A moderately complex PI case at settlement can involve Medicare conditional payments, a state Medicaid lien, an ERISA health plan reimbursement demand, a hospital lien under state statute, a workers' compensation lien under Labor Code section 3856, and a letter-of-protection balance from a treating provider. When the settlement proceeds cannot satisfy all of them, the order of priority determines who gets paid and who does not. Plaintiff's counsel who disbursements without understanding that order is exposed to personal liability to any lienholder who should have been paid ahead of the disbursement to the client.
The Federal Priority: Medicare and Medicaid
Medicare's conditional payment lien enjoys federal statutory priority over all other claims against the settlement proceeds under 42 U.S.C. section 1395y(b)(2). The statute gives CMS a right of recovery from the primary payer and from the beneficiary, and courts have held that the lien attaches to the proceeds regardless of how the settlement is allocated between past and future damages. An attorney who disburses to a client without resolving a known Medicare conditional payment claim faces direct liability to the federal government under the MSP private cause of action, which provides for double damages. This priority is absolute and cannot be negotiated away, though the amount of the conditional payment demand can be reduced through the standard appeals process or by establishing that the billed items were not related to the claimed injury.
Medicaid's priority is similar but varies by state. California's Department of Health Care Services holds a lien under Welfare and Institutions Code section 14124.791 that must be satisfied before disbursement to the client, and the anti-lien provisions of 42 U.S.C. section 1396p do not limit Medicaid's claim against the first-party tort recovery. Following Gallardo v. Marstiller, 596 U.S. 420 (2022), Medicaid programs can now reach settlement proceeds allocated to future medical care, not just past medical expenses, expanding the lien's reach in catastrophic injury settlements.
ERISA Health Plan Reimbursement: Equitable Priority Without Legal Priority
An ERISA self-funded health plan's reimbursement claim is governed by section 502(a)(3), which allows the plan to sue for equitable relief to enforce plan terms. The Supreme Court held in Montanile v. Board of Trustees, 577 U.S. 136 (2016), that if the beneficiary has dissipated the settlement funds, the plan cannot obtain a judgment against the beneficiary's general assets; it can only enforce against specifically identifiable settlement proceeds. This means that ERISA plans have equitable priority against the settlement fund while that fund exists in a segregated account or trust, but they lose their priority once the funds are commingled with the client's general assets. As a practical matter, ERISA plans whose reimbursement demand is not addressed before disbursement retain an action against the attorney personally if the attorney was on notice of the demand and disbursed anyway. The made-whole doctrine under state law does not apply to ERISA plans, but the plan document's own terms may contain made-whole or common-fund language that can reduce the demand.
Hospital Liens Under State Statute
State hospital lien statutes generally do not confer federal priority, and in states where multiple hospital liens and a Medicare or Medicaid lien coexist, the federal liens are satisfied first from the proceeds. Among competing hospital liens from different facilities, most state statutes do not create priority among the hospitals themselves; they all share pro rata from whatever proceeds remain after federal obligations are met. California's hospital lien statute under Health and Safety Code section 3045 allows a hospital a lien on any judgment or settlement but does not give it priority over federal liens or over the attorney's fee, since the common fund doctrine requires lienholders to contribute to the cost of the recovery before any lien is satisfied.
Workers' Compensation Liens
California Labor Code section 3856 gives the workers' compensation carrier or self-insured employer a lien against the third-party recovery for compensation already paid. The employer's lien is paid after the plaintiff's attorney fees and costs, but before any distribution to the plaintiff. This sequencing means the employer gets paid ahead of the client, creating a structural constraint on disbursement in cases where the third-party recovery is modest relative to the comp benefits paid. The lien amount is subject to reduction under section 3861, which gives the court discretion to allow a portion of the recovery for the plaintiff's benefit, and under section 3860, which requires that the lien be apportioned to reflect the employer's proportionate share of the cost of the litigation. Plaintiff's counsel should file for section 3861 reduction before disbursement in any case where the comp lien would otherwise consume a substantial portion of the net recovery.
Attorney Fee Liens and Disbursement Sequence
Under California law, the plaintiff's attorney's fee interest under a contingency agreement attaches to the judgment or settlement proceeds at the time the retainer is signed, giving the attorney a priority lien against the client's recovery that is satisfied before the net is distributed to the client. Federal and state government lienholders' priority claims run against the gross recovery, not the net, meaning that the attorney's fee and costs are deducted first under California case law, and the lienholders then share the net. The common fund doctrine supports charging all lienholders a pro rata share of the attorney fee, and a motion under that doctrine can reduce the effective payout to each lienholder substantially in cases where fees are large relative to the recovery.
Understanding which liens must be resolved before disbursement and which can be paid on a reduced or negotiated basis requires mapping the full lien inventory before any settlement document is signed. The liens-and-settlement category covers each lien type in depth, including Medicare, Medicaid, ERISA, hospital, and providers. For the workers' compensation credit and holiday-offset analysis that affects comp lien calculations in third-party cases, the workers-comp category covers the sequencing and credit disputes. And for case law developing the common fund doctrine and attorney fee priority, the case-law-settlements archive tracks the relevant decisions.