Protecting the Health Care Subrogation Interest in a Personal Injury Action

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1 Protecting the Health Care Subrogation Interest in a Personal Injury Action (Appeared in National Association of Subrogation Professionals, Subrogator, Winter 2009) By J. Scott Byerley The writer is with the law firm of Gibson & Sharps, PC, and currently manages a nationwide network of local counsel for his subrogation clients, Transpac Solutions and Healthcare Recoveries. In order to protect the health plan s subrogation interest in a personal injury action, there are several things that you need to consider and several questions that need to be answered prior to taking action. Notice When did the injury occur? Where did the injury happen? Who was at fault in causing the accident? Was there a police report filed? Is the injured plan member represented by an attorney? What is the amount of the benefits paid by the health plan? Do you have the third party s contact information? Does the third party have insurance? Do you have the third party s insurance carrier s information? Are the third party and/or their insurer represented by an attorney? Does the injured party have first party insurance? Is there PIP or medical no fault coverage available? What type of health plan is involved? Is it an ERISA plan, or a non-erisa plan? Does the health plan have a right of reimbursement? Does the health plan have a right of subrogation? Does the health plan have both a right of reimbursement and subrogation? Does state law provide for an equitable right of reimbursement and/or subrogation? What is the law regarding subrogation in the jurisdiction where the injury took place? If the injury took place only a short time ago, making your claim well within the statute of limitations, then you are in the best position and have all of your options still available to you. However, three factors will affect your ability to recover: the law in the

2 jurisdiction where the injury took place, the type of plan that you represent and the plan s recovery language. If you have a right of subrogation, either an equitable right under state law or a contractual right under the terms of the plan document then you want to send written notice to the third party and their carrier that the health plan has a recovery interest in the plan member s personal injury claim, specifically noting the current amount of benefits provided by the health plan and referencing any applicable notice statute(s) in the jurisdiction where the accident took place. If your health plan does not have a contractual right of subrogation and if the state where the accident took place does not recognize equitable subrogation, then the health plan will likely be limited to seeking reimbursement from the plan member once the member s tort claim has settled. In such a case, you do not want to send a letter to the third party or their insurer asserting a subrogation claim in the personal injury action. The reason being, of course, that you do not have one. Thus, it is imperative that you know the law in the jurisdiction where the injury or loss occurred as well as the rights defined in the plan s recovery provision. Whether you are dealing with a Medicare Advantage plan, a federal employee plan governed by FEHBA 1, a self-funded plan established under ERISA 2 where federal law will generally take precedence, or perhaps a fully insured health plan (such as a PPO, POS or HMO) or a Medicaid plan, where state law will control, the type of health plan can make a difference in the steps that you are required to take and in the information that you must convey to all parties in order to establish effective and proper notice of the health plan s subrogation interest. Also, if the third party is represented by counsel you want to place their attorney on written notice of the health plan s interest. The same can be said of the health plan s insured - you should send written notice of the health plan s subrogation interest to his or her attorney. The purpose of placing all relevant and necessary parties on notice is to protect the plan s interest in the claim. At the time you are placing the parties on notice, there is usually no indication as to whether or not the underlying claim(s) will resolve in a prelitigation stage or through litigation. You do not want to take any chances with the health plan s claim so the goal is to get the proper parties on notice as soon as practically possible. With this letter of notice, you should also take the opportunity to ask for the status of the claim. These are the first steps in insuring that the plan s interest will be protected. You are seeking a response from the parties that you have put on notice. You want to know that the claim is going to be protected and you want them to tell you that in writing. Specifically, if you have sent notice to the third party carrier, you want them to respond in kind with a letter to the effect that they acknowledge your claim and will contact you at the appropriate time prior to resolution of the case to discuss a resolution of the plan s interest. Furthermore, from the plan member s attorney, you would like to receive a letter, again acknowledging the plan s interest in the personal injury action and agreeing to protect the plan s interest and agreeing to contact you at the appropriate time to discuss a resolution of the plan s interest. 1 Federal Employee Health Benefit Act (5 U.S.C et seq.) 2 Employee Retirement Income Security Act of 1974 (29 U.S.C et seq.)

3 If, [1] liability is clear and accepted by the third party, [2] there is enough coverage to satisfy both your interest and the injured plan member s claims as well as any other claimants, [3] all parties are cooperating in protecting your interest, [4] the law in that jurisdiction favors health plans recovery rights and, [5] your plan s contract with its member allows for a subrogation recovery, then the battle has been won and you should thank your lucky stars. It s almost never that easy. Usually at least one of these factors will be at issue and you ll have to work for your recovery. Reimbursement Once you have placed all of the appropriate parties on notice, you need to evaluate the feedback and the responses that you have received. Sometimes parties are willing to cooperate in protecting your interest, but often they are not. This unwillingness usually revolves around the fact that in many cases there are simply too many claimants seeking a recovery from the same small pot of money available for recovery. If your health plan s contract has a reimbursement provision allowing the plan to seek reimbursement upon the resolution of the member s claims against the third party, then the plan has a right to seek reimbursement from the member. It is imperative that you know what the recovery language says, the rights it gives you and the limitations that it places upon the plan s interest. Depending upon the type of health plan that you represent and the law in that jurisdiction, state law, and if applicable, federal law, will ultimately determine what type of action that you can take in regards to reimbursement. If the plan is governed by state law then you will be able to pursue an action for reimbursement under state law as long as it is allowed, either statutorily or by state common law in that jurisdiction. This is an action, a lawsuit, brought in the name of the health plan upon the resolution of the member s claims against any and all third parties in the personal injury case. In this instance, you are seeking reimbursement of the amount of benefits provided by the health plan for the injuries that were caused by the third party. If, however, the plan is an ERISA plan or a plan governed under federal law, then you will be limited to remedies available either under ERISA, or other federal statutes and regulations, or federal common law. With respect to ERISA, ERISA is a federal law that governs pension and welfare benefits. Specifically, ERISA controls and governs health care insurance for employees when: [a] there is group coverage; and [b] the employer is not a church or governmental entity. However, ERISA does not affect persons [1] who have individual coverage; or [2] who are covered by group policies for employers that are not private companies but are part of the federal, state or local government or a church. Defining ERISA There are two types of ERISA plans:

4 Self-funded: Insured: Self-funded plans exist when the employer decides to fund the payment of benefits through employer and/or employee contributions. In this case, the employer and the plan will generally use either a third party administrator (a "TPA") or an insurer ("administrative service only" or "ASO") to pay the claims of the plan. Insured plans exist when the employer group buys coverage from an insurer or HMO. This is the standard "employer obtains group coverage" situation. If you are representing an ERISA plan, the main thing that you need to remember is that ERISA treats self-funded plans and insured plans differently. The primary distinction between the two types is that state laws generally do not apply to self-funded plans (ERISA preempts state law, but not federal laws). On the other hand, only state insurance laws and federal laws apply to insured plans. There are many restrictions on subrogation that come from state insurance laws. These restrictions will apply to insured plans, but not self-funded plans. Constructive Trust In the past ten years, there has been a multitude of federal decisions affecting how an ERISA plan can recover for medical benefits paid on behalf of a group member that has made a recovery from a third party that has been held responsible for causing those injuries. In a major landmark decision in 2002, the United States Supreme Court held in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), 208 F.3d 221, affirmed, that an ERISA-governed health plan (either insured or self-funded) seeking to use ERISA to hold a member personally liable for reimbursing the health plan from the proceeds of a third-party payment was limited to an equitable remedy. The result of this decision sent ERISA attorneys scrambling on behalf of health plans to fashion equitable remedies that would allow them to seek funds back from the plan member that had been recovered from the third party at fault for causing the injuries to the plan member, and the resulting payments by the plan for medical services. The remedy of choice is what is known as an action for constructive trust. The legal definition for constructive trust is when a person has title to property and/or takes possession of it under circumstances in which he/she is holding it for another, even though there is no formal trust document or agreement. The court may determine that the holder of the title holds it as constructive trustee for the benefit of the intended owner. This may occur through fraud, breach of contract, ignorance or inadvertence. The key to remember when you are considering a constructive trust remedy to protect the health plan s interests is that once a claim has settled and the funds have been disbursed a constructive trust is a less than viable option. In order to pursue a constructive trust, the settlement funds at issue must be readily identifiable.

5 Subrogation If the health plan that you represent has a contract with the plan member that contains subrogation language or equitable subrogation is an available remedy under state law, then a direct subrogation action is often the superior way to protect the plan s interests in a personal injury case. By pursuing subrogation in this manner, you are assuming the legal rights of the person on whose behalf the medical benefits were paid. You are stepping into the shoes of the insured plan member and asserting the right to recover those medical payments directly against the third party. This can be done by notice and communication in prelitigation or it can be done by filing a lawsuit against the third party seeking to enforce the plan s subrogation interest or by intervening in the plan member s lawsuit against the third party. If you are filing a direct action, you need to be aware that as with all lawsuits it must be filed timely, so you will need to know the statute of limitations that is applicable for personal injury actions in the state where the loss took place. In summary, while protecting a health plan s interests in a personal injury case is not an exact science, and remedies and actions that you may take vary greatly depending on the type of plan that you have, where the accident occurred and the applicable state or federal law, probably the most important thing that you can do once you know the answers to those questions is to communicate effectively. That means you must find out who you can place on notice, which requires knowing whether you have a right to reimbursement or subrogation. That means putting the right language in your letters of notice, containing the appropriate and sometimes compulsory language in order to properly notice and assert a claim. That means staying in contact with the parties involved in the personal injury case, monitoring court dockets, and being proactive (intervening or filing a lawsuit) when communication doesn t seem to be working or when it breaks down. That means knowing the laws that govern the claim, and making sure that the statute of limitations is properly protected. If you do all of these things, then you will have done the best you can do to protect the interests of the health plan in the personal injury action. Unfortunately, you are never guaranteed a recovery even if you do all of the right things, but if you do not do the right things, you may miss out on getting a recovery at all or of not obtaining the best recovery for your client and that is most certainly guaranteed to be bad. Don t let that happen to you! Be knowledgeable and proactive and safeguard your client s interests at all costs.