Subrogation and Medical Liens in Personal Injury Settlements

Every personal injury settlement carries a hidden cost that few defendants or claimants fully appreciate until an enforcement letter arrives. When an injured person receives medical treatment paid by Medicare, Medicaid, an ERISA-governed health plan, or a self-funded employer plan, the payer almost always possesses a statutory or contractual right of subrogation. That right transforms a routine release into a three-cornered transaction in which the provider of care steps into the shoes of the injured party and demands reimbursement from the recovery. The failure to recognize and satisfy those demands can convert a civil tort settlement into the subject of a federal criminal investigation.

The Department of Justice and U.S. Attorney’s Offices across the country have made healthcare-recovery enforcement a priority. When a settlement check is cashed without first reimbursing Medicare, the government does not view the omission as a mere accounting error. It views it as a false statement designed to conceal a known obligation and, in aggravated cases, as a scheme to defraud the United States. A firm otherwise focused on federal criminal defense regularly sees how a seemingly mundane lien dispute escalates into a grand jury subpoena. Understanding the legal architecture of subrogation and medical liens is therefore not just a civil practice concern—it is a critical piece of risk management for anyone facing potential criminal exposure.

The Medicare Secondary Payer Statute and Mandatory Repayment

The most formidable lien in any personal injury case arises under the Medicare Secondary Payer Act, codified at 42 U.S.C. § 1395y(b). The Act makes Medicare a secondary payer when a primary plan—including liability insurance, no-fault insurance, or a workers’ compensation program—is legally responsible for the cost of medical care. When Medicare makes a conditional payment, the law requires that the primary payer reimburse Medicare within 60 days of receiving a recovery, judgment, or award.

The obligation attaches not only to insurers but also to the beneficiary, the beneficiary’s attorney, and any individual or entity that received a settlement or judgment. Title 42 U.S.C. § 1395y(b)(2)(B)(ii) grants the government a direct right of action to recover double damages from any party that fails to reimburse Medicare. The Act does not require a court order; the government’s demand for repayment is self-executing. The Centers for Medicare and Medicaid Services issues a conditional payment letter that computes the sum owed, and that letter carries the force of a statutory mandate.

Medicaid operates under a parallel regime. The federal Medicaid statute, 42 U.S.C. § 1396a(a)(25), requires states to pursue third-party liability recoveries and to place automatic liens on settlements to the extent of medical assistance provided. Although the lien is typically enforced by a state agency, the underlying obligation is rooted in federal law, and the federal False Claims Act can reach individuals who knowingly submit false statements to avoid repaying Medicaid.

ERISA Plan Reimbursement and the Limits of Equitable Relief

Employer-sponsored health plans governed by the Employee Retirement Income Security Act of 1974 also wield substantial subrogation power, though the scope of that power is more circumscribed than Medicare’s. Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), authorizes plan fiduciaries to bring suit “to obtain other appropriate equitable relief” to enforce the terms of the plan. For decades, courts debated whether a demand for monetary reimbursement from a participant’s personal injury recovery constitutes equitable relief or an impermissible claim for legal damages.

The Supreme Court resolved much of the tension in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. 136 (2016). The Court held that an ERISA plan could enforce a reimbursement provision against a participant’s settlement fund as long as the plan sought specifically identifiable funds still in the participant’s possession. Once the settlement proceeds had been dissipated on nontraceable items, the plan’s claim became a legal one and fell outside the scope of equitable relief under § 1132(a)(3).

The practical lesson is stark: a participant or defendant who quickly spends settlement proceeds without honoring an ERISA lien may, in some circuits, extinguish the plan’s civil remedy. However, that same action—intentionally rendering funds unavailable to a plan that has a valid subrogation right—can supply the mental state required for a criminal charge under the federal theft or embezzlement statutes if the plan’s funds are deemed to be the property of another person or entity under 18 U.S.C. § 664. What appears to be a clever evasion in civil litigation becomes an intent element in a criminal prosecution.

Practice Warning: Under 42 U.S.C. § 1320a-7b(a), it is a felony to knowingly and willfully solicit or receive any remuneration in return for referring an individual for a service payable by a federal health care program. When a settlement involves a medical lien that is paid out of proceeds that should have reimbursed Medicare, the transaction may be recharacterized as an improper remuneration arrangement if the settlement is structured to bypass the government’s recovery right. Federal prosecutors have used the anti-kickback statute and the companion conspiracy statute, 18 U.S.C. § 371, to reach conduct that was initially defended as routine lien negotiation.

Criminal Exposure When Medical Liens Are Disregarded

The most dangerous assumption a defendant or a plaintiff’s attorney can make is that a lien dispute is a purely civil matter. Federal criminal law provides multiple hooks for a prosecution when a person knowingly fails to satisfy a statutory subrogation claim. The health care fraud statute, 18 U.S.C. § 1347, makes it a crime to execute a scheme to defraud any health care benefit program, a term that includes both government programs and private insurers. The statute reaches false representations that are material to a health plan’s right to recover its payments. A signed settlement statement that omits a known Medicare lien, for instance, constitutes a false representation that directly affects the government’s ability to collect its statutory reimbursement.

Similarly, the False Statements Act, 18 U.S.C. § 1001, prohibits knowingly and willfully making a materially false statement in a matter within the jurisdiction of the federal government. When a beneficiary or their counsel submits a final settlement disclosure to a liability insurer without disclosing Medicare’s conditional payment amount, the statement is made in a matter that involves the Centers for Medicare and Medicaid Services. The government has invoked § 1001 to charge parties who certified that no government liens existed when, in fact, Medicare had paid thousands of dollars in conditional benefits.

The conspiracy statute, 18 U.S.C. § 371, adds a broad layer of risk. If two or more persons—such as a client and an attorney—agree to disburse settlement funds without reimbursing a known lienholder, and one of them performs an overt act in furtherance of that agreement, they may be charged with conspiracy to defraud the United States. The sentencing exposure under the U.S. Sentencing Guidelines is driven by the amount of the intended loss, and a failure to remit six figures in Medicare payments can push a defendant into the highest loss tables under USSG § 2B1.1, yielding a guideline range measured in years, not months.

Defendants should also remain alert to the fact that a criminal investigation often begins with a civil demand. A conditional payment letter that goes unanswered, or a series of evasive responses, frequently triggers a referral from CMS to the Health and Human Services Office of Inspector General, which works in tandem with the Department of Justice. Once a prosecutor issues a grand jury subpoena for bank records related to a settlement, the case has left the realm of lien resolution and entered the arena of potential indictment.

The following steps provide a framework for reducing criminal exposure when subrogation interests attach to a settlement:

• Identify all potential lienholders before any release is signed. This includes Medicare, state Medicaid agencies, ERISA plans, Federal Employees Health Benefits plans, and any hospital that filed a statutory medical lien under state law.
• Request written lien statements and conditional payment letters immediately. Under the Medicare Secondary Payer Act, a beneficiary or their representative has the right to challenge the amount of a Medicare conditional payment. The process, however, must be initiated before distribution, not after a demand letter is sent.
• Place disputed lien amounts in trust or an escrow account. Transferring settlement proceeds to another person or account while a statutory lien remains unresolved can be cited as proof of intent to conceal assets from the government.
• Document every communication with a lienholder in writing. A contemporaneous written record serves as the best defense when a prosecutor later claims that the defendant deliberately ignored a known obligation.
• Involve criminal defense counsel the moment a demand letter references potential penalties or fraud. Civil practitioners should not attempt to negotiate with a federal agent or an assistant U.S. attorney without a lawyer who understands the implications of 18 U.S.C. § 1001.

FAQ About Subrogation and Medical Liens in Criminal Contexts

Can the government prosecute someone who simply failed to reimburse Medicare after a settlement?

Yes, when the failure is accompanied by a knowing and willful act. The government does not typically pursue criminal charges for a mere oversight. But when a person receives a settlement, executes a disbursement that intentionally bypasses Medicare, and signs documents that omit the lien—or when the person affirmatively conceals the settlement from the government—the conduct can support charges under the health care fraud statute, 18 U.S.C. § 1347, and the false statements statute, 18 U.S.C. § 1001. The distinction between a civil mistake and a criminal violation often turns on whether the individual was on notice of the lien and took steps to avoid payment despite that knowledge.

Is it a crime for a lawyer to advise a client not to pay a medical lien?

It can be. An attorney who counsels a client to disregard a known statutory lien exposes themselves to charges of aiding and abetting under 18 U.S.C. § 2 or conspiracy under 18 U.S.C. § 371. Federal prosecutors have indicted lawyers who structured settlement disbursements in a manner designed to frustrate Medicare’s recovery rights. Even if the advice is characterized as a good-faith legal opinion, the attorney must be prepared to demonstrate that a reasonable basis existed for the position and that no false or misleading statement was made to any government program. When in doubt,