Recent United States Supreme Court decision could cost medical benefit plans millions in lost revenues

Most employee medical insurance benefit plans, which are regulated by the Employee Retirement Income Security Act of 1974 (ERISA) contain subrogation clauses which require a plan participant to reimburse the plan for medical expenses if the injured employee later sues and recovers money from a third party for those injuries. In this case the employee was seriously injured by a drunk driver. The employee’s medical plan paid more than $120,000 for his medical expenses. The employee subsequently sued the drunk driver and received a $500,000 settlement. Pursuant to the plan’s subrogation clause, the medical plan sought reimbursement from the proceeds of the settlement.

The injured employee’s attorney refused the request and informed the plan administrator that the funds would be transferred from a client trust fund to the account of the injured employee, unless the plan administrator objected. The plan administrator did not respond. Shortly thereafter, the injured employee received the remaining settlement funds.

Six months later the plan administrator filed suit to enforce the subrogation terms of the plan document. The employee argued that since he had already spent almost all of the settlement, no money was left to return to the plan. The case was tried at a District Court and later appealed to the Eleventh Circuit Court. In both instances the courts held that even if the injured employee had completely used up the money in the fund, the plan was still entitled to reimbursement from the employee’s general assets.

The case was then heard by the U.S. Supreme Court. In an 8-1 decision, the high court ruled that when an injured participant in an ERISA covered health insurance plan spends the funds which are recovered from a third party settlement the plan administrator may not bring suit for reimbursement from the plan participant’s other assets. In reversing the court of appeals, the justices said that if the health plan in question had immediately sued when the injured employee first came into possession of the settlement fund, that might have been a valid remedy. However, since the plan waited until after the injured employee had spent most of the settlement, the court held that the plan’s ability to seek reimbursement was limited or possibly extinguished.

Under this interpretation, a health plan can only seek reimbursement from monies that the plan participant still possesses. This decision could cost medical benefit plans billions in lost revenues. These losses could then cause an increase in employee health insurance premiums. In light of this decision, some Insurance carriers are considering not offering coverage for medical expenses which are the result of accidents caused by third parties.

Employers who have ERISA covered medical insurance plans should immediately begin the process of reviewing the subrogation provisions of the plan to determine if changes need to be made.

A company’s best defense against the potential expense and aggravation related to federal or State law violations is to proactively review and revise as needed their Human Resources policies, handbooks, hiring procedures, compensation, benefits, training programs, communications tools and other functions. The professionals of PHHR are ready to assist your organization maintain compliance with the latest state and federal mandates.

Newsletter Archive

Our newsletter is updated regularly, providing information of interest
to many of our readers. We invite you to check back frequently.

Paul Hilton is a certified Human Resources Consultant, located in Columbia, SC.
If you would like to subscribe to our Newsletter e-mailing list, please submit our Contact Form.