Injury victims are not the only ones who suffer financial losses in personal injury cases. In many cases, their health insurers have to pay accident-related medical expenses. It should come as no surprise, therefore, when health insurance companies want to share in the compensation their policy holders receive from whoever injured them. Those health insurers are sometimes entitled to be repaid under a principle known as subrogation and its related right of reimbursement. This article discusses a few situations where health insurers have subrogation and reimbursement rights and those situations where Virginia law prohibits subrogation and reimbursement.
Many people use the term “lien” to describe the subrogation and reimbursement rights discussed in this article. Though there are important differences between liens, subrogation, and reimbursement, those differences are not important for the purposes of this article.
Subrogation is the substitution of one person (or company) in place of another in terms of a legal right. Applying that principle to a personal injury case, a health insurance company who pays a policy holder’s medical bills will want to substitute itself in place of the policy holder in claiming compensation from the person who caused the injury. That sort of substitution, when permitted, can reduce the injured person’s net recovery, particularly in cases where the damages exceed the available liability insurance. The good news for Virginia claimants is that Virginia is an antisubrogation state. The bad news is that federal law often supersedes Virginia’s prohibition on subrogation.
To take an example, assume a person is injured by a negligent driver with a 100/300 liability policy (payment limits of $100,000 per person and $300,000 per accident). The victim suffers a ruptured disc requiring surgery and other medical treatment, incurring $80,000 in medical expenses. The health insurance company pays allowable charges of $60,000 to the various health care providers. Because the injured party had prior back problems, the defendant’s insurance company denies that the car accident caused the injury. The injured person hires an attorney who negotiates a settlement for the entire policy limit of $100,000.
The math is simple. The at-fault driver’s insurance company pays $100,000. The attorney will receive a fee of one third of the recovery. In addition, the attorney advanced the cost of a report from the surgeon confirming that the accident necessitated the surgery. For our example, assume the attorney’s fee and expenses totaled $34,500. In an antisubrogation state like Virginia, the remaining $65,500 will be paid to the client (assuming all medical care providers have been paid for accident related treatment). The health insurer receives nothing. In states that permit subrogation, the health insurance carrier would receive $60,000 from the proceeds leaving the injured accident victim with just $5,500. Some states require the health insurance company to pay its pro-rata share of attorney fees and expenses, in this example $20,700. Even with the pro-rata attorney fees and expenses, the client still receives only $26,200 out of a $100,000 settlement. It would be nice if Virginians could celebrate our antisubrogation status, but there is a catch.
The catch is that federal law often supersedes state law under a principle known as preemption. Sometimes Congress passes laws that clearly supersede state laws. Other times, it is hard to tell how far Congress intends federal preemption to go. Such is the case with two federal laws providing for health plan subrogation rights in personal injury cases.
One federal law that seems to have created a right of subrogation is the Federal Employee Health Benefit Act (FEBHA) passed in 1959 to permit federal agencies to negotiate health insurance for its employees with various private health insurance companies. To prevent those agencies from having to deal with myriad and sometimes contradicting insurance laws and requirements among the states, Congress provided that state laws would not apply to federal agency employees and that insurance contracts negotiated under FEBHA would stand in place of state law as those contracts related to “payments with respect to benefits.” The phrase, “payments with respect to benefits,” was interpreted by some as not going so far as to preempt state antisubrogation laws; the insurance companies disagreed. After some tweaking by the federal government, the issue persisted and on April 18, 2017, the United States Supreme Court ruled in Coventry Health Care of Missouri. Inc. v. Nevils that “payments with respect to benefits” include the right of subrogation. Accordingly, the law of the land is that Virginia residents who get their health insurance through FEBHA must reimburse health their health insurance carriers from third party settlements and verdicts.
The other federal law imposing the right of reimbursement on Virginians in some cases is the Employees Retirement Income Security Act of 1973 (ERISA). This law was passed to protect employees of private companies from negligent and unscrupulous management of employee benefit plans. ERISA-compliant employers who have fully self-funded health benefit plans are entitled to demand reimbursement of accident-related medical expenses from the proceeds of settlements or verdicts. Though there is a superficial fairness in reimbursing self-funded health plans for expenses they incur because of the negligence of others, the law often results in unfair outcomes. One unfairness is that ERISA gives no credit to the injured party for the attorney’s fees and expenses needed to get compensation from the at-fault party. ERISA also penalizes injured claimants who recover less than 100% of the value of their claims, usually because there is inadequate liability insurance. In those situations ERISA plans are still permitted to recover all of their expenditures for accident-related care. In 2013, the Supreme Court upheld these harsh provisions in U.S. Airways, Inc. v. McCutchen (2013). More than ever, ERISA is a potent weapon in favor of Virginia health insurers.
This article mentions two types of subrogation that might reduce a claimant’s net recovery. There other types of subrogation, each with its own peculiarities. The simple lesson for injured persons in Virginia is to consult a personal injury lawyer about potential claims and liens, particularly claims based on the ERISA statute as the precise language can determine whether the insurer is entitled to reimbursement. Even when an ERISA claim exists, discounts can often be negotiated by attorneys familiar with the complicated rules that health care plans must observe to be entitled to reimbursement.