Subrogation's Tightening Grip on ERISA Claimants

Since the Supreme Court decision last year in Sereboff v. MAMSI, 126 S.Ct. 1869 (2006), ERISA plan administrators have been more aggressive about chasing plan participants and beneficiaries to get reimbursed for medical expenses those plans have paid out. The common scenario is that a plan participant is severely injured in an accident through the fault of some other person. She requires extensive and expensive medical treatment. The ERISA plan pays the bills. She then pursues the wrongdoer who caused the injury and recovers funds to compensate her for her injuries, part of which includes payment of her medical expenses. The ERISA plan finds out about the recovery and brings suit to be reimbursed the money it has paid out. Problems arise for the participant if (as is often the case) the amount recovered is not sufficient to completely compensate her for her injuries. In addition, often the ERISA plan argues that it has no obligation to share in any costs the participant has incurred to obtain the recovery, such as the fees and costs the participant must pay her personal injury attorney. How do the courts resolve these competing interests? Sereboff gave a leg up to ERISA plan administrators by allowing them to assert equitable liens against the proceeds of the participant's recovery against the wrongdoer who caused the injuries. Since that case was decided over a year ago, many District and Circuit courts have expanded Sereboff to provide even more power to ERISA plan administrators. The latest example of this type of abuse of participants is a ruling from the U.S. Court of Appeals for the Eighth Circuit last week in Admin. Committee of Wal-Mart v. Shank, ___ F.3d ___, 2007 U.S. App. LEXIS 20927 (8th Cir. 2007). Deborah Shank was a Wal-Mart employee and participated in Wal-Mart's medical benefits plan. She was catastrophically injuried in an auto accident and Wal-Mart paid over $450,000 in medical expenses on her behalf. Thereafter she, through her guardian, retained a personal injury lawyer to obtain what recovery was available to compensate Deborah from the negligent third party who caused the accident. In the end there was a significant settlement, $700,000. But, given the severity of her injuries and losses, this was a small portion of Deborah's total damages. After payment of attorney fees and costs, the net amount, $417,000, was placed in a special needs trust, a separate fund controlled by an independent trustee who was charged with disbursing the funds in the account only for Deborah's benefit. When Wal-Mart found out about the settlement, it claimed that the plan documents gave it the right to get all its medical expenses back out of Deborah's personal injury recovery. The Eighth Circuit agreed, ruling that the ERISA plan had no obligation to contribute anything toward Shank's cost of getting the recovery. Compounding the absurdity, the court allowed Wal-Mart to be reimbursed its entire claim from the first dollar Shank had obtained in her personal injury claim until it had been paid back everything. The core question left open by the Supreme Court in Sereboff, and that the Eighth Circuit resolved in draconian fashion, was whether the money sought by Wal-Mart was "appropriate" equitable relief under ERISA. The decision gave Wal-Mart everything it asked for. The end result for Deborah Shank? She didn't end up with a nickel out of the personal injury claim. Shank illustrates that, when dealing with unwary participants and their counsel, ERISA plans may be able to get away with playing "gotcha." But it doesn't have to be that way. ERISA plan claimants and their attorneys need to deal with ERISA subrogation and reimbursement claims up front, before they go after third party personal injury recoveries. Claimants must make clear that their willingness to pursue personal injury claims depends on the willingness of ERISA plans to deal reasonably with the claimant and their attorneys about how a limited recovery in a personal injury case will be distributed. Taking this proactive approach will exert tremendous pressure on administrators of the ERISA plan. As a practical matter, it is impossible for ERISA plans to pursue personal injury claims against third party tortfeasors without the active participation and cooperation of the claimant, the party who has suffered the physical injury. If there is the real prospect that Deborah Shank and her attorney will end up working for nothing, why would they ever pursue the personal injury claim in the first place? No claimant's attorney in their right mind would do so without first getting the agreement from Wal-Mart that it will contribute a proportionate share of its recovery for attorney fees. In addition, Deborah's guardian will have no reason to pursue the claim on Deborah's behalf unless he is assured that, if the recovery is limited and it is not completely reimbursed, Wal-Mart will split any recovery with Deborah in a way that makes it worth the efforts to pursue the personal injury claim. This type of circumstance where funds are limited is quite common in personal injury situations. Persons and entities claiming the right to be reimbursed out of tort claims that are too small to get everyone paid their losses in full have been around for generations. It's very clear what the fair, the equitable, remedy is in that situation: each interested party must sacrifice a portion of their claim in a way that makes it worth everyone's while to continue to hold wrongdoers accountable in a personal injury setting and pursue compensation from tortfeasors. Three way splits of recoveries into equal thirds between the claimant, their lawyer and the party claiming reimbursement are a very common way of dealing with these situations. They have been for decades. It is difficult for me to understand what possible long term benefit is provided to any of the parties involved by the obtuse, radical solution the Eighth Circuit renders in Shank. While the court characterizes its resolution of the competing claims between the parties as "appropriate equitable relief" under ERISA, it is nothing of the sort. The court might just as validly have equated the nutritional value of spinach to the plastic bag you use to carry it home from the store. I have to keep reminding myself that federal judges are generalists and often simply don't have the experience in a particular specific area of law to see the forest rather than get hung up looking at specific trees. Unfortunately, Deborah Shank had three myopic judges on her case.

Don Levit 11/17/2008 01:47 PM

Brian: Interesting alternative you are suggesting the participant pursue in order to provide a win-win for all. The more I think about subrogation, the more I dislike it, particularly in a winner (ERISA plan) take-all arrangement. Can it be accurate to think that the premiums for the health coverage DO take subrogation into account? Are lawyers not able to simply add the subrogation proceeds to the settlement? Don Levit

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Roger Baron 11/17/2008 01:47 PM

Unfortunately there is no discussion in the Shank case about insurance on the risk. Atttached to a recent form 5500 recently filed for Wal-Mart, there are 49 schedules A forms, each of which reveal insurance covering part of the various risks covered by the ERISA plan. Some of these insurers are life insurers, but most are health insurers. Under Missouri law, there is no subrogation on personal injury claims and any portion of this risk which was paid by an insurance company should NOT be subject to reimbursement. According to the law set forth in FMC v. Holliday and the "savings clause" of ERISA, state regulatory law controls the right of an insurance company to reimbursement. There are numerous federal cases upholding this proposition. It seems that many lawyers do not aggressively look for the "insurance company" connection for reimbursement claims. Also, ERISA plans are very skillful in covering up that connection.

Roger: Thanks for your comments. Are you saying that Wal Mart's ERISA plans are fully insured? I would assume a company like Wal-Mart would self insure a good portion of its claims. As I understand federal law, a partially self funded plan is considered self insured, not fully insured. Therefore, the savings clause and state insurance law would not apply, even to the risk assumed by the stop-loss insurer. Can you cite some of the federal cases you wrote about? By the way, I really like Justice Stevens' dissenting opinion in FMC. v. Holliday when he talks about regulating self-insured plans similarly to fully insured plans. "Application of state insurance laws to uninsured plans would make direct payment of benefits pointless, and in most cases not feasible. This is because a welfare plan would have to be operated as an insurance company in order to comply with the requirements of state insurance codes designed with the typical operations of insurance companies in mind. The result would be to reintroduce an insurance company, which the direct payment plan was designed to dispense with. Thus it can be seen that the real issue is not whether uninsured plans are to be regulated under state insurance laws, but whether they are to be permitted." Makes you wonder why so many states regulate self-funded MEWAs, as if they were fully-blown commercial insurers? Don Levit

Don, The "regulation" by state law applies to the insurer, not the self funded plan. One of the frivolous arguments which ERISA Plans and their insurers make is that a "self-funded plan does not lose its status as being a self-funded plan by having insurance." Well, I have no problem with that statement. The savings clause applies to the INSURER which is insuring the self-funded plan! Another frivolous argument which you will find is that the insurance covers the plan, not the beneficiary. So what! If you go to the language from FMC Corp. v. Holliday 498 U.S. 52, you will see that this is exactly what is to be regulated by state law! (see quoted language below). In FMC v. Holliday, the ERISA plan secured 100% of the plan participant’s tort recovery of $49,825 despite the fact the plan member’s medical expenses alone exceeded $178,000. The Court noted that the reimbursement was sought by the plan on behalf of itself and not for an insurer of the plan. As to any such affiliated regulated insurers, the Court stated, “On the other hand, employee benefit plans that are insured are subject to indirect state regulation. An insurance company that insures a plan remains an insurer for purposes of state laws, ‘purporting to regulate insurance’ after application of the deemer clause [of ERISA]. The insurance company is therefore not relieved from state insurance regulation. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the plan’s insurer.” Id. at 62. There are numerous federal court opinions which uphold this principle. I can send you a synopsis of those opinions by e-mail. Just write to me at Roger. [email protected]. Below is my synopsis of a recent (post-Sereboff) opinion from a Georgia Federal District Court. Smith v. Life Insurance Company of North America, 2006 WL 2842529 (N.D. Georgia Sept. 28, 2006) – The Court applied the make-whole doctrine (on a default basis) and also held, as an alternative basis for its decision, that the Georgia anti-subrogation law applies to the insured ERISA plan. The court stated, “The Supreme Court’s holding in FMC Corp. also compels a finding that Georgia’s anti-subrogation statute is not preempted. In FMC, the Supreme Court held that Pennsylvania’s anti-subrogation statute regulated insurance because it controlled the terms of insurance policies by invalidating any subrogation provisions… Finally, the deemer clause does not apply because the Plan is not self-funded. Rather, the plan purchases an insurance policy from an insurance company to satisfy its obligations to plan participants… Thus, the instant plan is an insured plan and not captured by the deemer clause.” 2006 WL 2842529 at *15. (quoted language taken from text accompanying footnote 10). No appeal was taken from this case. Accordingly the district court opinion is final.

Roger: I like the way you think. You don't merely take the court's opinions as the gospel truth. I would assume that would apply to any court, including the Supreme Court. Yes, the courts are nitpicking when they speak of the plan versus the beneficiary, when it comes to stop-loss policies. Apparently, state laws apply only to insurers of individuals, not to insurers of plans themselves. I think that distinction is rather arbitrary and capricious. Actually, when the Supreme Court distinguished between self-insured ERISA plans and self-funded ERISA plans (I think it was in Metropolitam v. MA), that distinction was reading into ERISA what was never there. ERISA plans are not defined on how they are funded. They are defined on if they are established or maintained by employers or employee organizations. Unfortunately, that seems to be the law of the land, including the opinion you cited in Smith v. Life Insurance Company of North America. Apparently, that plan was a fully insured plan, so the anti-subrogation state law applied. If it was self-funded (even with stop-loss insurance), the state law would not have applied. Thanks for providing your E-mail. I will send you mine now. Don Levit

Roger; Correction to my post. What I meant to say was when the Supreme Court distinguished between self-insured and fully insured ERISA plans. Don Levit

Don, Thanks for your posting and e-mail. I think the key is to look at a particular situation and determine how much of the medical bills were paid (or underwritten) by insurance and how much of these bills were absorbed by the plan itself. As to that portion which was paid or underwritten by insurance, then the right to reimbursement would be controlled by the appropriate state law. So, for example if the situation were in Missouri or Arizona (states which prohibit subrogation on personal injury claims), and there was a loss generating $80,000 in medical bills and Wal-Mart's insurer (these are identified on schedule A of form 5500) paid $50,000, then none of the $50,000 should be subject to a reimbursement claim.

Roger: Thanks for the sypnoses. I think your premise of the stop-loss insurer not being able to recoup the medical reimbursement is a good one. However, if that was the case, don't you think the stop-loss insurer would simply increase the next year's premium by the amount it hoped to recover? If that did happen, who would ultimately pay: the ERISA plan. Subrogation is, supposedly, intended to save the ERISA plan the premium increse (while shortchanging the beneficiary). Let's look at this from a legal perspective. Are you aware of any federal court cases which stated that stop-loss insurance made the plan fully insured, and thus subject to state insurance law? Are you familiar with American Medical Security v. Bartlett? This happened in the federal district court of Maryland, in which Bartlett was the Maryland insurance commissioner. Even with a deductible as low as $10,000, the plan was considered self-insured, with the remainder of the liability assumed by the stop-loss insurer. All the cases you cited dealt with fully insured plans. Were any of these insured through stop-loss policies? Apparently not, since the participants were reimbursed directly by the insurer, as opposed to the plan itself being directly reimbursed by the stop-loss insurer. Don Levit

Don, with years of being involved with this issue, I can tell you that I have never found that subrogated recoveries (reimbursement recoveries) have EVER flowed to the benefit of the insureds (whether the insured is a plan or an individual). Ever! Subrogated recoveries flow first and primarily to fund those who pursue the recoveries themselves -- the subro lawyers and subro bill collectors and subro departments of insurers, and then secondarily into executive compensation, bonuses, etc for insurance personnel. I might also add that this whole business of subrogation/reimbursement has flourished into a cottage industry which has given birth to an Army of Amicus Briefs in the Supreme Court on any ERISA Reimbursment case. These vultures which are funded with the compensation intended for the victims of catastrophic loss. Their very existence is a sad commentary on the state of affairs in the U.S. The subrogated recoveries are never factored into rates because they are too speculative in nature. I have published a law review article which addresses this.

P.S. As to the notion of the stop gap insurer, the industry has been getting away with this for a few years. Basically the ERISA plans and the stop gap insurers bootstrap the stop gap insurer into ERISA preemption and such was never intended. If you go back and read the 4 sentences from the FMC v. Holliday case, you will see that state law regulating reimbursement applies to all insurers insuring ERISA plans. It doesn't matter (or shouldn't matter) whether or not the plan is fully insured. Presently many stop gap insurers enjoy reimbursement through the efforts fronted by the ERISA plan or one of the bill collectors for the reimbursement. This is especially egregious if you consider the public policy found in the McCarran Ferguson Act which provides that State Law should regulate Insurers ... this public policy is implanted in ERISA through the Savings clause and the Supreme Court clearly recognized this in FMC v. Holliday.

Brian S. King 11/17/2008 01:47 PM

Sorry I'm late to the party on this comment thread! I agree with both of your comments about the illusion that has been created by "self-funded" plans. On the one hand, there are ERISA plans that are genuinely self funded. For example, an ERISA welfare benefits fund that has been created through a collective bargaining with no stop loss insurance coverage (or stop loss insurance coverage that only kicks in at very high levels) is on one end of the spectrum. On the other end of the continuum is an employee welfare benefits plan sponsored by a small business that has a relatively high deductible per employee and then buys stop loss insurance for the great bulk of any significant claims that will come through. There are a number of insurers who have been marketing small employers with just such a product. Great-West Life is one that I think is still out there aggressively pushing that kind of product. Congress pretty clearly didn't intend the employer who is "self-funded" only in a nominal sense to have the insurers of its benefits shielded from state insurance regulation. More important, Congress didn't intend that the participants and beneficiaries of such a plan to be stripped of the protections of state insurance law. Professor Baron's comments and citations help establish that. Having said that, I've never seen a court make the common sense distinction between the analysis for benefits provided through self funding vs the benefits provided through an insurer in the way that Roger points out. That is unfortunate. The Ninth Circuit, in United Food v. Pacyga, 801 F.2d 1157 (9th Cir. 1986) suggested that if any portion of the plan is self funded, all benefits provided by the plan will be insulated from state insurance law. Frustrating. It ends up providing some support for the type of result we see in Shank.

Subrogation's Tightening Grip on ERISA Claimants

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