Subrogation to Health Care Plans / Long Term Disability

The Employer Retirement Income Security Act of 1974 governs employee benefits of private sector employees. The law is not limited to pensions. It covers, health insurance plans, long term disability plans, sometimes severance plans, life insurance plans, defined contribution plans (401(k)) and various executive compensation plans. This means in excess of 100 million people in the US are subject to ERISA. For years attorneys heard the term ERISA and ran away. That might have worked in the past, but now there is no escaping it.

Your client, a passenger in a car, suffers severe injuries when that car is struck by a brand new Mercedes sedan. She is an innocent victim of that other driver’s negligence. The Mercedes driver was talking on a cell phone, and fixing his hair when he drove through a red light. You learn he carries $500,000.00 in bodily injury coverage. That sounds pretty good considering the extent of your client’s injuries.

Your client worked for a responsible employer. Her job paid $84,000.00 per year plus this private sector employer provided health insurance, long term disability insurance, a matching 401k plan and other benefits.

After six months your client recovers from the injuries, however, she is not ready to return to work, and the reality is, she will not work again. Her health insurer pays her medical and rehabilitation bills. Those total $300,000.00.

She applies for long term disability benefits through her employer’s fully insured plan ("LTD Plan"). After the 90 day elimination period, the long term disability insurer pays 60% of her base monthly pay ($7000 x 60%) yielding $4200.00 per month.

Your client applies for Social Security Disability Income ("SSDI") benefits. Time goes by. After an ALJ hearing, SSDI pays to her $2083.00 per month plus another $600.00 a month in dependent benefits.

Your client receives a retroactive check for $32,196.00. But guess who wants it? The long term disability carrier tells your client that under the LTD plan terms it is entitled to be reimbursed for SSDI benefits paid to your client, because SSDI benefits are an "off set" under the LTD Plan. This is not the only bad news that day.

You are ready to send a demand letter to the insurer for the Mercedes driver. That afternoon, you receive a certified letter from the health insurer demanding reimbursement for $300,000.00 expended on your client’s behalf in the event that your client asserts a claim and collects from another responsible party.

You call the health insurer. You tell the health insurer the truth about your client. Her life is in shambles. The insurer seems sympathetic but nonetheless demands reimbursement of the entire $300,000.00 it paid. It will not consider the time-honored "make whole rule" or "common-fund doctrine" or reduce its claim by one penny.

What do you do? You have a lot of work ahead of you. You need to evaluate the LTD Plan’s claim. That goes for the health insurer too. The dilemma your client faces is all too real.

Administrative Committee of Wal-Mart Stores, Inc. Associates' Health and Welfare Plan v. Shank, 500 F.3d 834 (8th Cir. 2007) may be the most infamous and tragic case involving these issues. After the Supreme Court denied a petition for cert., filed by Mrs. Shank, Wal-Mart elected not to pursue its collection against Mrs. Shank. A rash of negative publicity seems to have changed Wal-Mart's tactics in the end. But what happened first?

Mrs. Shank worked at Wal-Mart Stores, Inc. She was catastrophically injured in a car crash and eventually adjudicated an incompetent. Wal-Mart provided medical coverage through the Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan which paid her medical expenses. She filed a lawsuit against the responsible parties and eventually settled her claims against the defendants for $700,000.00. After deducting attorneys’ fees and expenses, the remaining proceeds, approximately $417,477.00, were placed directly into a court-created special needs trust which was established for the sole purpose of providing for her future needs.

The Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan sued Mrs. Shank and the Trustee of the special needs trust "for recovery of sums paid by the Wal-Mart Stores, Inc. Associates Health and Welfare Plan for medical services paid." The United States District Court for the Eastern District of Missouri entered summary judgment in favor of Wal-Mart on August 31, 2006, and imposed a constructive trust on the settlement proceeds held in the Deborah J. Shank Irrevocable Trust in an amount not to exceed $469,216.00. On August 31, 2007, the Eighth Circuit affirmed the District Court order.

Neither the District Court nor the Eighth Circuit addressed the important question of whether it is both "equitable" and "appropriate" under ERISA to require a catastrophically injured individual to reimburse an ERISA plan from a special needs trust established solely for her future medical care. In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the Supreme Court elected not to address this specific issue.

Was the result fair to Mrs. Shank? What about to the taxpayers in her state who are likely to absorb the cost of her future medical care? The answer is obvious. Shank remains the law until the Supreme Court decides differently.

What do you do? What do you tell your client? Do you bother filing suit, or even making a demand on the Mercedes driver’s insurance company? Are you working for your client? Her health plan? Her LTD Plan?

There is no answer across the board. Ever situation is unique. You must begin your analysis by reading all of the benefit documents. That means reading the entire health insurance plan and the entire long term disability plan. The summaries will not suffice. In order to advise your client, and to avoid wasting your time, there is no way around this.

Do not believe anything an insurer tells you. Demand it in writing. Don’t believe what is set forth in letters. You need to examine the long term disability plan documents and the health insurance plan documents too. Just because an insurer tells you that there is no defense, and ERISA gives the insurer the right to recoup every penny paid, don’t believe it.

I. ERISA Overview

ERISA only applies to private sector workers. Employees of local, state and the federal government are exempt from its grasp. So too are employees of Church organizations, such as a Catholic Archdiocese, or sometimes a religious based hospital. Those who are self employed and have health insurance or disability insurance should be able to avoid ERISA too. That does not stop insurers from contending that ERISA applies. It’s your job to figure this out.

To fully appreciate the problem the injured worker faces, and to devise a strategy to maximize the injured worker's recovery, a rudimentary understanding of ERISA is required. There is no way around this. The reach of ERISA is vast. Almost every day there are ten new ERISA decisions reported on Westlaw. For some reason, on Fridays about 20 decisions are released.

ERISA's sweeping unfairness as applied in practice is mind boggling. A law that was created to protect employees has been turned upside down, and now more often has the opposite effect.

In the early 1960s, the Studebaker automobile manufacturing company went bankrupt. Because Studebaker failed to adequately fund its defined benefit pension plan, when the company went bankrupt the pension plan also collapsed, leaving many Studebaker retirees destitute, and its employees without their jobs or some their pensions. For the next decade, Congress drafted and redrafted legislation to address this problem. On Labor Day 1974, ERISA was signed into law.

Originally drafted with pension plans in mind, over time ERISA has come to govern much more. Part of the concept behind ERISA was to create a uniform law for employee benefits and pensions nationwide. This was thought to protect employees and to make it more reasonable for employers that operated in many states. Rather than needing to comply with 50 different state laws, employers would be governed by one Federal law.

The Employee Retirement Income Security Act of 1974 contains one of the broadest preemption clauses ever enacted by Congress. The application of which has been repeatedly referred to by the Supreme Court, a "'comprehensive and reticulated statute,' the product of a decade of congressional study of the Nation's private employee benefit system," Mertens v. Hewitt Associates, 508 U.S. 248, 251, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993), effects almost all aspects of the employer-employee relationship in the private sector.

ERISA welfare benefits are those employee benefits, such as disability insurance, health insurance, life insurance etc., as opposed to pension benefits which are governed under different provisions of ERISA. When Congress enacted ERISA in 1974, its focus was on abuse and mismanagement of pension funds:

It is hereby declared to be the policy of this chapter to protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.

ERISA Sec. 2,. 29 U.S.C. ' 1001(b)

Since then, ERISA has been greatly expanded, both legislatively by the Consolidated Omnibus Budget Act of 1985 ("COBRA"); Health Insurance Portability and Accountability of 1996 ("HIPAA") - and by Supreme Court decision.

In a number of seminal ERISA decisions, the Supreme Court has repeatedly referred to the purpose behind ERISA, protection of employees, and then has proceeded to gut the rights of employees and other beneficiaries. In the most recent major health care ERISA decision, Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004), the Supreme Court sided with the HMO industry, rather than patients and their doctors, by concluding that ERISA pre-empted state laws aimed at righting wrongs perpetrated by HMOs.

Congress enacted ERISA to "protect ... the interests of participants in employee benefit plans and their beneficiaries" by setting out substantive regulatory requirements for employee benefit plans and to "provid[e] for appropriate remedies, sanctions, and ready access to the Federal courts." 29 U. S. C. '1001(b). The purpose of ERISA is to provide a uniform regulatory regime over employee benefit plans. To this end, ERISA includes expansive pre-emption provisions, see ERISA '514, 29 U. S. C. '1144, which are intended to ensure that employee benefit plan regulation would be "exclusively a federal concern." Alessi v. Raybestos-Manhattan, Inc., 451 U. S. 504, 523 (1981).

Aetna Health, Inc. v. Davila, 542 U.S. 200, 208 (2004).

May be the tide is turning. In Metropolitan Life Ins. Co. v. Glenn, 128 S.Ct. 2343 (2008), the Supreme Court seemed to put to rest the age old insurance/corporate argument that ERISA was created to foster the development of employee benefits. That may be true, but the Supreme Court spoke otherwise in no uncertain terms that goal of ERISA was subservient to protection of employee benefits. The gains of plaintiff’s post Glenn are mixed. In some Circuits there have been victories that would have been losses in the past. Unfortunately, in the 3rd, 7th and 11th Circuits, the Courts have further gutted protection despite the mandate in Glenn.

II. ERISA Plans and Beneficiaries May Only Obtain Equitable Relief and Never Legal Relief

Most claims for relief arise under section 502(a) (1) (B) of ERISA, or 29 USC 1132(a) (1) (B). Other relief, which is rare, falls under section 502(a) (3) or 29 USC 1132(a) (3).

ERISA fiduciaries have a duty to act prudently and with loyalty toward participants in the plan. 29 U.S.C. § 1104(a) (1) (A) & (B). When fiduciaries (typically an insurer) breach that duty, Section 502(a) (3) entitles plan participants (employees) to sue them to redress the breach. 29 U.S.C. § 1132(a) (3); Varity v. Howe, 516 U.S. 489 (1996). The Supreme Court has described Section 502(a) (3) as a "catchall" clause that provides a "safety net" to redress injuries that ERISA does not remedy under other provisions. Id. at 512. Section 502(a) (3), however, expressly limits recovery to "appropriate equitable relief." The Supreme Court, through a series of cases, had unequivocally concluded that this excludes "legal" relief. Great-West Life & Annuity Ins. Co. v. Knudson, 122 S. Ct. 708, 713 (2002).

Janette Knudson was seriously injured in a car crash. Her health insurer provided by through her husband’s employer paid $411,157.11 in medical benefits. She sued Hyundai for defects in the car that harmed her. She settled her tort claim for $650,000.00 $13,828.00 was designated to reimburse the health insurer Great West. The insurer rejected that amount claiming that it was entitled to $411,157.11 of the $650,000.00 settlement, the full amount of medical bills paid. That settlement included $256,745.30 to a Special Needs Trust to pay for Ms. Knudson’s future medical care plus money to reimburse California Medicaid and to pay attorney’s fees and costs. A series of litigation in both state and federal courts arose. The case made its way from the Ninth Circuit to the Supreme Court.

The question presented to the Supreme Court was whether §502(a) (3) of ERISA authorizes the action by Great West to enforce a reimbursement provision the ERISA governed health insurance plan. Finding this claim to be premised upon a "contractual obligation," the Court concluded that the action was not equitable because suits for specific performance of a past-due financial obligation typically were not available in equity. The Court reasoned that the "restitution" claim did not seek to restore money in the "possession" of the defendant that is directly traceable to a property interest of the plaintiff, and as such amounted to a claim for restitution allowed at law but not at equity. The Supreme Court ruled that, as section 503 "by its terms, only allows for equitable relief," the provision excludes "the imposition of personal liability . . . for a contractual obligation to pay money."

Curiously the ERISA statute does not define "equitable relief." However, in Great-West, the Supreme Court clarified that to determine if the requested relief is "equitable" under Section 502(a)(3), courts should look to standard texts on remedies and trusts as well as how such relief was characterized when the bench was divided between equity courts and law courts. 122 S. Ct. at 712, 714 & 716 (considering character of restitution "in the days of the divided bench.") The Court explained that to qualify as equitable under Section 502(a)(3), the relief must be the type "typically available in equity." Id. at 712 (quoting Mertens, 508 U.S. at 252). Thus, the plaintiff must not only show that the relief would have been granted in equity in the days of the divided bench, the days in which some courts sat only in equity, but others in law, but that the relief was typically, as opposed to occasionally, available in equity. Id. at 715 (fact that damages such as those against non-fiduciaries were "occasionally awarded in equity cases" does not render them equitable relief). (emphasis omitted). The end result is one of the rare instances under ERISA, where the statute seems to help rather than hurt the injured individual. The obstacle to a plan recovering under its subrogation and reimbursement provisions arises under ERISA itself but became especially problematic after Knudson.

This was good for the insured but not for the insurer. Recovery attempts by insurers and plans continued to fail even when they argued that they were essentially trying to impose a constructive trust on funds held by the plan participant. Many claims were not successful, however, either because the plan participant no longer had the funds or because the plan was really seeking an award of money damages rather than equitable relief. But good things in the ERISA world never last too long.

Along came Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006). This case marked a significant retreat from the holding in Knudson. Without explicitly saying so, Sereboff was a reversal of Knudsen. So much for stare decisis.

Relying on an attorney's lien case from 1916, the Supreme Court ruled that when a benefit plan contains a right of reimbursement, it operates in the same manner as an attorney's lien because it makes the funds sought specifically identifiable. The Court held that the claim for reimbursement being litigated was a claim for “equitable relief” under § 502(a)(3), because both the nature of the relief sought and the basis for the claim were equitable. Sereboff, 547 U.S. at 663. Consequently, an insurer's claim for reimbursement out of a third party recovery constitutes a claim for equitable restitution permitted under 29 U.S.C. § 1132(a)(3).

While Sereboff was a major retreat from Knudson, Sereboff did not resolve all issues or preclude all defenses. Many questions remain unanswered. Can a reimbursement claim be defeated if the tort proceeds have been dissipated? Does federal common law, or state law, provide equitable defenses, such as laches, unclean hands etc. Should "appropriate equitable relief" under § 1132(a)(3) take into account the "made whole" rule or the "common-fund doctrine?"

III. Healthcare Lien, Subrogation and Reimbursement.

In examining the ERISA statute you will not find the words, healthcare lien, subrogation or reimbursement in the statute. In fact, ERISA does not dictate what type of benefits must be provided in an employer provided benefit plan. ERISA’s purpose is to protect the interests of plan participants and their beneficiaries "by setting out substantive regulatory requirements for employee benefit plans and to ‘provid[e] for appropriate remedies, sanctions, and ready access to the Federal courts.'" Aetna Health Inc. v. Davila, 542 U.S. 200, 208 (2004) (quoting 29 U.S.C. § 1001(b)).

ERISA purports to protect participants and beneficiaries, in part, by regulating how benefit claims are processed. Black & Decker Disability Plan v. Nord, 538 U.S. 822, 830 (2003). The statute mandates the use of reasonable claims procedures and "full and fair" review of benefit claims. See 29 U.S.C. § 1133(2) (2006); 29 C.F.R. § 2560.503-1(b), (h) (West 2009). Among other things, ERISA requires reporting and disclosure of plan information. 29 U.S.C. § 1021 et seq. (2006).

Section 1132(a)(3), an ERISA enforcement provision, is pertinent to subrogation and reimbursement and led to significant controversy as to whether ERISA plans can pursue subrogation and reimbursement claims. It permits a plan participant, beneficiary, or fiduciary to bring a civil action:

[T]o enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan[.]

A fiduciary can therefore bring suit under ERISA against a participant or beneficiary for "appropriate equitable relief." As concluded by the Supreme Court in Sereboff, the distinction between true equitable relief, and legal relief masquerading as equitable relief – an equitable lien by agreement – is blurred.