Have You Checked Your Plan’s Subrogation and Reimbursement Provisions Lately?
Employee Benefits Law Alert 04/18/13 Sarah L. Fowles, Angela Marie Hubbell
As a result of the recent Supreme Court decision in US Airways, Inc. v. McCutchen, plan sponsors of employee benefit plans should act soon to review their plans' subrogation and reimbursement procedures and make any necessary amendments to make sure that each plan's right to reimbursement remains protected.
Brief Background of US Airways, Inc. v. McCutchen:
Like many group health plans, the group health plan sponsored by US Airways required participants to reimburse it if the plan paid benefits for a sickness or injury that was the result of a third party's negligence or misconduct. US Airways required participants to reimburse the plan from any third party recovery, including recovery from a participant's own automobile insurance.
McCutchen was one such plan participant. He was seriously injured in a car accident in which he was not at fault. The US Airways health plan paid $66,866 of McCutchen's medical expenses. McCutchen, with the assistance of an attorney who was promised a 40% contingency fee, obtained a recovery of $110,000. $100,000 was paid by McCutchen's own automobile insurance company. After paying attorneys' fees, McCutchen received $66,000.
US Airways, as a fiduciary to the plan, asserted the plan's reimbursements rights and requested McCutchen to reimburse the plan for the $66,866 that the health plan paid towards McCutchen's medical expenses. McCutchen refused, and US Airways sued to enforce the plan's reimbursement rights.
US Airways Wins On One Key Issue:
The Court held that the plan's reimbursement provision could not be "trumped" by McCutchen's equitable defenses. McCutchen argued that the plan could not obtain reimbursement under equitable principles because he did not recover money from both the plan and a third party for the same medical expenses (a "double recovery"). The Court disagreed with McCutchen and held that the terms of the ERISA plan - the reimbursement provision in particular - govern and that the plan had a right to reimbursement under those provisions.
Q&B Key: We recommend that plan sponsors review their employee benefit plan documents to make sure that they contain appropriate and specific subrogation and reimbursement provisions.
Next Steps in the Litigation:
Because the plan's reimbursement provision did not describe in detail how attorneys' fees would be allocated between the participant and the plan, the Court found the reimbursement provision had a "gap." The Court indicated that the gap would be filled in by the equitable "common fund" doctrine. Application of the common fund doctrine generally requires an insurer to contribute towards the costs of obtaining a third party recovery. As a result, the Court remanded the case to allow the parties to address the amount of recovery to the plan under the common fund doctrine. Thus, while prevailing on a key issue, US Airways must still litigate over the amount of reimbursement to which the plan is entitled in light of the common fund doctrine.
Q&B Key: Some plan sponsors might be inclined to amend their plans' reimbursement provisions to prohibit application of the common fund doctrine (which is certainly a reasonable strategy for responding to the US Airways case). However, we recommend considering whether this strategy dissuades plan participants from seeking recovery at all, thus putting the onus of seeking recovery (and paying all of the attorney's fees) on the plan. Plaintiffs' attorneys may be less likely to represent plan participants in injury cases if they understand that the participant might be required to turn over most or all of the participant's recovery to an employee benefit plan.
One Parting Thought:
The reimbursement provision examined by the lower courts and the Supreme Court was contained in the Summary Plan Description ("SPD") rather than the plan document. Noting that the underlying plan document itself apparently had not been examined by the lower courts, the Court based its decision on the same SPD language that the lower courts had examined rather than on any reimbursement provisions contained in the underlying plan document.
Q&B Key: The fact that the Supreme Court raised the issue of potential differences between the SPD and the plan document is a good reminder to plan sponsors that subrogation and reimbursement provisions should be consistent in both documents.
For more information contact the authors of this alert, Sarah Fowles, at (414) 277-5287 / [email protected] or Angie Hubbell at (312) 715-5097 / [email protected]. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / [email protected]; John Barlament, at (414) 277-5727 / [email protected]; Amy Ciepluch at (414) 277-5585 / [email protected]; Alyssa Dowse at (414) 277-5607 / [email protected]; David Olson at (414) 277-5671 / [email protected]; Robert Rothacker at (414) 277-5643 / [email protected] or your Quarles & Brady attorney.