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ERISA PLANS: SUBROGATION AND REIMBURSEMENT ISSUES - PART 3

E. Some ERISA Points Of Law

1. ERISA Does Not Apply To All Plans

ERISA  governs "any plan, fund, or program which¼was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise,   (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) [pension benefits]...  " 29 U.S.C. § 1002(1) (2007).

ERISA does not apply to all employee welfare benefit plans. It does not apply to:
·                      a governmental plan;
·                      a church plan;
·                      a  plan  maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws;
·                      a plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens;
·                      an excess benefit plan that is unfunded.

ERISA § 4(b), 29 U.S.C. § 1003(b).

2. Federal Preemption

ERISA is a comprehensive statutory scheme that governs employee benefit plans. Carpenters Local Union No. 26 v. United States Fid. & Guar. Co., 215 F.3d 136, 139 (1st Cir. 2000). To this end, ERISA contains an expansive preemption clause, 29 U.S.C. §  1144(a), which provides that "the provisions of . . . [ERISA] shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. . . .  This broad definition encompasses common law causes of action under state law. See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47-48, 107 S. Ct. 1549, 95 L. Ed. 2d 39 (1987). The preemption clause contained in section 1144(a) "indicates Congress's intent to establish the regulation of employee welfare benefit plans as exclusively a federal concern." New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 656, 115 S. Ct. 1671, 131 L. Ed. 2d 695 (1995) (internal quotation marks and citation omitted).

State common law tort and contract claims are generally preempted by ERISA. See 29 U.S.C. 1144(a) ("the provisions of [ERISA] shall supercede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan."); Pilot Life Ins. Co. v. Dedeaux , 481 U.S. 41, 47-48, 95 L. Ed. 2d 39, 107 S. Ct. 1549 (1987) (state common law contract and tort claims preempted by ERISA when claims "relate to" an employee benefit plan) ("a state law relate[s] to' a benefit plan in the normal sense of the phrase, if it has a connection with or reference to such a plan.") (citations and internal quotation marks omitted); Provident Life & Accident Ins. Co. v. Waller , 906 F.2d 985, 989-90 (4th Cir. 1990) (citing Pilot Life).

It has been repeatedly held that a cause of action "relates to" an ERISA Plan when the court or fact finder must evaluate and interpret the terms of the ERISA-regulated Plan in order to determine liability under the state law. Hampers v. W.R. Grace & Co. , 202 F.3d 44, 52 (1st Cir. 2000); Harris v. Harvard Pilgram Health Care, Inc., 208 F.3rd 274, 280 (1st Cir. 2000).

As the Supreme Court recently explained, when a "federal statute completely preempts the state-law cause of action, a claim which comes within the scope of that cause of action, even if pleaded in terms of state law, is in reality based on federal law. ERISA is one of these statutes." Aetna Health, Inc. v. Davila , 124 S. Ct. 2488, 2495, (2004) (internal quotation and citation omitted).

However, the ERISA statute also contains the so-called “savings clause” that saves from federal preemption state laws that regulate “insurance, banking or securities.” 29 U.S.C. Sec. 1144(b)(2)(A). The term “state law” under this provision has been interpreted to mean

“all laws, decisions, rules, regulations ,or other state actions that have the effect of law.” Pilot Life Ins. Co. V. Dedeaux , 481 U.S. 41 (1987).

The savings clause prompts the question where a Plan provides benefits through an insurance policy ( e.g.,  an Anthem policy) whether state law as it pertains to subrogation is preempted as to that insured Plan. See UNUM Life Ins. Co. Of America v. Ward , 119 S.Ct. 1380 (1999).

In UNUM, an employee sought long term disability benefits through his employer sponsored policy that was issued by UNUM. However, his filing was late under the terms of the UNUM policy and UNUM denied the claim. The employee-claimant sought relief from the UNUM deadline by recourse to California state law that would have required UNUM to show that it was prejudiced by the late filing. UNUM claimed that ERISA preempted the application of state law. The Supreme Court ruled that the California notice-prejudice rule was a law that regulated insurance and was , therefore, saved from preemption.

In 2003, the Supreme Court simplified the test to determine whether a state law “regulates insurance.”  “First, the state law must be specifically directed toward entities engaged in insurance . . .  Second, . . . the State law must substantially affect the risk pooling arrangement between the insurer and the insured.” Kentucky Ass’n of Health Plans, Inc. v. Miller 538 U.S. 329, 341-42 (2003). Generally, the Court stated that for laws to be deemed regulating insurance and therefore not preempted by ERISA, they must be "specifically directed toward" the insurance industry; "laws of general application that have some bearing on insurers do not qualify." Id.

The foregoing presumably is the test that would be applied to determine whether, for example, a Dimick prescribed reduction of a subrogation claim should take place in a reduced recovery situation where the bills were paid by an insurance company. No federal court case in the First Circuit has reached the issue, however, as far as I know.

The possible application of the “savings clause” so as to allow a Dimick approach to compromising a subrogation/reimbursement claim could only be considered in insurance funded plans and not self funded plans. See Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 372 n.6, 122 S. Ct. 2151, 153 L. Ed. 2d 375 (2002) (discussing the possibility that an HMO may provide only administrative services for a self-funded plan and stating that a state law "would not be 'saved' as an insurance law to the extent it applied to self-funded plans").

The foregoing analysis was recently adopted by the Fifth Circuit Court of Appeals. At issue was a Louisiana state insurance regulation which provides that:

any right of recovery from third parties on the part of the insurer, whether by subrogation or reimbursement, is subordinate to the insured’s right to be fully compensated for his damages; and ... the insurer is obligated to share in the legal expenses incurred.

Benefit Recovery, Inc. v. Donelon, 2008  U.S. App. 5259, *2 (5th Cir. 2008).  The Court held that the regulation was a state law that regulates insurance and, therefore, was not preempted by ERISA. The Court made clear, however, that the regulation only pertained to insurance funded plans and not self-insured plans. Id.

3. U. S. Supreme Court Cases Interpreting “Regulates Insurance”

In 1985, the Supreme Court upheld a state law that mandated that mental health coverage be provided by health insurers. Metropolitan Life Ins. Co. v. Massachusetts , 105 S. Ct. 2380 (1985).

In 1999, the Court upheld the application of California’s “notice-prejudice” rule against a disability insurance carrier. UNUM, supra.

In 2002, the Court upheld a state law that mandated health insurers submit to independent review of their decisions not to cover medical procedures as not “medically necessary.” Rush Prudential HMO, Inc. v. Moran , 122 S. Ct. 2151 (2002).
In 2003, the Court upheld a state law that prohibited HMO’s from limiting their network providers, thus expanding the number of providers from whom an insured may
receive health services. Kentucky Ass’n of Health Plans, Inc. v. Miller 538 U.S. 329, 341-42 (2003).

In 2004, the Court held that ERISA nullifies insurance bad faith laws to the extent ERISA Plan participants rely upon such laws to seek extra-contractural damages from an insured ERISA Plan Aetna Health, Inc. v. Davila , 124 S. Ct. 2488 (2004)( attorney fee award disallowed). Compare La. Health Serv. & Indem. Co. v. Rapides Healthcare Sys., 461 F.3d 529 (5th Cir. La. 2006) ( State insurance law that allowed assignment of health benefits not preempted by ERISA); and Werdehausen v. Benicorp Ins. Co. , 487 F.3d 660 (8th Cir. Mo. 2007) (State law that forbad insurance companies from denying payment of a pre-authorized procedure not preempted).

4. Common Fund and Make Whole Doctrines Rejected

The First Circuit,  pre-Knudson, held that a Plan, if its Plan documents so state, is entitled to 100% reimbursement from the tort recovery of what is paid out in health benefits without an offset for attorney fees and without regard to whether the injured claimant has been made whole. Harris v. Harvard Pilgrim Health Care, Inc. , 208 F. 3d 274 (1st Cir. 2000). But see Primax Recoveries, Inc. v. Sevilla, 324 F 3d 544, 549 (7th Cir. 2003) (wherein Judge Posner stated:  ”The fact that the ERISA Plan may have rejected the common fund doctrine is irrelevant, since the lawyer whose claim to restitution is at stake was not a party to the Plan and so is not bound by limitations in it of his legal rights.”).

The First Circuit in Harris did not face the argument that the “make whole”  doctrine  was a matter of state insurance law. Therefore, the Court never undertook the analysis set out  by the Supreme Court in Miller, supra. The employee-insured in Harris contended that the make whole doctrine should be adopted as a matter of federal common law. The Court declined to do so.

5. Plan Documents

“‘ A primary purpose of ERISA is to ensure the integrity and primacy of the written plans . . . [so that] the plain language of an ERISA Plan should be given its literal and natural meaning.”’ Harris, 208 F. 3d at 279 (quoting Health Cost Controls v. Isbell , 139 F. 3d 1070, 1072 (6th Cir. 1997).  If its in the Plan and the Plan is not inconsistent with the provisions of ERISA, then the provision has the effect of federal law because of the federal preemption provisions of ERISA.

6. Subrogation/Reimbursement Agreements

At least two circuits have held that in ERISA cases, "a subrogation agreement is enforceable against an attorney who agrees with a client and a plan to honor the plan's subrogation right." So. Council of Indus. Workers v. Ford , 83 F.3d 966, 969 (8th Cir. 1996) (citing Hotel Empls. & Restaurant Empls. Int'l Union Welfare Fund v. Gentner , 50 F.3d 719, 721-22 (9th Cir. 1995) ("[A] beneficiary's attorney is not bound to the terms of a client's subrogation agreement to which he is not a signatory. . . . A subrogation agreement or lien can be enforced against the attorney only if the attorney  agrees with the client and creditor to protect the lien.").

ERISA Plans are frequently requiring beneficiaries and even attorneys to sign forms that include provisions promising that the Plans subrogation and reimbursement interests will be honored as a pre-condition to the Plan’s paying accident-related medical bills.

It has been held that it is not an abusive discretion for a Plan to withhold payment of claims prior to the beneficiaries having signed and returned the Plan’s Reimbursement Subrogation Agreement form as required by Plan provisions. Peterson v. Hotel Employees and Restaurant Employees International Union Welfare Fund , 288 F. Supp. 2d 1145 (D. Nev. 2003).  A Plan may either require counsel for the beneficiaries/plaintiff to sign a Subrogation Agreement before paying any accident-related claims. Kress v. Food Employers Labor Relations Association, 391 F 3d 563 (4th Cir. 2004); Bird v. NECA-IBEW, 2003 U.S. Dist. Lexis 22 866 (N.D. Ill. 2003).

7.  Attorney Fees

Section 502(g)(1) of ERISA states that "the court in its discretion may allow a reasonable attorney's fee and costs of action to either party." 29 U.S.C. §  1132(g)(1).

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