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The legal framework for the U.S. health insurance business rests on a few ambiguous paragraphs in the Employee Retirement and Income Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq. For more than 25 years, the U.S. Supreme Court has overseen a battle between states trying to push added requirements onto ERISA health plans and the plans resisting anything that might cost themselves money. The most recent case in this battle is Sereboff v. Mid Atlantic Medical Services Inc., 126 S. Ct. 1869 (2006). Joel and Marlene Sereboff were insured through an employer ERISA-qualified health plan. The plan, through Mid Atlantic Insurance, which was acting as third-party administrator (TPA), paid $74,869.37 of medical expenses arising from an automobile accident. The couple sued the other driver and ultimately settled the case for $750,000. Mid Atlantic, acting as an ERISA plan fiduciary, then made a claim against the settlement for medical expenses it had paid. The health insurance contract’s “Acts of Third Parties” provision required the insured to remit to the Mid Atlantic “all recoveries from a third party (whether by lawsuit, settlement, or otherwise)” for money receive for benefits provided. The Sereboffs refused to remit the $74,869.37, but, pursuant to a court-approved stipulation, the money was held in an investment account pending the resolution of the claim. The trial court found in Mid Atlantic’s favor and ordered the Sereboffs to pay Mid Atlantic the principle plus interest. 303 F. Supp. 2d 691, 316 F. Supp. 2d 265 (D. Md. 2004). On appeal, the 4th U.S. Circuit Court of Appeals affirmed in relevant part. 407 F.3d 212 (2005). The Supreme Court granted certiorari. 126 S. Ct. 735 (2005). ERISA includes both legal and equitable remedies ERISA jurisprudence is one of the last areas in the law in which a distinction between legal and equitable remedies matter. When ERISA was enacted, Congress was primarily concerned with pension protection, not health plans. Thus it grounded ERISA in the law of trusts, making employers fiduciaries to the plans and the beneficiaries, ( Varity Corp. v. Howe, 516 U.S. 489, 496 (1996)), and the legislation limited the recovery in legal actions to equitable relief. The distinctions between equity and law are seldom an issue for pensions. Most pension law issues deal with the behavior of the fiduciary, the tax treatment of the assets and contractual questions about the level of benefits for classes of employees. In general, when beneficiaries sue a pension plan, it is for dispersal of a benefit. In contrast, modern health plans oversee the beneficiary’s use of the funds and make individualized decisions about care. Accordingly, when beneficiaries sue a health plan, it is usually for wrongful denial of care. Sereboff is interesting because the plan, not the beneficiary, is attempting to recover a dispersed benefit; a situation not imaginable when ERISA was drafted. In Massachusetts Mutual Life Insurance v. Russell, 473 U.S. 134 (1985), the Supreme Court held that the combination of ERISA’s pre-emption of state medical malpractice laws and nonlegal relief mean that victims of wrongful denial-of-care decisions by ERISA plan TPAs were left without a remedy. Soon after Massachusetts Mutual, managed care organizations (MCOs) began using ERISA as a protective shield to deny beneficiaries needed medical care. Adverse publicity to such activities, and other reasons, resulted in the court’s retreat on the scope of ERISA’s pre-emption. New York State Conference on Blue Cross & Blue Shield v. Travelers, 514 U.S. 645 (1995), and subsequent ERISA cases held that state laws promulgated under a state’s police powers were not pre-empted by ERISA. See, e.g., De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806 (1997). Travelers thus suggested that state medical malpractice laws may not be pre-empted. In Pegram v. Herdrich, 530 U.S. 211 (2000), the Supreme Court recognized that TPAs made three types of decisions with respect to beneficiaries: eligibility, medical and mixed eligibility-medical decisions. According to the court, only eligibility decisions were entitled to ERISA pre-emption protection. Conversely, Pegram meant that if any part of a TPA’s decision concerning health care benefits involved a medical decision, the plan would be exposed to medical malpractice liability. This impression was bolstered two terms later when that court held that ERISA did not pre-empt a state’s health maintenance organization (HMO) act, unless the state act duplicated the causes of action in ERISA. Rush Prudential HMO v. Moran, 536 U.S. 355 (2002). In 2004, however, the notion that ERISA plans were exposed to medical malpractice liability was put to the test in Aetna Health v. Davila, 124 S. Ct. 2488 (2004). In a footnote, the court limited Pegram‘s rules to situations where the MCO’s decision was made by someone who was both the plan fiduciary and a treating physician. This is a rare situation, as MCO medical directors who are plan fiduciaries are almost never treating physicians. Thus, the court essentially gutted its holding in Pegram and created a situation whereby beneficiaries who are harmed by the medical plans’ decision-making sustain a “wrong without a remedy.” See Linda Peeno et al., “A Wrong without a Remedy,” Trial (September 2005). In a 2002 case, Great-West Life & Annuity Ins. v. Knudson, 534 U.S. 204 (2002), the Supreme Court addressed the other side of the equation: Can health plans recover money from beneficiaries? Great-West Life paid $411,157.11 in benefits for health care costs resulting from an automobile accident. The beneficiary later brought a claim against the car manufacturer and others, and entered into a settlement agreement for $650,000. Part of the agreement set aside $13,828.70 to reimburse Great-West for the medical care it paid for. The remainder was put in a trust to pay for the future medical care of the plaintiff. Rather than accept this partial payment, Great-West filed a claim for all of the $411,157.11 it had paid, under policy provisions that entitled it to payment for benefits paid by the plan that the beneficiary is entitled to recover from a third party. The court found that that action was barred under the terms of ERISA because it was a based on an action to recover monetary damages based on a contract, which is a legal remedy. Great-West accordingly creates “judicial symmetry”: Beneficiaries could not recover money from plans, and plans could not recover money from beneficiaries. Sereboff reassesses this symmetry. The Supreme Court in Sereboff explained that when a monetary award was at issue, whether that award constituted appropriate equitable relief turned on whether the monetary award was to “impose a constructive trust or equitable lien on ‘particular funds or property in the defendant’s possession.’ ” Id. at 213. In Great-West, the only identifiable funds for a constructive trust were the $13,828.70 set out in the settlement agreement. By the time Great-West had filed its claim the remaining funds were tied up in a trust. Thus the only way for the beneficiary to pay Great-West’s claim would be from personal assets. The court held that what the insurer actually sought to recover was a legal award and thus the lawsuit could not proceed. High court held that insurer sought equitable relief Chief Justice John G. Roberts Jr. then observed that the impediment to characterizing the relief sought in Great-West was not present in Sereboff. Rather, the 4th Circuit was correct in ruling in Mid Atlantic’s favor because it sought only “specifically identifiable” funds that were “within the possession and control of the Sereboffs.” Accordingly, Mid Atlantic was not seeking “to impose personal liability . . . for a contractual obligation to pay money.” 126 S. Ct. at 1874. Having concluded that Mid Atlantic sought equitable relief, the court next had to determine whether the claim arose in equity. In Barnes v. Alexander, 232 U.S. 117, 121 (1914), Justice Oliver Wendell Holmes recited “the familiar rule of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing.” According to Roberts, the “Acts of Third Parties” provision in the Sereboffs’ plan “specifically identified a particular fund, distinct from the Sereboffs’ general assets. [T]herefore, Mid Atlantic could rely on a ‘familiar rule of equity’ to collect for the medical bills it had paid on the Sereboffs’ behalf.” 126 S. Ct. at 1875 (citing Barnes, 232 U.S. at 121). In short, the contractual language in Mid Atlantic’s policy was sufficient to establish that a constructive trust came into existence when the Sereboffs settled with the other driver. As this claim arose in equity and the relief sought was equitable, Mid Atlantic’s suit was allowed under ERISA. Sereboff can be reconciled with Davila by viewing the court’s goal in ERISA cases as protecting the plan assets for the good of all of the beneficiaries. Given the open question of whether the real difference between Great-West and Sereboff was the panel of judges, it is expected that ERISA health plans will be much more aggressive in asserting claims for reimbursement from third parties. Thomas R. McLean is chief executive officer of Third Millennium Consultants in Shawnee, Kan.; clinical assistant professor of surgery at the University of Kansas; and attending surgeon at the Dwight D. Eisenhower Veterans Administration Medical Center. He can be reached at [email protected]. Edward P. Richards is the Harvey A. Peltier Professor of Law at Louisiana State University Hebert Law Center and director of its program in law, science and public health. Nothing in this article is to be construed as representing Veterans Administration policy or procedure.

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