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2015 Development In Healthcare

Michael H. Bernstein

Partner

Sedgwick LLP

michael.bernstein@sedgwicklaw.com

Wurtz v. Rawlings: Preemption, Remedies, and Subrogation

Lori A. Meaders

Senior Attorney

Southern California Edison Company

Lori.Meaders@sce.com

Bryan D. Bolton

Partner

Funk & Bolton, P.A.

bbolton@fblaw.com

April 13-14, 2015

Elizabeth (Lisa) J. Bondurant

Partner

Womble Carlyle Sandridge & Rice, LLP

Lisa.Bondurant@wcsr.com

Tweeting about this conference?

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ERISA’s Statutory Scheme

•502(a)(1)(B) – Participant’s right to enforce terms of the Plan • Must first exhaust internal Plan remedies

• Prohibited from obtaining remedies beyond those authorized under ERISA

•502(a)(3) – Plan’s right to enforce terms of the Plan • Includes contractual rights established by Plan’s terms

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Common Scenario

• Participant injured by a third party • Health Plan pays medical expenses • Participant sues third party for personal

injury • Participant receives settlement or

judgment • Plan attempts to enforce Plan’s

subrogation terms to recoup medical expenses paid by Plan • Participant disagrees – Plan brings action

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Subrogation and Equitable Liens

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What is Subrogation and

What Plan Terms?

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What is Subrogation? “Subrogation simply means substitution

of one person for another; that is, one person is allowed to stand in the shoes

of another and assert that person’s rights against a third party.”

“Subrogation” involves the substitution of the insurer . . . to the rights of the insured.”

U.S. Airways, Inc. v. McCutchen, 133 S. Ct. 1537 (2013), footnote 5.

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What is Subrogation? Third-Party Tort Action Settlements/Judgments

Health and Disability plans often include provisions requiring beneficiaries to return previously paid benefits if they obtain a settlement or judgment in a personal injury action.

These provisions are intended to prevent the beneficiary from receiving, what is in effect, a double recovery.

Establish a contractual agreement with the beneficiary

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Sample Health Plan Language Third Party Liability If you are injured or become ill through the act of a

third party, We will provide coverage for the treatment of such injury or sickness. Your acceptance of such Covered Services will constitute consent to the provisions of this section.

Upon providing treatment for such injury or sickness under the terms of this Certificate, We shall be permitted to recover the reasonable value of such care for injury or sickness, when payment is made directly to you in third party settlements or satisfied judgments. However, this recovery will be made only to the extent that the settlement or judgment specifically identifies amounts paid or health care services. You agree to cooperate fully to assist Us in protecting Our rights under this section. 8

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Sample Disability Plan Language

Other Income Includes: Disability payments which result from the act or omission

of any person whose action caused your disability. These

payments may be from insurance or other sources.

Lump Sum and Periodic Payments from Any Other Income Benefits

Any lump sum or periodic other income payments that you receive will be prorated on a monthly basis over the period of time for which the payment was made. If a period of time is not indicated, We will prorate the payments over a reasonable period of time, taking into account the expected length of disability benefits and other relevant factors.

That part of the lump sum or periodic payment that is for disability will be counted, even if it is not specifically apportioned or identified as such. If there is no proof acceptable to Us as to what that part reasonably is, 50% will be deemed to be for disability.

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Sample Disability Plan Language If payments are made in

amounts greater than the benefits that you are entitled to receive, We have the right to do any one or all of the following:

• to require you to return the overpayment on request;

• to stop payment of benefits until the overpayment is recovered;

• to take any legal action needed to recover the overpayment; and

• to place a lien, if not prohibited by law, in the amount of the overpayment on the proceeds of any other income, whether on a periodic or lump sum basis. 10

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Equitable Lien By Agreement Thurber v. Aetna Life Ins. Co., 712 F.3d 654 (2d Cir. 2013) (cert denied)

• Second Circuit held that the plan’s provision stating that any overpayment received belonged to the plan fiduciary was sufficient to create an “equitable lien by agreement” in favor of the insurer in the amount of the overpayment. Id. at 254. Accordingly, the Second Circuit found that the insurer’s counter-claim for the return of the amount of the equitable lien by agreement constituted a claim for “appropriate equitable relief” under ERISA § 502(a)(3).

ACS Recovery Services, Inc. v. Griffin, 723 F.3d 518 (5th Cir. 2013)

• Fifth Circuit en banc ruling that the plan administrator could recover specifically identifiable funds from a third-party tort action recovery held in a participant’s special needs trust under ERISA§502(a)(3).

• The “Plan held a pre-existing equitable lien by agreement on the proceeds of the recovery after the Plan paid Griffin’s medical bills.”

• “[A]n equitable lien for reimbursement attached to settlement proceeds as soon as a settlement fund arose from the injuries requiring payment.”

AirTran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014)

• “[T]he unambiguous terms of the AirTran plan created an equitable lien against any settlement funds that Elem received as a result of her accident.”

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State Anti-Subrogation Laws Many states have enacted laws that prohibit health

and disability plans from pursuing subrogation against beneficiaries’ third party tort recoveries.

The critical question is

whether such laws are

preempted by ERISA

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ERISA Preemption

• ERISA supersedes “any and all State laws” that “relate to” plan. 29 U.S.C. § 1144(a).

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ERISA Savings Clause

• Nothing in ERISA relieves “any person from any law of any state which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A).

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ERISA Deemer Clause

• No employee benefit plan or trust under a plan shall be deemed an insurance company “for purposes of any State law purporting to regulate insurance companies [or] insurance contracts.” 29 U.S.C. § 1144(b)(2)(B).

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ERISA Remedial Scheme

• Civil Enforcement provision defines parties that may bring a civil action. 29 U.S.C. § 1132(a).

• Participant or beneficiary may bring action to recover benefits due “under the terms of the plan” or clarify rights to “future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B).

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Fourth Circuit First

• Singh v. Prudential Health Care Plan, Inc., 335 F.3d 278 (4th Cir. 2003).

• District Court found Maryland HMO Act prohibiting subrogation was preempted by ERISA and dismissed case.

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Fourth Circuit Appeal

• Maryland law is saved from preemption and negates subrogation plan term.

• Reversed district court dismissal, finding action properly in Federal Court.

• State law saved from preemption may supply substantive term or mandate benefit, but once term is part of plan, enforcement action must be brought under 29 U.S.C. § 1132.

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Fourth Circuit Rationale

• Complaint sought return of funds taken based on subrogation claim, essentially seeking undiminished benefits under modified plan terms.

• When a plan term is applied to diminish a benefit is not determinative of entitlement to full benefit and claim remains within scope of 29 U.S.C. § 1132.

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Supreme Court Precedent

• FMC v. Holliday, 498 U.S. 52 (1990) (Pennsylvania anti-subrogation statute within savings clause).

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Supreme Court Precedent Continued • Rush Prudential v. Moran, 536 U.S. 355 (2002)

(HMO found to be insurer under savings clause and state independent review law saved from preemption, but lawsuit for benefits still must be filed under 29 U.S.C. § 1132(a)).

• Kentucky Health Plans v. Miller, 538 U.S. 329 (2003) (rejecting McCarran Ferguson factors and narrowing focus of savings clause analysis).

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Fifth Circuit - Second

• Arana v. Ochsner Health Plan, 338 F.3d 433 (5th Cir. 2003) (en banc).

• Action filed in Louisiana state court to determine insurer was not permitted to subrogate and compel withdrawal of liens based on state law.

• Removed to Federal court and district court finds for plaintiff.

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Fifth Circuit Panel Decision

• Three judge panel finds lack of subject-matter jurisdiction and directs remand to state court.

• Panel finds no claim for benefits because benefits already paid.

• Panel finds action was not seeking to enforce plan terms, but rather declare plan term illegal under Louisiana law.

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Fifth Circuit En Banc

• Reversing panel, court finds benefits not fully recovered because benefits were not free and clear of insurer claims.

• Plaintiff seeks to enforce plan terms by determining entitlement to retain benefits.

• Plaintiff argues state law regulates insurance, is saved from preemption, and without conflict preemption removal is improper.

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Fifth Circuit En Banc Continued

• Fifth Circuit precedent required complete and conflict preemption for federal court removal jurisdiction.

• En banc court holds complete preemption under 29 U.S.C. § 1132(a) sufficient for federal court removal jurisdiction, without deciding whether law is saved.

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Supreme Court Precedent

• Fifth Circuit finds conflict preemption requirement for removal in conflict with Unum v. Ward, 526 U.S. 358 (1999).

• Unum v. Ward, involved lawsuit filed under 29 U.S.C. § 1132 to recover under plan based on application of California notice-prejudice rule.

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Third Circuit - Third

• Levine v. United Healthcare Corp. 402 F.3d 156 (3rd 2005).

• Insureds filed unjust enrichment claims in state court based on New Jersey anti-subrogation statute.

• District court found New Jersey law saved from ERISA preemption, but certified interlocutory appeal.

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Third Circuit Decision

• Plaintiff’s claims fall within scope of 29 U.S.C. § 1132(a) because they are claiming benefits due based on benefits already paid back to insurer.

• Merits can only be determined by delving into provisions of ERISA plans.

• Analogy to mandated benefits and Federal jurisdiction affirmed citing Metropolitan Life v. Taylor, 481 U.S. 58 (1987).

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Third Circuit Savings Clause

• New Jersey statute reversed collateral source doctrine and required plaintiff to deduct benefits received from any source from recovery in any civil action.

• Language in statute not limited to insurers.

• Statute not specifically directed toward insurance industry.

• New Jersey collateral source statute preempted by ERISA.

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How Wurtz came to Worst

Wurtz v. Rawlings Co., LLC, 933 F.Supp.2d 480 (EDNY 2013)

• District Court ruled that New York State Anti-Subrogation Law (GOL §5-335), which was passed to prevent health insurers from seeking reimbursement of medical benefits paid out of third-party tort action settlements, was completely preempted by ERISA.

• Court found that the law was not specifically directed at insurance companies in order to be “saved” from preemption under ERISA §514(b)(2)(A) and permitted the health insurer to enforce its equitable lien to recover the amounts paid in medical benefits from the settlement.

• In response to Wurtz, New York State Legislature amended GOL §5-335 to state that it was specifically directed at and meant to regulate health insurance companies.

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How Wurtz Came to Worst Kohl’s Dept. Stores v. Castelli, 961

F.Supp.2d 415 (E.D.N.Y.2013) • First case to address newly revised GOL §5-335. • District Court ruled that GOL §5-335 is still preempted by ERISA, notwithstanding the amendment, based on finding that the law did not substantially effect risk pooling arrangements. • Court cited Supreme Court’s decision in Ky. Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003) concerning when a state law is saved from preemption. • The District Court noted that the Legislature only addressed the first prong of the Miller test but failed to account for the risk pooling factor. • “. . . The Court is hard-pressed to accept that the law’s effect on risk-

pooling arrangements is “substantial[ ],” where only a slice of certain types of settlements in certain types of cases involving certain types of benefit providers are actually implicated.”

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How Wurtz Came to Worst Wurtz v. Rawlings Co., LLC, 761 F.3d 232

(2014) • On plaintiff’s appeal from EDNY ruling finding plaintiffs’ claims to be

completely preempted by ERISA

• Second Circuit reverses, vacates and remands.

Holding

There is no conflict preemption because New York’s anti-subrogation statute falls within ERISA’s savings clause.

Court finds that district court’s holding that the savings clause does not apply is contrary to the Supreme Court’s ruling in FMC Corp. v. Holiday, which concerned a similar Pennsylvania anti-subrogation statute.

Court disagreed with the district court’s holding on risk pooling factor of Miller test because the state law effects how risk is shared when it applies.

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How Wurtz Came to Worst Wurtz v. Rawlings Co., LLC, 761 F.3d 232 (2014) Holding (Continued) The participants’ claims seeking a declaratory judgment prohibiting the plans’ efforts to recover benefits paid from their tort action settlements fails both prongs of the Davila v. Aetna complete preemption test under ERISA §502(a)(1)(B).

• On the first prong, the court found that plaintiffs claims sought no benefits under their ERISA plan, but rather to keep

the benefits that had previously been paid.

• On the second prong, the court found no other independent legal duty was implicated. Court found that the Plans’ rights to reimbursement were not statutory, regardless of the fact that that right could only be enforced by statute.

The Court noted that its decision conflicts with the decisions on point

from the Third, Fourth and Fifth Circuits (Arana, Singh and Levine). A petition for a writ of certiorari was recently denied by the Supreme

Court.

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Problems with Wurtz Decision • Court ignores Plan’s contractual

right to seek enforcement of its equitable lien by agreement under ERISA §502(a)(3).

• Court’s consideration of the Davila complete preemption test is myopic and result-oriented.

• Court’s consideration of Miller Savings Clause test is overly simplistic and fails to address the real issues raised in Kohl’s Department Store case.

• Court ignores the disuniformity of plan administration that will be caused by its ruling.

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Problems with Wurtz Decision

What about Fort Halifax? • Fort Halifax Packing Co., Inc. v. Coyne, 483 482 U.S. 1, 9

(1987)

Held that one of the principal congressional goals in enacting ERISA was to enable employers “to establish a uniform administrative scheme, which provides a set of standard procedures to guide processing of claims and disbursement of benefits.”

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Problems with Wurtz Decision

What about Conkright? • Conkright v. Frommert, 559 U.S. 506 (2010)

Observed that one of ERISA’s core congressional goals is administrative uniformity, which “. . . avoids a patchwork of different interpretations of a plan [ ], that covers employees in different jurisdictions – a result that ‘would introduce considerable inefficiencies in benefit program operation, which might lead those employers with existing plans to reduce benefits, and those without such plans to refrain from adopting them.’” (quoting Rush Prudential)

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Problems with Wurtz Decision

What about Harris Trust? • John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav.

Bank, 510 U.S. 86, 99 (1993)

Held that “[s]tate law governing insurance generally is not displaced, but ‘where [that] law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress,’ federal preemption occurs. Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 248 (1984).”

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Coping Strategies • LTD Plans can still apply offsets to

properly calculate benefits under the plan because this is technically not a recoupment or recovery of benefits

• Conflict of Law analysis – In which state was the policy delivered? If not in New York, argue that NY GOL 5-335 does not apply.

• Pursue equitable lien recovery as a plaintiff under ERISA 502(a)(3). This will at least preserve the issue in the event the Supreme Court accepts this issue for review at some later date.

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Other Issues and Questions

• Is Strict Tracing Required?

•Are Attorneys Proper Defendants?

•Will Attorney fees be awarded”

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AirTran v. Elem, 767 F.3d 1192 (2014)

• Self-funded health plan

•Good Plan Language

• Subrogation

•Reimbursement

• Lien Rights 40

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Subrogation and Reimbursement Subrogation

Immediately upon paying or providing any benefit under this Plan, the Plan shall be subrogated to (stand in the place of) all rights of recovery a Covered Person has against any Responsible Party with respect to any payment made by the Responsible Party to a Covered Person due to a Covered Person’s injury, illness, or condition to the full extent of benefits provided or to be provided by the Plan.

Reimbursement

In addition, if a Covered Person receives any payment from any Responsible Party or Insurance Coverage as a result of an injury, illness, or condition, the Plan has the right to recover from, and be reimbursed by, the Covered Person for all amounts this Plan has paid and will pay as a result of that injury, illness, or condition, up to and including the full amount the covered Person receives from any Responsible Party.

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Lien Rights and First Priority Claims Lien Rights

Further, the Plan will automatically have a lien to the extent of benefits paid by the Plan for treatment of the illness, injury, or condition for which the Responsible Party is liable. The lien shall be imposed upon any recovery whether by settlement, judgment, or otherwise related to treatment for any illness, injury, or condition for which the Plan paid benefits.

First Priority Claim

By accepting benefits (whether the payment of such benefits is made to the Covered Person or made on behalf of the Covered Person to any provider) from the Plan, the Covered Person acknowledges that this Plan’s recovery rights are a first priority claim against all Responsible Parties and are to be paid to the Plan before any other claim for the Covered Person’s damages. 42

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Facts

• Ms. Elem in motor vehicle accident • AirTran Plan paid $131,704.28 in medical bills for

self-funded Plan • Elem and attorney on notice of lien • Personal injury case settled for $500K • Plaintiff Advised Aetna the case only settled for

$25K • Drafted two releases (one for $475K and one for

$25K) • Mistakenly sent copies of both checks • Link received attorney fees of $190K 43

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Facts

• The Eleventh Circuit says:

• “Link’s [attorney] sin then found him out”

AirTran sued Elem, her attorney and his firm

Sought appropriate equitable relief under (a)(3) 44

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Strict Tracing Required?

• 502(a)(3) allows redress only in equity

• Must seek specifically identifiable funds

• Settlement proceeds from liability carrier dissipated

• Plan created an equitable lien by agreement

• Sereboff mandates no strict tracing for (a)(3) claim

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Specifically Identifiable Funds

• Fund identified were settlement proceeds

• “All that matters is that the beneficiary, did, at some time, have possession and control of the specific portion of the particular fund”

• Thurber v. Aetna (2nd. Cir. 2013), citing Sereboff

• Eleventh Circuit “It matters not whether the settlement funds have since been disbursed or comminged” 46

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AirTran’s Dissent

• Interprets Supreme Court’s various cases to require possession of the funds

• Necessary element of (a)(3) claim

• Sereboff - funds were in the possession of the defendants

• Supreme Court in Sereboff only eliminated the requirement that the disputed funds be with the plaintiff

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Personal Injury Attorneys as Defendants

• Plan may recover from a non-fiduciary party

• Harris Trust v. Saloman Smith Barney (S.Ct. 2000)

• Elem breached duty as Trustee and transferred money

• Attorneys took property subject to the Trust 48

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Attorneys as Defendants

• “Link and [firm] are hardly innocent parties”

• “[they] tried to hide the full amount of the settlement from AirTran”.

• Took the fees and costs subject to the lien held by AirTran and cannot now avoid liability

• Citing Bombardier (5th Cir. 2003), abrogated on other grounds, in 2013).

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Attorney fees available

• District Court awarded AirTran its fees

• Defendants paid them while on appeal

• 11th Circuit: all 5 factors met:

• “rarely see such a textbook example of ‘bad faith’”

• Award was paid

• Deterrence from “cheating their plans”

• Protects plan assets

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