The US Supreme Court decided an ERISA-related case recently that sponsors of self-insured medical plans are talking about, wondering about, and even worrying about. We’ll explain here why the case is worth knowing about, but why it’s most relevant, and most worrisome, for lawyers retained by self-insured medical plans to chase down third-party recoveries by insured individuals who had their medical expenses paid by the plans.
At issue in the case, called Montanile v. Board of Trustees, was a situation that self-insured health plans confront from time to time: an insured person is badly hurt, usually in an accident, and incurs tens or hundreds of thousands of dollars (or more) in medical expenses that the plan pays. The insured then sues the party who caused the injuries, and recovers tens or hundreds of thousands of dollars (or more) in a settlement or jury verdict.
Simply put, the medical plan wants to be repaid. Unfortunately, it’s rarely as simple as asking for repayment. Over the years a vast body of case law has evolved around plans’ efforts to get repaid. Often the plans’ efforts failed because the plans didn’t contain clear or adequate language requiring the insured to repay.
Those failures have mostly been corrected. A well-heeled plan today will have solid language requiring the insured to repay the plan, giving the plan the first bite at the settlement or jury verdict apple (even before the insured’s attorneys are paid), even if the settlement or verdict doesn’t make the insured whole, or doesn’t include an award for medical expenses. As a condition of paying the insured’s medical expenses related to the accident, plans typically require the insured to sign a repayment agreement.
Lockton comment: Many states have insurance laws that prevent insurers from recovering settlement or jury verdict proceeds. But these state prohibitions don’t apply to self-insured ERISA plans.
Plans also have the right to actively intervene in the insured’s lawsuit, to protect their interests in getting repaid. Few plans actually go that far, however. Most typically, the plans inform the insured’s lawyers, or the defendant and his or her insurance company, and then keep an eye (sometimes only a casual eye) on the proceedings, sending periodic reminders to the parties that, if and when a settlement is reached, the plan gets first bite at the pie.
Usually, that’s adequate. Usually, upon a settlement, the parties work it out that the settlement check is made payable to both the plan and the insured, so the plan is sure to get its share. Sometimes the monies are paid over to the insured’s lawyers, who then settle up with the plan, often after negotiating a reduction in the plan’s claim, to account for all the work the lawyers did in obtaining the settlement.
But sometimes things go sideways. The Montanile case was one of those situations. The plan had decent reimbursement language, and even had a repayment agreement with the insured. Settlement monies were paid over to the insured’s lawyers, who then carried on extensive negotiations with the plan. Negotiations broke down, and the attorneys told the plan they were going to distribute the funds to the insured unless the plan objected.
Unfortunately ─ and here is where the lesson from the case is to be learned ─ the plan did not object. Or rather, it waited months to object. In the meantime, the monies were paid over to and then spent by the insured, apparently more on services than goods, making it difficult or impossible for the plan to track down and assert a lien on physical property purchased with the proceeds. Indignant, the plan sued the insured for failing to pay over the plan’s share of the settlement pie. Because the settlement monies themselves were gone or otherwise no longer identifiable, the plan wanted the insured to repay the plan from the insured’s other assets.
Lockton comment: To understand what happened next, it helps to understand the difference between what the courts call legal remedies, such as money damages, and equitable remedies, such as restitution or repayment. Way, way back in the day courts were divided along legal and equitable lines, that is, between those hearing cases seeking legal remedies, like money damages for breach of contract, and those hearing cases based not so much on the letter of the law or a contract, but on notions of fairness, or equity. That distinction between legal remedies on the one hand, and equitable remedies on the other, haunts healthcare plans to this day, because ERISA authorizes plans to sue only for equitable remedies, and not so much legal ones. But let’s avoid getting too far into the weeds of jurisprudence from days of yore, and return to the action.
Simply put, a majority of the Supreme Court said, “You can sue the insured for repayment from identifiable settlement monies, because that’s an equitable remedy…that is, it’s seeking restitution from the specific pool of funds related to the settlement. But where those funds are no longer identifiable, you can’t sue the insured and demand repayment from his other assets…that’s seeking a legal remedy, and ERISA doesn’t permit it.”
Where, you might think, is the equity in that? Justice Ruth Bader Ginsburg, the sole dissenter to the Court’s majority opinion, posed precisely that question. She thought it supreme nonsense ─ and so do we, frankly ─ that an insured can slither out from underneath his or her repayment obligation, per a valid reimbursement agreement, by spending the settlement monies on untraceable services or goods. Surely Congress, in writing and passing ERISA, didn’t mean for that to be the result. But here we are.
So what do we learn from Montanile? Essentially, we learn this: The plan’s attorneys responsible for protecting the plan’s rights to a piece of the settlement or judgment pie must move faster and more aggressively to assert and enforce a lien to secure repayment, before the settlement or judgment monies are paid over to the insured.