New England Biz Law Update
Buoyed by a U.S. Supreme Court ruling last year, employer health plans are aggressively attempting to recoup money from beneficiaries who receive third-party payments.
In May 2006, the Supreme Court ruled in a case involving a Maryland couple that a health insurer was entitled to restitution from its policyholders under a subrogation clause in its contract (Sereboff v. Mid Atlantic Medical Services, 126 S.Ct. 1869).
Peter K. Stris, a professor at Whittier Law School in Costa Mesa, Calif., who argued the plaintiffs’ case before the Supreme Court, said the justices “made it clear that health plans can include subrogation provisions in reimbursement provisions and enforce them under ERISA.”
“It changed the landscape,” said Frederick A. Brodie, a partner at Pillsbury Winthrop Shaw Pittman in New York. “The last 18 months has been a slow realization by employers and plans about what they should be doing if they wish to have the best chance for recovery.”
Brodie said trustees of health plans covered by ERISA have a responsibility to recover payments from third-party settlements and judgments.
“If you are running an ERISA plan and the plan has the right to reimbursement or other recovery, then you have a fiduciary duty to consider whether it’s in the best interest of the plans to exercise that right,” he said. “You can’t just sit back and say we’re not going to exercise any rights of recovery.”
Paul J. Gitnik, an attorney and president of SOCRATES, a Pittsburgh-based subrogation software and recovery company agreed: “It’s truly cost-containment and ensuring we are recovering claims from the property/casualty, motor vehicle and workers’ comp [insurance carriers] that should be paid by them.”
In Sereboff, the Supreme Court ruled that ERISA allowed as “equitable relieve” a health plan’s attempt to obtain reimbursement from a beneficiary who received payments from a third party.
The court noted the carrier sought only that portion of the tort settlement due to it under the terms of the plan, and that the money had been set aside in an investment account under the Sereboffs’ control.
The ruling has encouraged ERISA plans to revise their subrogation provisions and practices.
“It’s reasonable to assume that having revamped their reimbursement and subrogation clauses after Sereboff, plans and plan sponsors are now grappling with the issue of whether and how to enforce those clauses,” Brodie said.
But critics charge that some health plans are going too far in their recovery efforts, and are robbing beneficiaries of their rightful tort settlements.
“The prospect of reimbursement in a personal injury setting transforms the traditional notion of knowing you are covered by insurance into the idea that you are covered only if you can’t get the money elsewhere,” said Roger Baron, a professor at the University of South Dakota School of Law and an expert on health plans. “If you get any money whatsoever, you have to pass it back to the insurer.”
Missouri case
In a recent case reported by The Wall Street Journal, Wal-Mart Stores’ employee health plan is demanding a Missouri couple repay $469,216 in medical bills.
Deborah Shank, a Wal-Mart employee, was severely injured in an automobile accident in 2002. She and her husband sued the trucking company involved in the accident, and settled for $700,000. After paying attorney fees and costs, she received $417,477, which was placed in a special needs trust for her care.
Because of the pending litigation with Wal-Mart, the Shanks have been unable to tap the trust. The cash-strapped couple is currently relying on Medicare and Medicaid to pay for Deborah Shank’s around-the-clock care in a nursing home.
Wal-Mart claims the couple’s failure to reimburse the health plan violates the terms of their health insurance policy.
A U.S. District Court in Missouri agreed. And the 8th Circuit in August upheld the ruling in favor of Wal-Mart (Administrative Committee of Wal-Mart Stores Associates’ Health and Welfare Plan v. Shank, 500 F.3d 834).
“We acknowledge the difficulty of Shank’s personal situation, but we believe the purposes of ERISA are best served by enforcing the plan as written. Shank would benefit if we denied the [plan] its right to full reimbursement, but all other plan members would bear the cost in the form of higher premiums,” the 8th Circuit said.
“Reimbursement and subrogation provisions are crucial to the financial viability of self-funded ERISA plans, and, as a fiduciary, the [plan] must ‘preserve assets to satisfy future, as well as present, claims,’ and must ‘take impartial account of the interests of all beneficiaries,’” it held.
Maurice Graham, a partner in Gray, Ritter & Graham in St. Louis who is representing the Shanks, said the trucking company responsible for the accident had only a $1 million liability policy, which covered a fraction of Deborah Shank’s claims.
He estimated her claim for past and future medical expenses, future lost income and pain and suffering at $12 million. Graham argued that because her settlement of $700,000 amounted to only 5.4 percent of her total damages, the Wal-Mart plan likewise is entitled to only 5.4 percent of the money it paid on her behalf, or a total of about $25,000.
But the 8th Circuit rejected that argument: “ERISA … does not limit the committee’s right to reimbursement. Some employee benefit plans explicitly provide for pro rata reimbursement, but Shank and the [plan] reached a different bargain, agreeing that she would reimburse the [plan] in full, and granting the [plan] first priority over any settlement or judgment she obtained.”
But Graham, who is asking the Supreme Court to hear the case, said that awarding the entire settlement account to Wal-Mart goes beyond the “equitable relief” available under ERISA.
“Wal-Mart shouldn’t get it all,” he said.
Other approaches
Gitnik, the Pittsburgh subrogration firm’s president, called Wal-Mart’s scorched earth policy an “anomaly.”
His firm, for example, typically tries to recover medical payments from the responsible third party through subrogation prior to a settlement or judgment.
“If we’re doing our job effectively we shouldn’t have to go against a member,” Gitnik said.
He added, however, “If we didn’t recover, we would be underwriting the property and casualty industry, and the motor vehicle and workers’ comp carriers. We would be paying claims they should have paid.”
