To amend title XIX of the Social Security Act to permit the Secretary of Health and Human Services to waive recoupment of Federal government Medicaid claims to tobacco-related State settlements if the State uses a portion of those funds for programs to reduce the use of tobacco products and to assist in the economic diversification of tobacco farming communities.

Amends title XIX (Medicaid) of the Social Security Act to prohibit as the treatment of an overpayment for Medicaid-related purposes any amount recovered or paid to a State as part of a settlement or judgment reached in litigation initiated or pursued by the State against one or more manufacturers of tobacco products (recovered amounts), if (and to the extent that) the Secretary of Health and Human Services finds that specified conditions will be met, including that the Governor or Chief Executive Officer of the State has filed a plan with the Secretary that: (1) outlines specified anti-tobacco use efforts that account for the needs of minority and other high risk groups; and (2) allows the State to use at least 25 percent of recovered amounts for a fiscal year for such efforts, including certain tobacco use reduction programs such as tobacco use cessation programs and school-based and child-oriented education programs. Includes among such efforts: (1) tobacco-related research aimed at preventing tobacco addiction and State-wide advertising to discourage tobacco use; and (2) assistance in economic development efforts designed to aid tobacco farmers and workers and communities as they transition to a more broadly diversified economy.