In recent years, health insurance carriers have been using the federal ERISA statute to insist upon full reimbursement of their liens from the proceeds of third party recoveries. Contrary to longstanding practice, carriers were refusing to reduce their liens by an amount equal to their proportionate share of the injured person’s attorneys’ fees and litigation expenses. A new decision by the United States Supreme Court should put an end to this.
II. Health Insurance Liens and ERISA
New Hampshire, like most states, requires health insurance carriers to bear their proportionate share of attorneys’ fees and litigation costs when they seek to enforce a contractual subrogation provision.1 This eminently logical rule was essentially rendered meaningless when the First Circuit held in 2000 that health insurance plans governed by the federal ERISA statute could ignore state law such as this and were free to insist upon being repaid in full.2 Of course, with very few exceptions, all health insurance plans that are provided as an employment benefit are subject to ERISA.3 Thus, the First Circuit’s ruling governed nearly all New Hampshire cases resulting in third party recoveries in which a lien was asserted by a private health insurance carrier.
However, on January 8, 2002, ERISA became a hindrance to health insurance plans when the United States Supreme Court ruled in Great-West Life & Annuity Insurance Company v. Knudson4 that ERISA does not permit insurance carriers to sue their members to enforce contractual subrogation provisions. Suddenly, covered health insurance plans were left without any means of enforcing their liens.
III. The Knudson Decision
Janette Knudson was rendered a quadriplegic in an automobile accident. Her medical bills totaling $411,157.11 were paid by her husband’s health insurance plan. The Knudsons brought a products liability suit against the car manufacturer and recovered $650,000. They apportioned only $13,838.70 of the settlement to past medical expenses and offered this to the health insurance carrier to satisfy its lien. They put the entire net proceeds in a special needs trust for Mrs. Knudson’s benefit.
The health insurance carrier did not accept the apportionment offered by the Knudsons and filed suit in federal district court against them seeking to enforce the reimbursement provision of the plan. The Knudsons argued that the plan was only entitled to recover the amount they received from the third party that was allocated to past medicals ($13,838.70). The district court agreed. On appeal, the 9th Circuit ruled that the carrier had no legal right to sue the Knudsons under ERISA. The Supreme Court affirmed by a 5-4 vote.
Justice Scalia, writing for the majority, began by noting that the plain language of the ERISA statute only allows plans to sue members if the plan is seeking an equitable remedy as opposed to a remedy at law. In this case, Scalia found that the plan was seeking “to impose personal liability on [the Knudsons] for a contractual obligation to pay money – relief that was not typically available in equity.”5
Scalia explained that a plan’s claim for restitution might be an appropriate remedy under ERISA, but that this was not such a case:
[F]or restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.
Here, the funds to which [the carriers] claim an entitlement under the Plan’s reimbursement provision – the proceeds from the settlement of [the Knudson’s] tort action – are not in [the Knudson’s] possession. . . . [T]he disbursements from the settlement were paid by two checks, one made payable to the Special Needs Trust and the other to [the Knudson’s] attorney (who, after deducting his own fees and costs, placed the remaining funds in a client trust account from which he tendered checks to [the carrier for $13,838.70 and Medicaid]).6
In addition, Scalia noted:
[T]here may have been other means for [the carriers] to obtain the essentially legal relief that they seek. We express no opinion as to whether [the carriers] could have intervened in the state- court tort action brought by [the Knudsons] or whether a direct action by [the carriers] against [the Knudsons] asserting state-law claims such as breach of contract would have been pre-empted by ERISA. Nor do we decide whether [the carriers] could have obtained equitable relief against [the Knudson’s] attorney and the trustee of the Special Needs Trust . . .7
Justice Ginsburg dissented (with Justices Souter, Stevens, and Breyer). She believed that the relief sought by the plans was equitable restitution (as opposed to Scalia’s finding of legal restitution) and that this was expressly allowed by ERISA. She commented:
After today, ERISA plans and fiduciaries unable to fit their suits within the confines the Court’s opinion constructs are barred from a federal forum; they may seek enforcement of reimbursement provisions like the one here at issue only in state court. Many such suits may be precluded by antisubrogation laws, others may be preempted by ERISA itself, and those that survive may produce diverse and potentially contradictory interpretations of the disputed plan terms.8
IV. What It Means
The limited holding from Knudson is that a health insurance plan may not sue its member under ERISA to enforce a contractual subrogation right when the money sought by the plan is no longer in the member’s possession. Other ramifications of the decision are more difficult to pin down.
The decision can be read to cast doubt on the ability of a health insurance carrier to ever sue under ERISA to enforce a subrogation right. If the carrier is unable to sue under ERISA, it is quite likely that it would have no means by which to enforce its lien. This is so because ERISA has an express preemption clause which, by its terms, eliminates any state law claims that “relate to” an ERISA qualified plan.9 According to the statute, a state law “relates to” an ERISA plan “if it has a connection with or reference to such a plan.”10
The First Circuit has interpreted this to mean that “ERISA will be found to preempt state?law claims if the trier of fact necessarily would be required to consult the ERISA plan to resolve the plaintiff’s claims.”11 It is hard to imagine that a suit to enforce a contractual subrogation provision would not require reference to the contract itself. Therefore, it certainly seems as if such a suit would be preempted. If the carrier could not sue under ERISA in light of Knudson and was also preempted from suing under state law, its subrogation rights would be completely unenforceable.
On the other hand, if, unlike Knudson, the carrier were able to fashion its subrogation enforcement action into an equitable restitution suit under ERISA, it remains unlikely that the carrier would be permitted to recover the full amount of its lien. Such a suit would invoke the equity powers of the federal court, meaning that the court would have to apply equitable considerations to determine a fair distribution of the third party recovery. Surely equity requires one who benefits from a fund of money obtained by another to pay his proportionate share of the costs incurred by the one who acquired that fund. Of course, other equitable arguments could be made to lower the amount the carrier is entitled to recover. For example, the court should consider whether the injured party is being made whole by the recovery before it determines the appropriate distribution of the proceeds.
Similarly, if the carrier were somehow able to avoid ERISA preemption and proceed with a state law claim against its injured member, in New Hampshire that suit would be subject to the common law requirement that a health plan asserting a lien must pay its proportionate share of the injured person’s attorneys’ fees and litigation expenses.12
The bottom line is that a private health insurer seeking to enforce a lien should now be required to first demonstrate that it has a valid means of enforcing its subrogation rights. If the carrier is unable to establish a right to proceed through equitable restitution under ERISA or through a state law claim that is not preempted, it is not entitled to any portion of the third party recovery. However, if the carrier is able to demonstrate a right to proceed, it will still be required to reduce its lien by a proportionate share of the attorneys’ fees and expenses incurred by the injured party. Either outcome is vastly preferable to the prospect of repaying 100%.
In the aftermath of Knudson, it is clear that health plans covered by ERISA can no longer demand 100% reimbursement of their liens. In fact, they may very well be entitled to nothing. For years, the rights of the average citizen have been trampled by insurance companies and HMOs hiding behind the ERISA statute. It seems that what goes around, has come around.
See Lutkus v. Lutkus, 141 N.H. 552, 557 (1997); Roy v. Ducnuigeen, 130 N.H. 24, 27 (1987).
See Harris v. Harvard Pilgrim Health Care, Inc., 208 F.3d 274 (1st Cir. 2000).
ERISA does not govern plans provided by employers who are either governmental entities or churches. See 29 U.S.C. §1003.
122 S.Ct. 708 (2002).
Id., 122 S.Ct. at 713.
Id., 122 S.Ct. at 715.
Id., 122 S.Ct. at 718.
Id., 122 S.Ct. at 722 (Ginsburg, J. dissenting) (citations omitted).
29 U.S.C. §1144(a) (1985).
Shaw v. Delta Airlines, Inc., 463 U.S. 85, 96-97 (1983).
Harris, supra note 2, 208 F.3d at 281.
See note 1, supra.