Group health plans typically provide that when the plan pays benefits for treatment of injuries incurred as the result of a third party’s negligence, the plan is entitled to reimbursement for those payments from the proceeds of injured participant’s recovery (if any) from the third party.  In general, those kinds of provisions are enforceable under federal law, and careful drafting of precise and unambiguous language can help ensure that the plan is entitled to reimbursement even if the participant’s recovery does not fully compensate the participant for the harm suffered by the participant – that is, make the participant whole.  Further, again assuming appropriate language in the plan, the plan’s reimbursement will not be subject to reduction for a share of the participant’s attorneys’ fees.  That appears to be the state of the law in West Virginia, Ohio, and Kentucky.  Until about a month ago, it was the law in Pennsylvania as well.

On November 16, 2011, the U.S. Court of Appeals for the Third Circuit issued a ruling that might change things for plans administered in Pennsylvania, Delaware, and New Jersey:  U.S. Airways v. McCutchen, 2011 WL 5557411 (3d Cir. 2011).  McCutchen was severely injured in a “tragic car accident,” and the plan had paid medical expenses in the amount of $66,866 on his behalf.  He recovered $110,000 from third parties, 40 percent of which went to his attorneys for fees and expenses.  McCutchen’s net recovery was less that $66,000.  Under the terms of the plan, McCutchen was required to reimburse the plan for the medical expenses paid (up to the amount of the recovery), and the plan sued to enforce its rights.  The trial court ruled in favor of the plan based on the language of the plan’s subrogation provisions.  The total settlement amount — $110,000 – was, of course more than adequate to cover the plan’s claim.  Since the attorneys got paid first, however, the effect of permitting the plan to recover the entire $66,866 was that part of that recovery would have to be paid out of McCutchen’s pocket.

The court of appeals vacated the decision in favor of the plan.  In the appellate court’s view, the judgment requiring McCutchen to provide full reimbursement to the plan constituted “inappropriate and inequitable” relief.  Because the amount of the judgment exceeded the net amount of McCutchen’s third-party recovery, the court reasoned, it left him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the plan.  Moreover, the court concluded, the judgment in favor of the plan amounted to a windfall for the plan. 

The court based its conclusions on the notion that general principles of equity permit the court to override the terms of the plan when justified by the “necessities of the particular case.”  That approach has not been adopted by courts elsewhere (at least not yet), and appears to conflict with the “strong preference” for adherence to the written terms of employee benefit plans.  In light of the novelty of the court’s ruling in this case, we would not be surprised if the plan were to seek rehearing from the court of appeals or consideration by the U.S. Supreme Court.

With an emphasis on litigation, Sara Hauptfuehrer’s practice focuses on Title I of the Employee Retirement Income Security Act of 1974 (ERISA). She also handles employment discrimination litigation and counsels on a number of employee benefits-related issues.
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