THIRD
PARTY LIABILITY REIMBURSEMENT ISSUES
Most people
do not know that if they recovery money after being injured in an accident, they will
probably have to pay their health care plan back for the medical bills they paid. This
article will discuss the legal issues surrounding the concept of third party liability and
should be of particular interest to health care plans engaged in seeking reimbursement
under a third party liability cause in their plans from their members.
Full
Story:
1.
INTRODUCTION
Over the past
few years, health care plans have stepped up efforts to recover the plan benefits they
provided from its members who collect settlements in personal injury cases. This article
will discuss the legal issues concerning these reimbursement efforts by health care plans.
In a personal
injury case, a plaintiff can recover damages for his or her injuries, including any
medical expenses incurred. In most states, the collateral source rule prevents defendants
from arguing that damages for medical expenses should not be awarded because the expenses
were paid by health insurance. However, most health plans today contain a provision in
their contract, commonly known as "third party liability", which allows the plan
to recover the benefits they provided for the health care services furnished due to the
accident, from a plan member who recovers a settlement or judgment from a third party
liable for their injuries. These contract provisions generally create a lien in favor of
the health plan on any recovery by the plan member.
2.
RIGHT OF HEALTH PLANS TO SEEK REIMBURSMENT
This right of
health plans to take a part of settlements obtained by personal injury plaintiffs after
those plaintiffs have paid premiums for their health coverage seems unfair to many people.
However, in California the validity of reimbursement clauses in health care service
contracts was upheld in 1966 by the courts in Block v. California Physicians’
Service.
Subsequent
court decisions rejected the argument that reimbursement provisions were a subrogation
that unlawfully assigned the insured’s claim against a third party to the health
insurer because the insurer’s reimbursement rights did not arise until the insured
obtained a settlement of judgment.
3.
COMMON FUND DOCTRINE
In a 1976
decision entitled Lee v. State Farm, the court held that the amount sought by the
insurer should be reduced by the same percentage the attorney for the insured took as a
contingent fee as compensation for the attorney’s efforts to recover the medical
expenses for the insured which were being handed over to the insurer. This limitation on
recovery was based on the common fund doctrine which allows the attorney to be compensated
for his or her efforts to recover monies for the common fund to be shared by the insured
and the insurer as a matter of equity.
Since one third
contingency fees are common in personal injury cases, liens by health plans are usually
reduced by a third routinely under the common fund doctrine.
4. NO
RIGHT TO INTERVENE
As noted above,
some personal injury plaintiffs believe that a health plan’s reimbursement right is
unfair and refuse to reimburse the plan. Health plans recognize that once the settlement
of a personal injury action takes place, settlement proceeds are quickly distributed,
leaving the personal injury plaintiff financially unable to pay off any liens.
In California
Physicians’ Service v. Superior Court, the court in 1980 held that a plan could
not intervene in a third party liability action where the member had refused to honor the
plan’s lien because the plan’s right to reimbursement did not arise until after
the member had obtained the settlement.
This decision
left health plans with no other legal alternative but to file suit against members who
refused to reimburse the plans for the benefits they provided for their medical expenses.
5.
COMPROMISE OF LIENS
In many cases,
personal injury plaintiffs cannot recover enough in damages from third parties to fully
compensate them for their injuries because they cannot prove liability or damages, or if
the third party has inadequate liability insurance coverage. In these cases, health plans
have no alternative but to accept a reduced amount for their liens. Refusal by health
plans to compromise their liens may force plaintiffs to try their cases and risk
recovering even less than what has offered in settlement years earlier
The court in Samura
v. Kaiser Foundation Health Plan found in 1993 that reimbursement clauses in health
plans were not against public policy and suggested that in cases where the plan
member’s recovery from a third party was less than the benefits provided, it might be
unconscionable for the plan to demand complete reimbursement of its lien.
6.
LIMITATIONS ON LIENS
Because
reimbursement rights are based upon contract, they can be enforced only against parties to
the contract.
In Farmers
Ins. Exchg. v. Zerin, the court held in 1997 that an auto insurer could not seek
reimbursement for medical payments benefits from the passenger of an auto owned and driven
by one of its insureds because the passenger was not a party to the insurance policy but
was covered only as an additional insured. Nevertheless, the insurer could still obtain
reimbursement from the driver who was a party to the insurance policy as a named insured.
7.
RESPONSIBILITIES OF THIRD PARTIES
If the
liability insurer for third party is aware of a lien by a health plan, the liability
insurer must make sure that the lien is resolved before any settlement is reached in the
personal injury action or risk liability for the lien itself. This warning is especially
important in cases where the personal injury plaintiff may refuse to honor the lien
because of an inadequate settlement.
In Siciliano
v. Fireman’s Fund, a plaintiff fired his lawyer and entered into a settlement
with the insurer for the defendant. The plaintiff refused to honor his former
attorney’s lien on his settlement. The court held in 1976 that the attorney could sue
the insurer for failing to protect his lien.
Siciliano
Siciliano
appears to allow health plans the right to sue liability insurers who are aware of health
plan liens but permit plaintiffs to dissipate settlements which extinguish the plans’
ability to collect their liens.
As a result, it
is critical for health plans to provide the insurer for a defendant in an accident case
with notice of any liens if the plan intends to assert a right of reimbursement against
the plaintiff and his or her recovery.
Liability
insurers must either include the name of the health plan as an additional payee on any
settlement draft or interplead the settlement funds to protect the plan’s lien rights
if the plaintiff refused to allow the health plan as an additional payee on the settlement
draft.
Liability
insurers should scrutinize cancelled settlement drafts to make sure that they have been
properly negotiated by the plaintiff and to notify their banks of any irregularities in a
timely fashion to avoid further potential liability.
Liability
insurers should not rely upon indemnity agreements over liens with plaintiffs because they
can be ineffectual since the plaintiff is very often financially unable to defend or
indemnify the liability insurer from a lawsuit brought by a health plan.
8.
RESPONSIBILITIES OF PERSONAL INJURY ATTORNEYS
Attorneys
representing plaintiffs should not agree to personally indemnify the liability insurers
from such lawsuits. Otherwise, it is possible that a plaintiff’s attorney might be
forced to pay for the defense of a liability insurer from a reimbursement action brought
by a health plan.
More
importantly, the failure by a personal injury attorney to protect a health plan’s
lien rights may subject the attorney for personal liability for the lien.
In 1996, the
court in Kaiser Foundation Health Plan v. Aguiluz held that a plaintiff’s
attorney could be held personally liable for failing to honor a health plan’s lien
when the attorney had notice of the lien.
As a result, it
becomes imperative that attorneys representing plaintiffs in personal injury actions
evaluate new cases and their potential recoveries in light of any possible health plan
liens. Furthermore, plaintiff attorneys must resolve liens with health plans before
entering into settlements to avoid incurring personal liability for the lien.
Failure to
honor a lien could subject a party to liability for the entire lien, notwithstanding the
common fund doctrine since the doctrine is equitable in nature and could be ignored by a
court who views the refusal to honor a lien as an inequitable act.
9.
LIENS BY SELF FUNDED EMPLOYER SPONSORED PLANS
Many states
have laws which make these reimbursement provisions in health plans illegal. However, the
Supreme Court in a 1990 decision entitled FMC Corp. v. Holliday, held that self
funded employer sponsored health plans were regulated by ERISA which preempted state laws
prohibiting reimbursement clauses and allowed those plans to seek reimbursement.
State law could
be ignored because ERISA "deemed" self funded plans to not be insurance
companies that are subject to state insurance regulations. Insured ERISA plans are
apparently not so "deemed" and continue to be subject to state insurance laws
"saved" from preemption under ERISA.
Accordingly,
state laws prohibiting reimbursement provisions are preempted by ERISA where reimbursement
is sought by a self-funded employer sponsored health plan.
10.
LIENS IN MEDICAL MALPRACTICE CASES
In many states,
including California, tort reform has abrogated the collateral source rule so as to
restrict the ability of plaintiffs to recover medical expenses paid by insurance as
damages in medical malpractice cases. In those states, health plans cannot seek
reimbursement of plan benefits since the plan member cannot recover medical expenses as
damages from the third party.
However, FMC
Corp. v. Holliday may be interpreted to suggest that health plan may seek
reimbursement in medical malpractice cases if the plaintiff is has health care coverage
under a self funded ERISA plan since the state tort reform laws prohibiting reimbursement
may be preempted by ERISA.
If this is
correct, plaintiffs in medical malpractice cases may recover medical expenses as damages
given the existence of a valid lien by a health plan. Plaintiffs should move to introduce
evidence of the lien and assert preemption over any state tort reform laws or risk being
forced to reimburse a health plan for benefits provided even when medical expenses were
never recovered as an element of damages in the medical malpractice action.
