The Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal law that governs retirement, health, life, and disability benefits for Americans. ERISA sets minimum standards for most voluntarily established pension and health plans in the private industry to provide protection for individuals in these plans.
ERISA requires plans to provide participants with plan information including important information about plan features and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a grievance and appeals process for participants to get benefits from their plans; and gives participants the right to sue for benefits and breaches of fiduciary duty.
First, this memo will begin with a general explanation of the two different ERISA health plans and then discuss the preemption rules as it relates to those plans. Second, this memo will provide a discussion on the ERISA self-funded health plan and how an ERISA lien affects such plans. The heart of this memo will focus on pertinent Supreme Court decisions and the current state of the law in the Eleventh Circuit regarding ERISA liens for self-funded plans. Finally, this memo will provide defenses that are available to avoid ERISA liens and litigation strategies that may be helpful in negotiating such liens.
ERISA HEALTH PLANS
There are two types of ERISA health plans: insured and self-funded. An insured plan is a health plan where the employer has purchased a group insurance policy for its employees from a health insurance carrier. A self-funded ERISA plan is one in which the employer completely funds the plan and pays for employee health care with its own assets. These two types of plans and their liens are treated differently under ERISA, due to rules as to when federal law preempts state insurance law and when it works in conjunction with state law.
The general rule is that ERISA preempts state law in the governance of employee health plans. However, one exception is the ERISA “saving clause,” which saves state laws regulating insurance from the realm of federal preemption. This clause greatly narrows the scope of ERISA preemption where health insurance carriers are involved. The saving clause provides that health insurance carriers—and the group health insurance policies they sell to employers—are subject to state law. Thus, claims based on an employee health plan purchased through a health insurance carrier are governed by both state law and ERISA.
On the other hand, the “deemer clause,” which immediately follows the saving clause, provides that a self-funded employee benefit plan is not to be deemed an insurance company. Thus, self-funded ERISA plans are not subject to state law but health insurance carriers and insured ERISA plans are. This distinction makes determining whether an ERISA plan is self-funded or insured of great importance.
1. Insured Health Plans
Insured ERISA plans are subject to state law regulation. When an insured plan asserts a lien against a personal injury settlement, it is the insurer—not the plan—that is attempting to recoup its expenses. An insurance company that insures a plan remains an insurer for purposes of state laws purporting to regulate insurance after application of the deemer clause.
2. Self-Funded Health Plans
Self-funded ERISA plans are exempt from state law regulation. Because self-funded plans are not connected to an insurance company, they benefit from ERISA preemption. State laws that directly regulate insurance…do not reach self-funded employee benefit plans because the plans may not be deemed to be insurance companies, other insurers, or engaged in the business of insurance for purposes of such state laws.
In resolving a personal injury claim, there may be a number of liens of varying types that attach to the settlement proceeds and which must be properly dealt with before ultimately completing the case and disbursing the proceeds to the client and the attorney. Not all liens are the same, however, and the liens attaching to any particular case may range from completely mandatory to practically unenforceable. Also, some liens are governed by state law while other liens are governed by federal law through the preemption doctrine. A lien preempts state law if the health plan is promulgated under ERISA and the plan fully self-funds all medical expenses incurred by its plan participants.
Following is a discussion of how the Supreme Court decisions and Eleventh Circuit decisions have handled ERISA liens.
A. U.S. SUPREME COURT DECISIONS
1. Self-Funded Plans Have a Right to Be Reimbursed Out of the Proceeds of a Third-Party Action
FMC v. Holliday, 498 U.S. 52 (1990), was the first ruling issued by the Supreme Court on the issue of whether a self-funded health benefit plan is able to enforce a reimbursement clause in the plan. Although the claim arose in Pennsylvania, a state with a law that bars subrogation and reimbursement claims by insurers, the Court ruled that self-funded plans are not subject to anti-subrogation laws and such plans can enforce the plan’s right to be reimbursed out of the proceeds of a third party action.
2. Lien Recovery is Limited to “Appropriate Equitable Relief”
Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), was the next major Supreme Court ruling regarding this area of law. In Knudson, the Court held that the lien was unenforceable because the third-party recovery provision of the plan at issue did not specify a particular fund from which to recover the lien. Rather it sought legal restitution from the client’s general assets. The Court focused on 29 U.S.C. § 1132(a)(3), which limits recovery to “appropriate equitable relief.” The Court held that such lien relief was “legal” rather than “equitable,” and not permissible under ERISA.
3. A Valid Lien Must Seek Funds that Are “Specifically Identifiable”
Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356 (2006), was a significant retreat from the holding in Knudson. Relying on an attorney’s lien case, the court ruled that when a benefit plan contains right of reimbursement, it operates in the same manner as an attorney’s lien because it makes the funds sought specifically identifiable. Consequently, an insurer’s claim for reimbursement out of a third party recovery constitutes a claim for equitable restitution permitted under 29 U.S.C. § 1132(a)(3). Thus, recovery is permitted under § 1132(a)(3), so long as the plan contains language specifically authorizing a right of recovery. Echoing the ruling in Knudson, the Court found that one feature of equitable restitution is the imposition of a “constructive trust” or “equitable lien” on particular funds or property in the client’s possession.
a) The “Constructive Trust”
In Sereboff, the Court found that the Plan language justified equitable restitution for two reasons: (1) the Plan specifically identified the settlement proceeds—apart from the Sereboff’s general assets—as being subject to its lien; and (2) the Plan limited its right of recovery to only the amount it had paid for injury-related care, as opposed to the settlement as a whole. By identifying a specific fund from which the Plan would claim reimbursement (i.e., the settlement), and limiting that reimbursement to the amount to which it was equitably entitled (i.e., the amount it had paid for injury-related care), the Plan had created a “constructive trust” on that portion of the settlement.
B. ELEVENTH CIRCUIT DECISIONS
1. The “Make Whole” Doctrine
The make whole doctrine invokes the notion that the injured person should be first fully compensated for her injuries before subrogation or reimbursement for medical expenses will be permitted. The Eleventh Circuit has held that while the “make whole” doctrine is the default rule for ERISA reimbursement claims, a benefits plan need only state in the plan document that the doctrine does not apply to overcome that default. Therefore, O.C.G.A. § 33-24-56.1 has no applicability to a plan governed by ERISA, and a “ten-day letter” under section (g) of the state statute sent to such a plan provider will not protect the claimant from a reimbursement claim.
A health benefits plan is governed by ERISA and subject to federal preemption of the “make whole” doctrine if (1) it is sponsored by an employer, which is given extremely expansive meaning under case law; (2) it is “self-funded,” meaning it is funded by payments from the employer and/or its employees directly, rather than being funded by purchasing insurance; and (3) it does not fall under an exception to ERISA preemption.
In addition to self-funded and employer sponsored requirements, within the Eleventh Circuit a plan must contain certain language in order for reimbursement to be a viable option.
2. A Plan Must Contain Language that Specifically Authorizes a Right of Recovery
In Popowski v. Parrot, 461 F.3d 1367 (11th Cir. 2006), two different plans sought reimbursement from a recovery made by the Parrots. One plan specifically permitted the plan to recover “out of the recovery made from the third party or insurer.”(emphasis added). Applying the Supreme Court decision of Sereboff, the court concluded that the Plan had stated a claim for “appropriate equitable relief” under § 1132(a)(3) because the Plan’s language specified both the fund out of which reimbursement was due to the Plan and the benefits paid by the Plan on behalf of the Defendant. In contrast, the Popowski court specifically disapproved the language of another plan that simply stated it had a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness” without stating that the reimbursement was to be made by specific funds recovered. Thus, the court banned the Plan from seeking recovery of payments. Thus, it is absolutely necessary to examine the plan language.
3. A Plan’s Reimbursement Provision May Limit Recovery
In a settlement of personal injury lawsuit with an agreement that specifically limited the payment to pain, suffering, and lost wages and did not include either past or future medical expenses, a claim for reimbursement could be avoided. Hence, in Wright v. Aetna Life Insurance Co., 110 F.3d 762 (11th Cir. 1997), the court ruled the reimbursement agreement limited the insurer’s rights in that manner and that no reimbursement could be obtained. The court noted if the agreement provides that reimbursement be made out of “any recovery,” the covered person is obligated to reimburse the plan.
DEFENSES: DEALING WITH ERISA LIENS
A. COMMON DEFENSES AGAINST ERISA LIENS
Before developing a strategy for addressing a lien, one should obtain a copy of the entire ERISA plan or the Summary Plan Description and thoroughly review its language. The strategy for addressing a lien should be based on the defenses that area available given the language of the Plan and the applicable law. The most common defenses are: (1) the specific-fund doctrine, (2) the make-whole doctrine, and the common-fund or common-benefit doctrine.
1. The Specific-Fund Doctrine Defense
In Sereboff v. Mid Atlantic Medical Services, Inc., the court held that an ERISA carrier is able to enforce its plan’s third-party recovery provision under federal law as long as the plan “specifically identified” a particular fund, distinct from the plan beneficiaries’ general assets and a particular share of that fund to which the plan was entitled. This language is critical to all ERISA plans, and it will make or break an ERISA lien right from the start.
When analyzing the language of an ERISA plan that is asserting a lien against a client, one should examine the third-party recovery provision closely. If the language does not identify a specific fund to which it is entitled or does not limit the plan’s recovery to the amount it has paid for injury-related care and is thus rightfully entitled to, then under Sereboff the lien is unenforceable.
2. The Make-Whole Doctrine Defense (applied by the Eleventh Circuit)
The make-whole doctrine is a common law rule that limits an insurer’s right of subrogation. Generally, an insurer is entitled to subrogation of an insured’s recovery against a third party only to the extent that the combination of the proceeds the insurer has already paid to the insured and the insured’s recovery from the third party exceed the insured’s actual damages. In other words, the insurer can exercise his right of subrogation.
There currently exists a circuit split as to whether the make-whole doctrine should be applied as the default rule in ERISA subrogation. The Eleventh Circuit applies the make-whole doctrine as the default rule. However, the doctrine is considered only a default rule that can be abrogated by specific plan language. If the make-whole doctrine has been abrogated by the plan, a well-crafted ERISA plan could be entitled to most or even all of the client’s settlement proceeds if the settlement amount is not large enough to satisfy the lien. In these cases, attorneys must rely on their negotiating skills, as the law may not offer your client a defense against the lien.
3. The Common-Fund or Common-Benefit Doctrine Defense
The common-fund or common-benefit doctrine demands that the lien holder contribute to attorney fees. The underlying theory is that to allow the insurer to obtain full benefit from the plaintiff’s efforts without contributing equally to the litigation expenses would enrich it unjustly at the plaintiff’s expense. However, the majority of federal circuits have ruled that an ERISA plan need not contribute to attorney fees where its own plain language gives an unqualified right to reimbursement. Even if the plan is ambiguous or silent on the matter of attorney fees, the question of whether the plan must contribute to the fees is still unsettled. Thus, even if a self-funded plan is silent on the matter, the ERISA lien may not have to be reduced for attorney fees.
B. OTHER DEFENSES AGAINST ERISA LIENS
1. Equitable Defenses
The United States Supreme Court has recognized a number of traditional equitable defenses over the years. For example, under appropriate facts, an ERISA beneficiary may be able to assert the defense of laches, the defense of “equity will not aid in the enforcement of a forfeiture,” or the defense of unclean hands.
2. Examine Language of Plan Document for Favorable Provisions.
In each case, it is important to thoroughly examine the language of the plan document. In many situations, the applicable language is from a former era when plan documents were more favorable to beneficiaries. For example, the plan document may itself invoke the common-fund principle, which requires the ERISA plan to bear its share of the attorney fee incurred by the beneficiary in pursuing the tort settlement. Also, the language in the plan document may not adequately “create” a lien and/or it may not adequately overcome the “make whole” doctrine.
3. Look for Relevant State Law that Escapes Preemption because it does not “Relate To” an Employee Benefit Plan.
In some situations, favorable state law may still be applicable because that law escapes preemption by ERISA. This occurs when the state law does not “relate to” an employee benefit plan. For example, in Liberty Corp. v. NCNB Natl. Bank of South Carolina, 984 F.2d 1383 (4th Cir. 1993), an ERISA plan sought to recover a pro-rata share of $93,829.50 which it paid on medical bills from a settlement of $1,500,000 secured for a wrongful death claim. Under the law of North Carolina, as found in its wrongful death statute, the maximum amount allowable for payment of medical expenses was $1,500. The ERISA plan argued that the state law was preempted by ERISA’s preemption clause. The Fourth Circuit Federal Court of Appeals disagreed, holding that the preemption clause did not apply because the wrongful death statute is not a law which “relates to” an employee benefit plan. Furthermore, the wrongful death claim did not belong to the deceased’s estate, but rather the claim belonged to the statutory beneficiaries and was not capable of being subrogated.
4. Determine Whether the Plan Language Sufficiently Negates the “Make Whole” Doctrine.
The “make whole” doctrine invokes the notion that the injured person should be first fully compensated for her injuries before subrogation or reimbursement for medical expenses will be permitted. The doctrine has been widely adopted among the states, including Georgia. As recently explained by the federal district court for the Northern District of Georgia,
“[I]f the plan does not include language explicitly providing the fund with a right to first recovery even when a participant or beneficiary is not made whole, the fund cannot avoid the application of the make whole doctrine. Standard subrogation language providing the fund the right to seek repayment of settlement or other funds obtained from a third party is not a sufficient explicit rejection of the make whole doctrine.”
This post was written by Ms. Onyema M. Anene, Esq., Staff Attorney of The Burkey Law Firm.