By Roy Harmon III
Several outcomes in an upcoming Supreme Court decision on the extent of health plan subrogation and reimbursement rights could make life more difficult for plans.
One outcome in Montanile v. Bd. of Trs. National Elevator Industry Health Benefit Plan would erode health plans’ lien rights if they fail to expeditiously pursue the money. Another outcome would not differentiate between participants who fraudulently collude with attorneys to frustrate plans’ recovery rights and participants who used funds to address honest needs without knowing plans’ claims at all. Other outcomes would defeat recoveries if funds are dissipated for other reasons before a reimbursement claim is asserted.
This article suggests tactics plan fiduciaries can use to make recoveries in the event of a worst-case Montanile ruling, which would result in a world where dissipated funds (regardless of the reason) mean no recovery for the plan.
The Court Could Narrow Equitable Relief
The U.S. Supreme Court last month heard oral arguments in Montanile, to once again address the boundaries of an ERISA plan’s claim for equitable relief. As before, the issue arises in the context of a group health plan’s attempt to recover from a plan member who successfully recovered money from a third party who injured him in an auto accident.
The latest turn on the question involving the scope of equitable relief amounts to this: Do plans’ recovery rights survive if the defendant at one time had possession of the funds, on the theory that an equitable lien by agreement existed (7th and 6th U.S. Circuit Courts of Appeal precedent supports this); or does lack of possession of the funds defeat the plan’s claim (an argument that has been accepted by the 9th Circuit)?
The Montanile case raises the issue because the defendants at one point had possession, but the funds were dissipated at the time of suit.
The plaintiffs said Montanile’s dispersal was a form of fraud and it was improper for him not to preserve the settlement proceeds in order to reimburse the health plan. In response, Montanile contended it was the plan’s fault for dragging its feet for months before it asserted its claim, and he used the money on important expenses, not fraudulently.
Plans hope the Court will recognize that when a plan has the right language in place and runs an efficient subrogation program, that plan recoveries should not be defeated through dissipation. They also hope it will expand remedies to compensate for fraudulent shifts and intentional dissipation of recovered funds.
Plans should review measures in place to protect plan assets and institute the following measures to protect the plan, which will help even assuming a bad outcome in Montanile.
Identify the Disputed Funds
Regardless of the Montanile decision, the plan fiduciary may fall back on the simple teaching of Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002). This seminal case did not leave ERISA plans without recourse.
In Knudson, the Court essentially said that a plan fiduciary’s claim for equitable relief would fail if the defendant was not in possession of the disputed funds.
Under that ruling, if a plan fiduciary asserts claims on funds in the possession of the defendant that in good conscience (for example, by plan provisions) belong to the plan, then the claim will be successful. In other words, the plan fiduciary still may rely on the simple approach of making a direct claim on the party in possession of the funds under ERISA 502(a)(3). This approach also may succeed if the plan asserts claims to property in which the original funds were converted.
Two challenges for the claims administrator are to:
- promptly identify circumstances suggesting an incident in which reimbursement may be available and promptly investigate; and
- assert remedies on a timely basis to prevent dissipation.
Plan fiduciaries must vigilantly assess trauma codes on submitted claims and promptly follow up by investigating the circumstances and notifying adjusters or attorneys of the plan’s claims. Injunctive relief may be available to aid the plan in preventing dissipation of funds. Thus, the plan must have legal counsel familiar with ERISA and be prepared to take action quickly if circumstances warrant.
Tactic One: Condition Payment on Signed Subrogation Agreements
Courts consistently have recognized as reasonable plan administrators’ decisions to require execution of subrogation agreements as a condition for the payment of benefits. Courts have held it would be inequitable to permit plan members to enjoy plan benefits but then let them invoke common law principles to justify their refusal to satisfy their end of the bargain after they had received a substantial settlement.
Nothing under ERISA prohibits a plan from requiring a signed subrogation agreement as a condition for paying benefits. Therefore, the plan should require the plan member to acknowledge the plan subrogation and reimbursement provisions before paying claims. The plan also could require the plan member’s attorney to sign the acknowledgment.
Failure to acknowledge plan provisions, assuming proper plan language, justifies the denial of claims in the case of self-funded ERISA plans. (Note, however that fully insured plans may be subject to state insurance laws that require a pay-and-chase approach.) Particular attention should be given to the wording of questionnaires and forms so that they do not contradict plan terms and that they elicit the necessary information to pursue plan claims.
Tactic Two: Seek Refunds
If the plan’s payments for health services are relatively recent, the plan administrator may be able to request refunds from the providers should the plan document authorize this, if the plan member fails to cooperate. The success of this tactic will depend in part on the plan’s relationship with the health care provider and the claim size.
For example, if the provider is in-network, the parties may have sufficient transactions in the regular course of business that refunds for ineligible claims or overpayments may be routine. On the other hand, if the paid claims are large and little recourse for payment exists if the payments were to be refunded, then the provider likely will be more reluctant.
Generally, courts often consider the risk of loss for ineligible claims more properly borne by the plan since the plan is in a better position to determine claims eligibility in the first place. Yet, if the provider has taken an assignment of benefits and essentially asserts a claim for benefits, it would not be unreasonable to hold a provider to the plan’s reimbursement provisions.
Thus, if a plan member fails to cooperate in complying with the plan’s recovery provisions, the plan may cogently argue that any payments should be refunded. This seems particularly true where the provider may have obtained information as to third-party liability itself through the patient admission process and thus be on notice of the issue. The plan fiduciary may use the possibility of refunds as leverage to induce cooperation by the plan member or personal injury attorney.
Tactic Three: Impose Offsets
Another possible tactic lies in using offsets, should plan language authorize that, and the plan member is covered under the plan. Substantial precedent for the use of offsets may be found in the case law involving payments by disability plans. These plans typically contain language that integrates the benefit payments with other income sources such as Social Security disability payments.
Where the determination of Social Security benefits has occurred well after commencement of disability benefits by the plan, courts have upheld the plan’s right to offset future payments in the amount of the Social Security benefits received by the plan member.
Tactic Four: Use Ethical Considerations
Often, settlement proceeds are paid to the plan member’s attorney or to such persons or entities as he or she directs.
May an attorney on notice of a plan’s subrogation and reimbursement provisions disregard those provisions and disburse settlement funds to his client (the plan member or beneficiary) or to trusts, annuity companies or such other entities with impunity?
At one time, the weight of opinion favored the view that the lawyer must obey the client’s wishes. But that has changed. The modern view is expressed in Rule 1.5 of the ABA Rules of Professional Responsibility, which states:
(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
The plan administrator should consult the respective state rules on professional responsibility for the extent to which the model rule has been adopted in the state in question.
Under this rule, should a lawyer receive funds in which a third party, such as a lienholder, claims an interest, the lawyer is obliged to notify that party. As a general rule, the lawyer must promptly deliver the funds to the third party and render an accounting upon request; however, the rule allows for an exception based upon the terms of the agreement with the client.
Invariably, the terms of engagement will require the client approval of proposed disbursements and thus the stage is set for the client to veto a distribution to a lienholder. For example, if a client objects to the reimbursement claims of his or her group health plan, then the attorney cannot proceed with the disbursement to the plan.
The model rule provides guidance for proceeding in such events but falls short of setting forth a procedure for resolving the dilemma. The rule states that:
(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.
To summarize the foregoing, we may take away the following salient points:
- States will likely have some version of an ethical rule binding upon attorneys that requires preservation of property to which a third party claims an interest.
- The rule requires notice to the third party when the lawyer has reason to know of the claim.
- The client may restrict operation of the rule requiring disbursement of the funds to the third party but the property must be kept separate until the dispute is resolved.
The operation of these ethical rules may assist the plan administrator in preventing disbursement of funds to the plan member. Prompt notice of claim to the attorney and reference to these rules may support the plan administrator’s effort to have the funds held in place until resolution of the dispute to the funds.
Roy F. Harmon III is a principal in Harmon & Major, P.A. in Greenville, S.C., and serves as vice president and general counsel of Cost Recovery Systems, Inc. He is a graduate of the University of Mississippi (B.A. English, summa cum laude), the University of Notre Dame Law School (J.D.) and the University of Florida Levin College of Law (LL.M.). He is a member of the Texas, Virginia and South Carolina bar associations. He is the contributing editor of Thompson’s Coordination of Benefits Handbook.