WORKER S COMPENSATION SETTLEMENTS: DEALING WITH THE DREADED HEALTH INSURANCE CARRIER

WORKER S COMPENSATION SETTLEMENTS: DEALING WITH THE DREADED HEALTH INSURANCE CARRIER Prepared by: Timothy J. Schumann Lindner & Marsack, S.C. 411 East Wisconsin Avenue Suite 1000 Milwaukee, Wisconsin 53202 (414) 273-3910 tschumann@lindner-marsack.com 1

WORKER S COMPENATION SETTLEMENTS: DEALING WITH THE DREADED HEALTH INSURANCE CARRIER Prepared by: Timothy J. Schumann I. Subrogation vs. Reimbursement A. Subrogation 1. The substitution of one person in the place of another with reference to a lawful claim or right. 2. Equitable principle. A non-volunteer who pays for a debt or obligation should be permitted to look for reimbursement from a responsible party up to the extent of payments made. 3. Standard subrogation provision found in health insurance policy: B. Reimbursement SUBROGATION If, after payments have been made under this policy, you or your covered dependents have a right to recover damages from a responsible party, we will be subrogated to your rights to recover. You or your covered dependent will do whatever is necessary to enable us to exercise our right and will do nothing after loss to prejudice it. If we are precluded from exercising our right of subrogation, we may exercise our right of reimbursement. 1. Contractual recovery against insured. Generally triggered in a worker s compensation case. 2. Health policies routinely exclude payments for work-related benefits. 3. Standard Worker s Compensation exclusion in health policy: EXCLUSIONS This policy does NOT provide benefits for: 2

treatment of any bodily injury or sickness that is sustained by an employee or a covered dependent that arises out of, or as the result of, any work for wage or profit when coverage under any Workers Compensation Act or similar law is required for the employee or covered dependent. 4. While a worker s compensation claim is pending, health insurer may pay benefits and then seek reimbursement out of worker s compensation recovery. 5. In a few states, health insurers are required by law to pay medical bills if worker s compensation carrier denies the claim. For example, in Michigan and Minnesota, the health insurer must pay the outstanding medical bills, but is then entitled to intervene in the worker s compensation proceeding. 6. In most states, the decision by a health insurer to pay medical bills in a disputed worker s compensation case is purely voluntary. If payments are made, however, the health carrier will likely seek to enforce its right to reimbursement. 7. In Couch on Insurance 3d, the author indicated that the preference was to allow health insurers the right to obtain reimbursement: In any case of doubtful liability, the safest course for the insurer is to immediately pay benefits on the assumption that the sickness or injury was covered by the policy, and later seek reimbursement if there is a successful Worker s Compensation proceeding. Couch on Insurance 3d 180.23 at 180.38. 8. Sample provision providing health carrier with a right of reimbursement in worker s compensation case: WORKER S COMPENSATION If benefits are paid by us and we determine you received Worker s Compensation for the same incident, we have the right to recover as described under the Recovery Rights provision. We will exercise our right to recover against you. The Recovery Rights will be applied even though: a) The Worker s Compensation benefits are in dispute or are made by means of settlement or compromise; 3

b) No final determination is made that bodily injury or sickness was sustained in the course of or resulted from your employment; c) The amount of Worker s Compensation due to medical or health care is not agreed upon or defined by you or the Worker s Compensation carrier; or d) The medical or health care benefits are specifically excluded form the Worker s Compensation settlement or compromise. You hereby agree that, in consideration for the coverage provided by this policy, you will notify us of any Worker s Compensation claim you make, and that you agree to reimburse us as described above. RIGHT OF REIMBURSEMENT If benefits are paid under this Policy and you or your covered dependent recovers from a responsible party by settlement, judgment or otherwise, we have a right to recover from you or your covered dependent an amount equal to the amount we paid. 9. In a worker s compensation proceeding, the group health carrier is likely to argue that it has a contractual right of recovery. Since it is not subrogation, common law subrogation rules (i.e. made whole) will not apply. II. Health Carrier s Participation in Worker s Compensation Proceeding A. Is health insurer required to give notice of its lien? Lack of notice may not necessarily bar insurer from enforcing reimbursement interest. If claimant is aware that benefits have been paid, then insurer will assert that claimant is required to notify carrier of existence of pending worker s compensation claim. B. A prudent claimant s attorney will question claimant regarding who paid the medical bills, to ensure there are no surprises when a health insurer comes calling after a settlement is final. C. Some statutes have laws preventing a health insurer from exercising a right of subrogation. But these laws may not bar a health insurer from exercising reimbursement in a worker s compensation case. 4

Example: Virginia 1) Virginia Code 38.02-3405 provides that no health insurance contract shall contain any provision requiring a beneficiary of any such contract or plan to sign an agreement to pay back the insurer. 2) However, health insurers are not forbidden from excluding coverage for work-related injuries unless the worker s compensation claim is denied. If benefits are paid and the claim is found to be compensable, the health insurer may recover from the applicable employer or worker s compensation insurance carrier the costs of coverage for medical condition found to be compensable under the act. D. In some states, a health insurer is entitled to intervene in a worker s compensation proceeding: Example: Pennsylvania 1) 77 P.S. 671 provides that a health insurer has a right of subrogation in a worker s compensation proceeding. 2) A subrogation claim must be asserted during the pendency of a worker s compensation proceeding. In Baierl Chevrolet v W.C.A.B., 613 A.2d 132 (Pa. Cmwlth. 1992), the Court held that a health insurer can be denied subrogation if it does not intervene in the worker s compensation proceeding. 3) In Furnival State Machinery/Transamerica Ins. Group v. W.C.A.B., 757 A.2d 433 (Pa. Cmwlth. 2000), the court held that a health insurer s reimbursement can exceed the amount allowable in the medical cost containment provision. The court held that the insurance contract controls the charges for which medical providers may be compensated. Id. at 436. Example: New Jersey 1) N.J.S.A. 34:15-15.1 provides that the Division of Worker s Compensation is authorized to incorporate in any award, order or approval of settlement an order requiring the employer or the employer s insurance carrier to reimburse a health insurance company for medical, surgical or hospital expenses paid on behalf of an employee. 5

2) In Aetna Cas. & Surety Co. v Para Manuf. Co., 424 A.2d 423 (N.J.Super.A.D. 1980), the court held that a PIP carrier is entitled to proceed directly against the worker s compensation insurance carrier. Although the case involved personal injury protection coverage and not health insurance, it is possible a court may allow a health insurer to intervene. 3) In Hospital Service Plan of N.J. v Phillips, 313 A.2d 811 (N.J.Dist.Ct. 1973), the court allowed a health insurer to recover from its insured in a case where a worker s compensation judge entered an order approving a settlement, in which the judge found that the covered medical expenses were unauthorized so as not to be the employee s responsibility. The court held that the Division s ruling was not binding because it was irrelevant to the contractual language, which provided for reimbursement whether or not the covered person claims compensation or receives benefits for services thereunder. 4) In Bielak v Counties Contracting & Const. Co., 230 A.2d 545 (N.J. Co. 1967), the court held that the Division was not authorized to reopen a case where the health insurer failed to provide notice to the parties of its interest. 5) In Hetherington by Hetherington v Briarwood Coachlight, 602 A.2d 292 (N.J.Super.A.D. 1992), the court held that N.J.S.A. 34:15-15.1 does not allow the Division to approve a settlement that only authorizes partial reimbursement to the carrier. Example: North Carolina 1) In Hansen v Crystal Ford-Mercury, Inc., 531 S.E.2d 867 (N.C.App. 2000), superseded by statute by N.C.S.G. 97-90.1 (2001), the court held that a health insurer may intervene as a real party in interest in a worker s compensation proceeding when it alleges that it has paid medical expenses due to an employee s compensable injury. 2) The North Carolina legislature responded to Hansen by passing N.C.S.G. 97-90.1, which provides that a health insurer or disability insurer is not a real party in interest 6

and shall not intervene or participate in any proceeding or settlement agreement... to determine whether a claim is compensable... or to seek reimbursement for medical payments under its plan. However, the provision states that the health insurer is entitled to seek reimbursement from the employee, employer or carrier. Upon the admission or adjudication that a claim is compensable, the party or parties liable shall notify in writing any known health benefit plan covering the employee of the admission or adjudication. Example: Indiana 1) The Worker s Compensation Board has authority to determine the amount of reimbursement owed to a health insurer. 2) A non-occupational insurer s participation will help to prevent future attempts by worker s compensation carriers to shift the burden of payment. Worker s compensation carriers currently settle with employees if the employee agrees to stipulate that injuries were not work-related. These settlements make it difficult and expensive, if not impossible, for the non-occupational insurer to gain reimbursement in the subsequent action. These settlements also allow the employee to play both ends against the middle by receiving funds from both the compensation carrier and the non-occupational insurer. Associated Insurance Companies, Inc. v. Burns, 562 N.E.2d 430, 434 n. 4 (Ind. App. 1990). E. Most states do not allow a health insurer to directly participate in worker s compensation proceedings. The insurer s only remedy is to litigate against the claimant under a general breach of contract theory. Example: Maryland There is no statute or case law addressing a reimbursement provision in a health insurance contract. In Allied Am. Mut. Fire Ins. Co. v Loveman, 139 A.2d 227 (Md. 1958), an insurer sought reimbursement from its insured after the insured collected for his loss from a third party involving an automobile accident. The court concluded that the insured, having accepted settlement from the third party and having released all claims against the third party, was required to reimburse its own insurer. Although this 7

case did not involve worker s compensation, it would appear to open the door for a breach of contract action. Example: Delaware There is no case law specifically addressing a health insurer s right of reimbursement. However, in Guy J. Johnson Transp. Co. v Dunkle, 541 A.2d 551 (Del.Supr. 1988), the court held that an employee was not entitled to recover for medical expenses through worker s compensation claim where those expenses had been paid prior to hearing through a health insurance policy. The court considered the fact that there is no express legislative authority permitting subrogation. In theory, this decision could be used to permit a health insurer to pursue reimbursement against the employer or employee. However, there is no legislative authority allowing a health insurer to be a party to a worker s compensation proceeding. Example: Illinois We have found neither a provision in the Act nor any Illinois case which provides for intervention in a workmen s compensation case by a health insurer seeking reimbursement. Nor do we find it readily apparent that such a remedy will effectuate the purpose of the Act. While in certain circumstances such intervention might be warranted, we are of the opinion that this type of remedy in a workmen s compensation proceeding must be provided by the legislature and not established by judicial fiat. General American Life Insurance Company v. Industrial Commission, 454 N.E.2d 643, 649 (Ill. 1983). Example: Wisconsin 1) Wis. Stats. 102.30(7)(a) prohibits a group health carrier from intervening in proceedings under the Worker s Compensation Act, but provides the Commission with the power to order reimbursement. 2) Group health insurers can recover payments indirectly through the use of a reimbursement clause in the policy that requires the claimant to reimburse the group health carrier for payments made that should have been made by the worker s compensation insurer. Employers Health Ins. Co. v Tesmer, 469 N.W.2d 203 (Wis. App. 1991). 8

3) If group health carrier is denied, a non-industrial carrier can deny payment of post-compromise medical expenses to the injured employee. 4) In Tesmer, the court held that, constitutionally, a group health carrier is not precluded from a remedy merely because it is not entitled to intervention. The court explained that several remedies exist for the group health carrier. If [an] Employer believes it has improperly paid Tesmer s expenses, it may proceed against Tesmer directly for reimbursement. Second, 102.30(7)(a) permits DILHR to order reimbursement for payments improperly made under a non-industrial insurance policy covering the same disability and expenses. Thus, if Tesmer should succeed in his worker s compensation claim, Employers may petition DILHR for reimbursement under 102.30(7)(a). Id. at 105-06. III. Negotiating with the Health Insurer A. Force the health insurer to prove its lien. 1. Ask for copies of the medical bills. 2. Ask for copy of policy to examine pertinent contractual language. Look for policy provisions that limit group health carriers right to reimbursement. 3. Lay seeds at an early stage regarding difficulties inherent in worker s compensation process. 4. Provide group health carrier with medical documentation establishing difficulty in proving worker s compensation claim. IV. Settlement of Health Lien A. Argue merits of worker s compensation claim. Ask health insurer to accept pennies on the dollar. B. How to value the health insurer s recovery 1. Made whole 9

a) When a fixed and limited sum of money must be divided between claimant and its health insurer, the health insurer is not entitled to recover until insured has been made whole, which does not occur unless claimant has been completely compensated for all elements of its damages. b) Example A claimant has total damages of $50,000.00. That is the made whole number. The insurer has paid $30,000.00 in medical expenses on behalf of the claimant. The claimant settles for $30,000.00. Thus, the claimant has received, or received the benefit of, $60,000.00, or $10,000.00 over his or her made whole number. That excess $10,000.00 is available to reimburse the group health carrier. If the claimant recovers less than $20,000.00 by way of settlement, then he or she has not been made whole, and the group health carrier is not entitled to recover. c) The made whole argument will generally not be successful in resolving group health liens in worker s compensation proceedings. Remember, reimbursement rights are not akin to subrogation, so state common law subrogation rules do not apply. The group health carrier will take the position that if applicant receives even $1.00 through settlement of worker s compensation claim, the contract provides the group health carrier with a right to full recovery. 2. Pro-rata reimbursement Best way to resolve health liens a) Prove to the health insurer that claimant s case has settled for pennies on the dollar. Ask the health carrier to proportionally adjust its lien. b) Enter into a pro-rata repayment agreement whereby the health insurer agrees to accept a proportion of its lien relative to the maximum value of the case. For example, if the claimant s case is worth $50,000.00, the settlement is for $25,000.00 and the health lien is $20,000.00, the health insurer receives 50%, or $10,000.00. V. Creative Compromises that Attempt to Freeze Out the Health Insurer A. Hold Harmless Agreements 10

1. Shift the burden of reimbursing health insurer to the Worker s Compensation carrier, who agrees to indemnify and hold the applicant harmless against claim by health insurer for payment of medical expenses. A health insurer may file suit against is insured, but the defense will be provided by Worker s Compensation carrier. 2. Problems with Hold Harmless Agreements a) Worker s Compensation carriers generally want full and final compromise agreements. b) If worker s compensation carrier does not resolve health lien, then health insurer may file a lawsuit against claimant. B. Reimbursement Agreements. 1. Examine reimbursement agreement provisions. If provisions are narrowly defined (i.e., reimbursement required only if applicant receives benefits pursuant to an award) then bypassing lien more likely. If reimbursement provisions are broadly defined (i.e., reimbursement required for any worker s compensation recovery) then by passing lien less likely. 2. Claimants should argue unconscionability of repayment agreement. These agreements are signed at a time when employee requires medical care. Obviously, they are inclined to sign anything. It would be against public policy. The argument can be made that the health insurer has a duty to make payments. 3. In response, carrier will argue that reimbursement agreements are enforceable because the parties would enter into the agreement with full knowledge of facts regarding the accident, and also presumably the applicable law. C. State in the settlement agreement that the injury is not work-related. In some states, an ALJ may assist the parties in freezing out a health carrier by rendering findings of fact in the settlement that appear to close the door on the health insurer by indicating that the injury is not work-related. D. If health insurer will not agree to a reasonable pro-rata resolution, then consider a limited compromise on all issues other than medical expenses and simply try the issue of medical expenses. E. Ignore health insurer. Make sure that you warn applicant about potential risk of suit by health carrier before you settle the remainder of the claim. 11

VI. Conflicts of Interest A. Claimant s attorney cannot serve two masters. Be wary of agreeing to represent the health insurer. When a case settles, there is an obvious conflict of interest regarding the distribution of settlement proceeds. B. These problems can be avoided if the claimant and health insurer agree at the outset of litigation on a specific disposition of funds. VII. Attorney Fee Issues A. When a health or disability insurer seeks reimbursement, is the claimant entitled to reduce the lien amount by assessing a proportionate share of attorney fees? B. Some states recognize the common fund doctrine, which provides that in subrogation cases, health carrier s reimbursement is reduced by percentage of attorney fee and pro-rata share of costs. C. Michigan Reduction for attorneys fee allowed In addition to encouraging disability insurers to make advance interim payments to disabled employees, 821 allows a claimant s attorney to collect part of his fee from the insurer where, through reimbursement, it has benefited from the attorney s successful prosecution of the worker s compensation claim. To require the reimbursed insurer to pay a proportionate share of the attorney fee under those circumstances is fair and avoids giving the insurer a free ride. Gilroy v General Motors Corp., 475 N.W.2d 271, 277 (Mich. 1991). D. Minnesota No reduction permitted for attorney fee In return for the health carrier s undertaking the responsibility [of paying medical bills] and to minimize the administrative cost of doing so, the health carrier is permitted to take a relatively passive role in the worker s compensation litigation [I]t is not unfair that Blue Cross be entitled to full reimbursement. Nor is it unfair to deny appellant compensation from Blue Cross for services that appellant essentially had to perform anyway in representing his client, the employee. If appellant has a quarrel, it is more with the statute that awards him attorney fees only on compensation benefits paid. Johnson v. Blue Cross and Blue Shield of Minnesota, 329 N.W.2d 49, 52-53 (Minn. 1983). 12

VIII. Self-funded ERISA Plans A. Self-funded employee benefits plans are governed by ERISA, which preempts state laws that relate to any employee benefit plan. FMC Corp. v. Holliday, 498 U.S. 52, 57-58 (1990). B. The ERISA pre-emption argument may no longer be persuasive following the U.S. Supreme Court s decision in Great West Life and Annuity Insurance Company v. Knudson, 534 U.S. 204, 122 S. Ct. 708, 151 L.Ed.2d 635 (2002). Knudson was injured in a car accident. Great West Life and Annuity paid approximately $400,000.00 pursuant to an ERISA self-funded plan. Plaintiff settled this case and earmarked $13,000.00 to satisfy Great West s reimbursement claim. Great West filed a federal action to enforce the plan s reimbursement provision. The court held that because Great West sought legal relief on a contractual obligation, ERISA did not apply. The court basically held that the type of monetary relief sought in a reimbursement action was not the type of equitable relief allowed by ERISA. The court expressed no opinion as to whether the plan could have intervened in the state court tort action or whether the plan could have taken direct action against the plaintiff asserting state law claims such as breach of contract. The Supreme Court never criticized the merits of Great West s reimbursement claim. The court basically stated that you need to bring the right claim, which presumably would be a breach of contract action. C. It will be interesting to see how courts interpret Knudson. Will claims for reimbursement still be subject to ERISA? Will they still be filed in federal court? Will state subrogation or reimbursement law apply? D. No matter how the courts interpret Knudson, the following standard rules apply for practitioners dealing with a self-funded claim. 1. Obtain and review the summary plan description and all the plan s documents. Compare the summary plan description with the actual plan s documents. If the plan documents are more favorable, you can elect to enforce them against the plan. 2. Review the plan language. Some ERISA plans contain made whole provisions, or provide that state law controls questions of interpretation. The applicable language will determine whether state common law rules apply. Of course, following Knudson, it is possible that state law will apply anyway, so there will be an issue as to whether established subrogation law or simple breach of contract principles will apply. 13

IX. Liens involving short-term disability, long-term disability, disability retirement A. Employer will seek to offset payment of short-term disability benefits from liability for temporary disability. B. In Alessi v. Raybestos-Manhattan, Inc., 151 U.S. 504 (1981), the U.S. Supreme Court preempted and invalidated New Jersey worker s compensation legislation that would have prevented an offset. The court held that it is not contrary to the Employee Retirement Income Security Act (ERISA) to reduce ERISA pension benefits by amounts equal to state worker s compensation awards. C. Disability carriers may be entitled to reimbursement for benefits paid on the policy. Although avoidance of duplication [of benefits] cannot ordinarily be achieved under American statues in these cases by, so to speak, trimming at the compensation end, it is frequently achieved by express language trimming at the private plan end, that is, by reducing the private benefits by the amount of any compensation payments. 4 Larson, The Law of Workman s Compensation 97.51(b) (1990). D. Often disability policies are not sponsored by the employer. Not all policies contain language providing for a right to reimbursement. If the policies are not employer sponsored, some states do not allow a worker s compensation board to order an offset. The employee will be entitled to a double recovery, unless the disability insurer attempts to enforce reimbursement rights. E. You must examine the language of the policy to ensure that a right to reimbursement exists. F. Many disability policies contain language similar to the following: any monthly disability benefits shall be reduced by any worker s compensation benefit payments received by the member subsequent to the time he becomes entitled to a disability benefit. G. You should scrutinize policy language for the following: 1. Exceptions to offsets. Some policies exclude as offsets worker s compensation benefits for fixed statutory payments for loss of any bodily member, i.e. permanent partial disability. Characterizing the compromise in exact language, i.e., $100,000.00 for payment of loss of a bodily member, may help to circumvent the offset. 14

2. Some policies offset for receipt of other income, which is defined as receipt of worker s compensation benefits as payment for lost time. You may be able to get around this language by creatively wording a settlement agreement to indicate that payments are not for lost time, but rather are for other elements of compensation, i.e., payment of past or future medical expenses. 3. If long-term disability benefits will cease at a particular age (55, 60, 62, or 65), then structure settlement agreement so that the benefits are paid before commencement or after the cessation of the long-term disability benefits. 15