HARP/Health Administration Responsibility Project

Some Notes on "Subrogation"

  • In General
  • ERISA
  • Medicaid
  • Medicare


    In General

    Many HMO contracts have clauses which say that if you have an accident, and they pay for your medical care, and you sue the person who caused the accident, and you get money from him, the HMO can take from that judgment or settlement, whatever they paid for your care, and they can place a lien on the money you got.

    They often call this "subrogation", but it's really not.  Subrogation is the right of an insurer to sue a responsible third party on your behalf. But in this case, YOU sued and won, and the insurer is really looking for "reimbursement" or "indemnification". What it's called can be important if your case comes under ERISA, as we'll discuss below.

    For all types of insurers, you can usually keep them from taking the full amount of the award by checking exactly what the money you got from the defendant was for. Usually there's money for medical expenses, and some for pain and suffering, lost wages, maybe punitive damages, etc.

    The HMO can get at ONLY the part that was earmarked for medical expenses. If that was $5,000, and the rest of the award came to $1 million, and the HMO had paid $50,000 for your care, it still couldn't get more than the $5,000, and it would still be fully obligated to pay your future claims without deduction for the $45,000 you didn't pay.

    If you're lucky enough to live in Maryland, the HMO might not be able to collect anything from you. A court there said, in Reimer v. Columbia Med. Plan, that since their enabling statute says that an HMO is a "prepaid plan", any payment other than premiums, deductibles, and co-payments is against the law. You might see how your own state's statute is written to see if you could make the same argument. It doesn't look as though it would apply in California.
    I've recently (10/2000) heard, but don't know, that the Reimer decision was "overturned" by the Maryland legislature, so check it out before relying on it.

    But California has its own protections against these liens, specified in Civil Code s. 3040.
    It applies to liens by HMOs, Insurance companies, IPAs, or medical groups.
    Liens are limited to costs to perfect the lien, plus either

    1. for non-capitated plans: the actual amount paid to providers, or
    2. for capitated plans: 80% of the usual & customary charges by non-capitated providers in the area. And don't take the HMO's word for what's "usual & customary". If you check with the doctors they pay, you may find that they tell Them very different story.

    In addition the liens are subject to pro rata reductions for attorney's fees, and if your recovery was reduced because you were partly at fault. ("comparative fault")
    But even the above amount may be further limited. The lien may not exceed:
    1. if an attorney was involved: 1/3 of money due to the patient
    2. if no attorney was involved: 1/2 of money due to the patient

    Note that these rules are not applicable to:


    ERISA

    If your HMO is governed by ERISA, it may be precluded from getting at any of your money, according to two cases from the 9th Circuit, FMC v. Owens and Reynolds v. Ellis.

    ERISA allows only "equitable" remedies, which doesn't include damages for breach of contract, which is what they'd be suing you for. "Subrogation" is an equitable remedy, but the court said that what they did is not really subrogation. If they wanted to do that, they should have taken an assignment of your suit against the guy who hit you, and sued him themselves. They didn't, so it's not subrogation, and it's not equitable, and they can't collect under ERISA.

    The HMO might try to call it "restitution", another equitable remedy, but that requires that you did something wrong or fraudulent, which you didn't, so that won't apply either. So all they're left with is a breach of contract claim for damages, which isn't allowed under ERISA, so they get nothing.

    However, if you require further treatment or reimbursement, there is probably nothing to keep them from withholding the amount they want from any other benefits you would otherwise be due, eg some new surgery.
    If you then sued THEM for what they withheld, you'd probably lose, on the basis of "unclean hands", since you had already breached the reimbursement clause of the contract, and would have had to pay but for the quirk in the law. The idea is that the court won't help EITHER side change the status quo.

    In another ERISA case, a district court held that if the insured wasn't Fully Compensated by the third party, then the "Make-whole" rule prevents the employer from recouping Any of the benefits it paid, unless it explicitly excluded that in the plan. See: Hiney Printing v. Brantner, 75 F.Supp.2d 761 (N.D.Ohio 1999)
    The make-whole rule was adopted in California in Sapiano v. Williamsburg Nat. Ins., 28 Cal.App.4th 533 (1994), and for the 9th Circuit in Barnes v. Independent Auto Dealers of Calif., 64 F3d 1389 (9th Cir. 1995).
    The make-whole amount is based on expert testimony at trial.
    Note, however, that this rule can be overruled by an explicit contractual term, and all Kaiser contracts include such a term.


    Medicaid

    If your medical costs were paid by Medicaid, the provider may also be prohibited from taking any portion of a 3d party payment, even if state law would otherwise allow it. A California appeals court, citing other opinions, held that Medicaid's requirement that providers accept Medicaid's payment as "payment in full" preempts any state laws to the contrary. See: Olszewski v. ScrippsHealth. (This case has been appealed.)

    If none of the above works, the insurer may still be required to at least pay its proportionate share of the legal costs and fees expended to win the judgment. E.g.: See Guiel v. Allstate, VT Supreme Ct. #99-046, 4/26/00.


    Medicare

    If your medical costs were paid by Medicare, HCFA's subrogation rights are defined by the Medicare Act, 42 U.S.C. 1395 et seq., and the regulations interpreting it. Section 1395y(b)(2), known as the Medicare Secondary Payer statute (MSP), makes Medicare the secondary payer for medical services provided to Medicare beneficiaries whenever payment is available from another primary payer, such as the beneficiary's private insurer or the private insurer of someone liable to the beneficiary. This means that if payment for covered services has been or is reasonably expected to be made by someone else, Medicare does not have to pay. However, Medicare does make "conditional" payments for covered services, even when another source may be obligated to pay, if that other source is not expected to pay promptly. 42 U.S.C. 1395y(b)(2)(A)(ii).
    Medicare's conditional payments are "conditioned on reimbursement [to Medicare] when notice or other information is received that payment for such item or service has been . . . made." 42 U.S.C. 1395y(b)(2)(B)(i).
    Thus Medicare is entitled to reimbursement if and when the primary payer pays. Among other avenues of reimbursement, Medicare is subrogated to the beneficiary's right to recover from the primary payer. 42 U.S.C. 1395y(b)(2)(B)(iii). Medicare regulations extend that subrogation right to any judgments or settlements "related to" injuries for which Medicare paid medical costs, thereby casting the tortfeasor as the primary payer. 42 C.F.R. 411.37 (2002).

    However, several district court cases, and a 2002 5th Circuit case, Thompson v. Goetzmann  have held that Medicare may NOT recover from payments by 3d party tort-feasors, since the law only allows recovery from primary insurers, or "self-insured PLANS".

    In addition, Medicare's reimbursment is reduced by a pro-rata share of the "procurement costs," which include attorney's fees. 42 C.F.R. 411.37(c) (2002). So Medicare demands that attorneys send it a copy of the agreement setting out the share of the recovery they are to receive.

    However, HCFA has broad discretion to waive the right of subrogation when pursuing it "would defeat the purposes of the Medicare Act or the Social Security Act or would be against equity and good conscience." 42 U.S.C. 1395gg(c). So it is worthwhile to fight their subrogation request.
    You would first have to request that the agency exercise its discretion to waive its subrogation right.
    If HCFA denies your request for a waiver, you would then have to seek review of that denial at a hearing before an administrative law judge.
    If you lose there, you can request review by the Department of Health and Human Services Appeals Board. 42 C.F.R. 405.720, 405.724.
    During that process, if the issue hasn't been decided yet by a court, you could raise constitutional objections to HCFA's subrogation practices. See Illinois Council, 529 U.S. at 12.
    Only after you exhaust all these administrative remedies, can you bring your claims to federal court. 42 U.S.C. 1395ff(b)(1).

    So, the lesson is: Don't simply accede to the insurer's or HMO's demand for what you won from the third party until you check your options!

    HARP/Health Administration Responsibility Project

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