Every lien in a personal injury settlement is paid from a fund that the plaintiff's attorney created at the plaintiff's risk and expense. The common fund doctrine rests on a simple equitable premise: a party that benefits from a recovery should bear a proportionate share of the cost of obtaining it. In practice, the doctrine's availability depends on the type of lienholder, the governing statute or plan document, and the facts of the particular case. Mastering where it applies and where it does not is among the most reliable ways to improve a client's net.
Medicare: A Codified Reduction
For Medicare conditional payments, the doctrine is built into the regulations. Under 42 CFR 411.37, the amount Medicare recovers is reduced by a pro rata share of procurement costs, meaning attorney fees and litigation expenses, calculated as a proportion of the total recovery. The formula adjusts the final demand rather than operating as a negotiated discount. Make sure your demand package documents the fees and costs in sufficient detail so the recovery contractor can apply the reduction correctly, and verify the arithmetic when the final demand arrives. Errors appear, and they are cheaper to fix before payment.
ERISA Plans: McCutchen and the Plan Document
For self-funded ERISA plans, the controlling case is US Airways v. McCutchen, 569 U.S. 88 (2013). The Supreme Court held that plan terms govern. Where the plan language clearly disclaims the common fund doctrine and the made-whole doctrine, the plan can enforce full reimbursement. Where the plan is silent on allocation of costs, the common fund doctrine applies as a default equitable rule, so the plan must share fees. That makes plan document review the first task. Request the full plan document and summary plan description, not only the summary, and read the reimbursement section for language addressing attorney fees. Plans with fee-sharing clauses often reduce by one-third, matching the typical contingency percentage. Plans with express fee disclaimers require a different strategy, including arguments based on plan ambiguity, the plan administrator's discretion, and Montanile limitations on enforcement once funds are dissipated.
Medicaid: Ahlborn and Gallardo
Medicaid is governed by federal anti-lien provisions as interpreted in Arkansas Department of Health and Human Services v. Ahlborn, 547 U.S. 268 (2006), which limited the state's recovery to the portion of a settlement representing medical expenses. Gallardo v. Marstiller (2022) then held that a state may recover from the medical-care portion of a settlement, including future medical expenses. The result is that allocation matters. Many states have statutory formulas that reduce reimbursement by fees and costs, and some provide a hearing procedure to contest the allocation. Know your state's statute before negotiating. The Medicaid agency's initial lien claim often overstates what it is entitled to take.
Hospital and Provider Liens
Statutory hospital liens vary widely. Some states cap the lien at a percentage of the recovery, some require proportionate reduction for attorney fees, and some say nothing, leaving the issue open to negotiation. Contractual provider liens, including letters of protection, are creatures of contract, so the doctrine does not apply of its own force. The argument becomes one of fairness and reasonable value rather than legal entitlement. Providers who agreed to wait for payment often accept reductions in recognition of the risk and delay, particularly when the lien is large relative to policy limits.
Making the Case for the Reduction
Frame the request in terms the lienholder can verify. A concise reduction letter should include:
- The gross settlement amount, policy limits, and any evidence of limited collectability.
- Attorney fees and costs, itemized, with the pro rata calculation shown.
- A statement of comparative liability risk and any damages that the settlement does not fully compensate.
- Documentation of other liens competing for the same fund.
- The legal basis for the reduction by lien type: regulation, plan language, or statute.
Where multiple lienholders compete, sequence matters. Resolve those with a statutory or regulatory reduction formula first, so the remaining pool is clear before negotiating with contractual claimants. Our liens and settlement category covers priority disputes and disbursement mechanics in more detail.
Trust Accounting and Documentation
Hold disputed lien amounts in trust until the dispute is resolved. Many jurisdictions treat the attorney as having a duty to the lienholder once funds are received with notice of a valid lien, so release of the disputed funds to the client can create personal exposure. Document your reduction calculations in the file, and obtain written final lien releases before disbursement. The closing statement should reflect the reduced amount and show how it was reached, which also protects the firm in later fee disputes. For firms evaluating other uses of settlement structure, see our practice operations coverage.
Takeaways
- Medicare reduction by procurement costs is regulatory, so verify the final demand math.
- For ERISA plans, read the plan document: silence triggers the common fund default.
- Medicaid recovery turns on allocation and state statute.
- Contractual liens rely on negotiation, not entitlement. Prepare a documented fairness case.