A new case from the United States Court of Appeals for the Third Circuit, US Airways, Inc. v. McCutchen, ___ F.3d ___, 2011 WL 5557411(3d Cir. Nov. 16, 2011), represents a bright spot on the otherwise rather bleak horizon for injured plaintiffs trying to negotiate medical liens asserted by ERISA welfare benefit health plans.
During the more than 30 years that I’ve been handling personal injury cases, I’ve seen them become an increasingly complex practice area. It’s no longer just a matter of investigating the facts, applying a few familiar negligence principles, valuing the claim, and negotiating a settlement. One reason for that has been the growing keenness of those who pay medical bills for injured plaintiffs to recover their costs from third party tortfeasors.
Of course, by attempting to recover those costs from tortfeasors, the payers of claimants’ medical expenses end up competing with injured plaintiffs for limited settlement dollars.
That means that counsel needs to be attentive to these interests lest a successful client end up with a far smaller recovery than expected or, even, with no recovery at all. Failing to pay attention can end up creating another kind of claim altogether: legal malpractice.
Health insurers have long asserted subrogation interests and experienced plaintiffs’ counsel have often been successful in reducing and sometimes eliminating health insurers’ claims. Two familiar weapons against health insurers have been the “common fund” doctrine and the “make-whole” doctrine. As applied in this context, the common fund doctrine is the idea that if an insurer benefits from a fund created as a result of the efforts of the injured party to recover damages from a tortfeasor, the insurer should also share in the costs incurred in creating that fund, typically attorneys’ fees and expenses. The “make-whole” doctrine is the idea that the injured party should be made “whole,” that is, reimbursed for all losses, including pain and suffering and lost income, as well as costs, including attorney fees, before the insurer can recover for the costs of its medical insurance by way of subrogation.
But with the adoption of ERISA (the Employee Retirement Security Act of 1974), a new kind of “super” lien began to evolve. ERISA applies to claimants whose medical bills are covered by employer-sponsored self-insured medical plans.
Over the years, plan sponsors have structured increasingly sophisticated plan documents providing that where a tortfeasor is responsible for the plan participant’s injuries, the plan will recover all of its resulting expenses first, even if the amount recovered from the tortfeasor or the claimant’s own insurance is small enough so that recovering “second” means getting nothing at all.
This has led to litigation between ERISA welfare benefit plans and injured participants. While there have been occasional bright spots, the overall course of this litigation has been discouraging for injured plan participants and their lawyers. The trend has been for courts to allow the plans to recover for medical expenses in accordance with the literal language of the plan document and without reference to common fund and make-whole concepts.
US Airways, Inc. v. McCutchen may well represent an important turn in a more favorable direction for claimants. In that case, the injured plaintiff settled with the tortfeasor, recovering less than the total amount of his attorney’s fees plus the Health Plan’s subrogation claim. Plaintiff’s counsel put two-thirds of the Plan’s claim into its trust account, “reasoning that any lien found to be valid would have to be reduced by a proportional amount of legal costs.” Id. at ___, *1.
The US Airways Plan sued under § 502(a)(3) of ERISA, “seeking ‘appropriate equitable relief’ in the form of a constructive trust or an equitable lien on the [amount] held in trust and the remaining [balance] personally from McCutchen.” The United States District Court for the Western District of Pennsylvania agreed, relying on plan language allowing the plan’s subrogation interest to reach “any monies recovered,” and granted summary judgment for the Plan. Id. at___,*1.
The Third Circuit, in an opinion by Circuit Judge Fuentes, reversed. It noted that under ERISA, plan participants can enforce their rights against a plan’s fiduciaries under the plain language of the plan document. Id at ___,*2. Plan fiduciaries, on the other hand, are limited in their rights to recover to injunctive relief or “other appropriate equitable relief.” Id., citing, 29 U.S.C. § 1132(a)(3); Knudson, 534 U.S. at 221; Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356, 361 (2006). Citing Knudson and Mertens, the court repeated that “’equitable relief’ must mean something less than all relief.” Id. at ___.*4. It noted that in construing §502, the Supreme Court has stated the word “appropriate” is not superfluous. Id.at ___, *3, citing, Mertens v. Hewitt Assocs., 508 U.S. 248, 257-58 (1993).
The opinion went on to interpret § 502(a)(3) to incorporate not just equitable claims, but also traditional equitable defenses, such as unjust enrichment. Id. at___,*4, citing Cigna Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011), (citing Restatement (Third) of Trusts § 95, and Comment a (Tent. Draft No. 5, Mar. 2, 2009)); see also 4 Palmer, Law of Restitution § 23.18 at 472-74 (‘[T]he principle of unjust enrichment . . . . should serve to limit the effectiveness of contract provisions which in terms provide for reimbursement out of the insured’s tort recovery without regard to whether or the extent to which, that recovery includes medical expense.’)).
The decision allows the common fund doctrine to be considered to determine whether a plan is unjustly enriched by gaining the benefit of an injured party’s effort to recover from a tortfeasor without sharing in the costs of such a recovery.
In the District Court, McCutchen had also argued for application of the “make-whole” doctrine.
The Third Circuit did not decide whether the make-whole doctrine would also be taken into account to mitigate against the literal application of the plain language of plan documents in §502 equitable subrogation claims, as McCutchen did not argue that issue on appeal. But on its face, that same logic suggests that the equitable doctrine of unjust enrichment could permit consideration of the make-whole doctrine as well.
It is by no means clear that McCutchen will stand the test of time. The insurance/third-party administrators’ industry is up in arms about it, and one adjuster to whom I’ve argued the case claims that the decision will be subject to an a motion for reargument, en banc.
In fact, McCutchen’s counsel at Public Justice advises that the time within which reargument can be sought has been extended to December 14. A petition for certiorari seeking U.S. Supreme Court review seems likely. Meanwhile, in the Ninth Circuit, in CGI Technologies & Solutions, Inc. v. Rhonda Rose and Nelson Langer Engle PLLC, Docket Nos. 11-35127 and 11-35128, the same issue, together with the hot question of lawyer liability, has been briefed. Oral argument has not yet been scheduled.
At least for now, McCutchen puts an important weapon in the hands of plaintiffs’ counsel seeking to resolve ERISA subrogation claims. As a practical matter, if McCutchen is upheld, it will reduce ERISA plans to virtually even footing with fully insured plans.
For counsel in personal injury cases on either side of the “v,” this is a development worth watching.
Rich
RSS Posts Feed
Subscribe by e-mail
Follow me on Twitter
{ 3 comments… read them below or add one }
Richard – thanks very much for your thoughtful discussion of McCutchen.
I think an interesting aspect of this case is how the historical narrative of subrogation liens can explain the shift in how the law has treated them, and how we used this narrative in McCutchen.
You touch on this in your post, but the history of these liens is fascinating. Although subrogation and some forms of reimbursement are ancient equitable remedies (the roots of the doctrine date back to Roman and even Talmudic law), the ability of insurers to bring claims for reimbursement against insureds who are personal-injury victims is a very modern practice. Before the mid-20th century, courts almost universally prohibited this type of claim in the personal-injury context, reasoning that personal-injury victims are never truly made whole by money damages, let alone deemed to have obtained a double recovery. See, for instance, the familiar maxim from the DC Circuit in Hudson v. Lazarus that “Not many people would sell an arm for the average or even the maximum amount that juries award for loss of an arm.” What’s more, courts viewed these claims as equitable, and reasoned that by accepting premiums, an insurer was agreeing to, in exchange, pay for medical expenses in the event of an injury. Allowing an insurer to then come back and pick up those medical expenses on the back end was, according to most courts, inequitable because it allowed them to obtain a windfall. There’s a good recent case discussing this history from the Missouri Supreme Court, called Scroggins v. Red Lobster.
It wasn’t until after World War II, however, that courts began to permit these liens against personal injury victims. What changed in the second half of the 20th century was that insurers realized that they could repackage their claim for reimbursement as based not on equitable grounds, but as rooted in “freedom of contract.” As medical insurance became profitable, insurers began to systematically including subrogation/reimbursement clauses in their insurance agreements, and they then began to argue in court that these agreements should govern the rights of the parties. (It’s interesting to note that this shift roughly corresponds with the birth and rise of the “law and economics” movement.)
Many courts agreed with this argument, and the concept of subrogation began to be viewed as a contractual one, as opposed to an equitable one. We can see this pretty clearly in the Shank and O’Hara decisions from the Eighth and Eleventh Circuits. In these cases, the courts looked at the subrogation language of the plan and said, essentially, “is this language clear?” In their view, the right to enforce a subrogation lien was governed by rules of contract. Thus, if the contractual language is clear, then the rights should be enforced according to the plain language of the Plan. Under this approach, insurers could pretty much write whatever language they wanted to into their plans and come into court to enforce it, no matter what the factual circumstances of the particular case.
Of course, one of the big problems with this position is that it’s pretty hard to get around the plain language of ERISA, which makes clear that these types of claims are equitable, not legal. This distinction, as the Supreme Court has said repeatedly, imposes significant limitations on the type and availability of relief that a party can obtain when they seek relief under ERISA. The plans got around this by arguing that one of ERISA principal objectives was to enforce plan terms as written, and that any deviation from clear plan language would create severe uncertainties for both insurers and beneficiaries. They also used Sereboff to argue that the Supreme Court had already authorized reimbursement claims under ERISA.
But in McCutchen, we took pains to pretty exhaustively sketch out the history of subrogation liens, and to articulate the two competing visions of how subrogation liens should be treated: either as rooted in contract law, and therefore governed by the language in the plan, or as rooted in equity, and governed by principles of equity. What McCutchen does, and why I think it’s a game-changer, is that it recognizes, essentially, that the first view is wrong because it cannot be reconciled with the language of the statute. The court concluded that if these liens are to be enforced under ERISA, Congress said that they must be treated as and considered to be equitable claims, and that this limitation is both significant and material. Once the court reached that conclusion, the rest of the decision, in my opinion, necessarily followed. In the end, the court returned subrogation liens to equity, which is – and always has been – their proper place.
Matt,
Thanks for the interesting history.
It is particularly interesting to me in light of my own experience of the most recent developments of that history, which I referred to in my post. That is, that when I first started seeing ERISA liens, we considered them to be on par with the contractually-based lien claims of regular medical insurers. Then, as the law developed, ERISA liens seem to evolve (or perhaps mutate!) into a more powerful weapon than contract based claims as the plans asserted that they were not subject the usual arguments that we used to mitigate the effect of insurer liens.
I initially read McCutchen as suggesting that the claims of ERISA welfare benefit plans should be no more powerful than the insurers’ subrogation claims.
In light of the history, it seems to me ERISA plan liens should be less powerful, as subject to broad panoply of fairness-oriented defenses recognized in equity. Consider, for example, latches? Should a plan be allowed to sit on its hands, doing nothing until a plan participant has borne the risk and expense of enforcing his or her rights against a tortfeasor, and then, when the battle has been won, swoop in and take the lion’s share of the proceeds?
At any rate, thanks as well for your work on this important issue.
Rich
I think the lesson to be learned (for self-funded ERISA plans) with respect to this decision is that compromise can, in the long run, be well worth some short term sacrifice. One could argue this whole situation could have been avoided if the Plan had been more willing to work something out with the member rather than demanding a sum that was MORE than his net recovery. Failing to see the “big picture” and acknowledge the human side of these cases can end up costing far more not only for the ERISA plan involved in the litigation itself – but for the industry as a whole (remember WalMart v Shanks?). For me, the facts in this case – on the numbers alone – just screamed for compromise. But what’s done is done.
Still, it’s important to keep the decision in perspective. Many of the comments I read in various places online include the terms “health insurance plan”, “employer based health insurer”, “insurer greed” and even the old “employees pay premiums for insurance in exchange for….” argument (see the Public Justice article). The use of this kind of terminology or, dare I say, rhetoric, clouds the real issues in this case. What was at stake here was not the interest of an INSURANCE COMPANY but a self-funded Employer. What Mr. McCutcheon was covered by was not an “insurance policy” (priced to reflect risk considerations vs coverage vs collected premiums, etc…) but rather a Benefit Plan funded entirely by his Employer. Mr. McCutcheon did not pay “premiums” for his “coverage” either. He, like other members, made pre-tax contributions to the Plan that are nowhere near sufficient to be an exchange – on any level – for his employer’s potential liability for his medical care. Such contributions are used to offset administrative costs to ERISA plans and in no way mitigate the exposure an employer has for the actual medical costs of its employees.
It is clear that everyone on both sides of this business is aware of these distinctions – yet we still see that language being brought into the discussion and, quite frankly, it just does not belong there. It does a disservice to both sides and to the overall integrity of the discussion.
Second, it is important to note that, while the 3rd Circuit did not support the District court’s award of full reimbursement, it also stopped short of saying Mr. McCutcheon owed NOTHING. Specifically, the court stated “we do not decide on appeal what would constitute appropriate equitable relief…..” and instructed the lower court to “…exercise it’s discretion under 502(a)(3)”. So the final chapter has yet to be written on this case.
Finally, the language in the U.S. Airways Plan is worth noting in that it did not expressly reject the “made-whole” rule directly or as strongly as it could have. In fact, compared to many plans today, the language in the U.S. Airways Plan is quite weak. Many plans have much more direct language on that point. Just something to keep in mind when attempting to use McCutcheon against other plans with stronger language.
Overall – I have to agree it’s a clear win for the anti-subro crowd….but a game-changer? Might be a little too early to use that term. I will be watching with much interest as things progress. Cases like this are, after all, why I find the field of healthcare reimbursement/subrogation and ERISA litigation so fascinating. Nothing is ever black and white!
Best regards – Dave
{ 1 trackback }