by, Malcolm B. Futhey III and Carrie Eaker Kerley
Lawrence & Russell, LLP, Memphis, Tennessee

Medicare statutes and regulations provide for a right of subrogation through the Medicare Secondary Payer provisions. However, the scope and strength of this right for Medicare Advantage organizations have been cast into confusion given Care Choices HMO v. Engstrom, 330 F.3d 786 (6th Cir. 2003). To complicate the matter, attorneys for members and liable insurers constantly present arguments that even further misconstrue Engstrom’s holding. A subrogating party may assert several strong arguments in response, ranging from clarification of the Engstrom decision and progeny to an explanation of the Medicare structure and the applicable regulations. This article provides a brief background of Medicare and the Medicare Secondary Payer rules, as well as addresses the typical issues that arise regarding the Engstrom decision.

Medicare Structure
Medicare is a program that provides federally funded health insurance for the aged, the disabled and people suffering from end-stage renal disease. The program is administered by the Centers for Medicare and Medicaid Services (“CMS”). Medicare consists of four primary parts of identified as Parts A, B, C and D. Part A provides insurance for hospital and related post-hospital services. 42 U.S.C. §§ 1395c-1395i-5. Part B creates supplemental coverage for such services as physicians’ services. 42 U.S.C. §§ 1395j- 1395w-4; often, the terms “original Medicare” or “traditional Medicare” refer to Parts A and B together. If an individual is enrolled in Part A, then he or she is typically enrolled in Part B automatically.

Medicare Part C is the part through which most private insurance companies issue Medicare benefits. Part C allows private organizations to contract with the government to provide alternative Medicare insurance benefits. 42 U.S.C. §§ 1395w-21 – 1395w-29. This section is commonly called the “Medicare Advantage” program, formerly the “Medicare + Choice” program. Finally, Medicare Part D establishes rules governing the drug benefit program. 42 U.S.C. §§ 1395w-101 – 1395w-152.

Medicare Secondary Payer Rules

In response to rising health care costs, Congress passed the Medicare Secondary Payer (“MSP”) statute in 1980. The general MSP statute currently requires most group health plans, workers’ compensation plans, automobile insurers, liability insurers and no-fault insurers to reimburse Medicare for any paid medical expenses. 42 U.S.C. §§ 1395y (b)(2). The statute accomplishes this by making liable third-parties the “primary payer” for medical costs and Medicare, the “secondary payer.”

Id. A similar provision exists for Medicare Advantage Plans. Medicare Part C’s MSP provision states a Medicare Advantage organization

“may… charge or authorize the provider of such services to charge, in accordance with the charges allowed under a law, plan, or policy described in such section- (A) the insurance carrier, employer, or other entity which under such law, plan, or policy is to pay for the provision of such services, or (B) such individual has been paid under such law, plan, or policy for such services.” 42 U.S.C. § 1395w-22(a)(4). A similar provision is found at 42 U.S.C. § 1395mm(e)(4).

Altogether, CMS has a clear subrogation right under §1395y(b)(2) for Medicare Parts A and B. Similarly, §§ 1395W-22(a)(4) and 1395mm(e)(4) appear to create a similar right for Medicare Advantage organizations. However, as shown below, some case law has cast doubt on this latter point.

The Engstrom Issue

In 2003, the Sixth Circuit decided Care Choices HMO v. Engstrom. 330 F.3d 786 (6th Cir. 2003). That case announced the Sixth Circuit rule that § 1395mm(e)(4) “does not establish a federal right of action [for Medicare HMO plans] to seek reimbursement for benefits conferred by another insurer.” Engstrom, 330 F.3d at 791. The court focused on the fact that the traditional Medicare MSP statute contained the mandatory term “shall” with regard to reimbursement, while § 1395mm(e)(4) used only the permissive term “may.” Id. at 790. The court concluded that Medicare HMOs had only the ability to create “a right of reimbursement… [in] their own insurance agreements with Medicare benficiaries.” Id. at 789.

Later, the Eastern District of Pennsylvania followed Engstrom and held that § 1395mm(e)(4) does not create a federal right of action for Medicare Advantage organizations. Nott v. Aetna U.S. Healthcare, Inc., 303 F. Supp. 2d 565 (E.D. Pa. 2004). However, the Nott decision also concluded that MSP laws for Medicare Advantage programs do not “completely preempt” state laws. Id. at 573. The court found no federal jurisdiction existed and remanded the case to state court. Id. Importantly, the court’s opinion distinguished “complete preemption” from “conflict preemption,” and acknowledged that the state courts had the power to resolve any conflict preemption issues. Id. at 569.

The Ensuing Confusion

In the wake of Engstrom, attorneys for members and liable insurers began raising interesting arguments, challenging Medicare Advantage organizations’ subrogation rights. The most common were (1) that the MSP rules for Medicare Advantage organizations do not preempt state anti-subrogation laws and, (2) that Medicare Advantage organizations could enforce only provisions in their agreements with members, as opposed to the provisions in the MSP statutes and regulations.

The first argument concerning preemption is clearly incorrect. The issue in Engstrom and Nott was not ordinary “conflict preemption.” Instead, the issue concerned federal jurisdiction and “complete preemption” (whether a suit has to be filed in Federal Court rather than state court). The Nott decision specifically left undecided the question of “conflict preemption,” which determines whether the Federal MSP laws trump conflicting state anti-subrogation laws. As a result, the Engstrom and Nott decisions had no effect regarding conflict preemption of state anti-subrogation laws.

The second argument is also incorrect but for more complicated reasons. A full review of the Medicare structure and an understanding of the relevant regulations reveal that the Medicare Advantage organizations do hold the same subrogation rights as the traditional Medicare program. For example, both Engstrom and Nott failed to address § 1395w-22(a)(4)’s express incorporation of § 1395y(b)(2). More specifically, § 1395w-22(a)(4)’s direct reference to § 1395y(b)(2) appears to incorporate the very same federal right that is set forth in § 1395y(b)(2). If the courts had considered this and similar arguments regarding
Medicare’s complex statutory and regulatory structure, a different result may have occurred.

Altogether, some negative case law exists regarding Medicare Advantage organizations’ subrogation rights. Even more troubling, however, are the misinterpretations that have further distorted the holdings of these negative decisions. Usually, an explanation of the applicable law will clarify the matter in favor of the Medicare Advantage organization. However, a Medicare Advantage organization must fully understand the relevant law. Also, as a last resort, it is important to have strong subrogation and reimbursement language contained in the agreement with its members.

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This entry was posted by Adam V. Russo on Thursday, July 2nd, 2009 at 4:51 pm and is filed under Medicare. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.