Generally, well-drafted subrogation and reimbursement provisions allow a health plan to recover benefits paid for medical expenses even if a tort settlement is structured so as to not reimburse the injured party for medical expenses caused by the individual making the settlement. However there are exceptions to this rule if the plan’s subrogation and reimbursement provision is less than perfect. The recent decision in ACS/Primax v. Polan, 2008 WL 5213093 (W.D. Pa., Dec. 12, 2008) illustrates the exception. Jacob Polan was born with extensive injuries apparently caused by a condition his mother developed while she was pregnant with him. Those injuries resulted in permanent physical and neurological damage for which Jacob underwent extensive treatment. He was covered under his father’s self-funded health plan. Up to the time of the lawsuit the plan paid roughly $236,000 for his treatment.

In 2004, his parents sued the doctors and hospitals for medical malpractice, alleging that their negligence in treating his mother’s condition caused Jacob’s condition. They were barred by the applicable statute of limitations from pursuing a claim for the medical expenses they incurred on account of Jacob’s injuries. In 2007, their medical malpractice claim was settled for $3 million. Their lawyer was awarded a fee of $1 million plus more than $95,000 for legal expenses. The state court ordered that $350,000 of the settlement be held in escrow pending resolution of liens claimed by others, including the plan. The plan then brought this action in federal court to recover the benefits it paid on account of Jacob’s treatment, seeking equitable relief by way of a constructive trust or equitable lien against the proceeds held in escrow.

The plan had been amended in 2003 while Jacob was still undergoing treatment for his injuries and before the 2007 settlement of the malpractice lawsuit. The court concluded that the initial plan provisions, which had been in effect when Jacob was born, would govern the outcome of the case. It concluded that the plan’s attempt to invoke changed plan terms “lacks logical appeal and is unsupported in the law.”

Based upon the ruling in another federal district court’s decision (Waupaca Foundry, Inc. v. Gelhausen, see App. IV, Case No. 238), the court concluded that, a plan ought not to be permitted to conscript its participants into becoming a de facto collection agency, changing the language of the plan documents such that the beneficiary’s lawsuit recovers only for the plan at the beneficiary’s own expense. It ruled that a plan cannot garner greater rights for itself simply by amending the terms of the plan.

After analyzing the plan provision the court concluded that it did not support the plan’s position. The Court stated that Polan did not recover medical expenses as they were precluded and statutorily barred from recovering medical expenses.

The Court provided a detailed analysis of another case in which Primax was a party (Primax Recoveries, Inc. v. Carey) which held that a plan’s recovery was limited by its language to the portions of a judgment or settlement paid specifically for covered expenses. The court in this case went on to cite several other cases in support of the conclusion that subrogation or reimbursement provisions ought to be read narrowly to preclude a plan from recovering where the settlement or judgment proceeds were not attributable, or related to the medical expenses paid by the plan.

The Court stated that the language at issue neither included explicit, broad terms such as “all rights of recovery,” “any payments” or “any recovery,” nor specifies that there even be a relationship between the payments received and the injury for which the medical expenses were paid in the first instance.

The court concluded: that Polan did not seek to recover the medical expenses the Plan paid on his behalf for his injuries and treatment. The Settlement reached by the parties in the underlying medical malpractice indisputably did not include any payments for the medical benefits paid by the Plan. Accordingly, the court granted summary judgment in favor of Jacob and against the plan.

Current subrogation and reimbursement provisions are drafted broadly to avoid the kind of strategies described in the previous paragraph. The court in this case followed a well-established line of cases that focus on plan language that failed to give the plan broad rights of recovery from settlements regardless of how the settlement agreements are structured.

It’s not all clear that this case would have been decided differently even if the revised plan language applied. That’s because neither Jacob nor his parents could recover medical expenses because such a claim was barred by the statute of limitations. The other Primax case cited by the court involved the application of a specific New York law that precludes recovery in a negligence action if the injured party was already reimbursed from some other “collateral source” such a medical policy.

The lesson of this case, which just about everyone familiar with such cases has already learned, is that it is imperative for a plan to have well-drafted subrogation and reimbursement provisions that provide for reimbursement out of any recovery, by settlement or judgment, related to the events that caused the injury and medical expenses. Even if that language turns out to be insufficient because recovery of medical expenses is specifically prohibited by statute, the better the language, the better the chances are for recovery of benefits paid.

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This entry was posted by Adam V. Russo on Wednesday, May 13th, 2009 at 3:20 pm and is filed under 3rd, Subrogation. 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.