Failure to Sign Subrogation Agreement Allows Plan to Deny Health Benefits
Coordination Of Benefits January 2012 Vol. 20 No. 1
Just about every self-funded ERISA health plan provides that it is entitled to subrogation and reimbursement of the benefits paid by the plan from tort settlement or judgment proceeds. In addition, just about every such plan requires the plan participant to sign a subrogation and/or reimbursement agreement. Attorneys who represent plan participants seeking to recover damages from third parties are learning that if a tort settlement/judgment does not exceed plan benefits paid, they are at risk of not being paid fees for their work. These attorneys realize that the best way to ensure that they will receive their fees, while representing the best interests of their clients, is to work out some settlement whereby their clients and the plans share the settlement or judgment proceeds, while they receive their fees and costs. Often, such negotiations do not work out, so what can happen when they don’t? A recent decision by a U.S. District Court in Florida indicates that both the plan participant and the attorney can end up with nothing. The case is Schwade v. Total Plastics, Inc., 2011 WL 5459649 (M.D. Fla., Nov. 10, 2011).
The Facts
Kristy Schwade, an employee of Total Plastics, Inc., was covered by its self-funded ERISA health plan. In May 2007, Schwade noticed that something was profoundly wrong with her 5-month old son. It turned out that he was the victim of shaken baby syndrome, and as a result, suffered profound brain damage. His daycare provider pleaded guilty to aggravated child abuse. From that time on, her child was hospitalized for more than two months and required continuous medical attention until he died at the age of four.
Total Plastics’ summary plan description (SPD) included a subrogation provision entitling the plan to recover whatever a plan participant is entitled to receive as benefits up to the full extent of benefits paid or provided by the plan. It also required the plan participant to “execute documents (including a lien agreement and papers and do whatever else is necessary to protect the Plan’s [subrogation] rights.” It also stated that if a plan participant refuses to sign a supplemental subrogation agreement after submitting a claim, “the Plan has no obligation to make any payment for any treatment required as a result of the act or omission of [the plan participant].” It also included a three-year limitation on any lawsuit brought against it. Schwade did not sign any such agreement.
The plan paid benefits for her child’s medical condition for about two months (in an amount stated in the opinion to be between $26,000 and $35,000). The plan followed up with a request that she sign the required agreement and complete a questionnaire. In doing so, it included a warning (in solid capital letters) that her failure or refusal to executive the document would relieve the plan of any and all legal, financial or contractual obligation for any expenses incurred by her. When she did not respond, the plan administrator stopped paying benefits and kept contacting her for updated information. Schwade quit her job in August 2007.
In June 2008, her attorney asked the plan administrator for information about her claim, and was told that she had to sign the subrogation agreement before the plan “can determine benefits.” The plan’s subrogation agreement again warned about the consequences of her failing to sign it, but nothing further happened. In November 2008, Schwade’s attorney proposed that the plan split any net recovery after payment of costs and attorney’s fees. He warned: “Without the foregoing agreement the Plan and Total Plastics essentially has [sic] no chance of a recovery.” The attorney renewed this “offer” in March 2009 and December 2009, but nothing further occurred between Schwade and the plan. Schwade then sued the daycare provider, the daycare center and others.
In November 2007, Tampa Hospital, which treated Schwade’s son, sued her for $600,000. Schwade removed the case to federal court along with a third-party complaint against Total Plastics for more than $1.4 million of plan benefits, despite the fact that the plan had a $1 million maximum liability for any individual plan participant. The federal court remanded the hospital’s claim back to the state court, but retained the action against Total Plastics. It then considered a motion for summary judgment.
The Decision
Regarding the plan’s subrogation agreement, the court recognized that recoupment of plan expenditure is crucial to the financial viability of self-funded ERISA plans. It noted that the 11th U.S. Circuit Court of Appeals held that “having such agreements in hand before paying benefits provides significant protection to [plan] assets.” The court found that Schwade provided no persuasive justification for failing to sign the subrogation agreement. It then found that her argument that the plan would be unjustly enriched if it was not required to pay a pro rata share of the attorney’s fees incurred in obtaining a tort recovery was without merit. Based on previous court decision, the court concluded that:
Indeed, it would be inequitable to permit the [plaintiffs] to partake of the benefits of the Plan and then, after they had received a substantial settlement, invoke common law principals to establish a legal justification for their refusal to satisfy their end of the bargain.
The court further noted that by attempting to drive a hard bargain with an ERISA plan for attorney’s fees, Schwade violated the existing bargain and left her son with no benefits. It further concluded that the plan was not seeking a windfall in demanding the right to full reimbursement, because it had to remain financially sound to help other employees pay for medical hardship. It said that the plan’s subrogation right was justified because the plan’s express terms of the plan allowed such action.
The court also agreed with the plan’s argument that, because Schwade never appealed its refusal to pay benefits, her lawsuit was barred under the plan’s three-year limitation to sue. It noted that a plaintiff cannot bring a lawsuit in a federal court until the administrative remedy in an ERISA plan SPD is exhausted. It also found that two minor defects in the plan’s handling of its denial of benefits were “technical deficiencies in an ERISA claim procedure [that] do not hinder effective administrative review” of her claims. Accordingly, it granted the plan’s motion for summary judgment, and closed the case.
Implications
Based on current precedents related to ERISA claims, this decision appears to be correct. However, if the reasoning of the 3rd Circuit in US Airways v. McCutchen (discussed on page 3 of this Newsletter) becomes applicable, the issue of the entitlement of a self-funded ERISA plan to full reimbursement without sharing of attorney’s fees might have to be revised. However, it remains to be seen whether the case law will change based on that decision.
Schwade’s attorney adopted a very aggressive strategy of negotiating with Total Plastics and clearly was unsuccessful. Most self-funded ERISA plans are not inclined to look on such tactics favorably. But, if equitable defenses become available to ERISA plan participants under the approach used in US Airways v. McCutchen, that approach may not be deemed to be aggressive, and may become mainstream.
The court’s opinion indicates that Florida Medicaid ended up assuming the cost of Schwade’s son’s medical care. Generally, Medicaid’s benefits are far less than what health plans would pay, resulting in much lower payments to his medical providers. And if Schwade had been successful in achieving a tort recovery, there is no doubt that Medicaid would have priority on any reimbursement for the benefits it paid.
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