Many health plans (both insured and self-funded) have vigorously pursued their subrogation and reimbursement rights. Those rights are generally written in broad and sweeping terms. The provisions may allow plans to recover from settlements with liable third parties the entire amount of the medical benefits paid on behalf of the participant, irrespective of whether the participant was made whole for injuries suffered or that a sizeable portion of any recovery was paid to the participant's attorney as fees and expenses for prosecuting the case. State anti-subrogation laws may adversely impact a self-insured plan's ability to enforce the policy's subrogation and reimbursement provisions. But a self-funded plan is not subject to state insurance laws and thus courts had generally upheld the provisions as written under ERISA §502(a)(3).
This article describes (1) the development of the law by the Supreme Court regarding the remedies that may be available to plans to enforce their subrogation and reimbursement provisions; (2) the most recent reimbursement case in which the Supreme Court heard oral arguments and the anticipated outcome of that case; and (3) best practices for plans to protect their subrogation and reimbursement rights under ERISA.
Equitable Remedies Under ERISA
The first influential case that considered what equitable remedies are available under ERISA was Mertens v. Hewitt Associates, 508 U.S. at 248 (1993). The question presented to the court in Mertens was whether ERISA §502(a)(3) authorized suits for money damages against nonfiduciaries who knowingly participated in a fiduciary breach. The Supreme Court held that it did not.
Justice Antonin Scalia (who authored the opinion) noted that "appropriate equitable relief" in §502(a)(3) meant something less than all relief and did not include whatever relief a court of equity could have provided (which could have included legal relief in certain circumstances). Rather, the equitable relief under §502(a)(3) was found to be limited "to those categories of relief that were typically available in equity (such as injunction, mandamus and restitution, but not compensatory damages). The Supreme Court also rejected the argument that "appropriate equitable relief" under ERISA included all remedies available in the common law of trusts to beneficiaries for breach of trust (including money damages).
After Mertens, the Supreme Court, in Great-West Life & Annuity Insurance Company, 534 U.S. 204 (2002), reviewed the remedies available under ERISA §502(a)(3) to a plan that sought to enforce its reimbursement provision against a participant under ERISA §502(a)(3). A self-funded plan sought to recover more than $400,000 of medical expenses paid on behalf of a participant who incurred injuries as a result of a car accident. The participant negotiated a settlement of $650,000, with $256,745 deposited in a special needs trust and $373,426 going to pay for attorney fees and costs. Only $13,838 was allocated to the plan to pay for past medical expenses.
Scalia looked to the relief that the plan sought under ERISA §502(a)(3) and held that it was not appropriate equitable relief. First, the court found that an injunction to compel the payment of money, past due under a contract, was not typically available in equity. Second, the court held that restitution was not exclusively an equitable remedy. Equitable restitution was only available to the plan if the plan was seeking to assert title to particular property in the form of a constructive trust or an equitable lien, rather than seeking a personal judgment against the participant. In Great-West, the proceeds from the settlement were not in the participant's possession and the plan was seeking to impose a personal judgment for monetary relief that constituted an action at law.
Four years later, the Supreme Court took another look at the available remedies under ERISA to enforce reimbursement and subrogation provisions. In Sereboff v. Mid Atlantic Medical Services, 574 U.S. 356 (2006), the self-funded plan filed suit to recover from the participant the medical expenses it paid on account of injuries sustained in an automobile accident. The participant settled with the liable third party for $750,000 and placed the amount the plan sought ($74,869) in an investment account until the court could resolve the issue of the plan's entitlement to a portion of the recovery. The Supreme Court held that because the plan was seeking "specifically identifiable" funds that were in the participant's possession and control, the restitutionary relief was available under ERISA §502(a)(3).
The court also found that the strict tracing rules were inapplicable because the equitable lien sought in this case was one "by agreement," as opposed to an equitable lien sought as a matter of restitution. Moreover, certain equitable defenses (e.g., the make-whole remedy) would only apply if the claim was for subrogation or an equitable lien sought as a matter of restitution. The court left open the question of whether the relief sought was appropriate equitable relief under §502(a)(3) because the participant did not raise the issue below.
Supreme Court's Consideration of U.S. Airways
The Supreme Court granted certiorari and heard oral argument on November 27, 2012, in U.S. Airways v. McCutchen, Case No. 11-1285. The case involved an action by a self-funded plan against a participant to recover the entire amount ($66,866) it paid in medical expenses resulting from an automobile accident. The participant recovered $110,000 from third parties, $66,000 of which was paid to the attorney as fees and expenses. The attorney placed $41,500 into a trust account, believing that any plan lien would have been reduced to account for a proportional amount of legal costs. The plan sought relief under ERISA §502(a)(3), claiming appropriate equitable relief in the form of a constructive trust or an equitable lien on the $41,500 held in trust and $25,366 personally from the participant. The subrogation and reimbursement provision relied on by the plan was very broad. U.S. Airways claimed that the provisions allowed it to recover the full $66,866 that it paid out of the $110,000 recovered. The district court granted summary judgment in favor of U.S. Airways, requiring not only the money held in trust to be turned over to U.S. Airways, but also requiring the participant to pay $25,366 from his own funds.
The U.S. Court of Appeals for the Third Circuit reversed in U.S. Airways v. McCutchen, 663 F.3d 671 (3d Cir. 2011). The court found that even though the case fell within the purview of the Supreme Court's holding in Sereboff, the Supreme Court left open the issue of whether the equitable relief sought was "appropriate" and whether equitable principles and defenses could be asserted by the participant. The court went on to hold that equitable relief under ERISA §502(a)(3) may be subject to the equitable principle and defense of unjust enrichment that was typically available in equity. Applying these principles, the court concluded that full reimbursement to U.S. Airways would be "inappropriate and inequitable relief," especially in light of the fact that the participant's net recovery was less than the medical expenses paid by the plan. The court remanded the case to the district court to determine what would be appropriate equitable relief under §502(a)(3).