Health Care Reform: Possible Subrogation And Reimbursement Rules
By Jack B. Helitzer, Esq., Coordination of Benefits Handbook
The federal health care reform law attempted to address two major problems with health coverage in the United States; (1) expansion of coverage to the uninsured; and (2) reducing overall health care costs. Most reform provisions won’t take effect for at least a few years. That’s because time is needed to develop regulations dealing with the vast scope and complexity of those problems, and because of the need to phase in increased costs that reform will cause in its early years. That means we really won’t know whether or not the law will achieve either goal, or even if it will survive the current complex political situation.
The statute does not deal directly with the issues of subrogation and reimbursement, but implementing regulations likely will have to address them. If so, what should those regulations look like? (Editor’s Note: In last issue of the newsletter, we reported that under early reform language, a “health choices commissioner” would draw up national COB and subrogation and reimbursement standards. That provision was eliminated from the final law.)
Current state laws impose three major limitations on the rights of health plans to recover the benefits they paid from tort settlements or judgments. Those laws don’t exist in all states and vary considerably where they do exist. Generally, those limitations on reimbursement of health plan medical expenses are based on:
•the make-whole rule, which precludes recovery unless the plan participant is “made-whole” financially by the tort judgment or settlement (see ¶623 of the COB Handbook);
•the collateral source rule, which precludes recovery in a tort case if the plan participant has already been reimbursed from some other source (such as insured or self-insured medical coverage – see ¶624); and
•the common fund rule, which requires the plan participant and the health plan to share, on a pro rata basis, from the tort recovery, which constitutes a common fund, the legal costs incurred by the plan participant in obtaining the judgment or settlement, which constitutes a common fund (see ¶625).
States impose any or all of these rules to effectuate what the legislatures (or the court-developed common law) concluded to be the states’ public policies. However, the federal government does not regulate insurance, but the new health reform law requires an approach that keeps the cost of federally mandated health coverage as low as possible.
One of the major public policies advanced by the state rules is to limit reimbursement from tort judgments or settlements by imposing the cost of wrongful acts on the individual who caused harm to another because of willful or negligent acts (the tortfeasor). That sounds like a proper allocation of justice, but in today’s society, wrongdoers rarely end up paying for those damages. Instead, responsible individuals who become tortfeasors now carry liability insurance. So, when they incur tort liability, an insurer – not the tortfeasor – ends up paying for the resulting damages. Less responsible individuals don’t carry liability insurance, but if they cause harm, they are very likely not to have either sufficient assets or income to pay for the damages they cause.
Further, most (but certainly not all) injuries resulting in tort lawsuits involve motor vehicle accidents, Many states require drivers and car owners to buy no-fault auto insurance, which requires the insurer to cover medical expenses of anyone injured in an auto accident regardless of which party is at fault. Other states require drivers and car owners to have auto liability insurance.
State legislatures today are not particularly interested in holding tortfeasors harmless from financial liability, but they do have a legitimate interest in keeping the cost of both fault and no-fault auto liability insurance as low as possible. That ensures the availability of affordable liability coverage. Indeed, since states regulate insurance, it makes sense for them to ensure the availability of at least some source of reimbursement for individuals injured in auto accidents. However, state laws that protect liability insurance can only apply their rules to insured health plans but not to self-insured health plans subject to ERISA. That’s because ERISA preempts state laws other than laws regulating insurance.
That can bring the state laws into conflict with federal laws because the federal government has strong interest in a public policy objective to keep the cost of health coverage as reasonable as possible. To advance that objective, the federal government is likely to seek to preempt or limit the application of state laws that reduce reimbursement of benefits paid by health plans subject to the new reform law.
How can the conflict between the state and federal government objectives best be resolved? There is no simple answer to that question. To the extent that the law favors health plans, it will increase the cost of liability insurance, and to the extent the law favors liability insurance, it will increase the cost of health coverage. Since federal government seems to be the entity that will be most responsible to regulate health coverage, and since it has the power of the proverbial 800-pound gorilla, it is likely to win any battle by preempting state laws that regulate liability insurance.
When there are competing equities such as the ones under discussion, governments usually develop complex rules to resolve them. Complex rules to impose or limit any of these three rules that limit application of health plan reimbursement are not likely to be helpful because the more complex the rules are, the more that limited resources of tort settlements and judgments will end up going to lawyers who help sort them out.
While the make-whole rule sounds fair, it is not always clear if or when an individual is actually “made whole” by a tort judgment or settlement. Those judgments or settlements usually take more than medical expenses into consideration. They also consider loss of income, future medical or custodial care and even incidental expenses (such as care of children when the parent can’t provide the care). In some states using the make-whole rule, tort liability will be limited based on the degree to which the injured party’s negligence contributed to the loss. Artificial and arbitrary rules to determine when a person is or is not made whole can’t easily and adequately address the equities involved.
The collateral source rule is usually based on the belief that the party causing the loss should be responsible for the loss. But in an age where insurers cover those losses, it appears that shifting the loss to the tortfeasor’s insurer fails to take into account the cost of the coverage, which should be kept as low as possible.
The common fund rule makes sense because it offends reason to allow one party (the health plan) to leave the injured plan participant with the liability of the full cost of creating the fund that is used to reimburse the health plan. As a practical matter attorneys don’t pursue clients who have no assets, which is pretty much what happens when the entire tort settlement proceeds remain unpaid because a health plan gets all if them. Some will argue that the common fund rule benefits attorneys more than the plan participant, ensuring payment of legal fees even if the injured party ends up with little or nothing to cover non-medical losses. But in most cases, the attorney who negotiates a tort settlement or wins a tort lawsuit should be paid for the services performed, and it offends one’s sense of justice when one beneficiary of the attorney’s work gets everything without allowing any compensation to the attorney whose work produced the fund.
So, what’s the answer? That’s hard to day. What this all boils down to is a sense that when the arguments are resolved, it is likely that the 800-pound gorilla will prevail. Might may not make right, but it generally tips the odds toward victory for the gorilla.
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