Minimizing Liens and Maximizing Personal Injury Recoveries
Liens complicate the resolution of nearly every personal injury case. Early identification of lien holders and knowledge of the circumstances under which liens may be compromised are essential to the favorable resolution of the client’s claims. This article is intended to summarize the law applicable to the most commonly encountered liens: workers’ compensation liens, health insurance liens, Medicaid liens, and Medicare liens.
II. Workers’ Compensation Liens:
Workers’ compensation carriers have a lien on an injured employee’s recovery from a third party.1 The amount of the lien is based on the indemnity payments and medical payments made by the carrier.2 It does not include vocational rehabilitation benefits.3 The carrier also gets a holiday from future indemnity and medical payments to the extent that the employee’s net recovery exceeds the carrier’s lien for payments already made.4
The carrier’s lien is reduced by its pro rata share of the attorneys’ fees and litigation expenses incurred by the employee in prosecuting the civil suit.5 In determining the carrier’s pro rata share of fees and expenses, the value of the carrier’s holiday must be taken into account.6 In cases involving severe, permanent injuries, the carrier’s economic benefit for purposes of determining its pro rata share will often be the entire net recovery by the plaintiff. As a result, the carrier will be required to reduce its lien for past payments by the amount of attorneys’ fees and costs attributable to its past payments and its future holiday. An example may be helpful:
In a catastrophic personal injury case, the workers’ compensation carrier had paid $1,250,000 in medical benefits and indemnity benefits. Its future exposure was calculated in present dollars by determining what amount would be necessary to buy an annuity that would pay the plaintiff’s future medical expenses for the duration of his life expectancy. This number was found to be $3.5 million. The same was done to calculate a present value for his indemnity benefits of approximately $250,000.
Assuming that the personal injury recovery would net an amount sufficient to cover these numbers, the workers’ compensation carrier would realize an economic benefit from the recovery of $5 million ($1,250,000 for reimbursement of benefits already paid + holiday from future payments valued at $3.5 million and $250,000). The carrier, however, must pay the attorneys’ fees and costs attributable to this benefit. In this case, the fees and costs amounted to 35% of the gross settlement. Applying this percentage to the carrier’s economic benefit, it turned out that the carrier was responsible for $1,750,000 of the fees and expenses incurred by the plaintiff (35% of $5 million).
The workers’ compensation carrier’s pro rata share of fees and expenses, in this case, exceeded its lien for past benefits. The plaintiff did not have to pay the carrier one dime on its lien. In fact, the carrier owed the plaintiff an additional $500,000 ($1,750,000 less $1,250,000). Having worked these calculations out early in the case, we knew to invite the workers’ compensation carrier to the mediation. Not only did it agree that the plaintiff did not owe it anything on its lien, it also contributed significant new money to the settlement. In exchange, it was relieved of its future exposure of approximately $3,750,000.
Only rarely will it turn out that the workers’ compensation carrier owes the plaintiff cash. Much more frequently, the carrier will offer to reduce its lien by only one-third, ignoring both the future economic benefit it will receive and the litigation expenses incurred by the plaintiff. Even when negotiating a compensation lien in the typical case, therefore, it is important to remember not to blindly accept a one-third reduction without first considering the actual value the carrier is receiving and the costs of recovery.
III. Health Insurance Liens:
Just about all health insurance policies include a subrogation clause that permits the insurer to recover benefits it paid to an insured who ultimately recovers damages from a liable third party. Our Supreme Court has regularly instructed trial judges to reduce the insurer’s lien by its pro rata share of attorneys’ fees and expenses.7
The most recent reported case involving a health insurer’s quest for reimbursement under its subrogation clause was Lutkus v. Lutkus.8 In Lutkus, the father of a child injured in an automobile accident brought suit against the child’s mother, who was driving one car, and the driver of the other car. The father sued as next friend of his son and also on his own behalf to recover medical expenses for the child. He settled the suit for $400,000 which was said to be the extent of the available liability coverage. His health insurer intervened and asserted a subrogation claim against the father for $183,000. Ruling on the father’s petition to approve the minor’s settlement, the trial judge held that the health insurer was not entitled to anything. The judge felt that this was a reduced recovery and that the injured party must be made whole before the insurer could recover.
On appeal, the Supreme Court reversed, noting that it had already rejected the “insured-first” rule that the trial judge had applied.9 Instead, it ordered the trial judge to “make separate findings regarding the full value of the claims of [the son] and his father; ascertain the amount of funds available for allocation; determine a reasonable figure for attorney’s fees, including a reasonable figure for the fees attributable to the recovery’s component for medical expenses; and . . . determine the appropriate allocation to [the insurer] as subrogee.”10
On remand, the trial court found the value of the son’s claims to be $3,630,948.80; the father had a claim for $6,964.53 in out-of-pocket expenses; and the health insurer had a subrogated claim for $183,906.27. Dividing the value of the son’s claims by the $400,000 he actually recovered, the court found that each claimant was entitled to 11.016% of their claims. Thus, the son was entitled to $378,973.67, the father was entitled to $767.21, and the carrier was entitled to $20,259.12. However, these numbers had to be further reduced by each claimant’s pro rata share of attorneys’ fees and litigation costs. The court concluded that the son was entitled to $272,524.71; the father was entitled to $551.81; and the health insurer was entitled to $14,568.56.11 The carrier appealed this order to the Supreme Court. On February 16, 1999, the Court affirmed the order without a written opinion.12
We used the Lutkus case recently to reduce a health insurer’s lien from approximately $350,000 to $20,000. A young girl was catastrophically injured in an automobile accident. We were able to recover $500,000 for her through liability insurance and underinsured motorist coverage. The key was to convince the carrier that it was not entitled to any reimbursement from the underinsured motorist policies. Those policies only provided coverage for damages for bodily injury suffered by an insured. They did not permit the parents to recover for their economic losses; i.e., their legal responsibility for their child’s medical expenses. Thus, the only policy against which the health insurance carrier had any right of subrogation was the liability policy of $100,000. By documenting the value of her individual claim versus the value of her parents’ claim for medical expenses, we were able to convince the health insurance carrier that it was entitled to only 20% of that policy. As a result, after reducing our fee, the girl netted out nearly $380,000.
An issue that has not been addressed in New Hampshire is the effect of ERISA regulation on efforts by health insurance carriers to enforce contractual subrogation clauses. Where the health insurance plan is an employment benefit, subject to few exceptions, the plan’s subrogation rights are governed by the federal ERISA statute. ERISA takes the enforcement of subrogation rights out of state law and subjects them to federal common law.13
Although neither the United States Supreme Court nor the First Circuit have yet ruled on the subject, at least two circuit courts have adopted the “make whole” rule rejected by our Supreme Court in Lutkus as federal common law.14 Thus, there is legitimate support for arguing to a carrier that it is entitled to nothing in a reduced recovery case. There is also support, under federal common law, for the right of a plaintiff to reduce the amount of the lien by the carrier’s pro rata share of fees and costs.15
III. Medicaid Liens:
Reimbursement of Medicaid benefits is governed by state statute.16 The statute was amended recently to implement a new set of notice requirements. Now, the plaintiff’s lawyer must provide written notice of a third party claim to the commissioner of health and human services at least 30 days before “any scheduled trial, alternative dispute resolution hearing, or settlement . . .”17 The commissioner then must inform plaintiff’s counsel of the amount of the Medicaid lien within 21 days.18 Although the statute says that “[n]o attorneys’ fees shall be deducted from the amount due the state”19, the new provision permits either the plaintiff or the commissioner to ask the trial court to “determine an equitable apportionment” of the money set aside for the lien.20
Administrative rules, which were enacted before the statute was amended, require the plaintiff’s attorney to notify the Office of Medical Services “upon initiation of legal action against a third party for a claiming involving personal injury.”21 The rules also explain the state’s policies on negotiating Medicaid liens. The third party recovery is said to be sufficient to demand full reimbursement if: 1) it covers the plaintiff’s attorneys’ fees and costs; 2) it covers all creditors’ claims at 100%; and 3) it allows the plaintiff to receive at least 10% of the recovery.22 Where the amount of the recovery is not sufficient to meet each of these criteria, the Office of Medical Services is ordered to “review, on a case by case basis, all attendant circumstances in order to determine to what extent repayment is to be made . . .”23
IV. Medicare Liens:
Unlike Medicaid, Medicare reimbursement is governed by federal law.24 Federal regulations expressly require Medicare to reduce its lien by its proportionate share of attorneys’ fees and costs.25 In addition, the agency may waive the lien, either partially or entirely, under circumstances where recovery would be contrary to “equity and good conscience” or would create an undue financial hardship.26
We were recently able to convince the government to waive its entire lien in a case in which it had paid more than $250,000 in medical expenses. The case involved an elderly man who was badly injured in an automobile accident. Available liability insurance only amounted to $100,000. The government initially requested reimbursement of $66,000, after taking into account attorneys’ fees and costs. However, by writing a detailed letter with many exhibits, we were able to establish that reimbursement would be contrary to equity and good conscience and that it would cause the client an undue financial hardship. As a result, the entire lien was waived.
It is vitally important to pay careful attention to the matter of third party liens at the very outset of every personal injury case. The examples set forth above demonstrate that with relatively little effort, we can save our clients thousands of dollars. And in some instances, we can actually make them money. At the very least, preparation will ensure that liens are minimized to the greatest extent possible.
- See R.S.A. 281-A:13, I(b).
- See id.
- See Chambers v. Geiger, 133 N.H. 149, 153 (1990).
- See Tarr v. Republic Corp., 116 N.H. 99, 105 (1976).
- See R.S.A. 281-A:13, I(b) and IV.
- See Gelinas v. Sterling Industrial Corporation, 139 N.H. 14, 19 (1994).
- See Lutkus v. Lutkus, 141 N.H. 552, 557 (1997); Roy v. Ducnuigeen, 130 N.H. 24, 27 (1987).
- See n. 7, supra.
- See id., 141 N.H. at 556 (citing Dimick v. Lewis, 127 N.H. 141, 144-45 (1985)).
- See id., 141 N.H. at 557.
- See Lutkus v. Lutkus, No. 94-C-028, Order on Future Course of Litigation (Belknap County Superior Court, October 9, 1997).
- See Supreme Court Docket No. 97-792.
- See FMC Corp. v. Holliday, 498 U.S. 52, 58-60 (1990); Harris v. Harvard Pilgrim Health Care, Inc., 20 F.Supp.2d 143, 150 (D.Mass. 1998).
- See Cagle v. Bruner, 112 F.3d 1510, 1521 (11thCir. 1997); Barnes v. Independent Automobile Dealers Association, 64 F.3d 1389, 1394 (9thCir. 1995).
- See Waller v. Hormel Foods Corporation, 120 F.3d 138 (8thCir. 1997); Harris, n. 13, supra, 20 F.Supp.2d at 153.
- See R.S.A. 167:14-a.
- See R.S.A. 167:14-a, IV.
- See id.
- R.S.A. 167:14-a, III.
- See R.S.A. 167:14-a, IV.
- See He-W 521.08(a).
- See He-W 521.08(g).
- He-W 521.08(h).
- See 42 U.S.C. §1395y(b)(2).
- See 42 C.F.R. §411.37.
- See 42 U.S.C. §1395gg (c); 42 C.F.R. §405.355.