We are anticipating the upcoming oral arguments (November 27) and decision in U.S. Airways, Inc. v. McCutchen, a case at the United States Supreme Court. This case involves a situation where the employer-sponsored plan fronted the payment of health care costs a participant incurred in an automobile accident, on the condition that the participant repay any monies recovered. The case begs the question, “If you were the victim of a car accident, would you agree to a settlement that required you to pay?” The answer appears to be “no,” unless perhaps you were gambling $866 and refusing to repay what you recovered in the hopes that the plan fiduciary would let you keep the $66,866 the plan says you owe to the other participants and beneficiaries. This decision could increase ERISA health care plan (and disability plan) benefit costs, administrative costs and legal costs, at the same time health care plans are adjusting for health care reform costs, so it merits watching.
For those of you who would like more detail on the legal issues and gambling involved in this case, keep reading.
This case involves a self-funded group health plan. (For purposes of this blog, we will steer clear of the issue of fully insured plans and ERISA preemption.) The plan terms provided coverage for expenses that were not covered by a third party. If the plan paid benefits for a claim incurred as the result of actions of a third party, the plan would be subrogated to all the participant’s rights of recovery. The participant would be required to reimburse the plan for amounts paid for claims out of “any monies recovered” from a third party.
Mr. McCutchen was injured in a car accident caused by another driver, and the plan paid $66,866 of his resulting health care expenses. He then retained a lawyer with a 40% contingency fee, settled with the other driver for $10,000, and settled for a recovery of $100,000 of underinsured motorist coverage. After paying attorneys’ fee and expenses, his net recovery was less than $66,000. US Airways demanded reimbursement of the entire $66,866, and filed suit when McCutchen refused to pay anything. The district court ordered McCutchen to pay US Airways $66,866.
The Third Circuit appellate court remanded the case for the court to fashion “appropriate equitable relief.” The court viewed the repayment as a windfall to US Airways because US Airways did not retain legal counsel to obtain the recovery. The court stated, “US Airways cannot plausibly claim it charged lower premiums because it anticipated a windfall.” The court applied the “traditional equitable principle of unjust enrichment,” to rule that leaving McCutchen with “less than full payment for his emergency medical bills” undermined “the entire purpose of the Plan.”
The US Supreme Court agreed to hear the case, and to accept amicus briefs (arguments of friends of the court). The question presented is whether the Third Circuit correctly held (in conflict with five other circuits) that ERISA Section 502(a)(3) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan’s terms give it an absolute right to full reimbursement.
The DOL filed an interesting brief. As the DOL explains, where a plan term requires a participant to reimburse the plan, a suit seeking to enforce that provision seeks “appropriate equitable relief” under Section 502(a)(3) because it is analogous to a suit in equity to enforce an equitable lien by agreement. The DOL explained that the provision is equitable to participants and beneficiaries as a class because it reduces plan expenses, and was equitable to McCutchen in particular because the reimbursement was part of a quid pro quo for his immediate receipt of plan benefits, even though a third party was responsible for his injuries. (In other words, US Airways was not recovering a “windfall” for itself, it was exercising its fiduciary duty to collect on behalf of the other plan participants and beneficiaries. Further, ERISA did not require the plan to agree to cover any of these expenses, or to cover all of his health care expenses.) McCutchen claimed that he and his wife suffered at least $1 million in damages for many things, including, embarrassment and humiliation. The DOL explains that pro rata apportionment would allow for manipulation of amounts in various categories, which could prove costly and complex to adjudicate.
The DOL notes that McCutchen originally made another equitable contention, under which US Airways was not entitled to any recovery, because his settlement was inadequate to make him whole. McCutchen abandoned that claim, but the DOL notes that such a contention would fail in any event, for the same reason that his request for a pro rata reduction fails.
The DOL next turned to the question of attorneys’ fees and costs, and whether the plan was required to share a portion of those amounts. In a 2003 case, the DOL had argued that if the plan terms expressly disclaimed responsibility for attorneys’ fees and costs, courts should enforce the plan terms and should not apply the common-fund doctrine. In other words, the plan should not pay a proportionate share. Now, the DOL reverses its position and argues that the common-fund doctrine is applicable to reimbursement suits under Section 502(a)(3). This brings us back to the issue the DOL raised about opportunities for manipulation. Further, the DOL points out that the district court would have to determine whether the fees were reasonable. So, absent filing suit and incurring those costs, how would a plan administrator quantify the recovery demand? This brings us back to the point about ERISA limiting administrative costs and legal expenses.
This common-fund argument seems to be a stretch based on the unique facts of this case, which make it appear that the fiduciary is unfairly taking $866 out of the plaintiff’s pocket. To the contrary, the plaintiff agreed to the terms of the two arrangements that caused this $866 shortage: an arrangement with legal counsel, and a settlement agreement. If you were the victim of a car accident, would you agree to a settlement that required you to pay out of pocket? Of course not, unless perhaps you were gambling $866 and refusing to repay what you recovered in the hopes that the plan fiduciary would let you keep the entire $66,866 the plan says you owe to the other participants and beneficiaries….
A participant who is involved in a traumatic event caused by a third-party may incur significant health care expenses, lost wages, pain and suffering, etc. A plan feature that assures the participant that he will be treated as insured in the moment of crisis, and that the plan will provide for the immediate payment of some of these expenses, regardless of whether there will be any recovery from the third party for any damages, is a valuable feature. This feature itself is a gamble that the plan will ultimately recover, and recovery rates determine the ultimate cost of the feature. If the U.S. Airways decision allows participants to thwart the recovery mechanism that keeps this plan design feature viable, employers will have to decide what to do with the increased cost: eliminate the feature, reduce benefits, increase premiums, etc. Stay tuned.