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:: ERISA Health Plan Subrogation Practice – WSJ Article Sparks Debate

Mr. Graham, the Shanks’ attorney, says he approached Wal-Mart’s attorneys about negotiating a compromise, but was told the health plan wanted to proceed with the lawsuit. “We’re not contending that Wal-Mart isn’t entitled to a payment. We’re saying they’re entitled to one based on equity,” he says. Since Mrs. Shank wasn’t fully compensated for her damages in the first place, he argues, Wal-Mart should also expect only partial reimbursement. . . .

In August last year, U.S. district judge Lewis Blanton sided with Wal-Mart, ruling that when Mrs. Shank signed on to Wal-Mart’s health plan she was obligated to abide by its terms. . . . The Shanks lost an appeal before a three-judge panel in the 8th Circuit Court of Appeals in August and last month were denied a request for a hearing before the entire court. They plan to appeal to the U.S. Supreme Court, though only a small percentage of cases are chosen to be heard. “Accident Victims Face Grab for Legal Winnings” The Wall Street Journal (January 20, 2007)

Today’s WSJ carries a provocative article about ERISA health plan subrogation. In the featured case, Wal Mart sued an employee that had been injured in a serious accident to recover what it had expended on her medical care. According to the article:

A collision with a semi-trailer truck seven years ago left 52-year-old Deborah Shank permanently brain-damaged and in a wheelchair. Her husband, Jim, and three sons found a small source of solace: a $700,000 accident settlement from the trucking company involved. After legal fees and other expenses, the remaining $417,000 was put in a special trust. It was to be used for Mrs. Shank’s care.

Plan Rights Upheld

The Eighth Circuit affirmed a district court holding for the health plan in Administrative Committee of Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan v. Shank, 500 F.3d 834 (August 31, 2007). In that holding the Eighth Circuit concluded that the plan’s suit for recovery of the expended medical payments was both equitable and appropriate.

The holding was not particularly surprising in view of recent U.S. Supreme Court authority. Perhaps the most interesting part of the opinion was the rejection of the argument that Arkansas Department of Health & Human Services v. Ahlborn, 547 U.S. 268 (2006) supported a “make whole” interpretation of ERISA Section 502(a)(3). (Section 502(a)(3) of ERISA authorizes a civil action by a plan “participant, beneficiary, or fiduciary . . . to obtain other appropriate equitable relief . . . to enforce any provisions of this subchapter or the terms of the plan.”

Ahlborn thus turned on the application of the federal Medicaid statute. ERISA, by contrast, does not limit the Committee’s right to reimbursement.

A Template For Plan Administrators?

The facts of the case are easily derived from a perusal of the article, so little would be gained here by repetition. Suffice it to say, the article does little for the retail giant’s public image, but analysis from that perspective would be redundant at best. More germane to the subject at hand, does the Wal Mart way suggest an approach that is beneficial to plan administrators as a group?

The answer is yes and no. On the positive side, the article demonstrates that ERISA plans can pursue full recovery of medical expenditures. Of course, after Sereboff, we knew that already. The Eighth Circuit case interprets the meaning of “appropriate” equitable relief in a manner that gives little advantage to participants. That outcome was welcomed by plan administrators inasmuch as some had contended the term should be construed to limit plan recovery in cases where the plan participant had not been “made whole” by the personal injury settlement.

Saving Money The Wal Mart Way?

On the other hand, most plan administrators will continue to find advantage in compromising recoveries where possible. Having represented plan administrators in litigation in such matters myself, my experience has been that plan administrators usually try to find a reasonable solution when plan participants are seriously debilitated and recovery funds are limited. The reasons are several, but here are two of the most obvious.

Unlike Wal Mart, most employers have to give some thought to legal costs. True, ERISA authorizes recovery for attorneys’ fees and costs, but the issue remains an important consideration. For example, the featured case in the WSJ article has traveled from the U.S. District Court, to the Eighth Circuit Court of Appeals, and after a petition for rehearing was denied, is now poised for a petition for review by the U.S. Supreme Court.

Also, most employers prefer not to sue their own employees if given a reasonable alternative. Thus, particularly where recovery resources are limited, the cases will be more likely resolved by compromise than by litigation.

And then there are less obvious reasons. For example, though self funded plans must be fully responsible for claims to avail themselves of ERISA’s preemptive force vis a vis state law subrogation restrictions, plan administrators may avail themselves of stop loss insurance. Thus, depending on the risk retention levels, the economics of the transaction as a whole will often result in a diffusion of the risk. While liability cannot be bifurcated, it can be mitigated.

Conclusion

Plan administrators have a fiduciary duty to preserve plan assets and defray expenses where possible. Despite the implication in the WSJ article, the great majority of health plan subrogation cases are resolved without litigation. In some cases, litigation is simply unavoidable where the parties have substantial disagreement as to the adequacy of plan language or applicable law, but these cases are the exception, not the rule. In my experience, most plans conduct ERISA subrogation programs without regular court appearances or unfavorable media coverage.

(Thanks to Professor Roger Baron, University of South Dakota School of Law for calling this article to my attention this morning.)

See also -:: Wal-Mart Takes All In ERISA Reimbursement Dispute With Minor Child Plan Beneficiary ; :: Wal-Mart SPD Deemed To Be “The Formal Plan Document” But Release Terms Leave Open Issue On Remand ; :: A Health Plan Subrogation Reader ; :: Health Plan Subrogation Provisions: A Revue ; :: Essential Requirements For ERISA Health Plan Subrogation Language ; :: Court Denies Wal-Mart Administrative Committee’s Motions In Subrogation Controversy

Comments

  1. This case makes the cover of the Journal. Did it really have to come to this? While I can understand the reasoning behind the Plan’s decision to litigate, often times I wonder whether people realize what this type of case can do to our industry. Could the Plan have agreed to a portion of the settlement funds? It clearly had the opportunity to do so

    The point I am trying to convey is that not every decision relating to subrogation rights should go to court or be strictly based on monetary reasons. Plans have to assess the effects that these types of cases can have on the industry as a whole. There is no question that the publicity surrounding this case will only harm the positive results that subrogation can bring to the self-insured industry. The patient’s attorney is attempting to appeal this decision. What effect will this publicity have on that?

    In situations where there is not enough money to go around, it is important to think about the ramifications of certain processes to ensure that the overall goals are met by the administrator – to protect the plan, offer reasonable pricing and to ensure the future of the self-insured industry. These stories only boost the arguments for those who want to have universal healthcare and further damage the limited protections that we currently have under ERISA.

  2. Professor Roger Baron says:

    Thanks for blogging this, Roy. The misfortune for the Shanks was exacerbated by the death of their son in Iraq which occurred shortly after the trial court’s decision in this litigation. You are right, Roy, that many cases are settled without litigation. Too bad this one wasn’t.

  3. To complete one’s comprehension of the extent to which Wal Mart is a statistical outlier, one needs to read Administrative Committee of Wal-Mart Stores, Inc. v. Mooradian, 2006 WL 2793183 (M.D.Fla.) (2006). There, having been precluded from pursuing a participant’s estate for reimbursement, Wal-Mart carried its battle for reimbursement of plan expenditures against the participant’s widow. The situation becomes all the more ridiculous when viewed in the context of the vast wealth of the low cost retail leader. See, :: Court Denies Wal-Mart Administrative Committee’s Motions In Subrogation Controversy

    On the other hand, don’t overlook that the health plans often have to pick up the tab when the liability carriers for the at fault parties refuse to honor their obligations. Take a look , for example, at Brian King’s article about Allstate’s business practices. The health plan industry subsidizes the likes of Allstate when these carriers apply their own version of the Wal Mart approach to claims settlement.

  4. Denny Siebold says:

    Roy,

    The real problem with these provisions rests with their hidden limitations on benefits. You never find an SPD that says: In the event of an injury, the plan will only provide benefits to the extent that you do not receive compensation for that injury from another source.If a plan is rated properly, subrogation recoveries amount to windfall income.

  5. Adam:
    You wrote about subrogation helping to ensure the future of the self-insured industry.
    Are you saying that without subrogation, that the premiums insurers would have to charge would not be economically feasible for plans to assume?
    I understand that subrogation claims account for 2-3% of all claims paid.
    If true, wouldn’t the premiums increase only 2-3% if subrogation was not an option?
    Don Levit

  6. Denny has a good point. The ability to actuarially factor in subrogation or reimbursement recoveries when assessing health plan “premium” cost is far from clear.

  7. I said that subro helps…clearly the 2-3% help in limiting costs for the self insured industry. I agree that the actuarial factors do not use subro efforts enough in evaluating premium costs but a part of that is based on the less than standard recovery numbers that most of the Blues and other fully insured products have had over the years.

  8. Michael M. Tobin says:

    Professor Baron’s Elephant:
    Subrogation never should have crept into the courtroom as an assignment of a personal injury claim. Every liability settlement is a discount from full value. Even after verdict to prevent appeal. Insurance companies have sold this foolish notion that all claimants are overpaid. (with the exception of their CEO’s). Subro recoveries are pocketed by insurance companies and never get calculated into the premium charges. Ask any insurance actuary about their “secret profit” cushion set aside every year for IBNR-incurred but not reported. Subro is treated as a windfall in ratemaking.

  9. Thanks for the plug, Michael! (I haven’t corresponded with my Florida attorney friend Michael Tobin for quite a while.) Michael’s elephant reference is to the law review article which I published in Mercer Law Review — “Public Policy Considerations Warranting Denial of Reimbusement ot ERISA Plans: It’s Time to Recognize the Elephant in the Courtroom,” 55 Mercer Law Review 595 (2004). This article was written and published in the post-Knudson era, prior to Sereboff. I continue to be amazed at how so many ERISA judicial decisions are made in a vacuum void of discussion of public policy considerations. It seems that the court rulings are “all or nothing” — either the plan gets 100% of what it seeks or it gets nothing. Perhaps someday a moderate rule of reason may start prevailing. [By the way, if I had it to do over again, I wouldn't make the title to that law review article so long!]

  10. Subrogration. I was injured in a MVA and disabled. I did win a lawsuit against the car insurance company, but all of it went to Washington State Worker’s Compensation and my insurance company.

    That is the law and if it applies to one person, it should be applied to everyone.