Part 6 - ERISA DEFENSES : Failing to Adequately Advise Members of the Substantial Differences in Coverages

You can use the following defense ("failing to advise" members argument) when negotiating down your injured client's ERISA protected health care plan:

"Interestingly, the plan offers each member a choice among a Kaiser HMO, a PacifiCare HMO, or the self-funded plan that our client chose. However, as far as I can tell, the plan never notified the union members of the radical difference in treatment of the subrogation rights of those plans. Under ERISA’s savings clause in 29 USC 1144, Kaiser’s and PacifiCare’s subrogation rights would be limited by state law. For instance, Civil Code §3040 would apply, which imposes the common fund doctrine on HMO’s. On its face, this would save Mr. XX more than $111,000, that he inadvertently waived by choosing the self-funded plan. Moreover, all of the PacifiCare HMO’s that I have ever reviewed expressly do not waive the make whole doctrine. Since Mr. XX was clearly not made whole, he would owe nothing if he had chosen the PacifiCare plan.

Of these cases, only Westaff v. Arce was partially overruled by Sereboff. Notably, Westaff had gone beyond the other six cases in holding that Congress intended to bar reimbursement when it passed ERISA. 3 At your request, this office can provide at least a half dozen waivers obtained from PacifiCare HMO plans on this basis. If the plan members had been advised of this discrepancy in the plan’s coverages, they almost certainly would have opted for the insured plans. I doubt that many federal courts would tolerate such a difference in subrogation rights among plan members without their informed consent.

FEDERAL LAW OF ERISA—PARTIAL DEFENSE

On May 15, 2006, the Supreme Court decided Sereboff v. Mid-Atlantic Health Services, Inc., 126 S. Ct. 1869 (2006), which held that ERISA plans could seek to enforce reimbursement provisions on an equitable lien or constructive trust argument. But, as noted above, Sereboff was a very limited holding and did not discuss the requirements for a cause of action for constructive trust or equitable lien.

However, the Court in Sereboff expressly relied upon its opinion in Barnes v. Alexandra, 232 U.S. 117,121 (1914) for 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 she gets title to the thing.” 164 L.Ed. at 620, 623. (emphasis supplied) This passage from Barnes was considered so controlling by the Sereboff Court that it quoted it two and one-half times in its opinion. This clearly suggests that the constructive trust and equitable lien theory will only support an ERISA reimbursement claim by the plan to the extent there is actual recovery of the plan member’s medical bills. In this case there was only a minimal recovery of those bills.

This result is further supported by three other recent Supreme Court cases involving enforcement of Medicaid liens. In Arkansas Dept. of Health & Human Services v. Ahlborn, 126 S. Ct. 1752 (2006), the High Court held that a state Medicaid agency would be limited in its statutory entitlement to reimbursement from a recipient's personal injury case where the recovery was limited by virtue of the recipient's own comparative negligence. Because the recipient was 5/6 at fault, the Court limited DHHS to 1/6 of its statutory lien, as being the only amount of DHHS paid medical bills that the recipient had actually recovered. The Court held that “The statute does not sanction an assignment of rights to payment for anything other than medical expenses—not lost wages, not pain and suffering...” (emphasis supplied) Likewise, in Fitch v. Select Products (2005) 36 Cal.4th 812 the California Supreme Court held that Medi-Cal was not entitled under the Medicaid statutes to recover its medical expenses paid to a recipient from his heirs' wrongful death action. The Court's reasoning was that such medical expenses were only recoverable in a survival action and therefore as a matter of law had not been recovered in the wrongful death action. A similar rationale was utilized by the California Supreme Court to strike the Medi-Cal balance billing statute in W&I §14124.791 in Olszewski v. Scripps Health (2003) 30 Cal.44th 798.

Based upon the above four cases, it appears any action for constructive trust/equitable lien under ERISA, that survives the above complete defenses, will only lie to the extent that the plan member’s medical bills were actually recovered in the personal injury action. To the extent the plan’s claim exceeds the amount of medical expenses actually recovered, it would appear to constitute an action for contractual damages—legal relief not available under ERISA. Clearly, there is no basis for the plan to claim reimbursement from plaintiff’s non-medical damages other than a contractual claim for legal relief. See Great West v. Knudson, 534 U.S. 204 (2002). Therefore, in cases where significant undercompensation exists, it appears likely that the Supreme Court would require an apportionment approach to limit the plan’s recovery to its equitable share."

The above creative arguments for defenses (Parts 1-6) on ERISA protected health care plans comes from the knowledge and legal foresight of attorney Donald M. de Camara, Esq.

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