Note from TCSG: In our opinion, the federal claim -- by the Health Care Finance Administration (HCFA) -- to a share of the state's tobacco settlement funds is a serious claim and has a long-standing legal basis, i.e., the federal government annually contributes to the states over 50% of their Medicaid expenditures, and thereby has a right to the same percentage share of any future recoveries the states may make of these costs. The right to this isn't affected by whether the recovery comes from a private insurer or some other party, such as a tobacco company, or by the amount of work the state had to put into obtaining the recovery.

What has suddenly made HCFA's claim to the federal share of the tobacco settlement funds so high profile is not the legal issue, but the amount of money involved. Remember the old line -- when someone tells you the issue isn't the money, it is. In this case, the states want all the money, for easily understood reasons, and they want the money without strings attached, which is what they told their Attorneys General to negotiate for during the settlement negotiations. The one possible major legal hook the states have to hang their hat on is that some of the states may be able to claim that not all (any?) of the settlement funds are to reimburse the state for Medicaid expenditures, but instead to reimburse the state for medical expenditures for indigent care, etc. not related to Medicaid.

The key point to remember is that the federal claim is not specious. That is why 25 U.S. Senators have now filed legislation to try to enact a law nullifying any federal claim on the state settlement funds.

The other key point to remember is that the White House is saying that if the states agree to spend the settlement funds largely for the purposes for which they are being reimbursed by the tobacco companies -- for health care costs related to tobacco-caused diseases, and for programs to reduce tobacco use and the harm caused by tobacco -- then the federal government would undoubtedly not assert its claims to the money. (See articles below.)

Therefore, at this point in time, states would appear to be very well-advised to appropriate the settlement funds for public health programs related to persons who have been harmed by tobacco use and to programs to reduce tobacco use by youth and persons of all ages. By so doing, the states should proactively protect their financial interests in the settlement funds they have obtained.

Related news articles follow:

Fight Flares Over State Tobacco Settlements

Thursday February 4, 1999
By Steve Holland

WASHINGTON (Reuters) - A bipartisan group of 25 senators introduced legislation Wednesday that would block the federal government from taking a share of the money that states obtained through settlements of tobacco lawsuits.

"These settlements belong to the states,'' said a leader of group, Texas Republican Sen. Kay Bailey Hutchison. "Because of the possible threat of federal seizure, many states, including Texas, are unable to plan and to spend the money for the benefit of their citizens.''

Forty-six states two months ago reached a $206 billion settlement with the main tobacco companies, partly to compensate them for smoking-related spending in Medicaid, a health program for the poor that is jointly funded by states and the federal government.

The federal government believes it has a claim to a portion of any Medicaid reimbursement. President Clinton's five-year budget projections, released this week, assume the federal government will take $18.9 billion in state funds through 2004.

The legislation, written by Hutchison and Florida Democratic Sen. Bob Graham, would prevent that. It would prevent the federal government from cutting Medicaid payments to states as a way of recouping federal Medicaid payments made earlier for treating smokers' ailments.

State governments are angry that the federal government now wants to come in and take some of the proceeds from lawsuit settlements that they fought hard over.

"The federal government never offered states any help when they were pursuing cases against the tobacco industry," said Graham.

He urged the federal government to go ahead with plans to file a federal lawsuit against tobacco companies to gain receipt of billions of dollars in federal dollars spent treating smoking-related illnesses.

"It shouldn't look for a free ride from the states,'' he said.

White House domestic policy chief Bruce Reed said the White House would oppose the Hutchison-Graham legislation because it ''would completely give up the federal share of the states' tobacco settlement -- without any commitment by the states to use these monies to prevent youth smoking, protect tobacco farmers, improve public health, or assist children.''

Reed said an average of 57 percent of the money states get back are for costs borne by the federal government.

"The administration believes that these funds should be spent on purposes related to tobacco, public health and children,'' Reed said.

He said the White House would work with the states and Congress to enact tobacco legislation that resolves the federal claim to settlement funds in exchange for a commitment by the state to use the federal share to support these priorities.

Copyright 1999 Reuters Limited.

Bill would keep tobacco funds in state
Senator wants D.C.'s hands off money won by Michigan in settlement

Thursday, February 4, 1999
The Detroit News -- Associated Press

LANSING -- The federal government should leave its hands off money won by the states in tobacco settlements, U.S. Sen. Spencer Abraham said Tuesday.

The Michigan Republican plans to introduce a bill Wednesday that will keep the money won by the states under their control. Sens. Kay Bailey Hutchinson, R-Texas, and Bob Graham, D-Florida, are among the bill's co-sponsors.

Abraham first pledged to keep the money out of federal hands last Thursday, when Gov. John Engler unveiled a plan during his State of the State address to use part of Michigan's $8.2-billion tobacco settlement to pay for scholarships for students who do well on high school standardized tests.

"These dollars were won by the states in legitimate legal settings and it ought to be the states who make the decisions on how these dollars are spent," Abraham said during a news conference with Engler.

"It just simply doesn't make sense to let the federal government, after all the hard work is done, ... try to reach back and grab some of these dollars."

Federal officials say they are entitled to part of the $246-billion tobacco settlement states won from tobacco companies as compensation for Medicaid coverage of smoking-related illnesses. Because Medicaid money flows from the federal government to the states, the Health Care Finance Administration says it should get a share.

President Clinton mentioned Monday when he released his proposed 2000 budget that he would like for the federal government to share in the state settlements. Federal officials also are considering suing tobacco companies themselves.

Engler said he opposes the federal government trying to take any of the money or putting strings on how it can be used.

"We want to make sure the money comes to Michigan and stays in Michigan," he said.

The governor said some of the tobacco money will go to expand or create new statewide tobacco prevention plans, which Michigan health groups have said is a more appropriate use.

No one knows yet how much of the settlement the Michigan Merit Awards program would need. Under the plan, students who meet or exceed standards on the Michigan Educational Assessment Program high school test would receive $2,500 scholarships to use for college or training at any Michigan school.

They also could earn $500 by passing MEAP tests in the seventh and eighth grade, although only students who qualified for the $2,500 could get the extra $500. Engler said he didn't know yet if seventh graders now taking MEAP tests would be eligible for the $500 if they pass MEAP tests next year in eighth grade.

The merit awards would be given to students in public, private or home schools who passed the tests. Engler said the scholarships could encourage more students in private or home schools to take the tests, and give a nudge to all students to pass them.

Copyright 1999, The Detroit News