incorrect. Under longstanding law and practice, the federal government is clearly entitled to a share of those settlement payments that are attributable to Medicaid costs. For over 30 years, the states and the federal government have been sharing in both the costs and the recoveries under the Medicaid program. If Florida, for example, spends money paying for hospital care or nursing home care under Medicaid, the federal government pays 56 percent of the cost. If Florida then recovers some of these costs from liable third parties — whether from automobile insurers or from tobacco companies — the federal government is entitled to 56 percent of the recovery. If the state position prevailed, the federal government would continue to share in the costs of the Medicaid program, as it well should, but would not participate in the recovery of those costs from the tobacco industry.

The amount of money potentially at issue is substantial. For example, if only half of the states that have currently filed suit against the tobacco industry were successful in obtaining settlements that covered all of their smoking-attributable Medicaid costs, and if those costs were the same as those estimated for each of these states in 1993, the total amounts paid by the tobacco industry in reimbursement for these costs would be $3.9 billion per year, and the federal government would be entitled to 57 percent of that amount, or $2.2 billion per year. (1) If all of the suing states were successful in recovering their estimated 1993 smoking-attributable Medicaid costs, the federal share would be $4.4 billion per year. By way of comparison, the State Child Health Insurance Program enacted by the Congress this past summer provides $4.3 billion in federal funds for each of the next four years to the states to reduce the number of uninsured children.

The states argue that they, and not the federal government, brought the lawsuits against the tobacco industry, so they, and not the federal government, are entitled to all of the settlement funds. Not only does this argument ignore federal Medicaid law, which establishes the principle that the federal government and the states share in both costs and recoveries, but it also ignores Medicaid's basic administrative structure. The federal government shares on a 50-50 basis in all costs states incur in administering the program, including costs of seeking recoveries from third parties. In the case of recoveries, the federal government shares in these administrative costs whether or not the state is actually able to secure the funds from the third parties. Thus, both the states that prevail in their tobacco lawsuits and those that do not are entitled to receive 50 percent of their litigation and other costs from the federal government. Consequently, the federal government bears just as much Medicaid-related financial risk in these lawsuits as the states do.

This analysis examines the federal government's entitlement to a share of any state recoveries against tobacco manufacturers attributable to state Medicaid spending. The analysis does not address the federal government's potential recovery against the tobacco industry with respect to costs it has incurred through its other health care programs, including Medicare, the Federal Employees' Health Benefits Program (FEHBP), the Department of Veterans Affairs (VA) health programs, and the Indian Health Service (IHS). Nor does the analysis examine the tobacco-related costs borne by the federal government's disability programs, such as the Social Security Disability Insurance program (SSDI) and the Supplemental Security Income (SSI) program. Any federal legislation that limits the tobacco industry's liability for the medical care costs of cigarette smoking should take into account the costs incurred by all federal health and disability programs, not just Medicaid.

Senator Graham and Congressman Bilirakis have introduced legislation that would in effect convert the federal share of tobacco-related Medicaid recoveries to unrestricted state dollars. If the Congressional Budget Office (CBO) were to determine that this legislation would result in federal budget costs, the bill would be subject to a point of order in both the House and the Senate unless its costs were offset by spending cuts in Medicaid or other entitlement programs, or unless the budget resolution adopted by the Congress accommodates these costs. If the Office of Management and Budget (OMB) were to determine that this legislation would result in federal budget costs, the "Pay-As-You-Go" rules recently extended by the Congress in the 1997 Balanced Budget Act would require that offsetting savings in entitlement programs (or offsetting tax increases) be enacted. Otherwise, a sequester affecting Medicare and other entitlement programs would likely be triggered.


Background on Medicaid-related Tobacco Litigation

Over the past three years, 40 states have sued tobacco manufacturers. One of the states' principal claims in this litigation has been for the recovery of state Medicaid expenditures for the treatment of tobacco-induced illnesses. States have appropriately argued that the tobacco manufacturers are liable for the costs which state Medicaid programs have incurred — and will incur in the future — in paying for physician, hospital, nursing home, and other care and services on behalf of beneficiaries whose illnesses are caused by smoking.

There is no question that cigarette smoking puts individuals at higher risk for medical conditions such as cancer, heart disease, emphysema, stroke, and arteriosclerosis; that the treatment of such conditions is costly; and that the Medicaid program has borne a significant portion of those treatment costs. The issue is the size of the Medicaid program's costs. An estimate published by the Centers for Disease Control and Prevention concluded that in the year 1987, the Medicaid program nationally paid $2.2 billion (4.6 percent of total Medicaid spending that fiscal year) to treat smoking-related conditions.(2) More recent analyses estimate that the Medicaid costs attributable to smoking were $51.8 million in Mississippi in 1996 (5.6 percent of the state's Medicaid spending that year)(3) and $319 million in Florida in 1996 (7 percent of the state's Medicaid spending that state fiscal year).(4)

To date, there have been four settlements of Medicaid-related litigation. The first occurred in March, 1996 between the Liggett Group and the states of Florida, Louisiana, Massachusetts, Mississippi, and West Virginia.(5) In June of this year, most of the states that had brought suit entered into a settlement with the tobacco manufacturers to be implemented through federal legislation. The third settlement was announced in July, 1997 between the state of Mississippi and the tobacco manufacturers. The fourth settlement took place in August between the state of Florida and the tobacco manufacturers. In each case, a portion of the settlement reflects the costs that the Medicaid program has incurred in the past — and will continue to incur in the future — in treating the costs of illnesses and conditions attributable to smoking.

The federal and state governments share in the cost of the Medicaid program. On average, 57 percent of the program's costs are paid by the federal government, with the remaining 43 percent paid by the states. The National Governors' Association and the State Attorneys General do not dispute the obligation of the federal government to match state spending on Medicaid, including future Medicaid expenditures for the treatment of smoking-induced illnesses. However, they "strongly oppose federal efforts to seize state tobacco settlement funds."(6)

This state position has no basis in law and is contrary to longstanding policy and administrative practice in the Medicaid program. Under current law, the states and the federal government share in both Medicaid costs and Medicaid recoveries. The federal government also pays half of administrative and litigation costs incurred by states in recovering funds from liable third parties. Under the state position, the federal government would continue — as it should — to share in all of Medicaid's legitimate costs, including the costs of state efforts to identify and recover funds from liable third parties, but it could not participate in the recoveries from liable tobacco manufacturers that would reduce those costs. Legislation to conform current law to the state position has been introduced by Senator Graham (S. 1471) and Representative Bilirakis (H.R. 2938).


Medicaid Is a Federal-State Program under Which the Costs Are Shared

Medicaid is a federal-state entitlement program under which the federal government shares in the cost of basic medical care and long-term care services with the states. States are not required to participate. If they choose to do so, they are entitled to federal matching funds for the costs of providing covered services to eligible individuals. CBO estimates that the federal government will make $105.3 billion in Medicaid matching payments to the states this fiscal year.(7) This amount represents 57 percent of the total estimated cost of the Medicaid program for fiscal year 1998. The federal government continues to share — at the same rates — in any unexpected Medicaid costs that are incurred by states due to economic downturns, unexpected increases in caseload or use of health services, epidemics, natural disasters, or any other factors. Since Medicaid's enactment in 1965, the federal government has shared in all the tobacco-related treatment costs paid by state Medicaid programs, and it will continue to do so in the future.


Medicaid Is Administered by the States with Federal Matching Funds

Day-to-day administration of the Medicaid program is and always has been the responsibility of the states. States designate Medicaid agencies to determine eligibility, pay claims, negotiate payment rates with providers, monitor the quality of care provided to Medicaid beneficiaries, investigate and prosecute fraud and abuse in the program, and recover the costs of Medicaid services from liable third parties. States are entitled to federal matching funds for all amounts found necessary by the Secretary of HHS for the "proper and efficient" administration of the Medicaid program.(8) Some state administrative costs, such as the investigation and prosecution of fraud and the survey and certification of nursing facilities, are matched at a 75 percent rate. All other allowable state administrative costs, including litigation and other expenses incurred in recovering Medicaid payments from liable third parties, are matched at a 50 percent rate.


States must Seek Recovery of the Costs of Medicaid from Liable Third Parties

By choosing to participate in Medicaid and receive federal matching funds, states agree to accept certain responsibilities set forth in federal statute. One of these responsibilities is to "take all reasonable measures to ascertain the legal liability of third parties ... to pay for care and services available under" the state's Medicaid program.(9) Where legal liability is found to exist for the cost of treatment paid for by Medicaid, and where the amount the state can expect to recover exceeds the cost of recovery, the state Medicaid agency is required to "seek reimbursement for such assistance to the extent of such legal liability."(10) Again, this requirement is imposed on a state as a condition of participation in Medicaid and eligibility for federal matching funds. As noted above, the federal government pays 50 percent of the costs incurred by a state in establishing legal liability and recovering amounts owed.

The rationale for this 30-year-old policy is straightforward. The fundamental purpose of Medicaid is to pay for basic medical and long-term care services on behalf of low-income individuals in cases where there is no other source of coverage for the services they need. Where there is another source of coverage — whether in the form of employer or individual health insurance coverage or a legal judgment — that third party should pay rather than Medicaid. This allows limited federal and state resources for Medicaid to reach more low-income families and avoids the subsidy of liable insurers and other third parties by Medicaid.

One example of Medicaid third party liability can arise in the context of a car accident. If an individual eligible for Medicaid is injured and the Medicaid program pays for the necessary medical treatment and rehabilitation services, the state would try to identify any applicable automobile insurance policy and recover from the insurer any payments due under the policy for medical care costs. Similarly, if the injured individual sued and was awarded compensation for her medical costs, the state Medicaid program would seek reimbursement for the costs for which it paid. The identification of liable third parties and the recovery of Medicaid payments from them is a longstanding, routine administrative responsibility of state Medicaid agencies. In fiscal year 1996, states reported a total of $2.2 billion in miscellaneous recoveries and collections from liable third parties and others.(11) Of that amount, the federal government was credited with 57 percent, or $1.2 billion. As indicated above, the federal government paid half of the administrative costs states incurred in recovering these funds.

In the case of the state settlements with the tobacco manufacturers, the liability of the manufacturers has been effectively established, and the amount of recovery far exceeds the cost. The federal Medicaid statute does not exempt tobacco manufacturers from legal liability as third parties for the costs borne by Medicaid for treatment of conditions attributable to cigarette smoking. The litigation and related costs that the states have incurred in negotiating these settlements are eligible for federal matching payments at the normal administrative matching rate of 50 percent.

It should be noted that states qualify for federal matching funds for the costs of seeking recovery from third party whether or not they are successful in actually recovering funds. Moreover, there is no limitation on the amount of federal matching funds a state may receive for such costs at a 50 percent rate. The Health Care Financing Administration (HCFA), which administers the Medicaid program at the federal level, has never disallowed a state claim for matching payments for litigation or other recovery costs on the grounds that they did not meet the statutory test as "proper and efficient." Thus, states which incur litigation costs but do not actually recover Medicaid payments from tobacco manufacturers would be entitled to federal matching payments for those costs. Therefore, the claim that states assumed all of the risk in initiating these lawsuits is flatly incorrect; to the extent that these lawsuits seek recovery for state Medicaid costs attributable to smoking, the federal government shares equally in the risk.


Amounts Recovered by States from Liable Third Parties Are Shared with the Federal Government on a Pro Rata Basis

Since 1967, the federal Medicaid statute has provided that the federal government is entitled to a "pro rata share" of the net amount recovered by a state from liable third parties in payment for the amounts the state spent under Medicaid on behalf of eligible individuals.(12) If a state's Medicaid expenditures are matched by the federal government at, say, 57 cents on the dollar, then the federal government's share of each dollar recovered from liable third parties would be 57 cents.(13) Again, nothing in the federal Medicaid statute suggests that a different rule would apply to any state Medicaid recoveries from the tobacco industry.

HCFA has been consistent in its application of this longstanding statutory rule to tobacco litigation. After a number of states settled their lawsuits against the Liggett Group in the spring of 1996 and began collecting payments from the company, HCFA notified each of the relevant state Medicaid directors by letter in June of that year that these settlement payments should be reported as third party recoveries. The letter explained how these amounts were to be identified on each state's quarterly expenditure reporting form. The letter also reaffirmed that "[s]tate administrative costs incurred in pursuit of Medicaid cost recoveries from tobacco firms qualify for 50 percent Federal financial participation (FFP)."(14) Florida, Louisiana, and Massachusetts have all reported their 1996 Liggett Group settlement payments as third party recoveries, sharing them with the federal government on a pro rata basis; Mississippi and West Virginia have not. The 1997 payments made by the Liggett Group under this settlement have been shared with the federal government by Massachusetts and Louisiana, but not by Florida, Mississippi, or West Virginia.

After the announcement of the Florida and Mississippi settlements with the tobacco industry in July and August of 1997, HCFA sent a letter to all Medicaid directors reaffirming that "[u]nder current law, tobacco settlement recoveries must be treated like any other Medicaid recoveries," and that "[s]tate administrative costs incurred in pursuit of Medicaid cost recoveries from tobacco firms qualify for the normal 50 percent Federal financial participation."(15)


A Principal Claim in the State Tobacco Lawsuits Relates to Medicaid Recoveries

The states correctly argue that their tobacco lawsuits involve a "broad range of claims" against the industry that go beyond recovering state health care costs to reducing youth smoking and bringing about change in the industry's behavior. These claims are being asserted on a number of legal theories in addition to Medicaid third-party liability, including state consumer protection and antitrust laws. Nevertheless, even the State Attorneys General concede that "many" of the state lawsuits "seek recovery of Medicaid payments made by the states for tobacco-related illnesses."(16)

In June 1997, before either the Mississippi or Florida settlements were achieved, the Attorney General of Indiana sent a memorandum to all suing Attorneys General which makes clear that Medicaid recoveries are central to the state lawsuits. The memorandum, which proposes a formula for the distribution of tobacco settlement funds among the states, explains that "[s]tates are in the business of administering Medicaid, and Medicaid reimbursement was the primary element of damages for most, if not all, suing States." In a footnote, the memo elaborates: "We realize, of course, that most States also sued on other theories such as antitrust, RICO, and consumer protection. States have in common, however, the desire for Medicaid reimbursement."(17)

The Mississippi and Florida lawsuits offer examples of how important the Medicaid claims are to many, if not all, of the state cases. Mississippi's suit, filed on May 23, 1994, was the first of these cases. In explaining its legal theory, the suit alleged:

"Many of the State's citizens who are afflicted with tobacco-related diseases are poor, undereducated, and unable to provide for their own medical care. These citizens rely upon the state to provide their medical care, which reliance results in an extreme burden on the taxpayers and the financial resources of this State....In equity and fairness, it is the defendants, not the taxpayers of Mississippi, who should bear the costs of tobacco inflicted diseases. By avoiding their own duties to stand financially responsible for the harm done by their cigarettes, the defendants wrongfully have forced the State of Mississippi to perform such duties and to pay the health care costs of tobacco-related disease. As a result, the defendants have been unjustly enriched to the extent that Mississippi's taxpayers have had to pay these costs."(18)

In a detailed overview of the tobacco litigation, the Wall Street Journal underscored the novelty of this legal theory, which it credited to attorney Michael T. Lewis:

"The industry had won one case after another by persuading juries that individuals were responsible for their own decision to smoke. Mr. Lewis' new approach would be different. For the first time, the plaintiffs wouldn't be smokers but wholly blameless victims, the taxpayers of the state. On their behalf, he figured, the Mississippi attorney general could sue tobacco companies to recover money the state spent in Medicaid bills for cigarette-related illness."(19)

Medicaid recovery also was central to Florida's lawsuit, filed in February 1995. The State's complaint begins as follows:

"Cigarette-related disease has killed and continues to kill untold millions of Americans. In the name of profits, cigarette manufacturers choose to ignore and suppress the truth about the hazards of cigarette smoking. As a result, Medicaid recipients have contracted smoking-related diseases including without limitation cancer, emphysema, and heart disease. The care of these Medicaid recipients has placed a significant burden on the State. This burden should rightfully be borne by the cigarette manufacturers. The Governor of the State of Florida has determined that the State of Florida can no longer afford to allow cigarette manufacturers to reap this windfall. Therefore....the Governor, the State of Florida, the Department for Business and Professional Regulation and the Agency for Health Care Administration do hereby bring this action pursuant to Florida Statute section 409.910, et seq., as well as for the purposes of obtaining reimbursement for all money paid for medical assistance to Medicaid recipients as a result of diseases or injuries caused by the foreseeable and intended use of the defendants' tobacco products, cigarettes."(20)

The Florida Statute section 409.910, referred to as the basis for the State's lawsuit, is entitled the "Medicaid Third-Party Liability Act."

Neither the complaints nor the settlement documents in either of these cases specify the amount of tobacco-related Medicaid costs incurred by either state. They also do not specify the proportion of settlement amounts attributable to these Medicaid costs. The settlement documents do, however, expressly release the defendant tobacco companies from "all claims" by the state of Mississippi(21) and "all claims" by the state of Florida.(22) Presumably, "all claims" includes all manufacturer liabilities for Medicaid costs.

It seems reasonable to assume, based on this settlement language, that the tobacco manufacturers consider themselves to have discharged any liability they might have as third parties with respect to Medicaid expenditures by the federal government in these two states. If all of the settlement amounts belong to the states, as the National Governors' Association has asserted, then the federal government could be left without any recourse for any portion of its share of Medicaid treatment costs in Mississippi or Florida. Of course, the federal government would continue to match all of the Medicaid treatment costs, including those for tobacco-related illnesses, incurred by these states in the future, as well as all "proper and efficient" state administrative expenses.


The States Are Attempting to Capture the Federal Share of Medicaid Recoveries Relating to Tobacco-induced Illnesses

The position of the National Governors' Association is that "[w]hether the settlement is state-specific or part of a national agreement, the federal government is not entitled to take away from the states any of the funds negotiated on states' behalf as a result of state lawsuits. Any efforts by the federal government to seek to recoup federal costs must be distinct and separate" (emphasis added).(23)

This assertion turns current law and policy on its head. Under the NGA interpretation, the Medicaid program would remain a federal-state partnership, but only with regard to costs. The federal government would continue — as it should — to match all allowable state Medicaid costs. The federal government would not, however, participate in any state recoveries from the tobacco industry related to Medicaid costs. The states would keep all of these funds, even though the federal government paid — and will continue to pay in the future — an average of 57 percent of all the state Medicaid treatment costs for smoking-induced illnesses.

The states and the tobacco industry, in negotiations with one other, each have a strong financial interest in nullifying the federal government's right to recover its share of the Medicaid treatment costs attributable to cigarette smoking. Such a result would allow the tobacco industry to escape some of its financial liability or would give the states a windfall in federal funds, or both. In either case, the federal government would be losing large amounts of funds that could significantly reduce the rate of growth in federal Medicaid outlays.

The Congress may decide, as part of a national settlement, to reduce or extinguish altogether the federal government's share of the Medicaid-related tobacco litigation recoveries. How the billions of federal dollars at issue would be most effectively spent is a legitimate subject for debate. It is not debatable, however, that neither the states nor the tobacco industry have the authority to give the federal share of these recoveries away. Only the Congress and the President, through legislation amending the federal Medicaid statute, have this authority.


Legislation Extinguishing the Federal Share of Tobacco-related Medicaid Recoveries

Senator Graham and Congressman Bilirakis have introduced legislation (S. 1471, H.R. 2938) that would exempt any state recoveries from tobacco manufacturers from the longstanding rules that apply to recoveries from all other third parties that are liable for Medicaid costs. More specifically, these bills would eliminate the federal government's entitlement to a pro rata share of the state recoveries attributable to all past or future Medicaid costs for the treatment of smoking-induced illnesses. The bills, in effect, acknowledge that the states have no convincing legal argument for denying the federal government its pro rata share of these recoveries and that a change in current law will be required to achieve this result.

The Graham-Bilirakis legislation represents a substantial windfall to Florida and Mississippi. Just how large is difficult to determine, because not all of the settlement amounts are necessarily attributable to reimbursement for Medicaid costs. However, one indication of the potential order of magnitude of the windfall is provided by state-specific estimates of the Medicaid costs attributable to smoking. In Florida's case, it has been estimated that the Medicaid costs attributable to smoking in state fiscal year 1996 alone were $319 million. That year, the federal government paid 56 percent of all of Florida's Medicaid benefits costs, so if the Florida settlement reflects that estimate, the federal pro rata share would be 56 percent of that amount, or $179 million for that year. In Mississippi's case, one published estimate is that the Medicaid costs attributable to smoking in 1996 were $52 million. Given Mississippi's matching rate of 78 percent, the federal pro rata share would be $40 million for that year alone.

No CBO cost estimate of this legislation is available at this time. However, CBO would certainly have ample reason to conclude that the legislation will result in federal Medicaid costs. First, as discussed above, the federal Medicaid statute has been clear for 30 years that state recoveries from all liable third parties must be shared with the federal government on a pro rata basis. Second, the federal agency responsible for administering the Medicaid program has consistently taken the position that recoveries from third parties must be shared between the federal and state governments, and has notified the states that this policy applies to any Medicaid-related proceeds from the tobacco litigation. Finally, CBO has in the past attributed significant federal savings to provisions designed to strengthen the ability of states to identify and obtain recoveries from liable third parties.(24) By increasing the amount of Medicaid recoveries from private insurers and other third parties, these provisions are expected to generate funds that would be shared by the federal government and the states on a pro rata basis. Similarly, provisions that deny the federal government its share of Medicaid-related amounts recovered from liable third parties would result in higher federal Medicaid outlays than would otherwise occur.

It should be noted that if CBO comes to the conclusion that the Graham-Bilirakis legislation would cost the federal government money, the bill would be subject to a point of order in both the House and the Senate unless its costs were offset by spending cuts in Medicaid or other entitlement programs, or unless the budget resolution adopted by the Congress accommodates these costs. If the Office of Management and Budget (OMB) comes to this conclusion, the "Pay-As-You-Go" rules recently extended by the Congress in the 1997 Balanced Budget Act would require that offsetting savings in entitlement programs (or offsetting tax increases) be enacted. Otherwise, a sequester affecting Medicare and other entitlement programs would likely be triggered.

The Graham-Bilirakis legislation is silent as to what the states must do with the federal government's share of their recoveries. The states could, but would not be required to, use any of these federal dollars to reduce the number of uninsured children or adults. In contrast, they could use these windfall dollars to reduce their own contributions to Medicaid or other federal-state matching programs — effectively increasing the federal share — or to reduce state taxes. In short, enactment of the Graham-Bilirakis legislation would be tantamount to the enactment of a federal revenue-sharing program for states settling their Medicaid and other claims against the tobacco manufacturers.

End Notes

1. The state-by-state estimates of smoking-attributable Medicaid costs were calculated using an econometric, regression-based model. V. Miller, C. James, C. Ernst, and F. Collin, Smoking-Attributable Medical Care Costs: Models and Results, Berkeley Economic Research Associates, September, 1997, Table 5.8(Revised).

2. "Medical-Care Expenditures Attributable to Cigarette Smoking — United States, 1993," Morbidity and Mortality Weekly Report, July 8, 1994.

3. Berkeley Economic Research Associates, Measuring the Medical Costs of Smoking, 1997, p. 13.

4. Jeffrey E. Harris, Estimates of Smoking Attributable Medicaid Expenditures in Florida, April 15, 1997,

5. In March, 1997, this settlement was expanded to include additional states.

6. National Governors' Association, Tobacco Settlement Funds, Interim Policy EC-6, October 17, 1997, cited with approval in letter from State Attorneys General to President Clinton, November 7, 1997.

7. CBO, Behind the Numbers: An Explanation of CBO's January 1997 Medicaid Baseline, April 1997, Table 1.

8. Section 1903(a)(7) of the Social Security Act.

9. Section 1902(a)(25)(A) of the Social Security Act.

10. Section 1902(a)(25)(B) of the Social Security Act.

11. Of this amount, $576 million represents recoveries from liable third parties, $194 million from fraud and abuse prosecutions, $175 million in estate recoveries, and $1.227 billion in other collections. Center for Medicaid and State Operations, Health Care Financing Administration.

12. Section 1903(d)(3) of the Social Security Act.

13. Technically, the amount of any recovery from a liable third party is treated as an "overpayment" by Medicaid and is deducted from the "total computable" amount that the states report each calendar quarter to for purposes of drawing down their federal matching payments. Section 1902(d)(2)(B) of the Social Security Act. For example, if a state with a 57 percent matching rate spent a total of $100 on Medicaid during a calendar quarter and recovered $5 from liable third parties, the $5 "overpayment" would be subtracted from the $100 before the state's matching rate was applied in order to determine its federal payment for the quarter ($100 - $5 = $95 times 0.57 = $54.15 federal payment to the state).

14. Letter from E. Grasser, Associate Regional Administrator, HCFA, to G. Crayton, Director, Medicaid Bureau, Florida Agency for Health Care Administration, June 13, 1996.

15. Letter from S. Richardson, Direct, Center for Medicaid and State Operations, HCFA, to all State Medicaid Directors, November 3, 1997.

16. Letter from State Attorneys General to President William J. Clinton, November 7, 1997, p. 1.

17. Attorney General Jeff Modisett, Memorandum to All Suing Attorneys General re: "Draft Proposal for Tobacco Settlement Distribution Formula," June 23, 1997, p. 3.

18. Complaint, Moore v. American Tobacco Company et al., May 23, 1994, paragraphs 79, 82, at

19. A. Freedman and S. Hwang, "Leaders of the Pact: How Seven Individuals with Diverse Motives Halted Tobacco's Wars," Wall Street Journal, July 11, 1997, p. 1.

20. Complaint, State of Florida v. American Tobacco Co., et al., Civil Action No. 95-1466AO, February 21, 1995, paragraphs 1 and 2, at

21. Memorandum of Understanding, July 2, 1997, Moore v. American Tobacco Co. et al., Cause No. 94-1429.

22. Settlement Agreement, August 25, 1997, section II.C., State of Florida v. American Tobacco Co., et al., The settlement agreement does not dismiss claims to the extent they seek "noneconomic injunctive relief."

23. NGA, Tobacco Settlement Funds, Interim Policy EC-6, October 17, 1997.

24. For example, CBO attributed $160 million in savings to the federal government over five years from Medicaid third party liability provisions contained in the Consolidated Omnibus Budget Reconciliation Act of 1985, P.L. 99-272. CRS, Medicaid Source Book: Background Data and Analysis, Committee on Energy and Commerce Print 103-A, January, 1993, p. 561.