In this challenging economic climate, subrogation and reimbursement claims by employers with self-funded health plans are gaining heightened attention. Injured employees, plaintiffs’ attorneys, and employers seeking to protect health plan assets are litigating subrogation and reimbursement claims more strenuously.
Consequently, the law in this area is quickly evolving. Recently, a circuit split developed which may affect the amount of health plan benefits an employer can recover.
Health Plan Reimbursement Claims
A typical health plan reimbursement claim involves the following fact pattern. Employer offers a self-funded health plan for the benefit of its employees. Employee, a participant in Employer’s health plan, is injured in a non-work-related accident, often a motor vehicle accident. The medical expenses for Employee’s accident-related injuries are paid by the health plan.
Employee sues the at-fault tortfeasor, and claims medical expenses, including all of the expenses paid by the health plan, as an element of her damages. Employee either settles the tort lawsuit, or obtains a judgment, which generally takes into account all of her alleged damages, including medical expenses.
The health plan’s language permits Employer to obtain full reimbursement of benefits paid for Employee’s injuries sustained from the tortfeasor’s conduct, from any monies recovered in Employee’s lawsuit against the tortfeasor. The health plan allows full reimbursement from any settlement funds or judgment, irrespective of whether the Employee is "made whole," and regardless of the Employee’s personal injury attorney’s fees.
Employee and her personal injury attorney resist Employer’s reimbursement claim. Employer ultimately is required to bring suit to recover the plan benefits under section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a) (3), which allows an ERISA plan fiduciary to obtain "appropriate equitable relief" to enforce the terms of the plan.
Zurich American Insurance Company v. O’Hara
The Eleventh and Third Circuits have taken contrasting views of "appropriate equitable relief" under § 502(a)(3). In Zurich American Insurance Company v. O’Hara, 604 F.3d 1232 (11th Cir. 2010), Zurich brought suit against an employee, O’Hara, to recover $262,611 in self-funded health plan benefits from a settlement fund of $1,286,457. O’Hara had been injured in a head-on motor vehicle accident.
The plan language expressly allowed Zurich to obtain full reimbursement of plan benefits, and provided that "no court costs or attorneys’ fees may be deducted from the Plan’s recovery without the Plan’s express written consent; any so-called ‘Fund Doctrine’ or ‘Common Fund Doctrine’ or ‘Attorney’s Fund Doctrine’ shall not defeat this right …." 604 F.3d at 1234.
The plan further provided that "[R]egardless of whether a covered person has been fully compensated or made whole, the Plan may collect from covered persons the proceeds of any full or partial recovery that a covered person or his or her legal representative obtain, whether in the form of a settlement or judgment …." Id.
O’Hara argued that enforcement of the plan’s reimbursement provisions was not "appropriate" because "he was not made whole by his third-party recovery." Id. at 1236. Specifically, O’Hara argued "as a matter of equity and in order to effectuate ERISA’s policy of protecting plan beneficiaries, the make-whole rule must be applied because allowing Zurich to recoup the medical expenses it paid on his behalf unduly punishes him by requiring him to forfeit a substantial portion of the compensation he received for his other losses, including future wages and bodily integrity, and unjustly enriches Zurich." Id.
Under the make-whole doctrine, an employee who has settled with a third-party tortfeasor is liable to reimburse the plan "only for the excess received over the total amount of his loss." Id. at 1236. In the Eleventh Circuit, "the make-whole doctrine is a default rule that applies only in the absence of specific and unambiguous language precluding it." Id. (citing Cagle v. Bruner, 112 F.3d 1510 (11th Cir. 1997)).
The court rejected O’Hara’s argument, holding that "[a]pplying federal common law to override the Plan’s controlling language, which expressly provides for reimbursement regardless of whether O’Hara was made whole by his third-party recovery, would frustrate, rather than effectuate, ERISA’s purpose to protect contractually defined benefits." Id. at 1237.
Moreover, the court held that "[a]pplying federal common law to deny an employer its right to reimbursement pursuant to a written plan would also frustrate ERISA’s purposes by discouraging employers from offering welfare benefit plans in the first place." Id. The court emphasized that "[a]lthough O’Hara himself will be in a better position if the subrogation provision is not enforced, plan fiduciaries must ‘take impartial account of the interests of all beneficiaries.’" Id.
Although O’Hara did not challenge the district court’s finding that the plan precluded deduction of O’Hara’s attorney’s fees from Zurich’s recovery, the court nevertheless held that "because the Plan clearly and unambiguously disclaimed the ‘common fund doctrine,’ the district court correctly found that Zurich was owed the entire amount it paid on O’Hara’s behalf without a deduction of attorney’s fees." Id. at n.4.
The court concluded that "[b]ecause full reimbursement according to the terms of the Plan’s clear and unambiguous subrogation provision is necessary not only to effectuate ERISA’s policy of preserving the integrity of written plans but to protect the interests and expectations of all plan participants and beneficiaries, such relief is both ‘appropriate’ and ‘equitable’ under ERISA § 502(a)(3)."
U.S. Airways v. McCutchen
In U.S. Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011), the court held that "applying the traditional equitable principle of unjust enrichment, … the [district court] judgment requiring McCutchen to provide full reimbursement to US Airways constitutes inappropriate and inequitable relief."
The court emphasized that "the amount of the judgment exceed[ed] the net amount of McCutchen’s third-party recovery, [and left] him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan."
The court also commented that full reimbursement "amounts to a windfall for U.S. Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall." The court did not decide what would constitute "appropriate equitable relief," but remanded to the district court to make that determination.
McCutchen expressly disagreed with O’Hara and other circuit court opinions that do not allow common law equitable principles to limit reimbursement recoveries, where full reimbursement was required under the clear and unambiguous plan language.
Other circuits have found reimbursement claims under § 502(a)(3) to seek "equitable" relief, without next asking whether the relief sought is "appropriate." The court stated that "[b]y categorically excluding the equitable limitations that § 502(a)(3)’s reference to equitable remedies necessarily contains, the … O’Hara court departs from the text of ERISA."
Points of Comparison between O’Hara and McCutchen
O’Hara and McCutchen are irreconcilable on whether common law equitable principles can limit ERISA reimbursement recoveries. Both cases claim to balance the equities, and yet, reach different conclusions. It bears emphasis that in McCutchen,the plan’s reimbursement amount exceeded the net sum of the employee’s third-party recovery, apparently putting the employee in a worse position than before he brought the personal injury lawsuit. The court’s holding was heavily influenced by the "injustice" of these facts.
O’Hara emphasized that reimbursement of plan assets "inures to the benefit of all participants and beneficiaries by reducing the total cost of the Plan." If plan assets were not recovered, "the cost of those benefits would be defrayed by other plan members and beneficiaries in the form of higher premium payments." Plan fiduciaries must "ensure that the assets of employee health plans are preserved in order to satisfy present and future claims."
"Because maintaining the financial viability of self-funded ERISA plans is often unfeasible in the absence of reimbursement and subrogation provisions like the one at issue in this case … denying [the plan] its right to reimbursement would harm other plan members and beneficiaries by reducing the funds available to pay those claims." These considerations are the most consistent with the policies underlying ERISA.
McCutchen in contrast, emphasized that it is "unjust" to require a plan participant to fully reimburse a health plan where the amount of the reimbursement exceeds the net amount of the participant’s third-party recovery, and further, full reimbursement constitutes a "windfall" to the plan. On the first point, it is not clear whether the court would find full reimbursement "unjust" if the benefits paid under the plan were significantly less than the third-party recovery. That factual distinction would exist in many, if not most reimbursement cases.
Second, the "windfall" argument seems misplaced, given that the reimbursement claim enforces a contractual right which protects plan assets. It rings particularly hollow when the plan participant is able to recover "medical expenses" as an element of damages in the underlying tort case, even when they are paid by the health plan. If the member gets to keep that money, which equitably ought to be returned to the plan, he is the one who obtains a "windfall."
It is important to keep abreast of this split when assessing the mercurial legal landscape in this area, and if called upon to address it, to carefully note the factual and analytical distinctions between these cases. For a detailed analytical comparison of O’Hara and McCutchen, see Schwade v. Total Plastics, Inc., 2012 U.S. Dist. LEXIS (M.D. Fla. Feb. 22, 2012).
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