ERISA Wake-Up Call: Self-Funded Plans Must Act to Protect Subrogation Rights
A recent U. S. Supreme Court decision has potentially far-reaching implications for self-funded health plans sponsored by many employers. Employers and their insurance companies will need to utilize effective monitoring systems to stay aware of health and medical-related lawsuits filed by plan participants if they hope to recover costs advanced. With the escalating cost of health care, employers unaware of this decision may find it difficult to exercise the subrogation or recoupment rights built into most company’s plans.
In Sereboff v. Mid-Atlantic Medical Services, Inc. (“MAMSI”), decided May 15, 2006, the U.S. Supreme Court held that a health plan can bring a claim against a plan participant under the Employee Retirement Income Security Act of 1974 (“ERISA”) to recover reimbursement of medical costs which the participant had also recovered from a third party in a separate personal injury case. Critically, however, the plan can only do so if the funds from the tort action are “specifically identifiable” and still “within the possession and control” of the plan participant. If the funds recovered from the third party have already been disbursed (by way of payment of a settlement or judgment) and are part of the participant’s assets generally, such an action for reimbursement under ERISA will be barred.
In 2002, the U.S. Supreme Court decided a case similar to MAMSI where a health plan participant was injured in a car accident and the insurer sought to recover the participant’s medical expenses paid by the health plan. The plan contained a typical reimbursement provision which permitted the plan to recoup these costs if the participant recovered the costs from a third party. The personal injury lawsuit arising from the car accident was filed and settled before the subrogation suit was filed. Great West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002).
In Knudson, the Supreme Court held that although ERISA expressly authorizes suits “to enjoin any act or practice which violates the terms of [a] plan, or…to obtain other appropriate equitable relief…to enforce any provisions of the terms of [a] plan,” it found the plan’s suit to be improper. The Court reasoned that the plan was seeking the repayment of money, and was not really seeking the non-monetary “equitable relief” permitted by ERISA.
The Supreme Court did not overrule Knudson in MAMSI, but distinguished it. Because the settlement funds from the third party in MAMSI had been set aside and preserved in the plan participant’s investment accounts and had not been disbursed, the plan could seek reimbursement of medical expenses under ERISA’s “equitable relief” provision. Unlike in Knudson, the plan sought to recover a particular fund from the defendant and was not seeking money damages from the defendant’s general assets. This made the action “equitable” under ERISA and akin to restitution (a common law equitable remedy) rather than an action seeking the payment of money. Thus, an action could be maintained under ERISA.
Practice Pointer: The real-world fallout from these two decisions could prove expensive for employers, but the MAMSI opinion at least provides new hope and helpful guidance about how self-funded health plans should pursue reimbursement rights.
Sponsors of self-funded plans should consider implementing an effective mechanism that will allow them to know about and monitor litigation filed by plan participants (employees and their dependants) for personal injuries, where part of the damages sought are the medical bills that have been paid by the employer’s plan. The plan will then need to attempt to intervene in the case in order to preserve its ability to be reimbursed or bring an action later seeking to enjoin the disbursement of any money to the plan participant before the plan’s reimbursement rights can be decided. Failing to do so could prove fatal in any action brought by the plan for reimbursement of medical expenses under ERISA.
These decisions potentially affect all employers with self-funded plans. If you need advice on these decisions or other issues involving your company-sponsored health plan, please contact the firm at (540) 983-9300.