ERISA medical plan subrogation provisions have long stirred the passions of personal injury attorneys. One can appreciate the sentiment: How is it, after all, that a personal injury plaintiff can lose a substantial chunk of her tort recovery merely because she had medical insurance as an employment benefit? Insurers see subrogation provisions as being necessary to balance out the overall premium scheme. And courts have approved of ERISA insurers’ right to incorporate a wide swath of offset and subrogation provisions. See Heimeshoff v. Hartford Life & Acc. Ins. Co., 571 U.S. 99, 108 (2013). The Supreme Court has noted that “employers have large leeway to design disability and other welfare plans as they see fit.” Black & Decker Disability Plan v. Nord, 538 U.S. 822, 833 (2003). Moreover, “[t]his focus on the written terms of the plan is the linchpin of ‘a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place.’” Heimeshoff, 517 U.S. at 108, quoting Varity Corp. v. Howe, 516 U.S. 489, 497 (1996).
As such, many ERISA administrators, particularly for health and welfare plans, have drafted plans with multi-page offset and subrogation provisions to minimize the payable benefit. Employees have typically been deemed to be parties to such contracts, despite not having bargained the terms. In September 2019, however, the Ninth Circuit approved of Hawaii’s legislative redress of ERISA-sanctioned personal injury subrogation that inures to the benefit of medical insurers, in Rudel v. Hawaii Management Alliance Association, ___F.3d___, 2019 WL 4283633 (9th Cir. Sept. 11, 2019).
A typical ERISA subrogation claim often reads like this:
- Employee has health insurance through her employer, which is governed by ERISA.
- The health insurance policy contains a “subrogation” provision granting the insurer the right to be reimbursed for all medical bills in the event that employee receives a personal injury recovery from a third party.
- Employee suffers a personal injury.
- Employee files a claim and recovers a sum as compensation for said injury, including for general damages and medical expenses.
- Health insurer invokes its subrogation provision and asserts a lien on the tort recovery or settlement.
- After paying attorneys’ fees and the health insurer, employee is left with very little, if anything, of the tort recovery.
The facts in Rudel were no different. Mr. Rudel was hit by a car making an illegal left turn and suffered numerous injuries, including partial amputations of his leg and arm. Rudel, 2019 WL at *2. According to the health insurer, the medical bills totaled $400,779.70. Mr. Rudel received a personal injury settlement of $1.5 million. Doing the math, assuming that his attorneys’ fees and costs were about $700,000, then Mr. Rudel would only receive about $400,000 from his $1.5 million recovery (about 26%), even though he had health insurance; in fact, his recovery would be smaller because he had health insurance.
Hawaii sought to protect the individual’s recovery in 2000 when it passed HRS § 431:13-103(a)(10), which provides in its Insurance Code that it is unfair competition and a deceptive act for an insurer to “refus[e] to provide or limit coverage available to an individual because the individual may have a third-party claim for recovery of damages;” the provision is to be read in conjunction with HRS § 663-10, which allows for certain liens. The Supreme Court of Hawaii interpreted these statutes in 2017 to conclude that they limit rights to “any claim of a lien” including “health insurance or benefits” only to “special damages,” not general damages. Yukumoto v. Tawarahara, 140 Haw. 285, 295, 400 P.3d 486, 496 (2017). The Court held that “(1) a health insurer does not have equitable subrogation rights against a third-party tortfeasor in the context of personal insurance; (2) a health insurer's subrogation and reimbursement rights are limited by HRS §§ 663-10 and 431-13:103(a)(10); and (3) any contractual provision that conflicts with HRS § 663-10 is invalid. We further hold that HRS § 663-10 takes precedence over HMSA's contractual subrogation rights.” Id. at 500.
After the Hawaii Supreme Court interpreted the statutes to prevent health insurance subrogation of personal injury recoveries, the next frontier of challenges awaited: The argument that ERISA preempted Hawaii’s anti-subrogation laws.
The Supreme Court has described ERISA as a “comprehensive and reticulated” statute with “a broad pre-emption provision declaring that the statute shall ‘supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.’” Nachman Corp. v. Pension Ben. Guar. Corp., 446 U.S. 359, 361 (1980); Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724, 732 (1985), quoting 29 U.S.C. § 1144(a). This first layer of ERISA pre-emption is known as the “complete pre-emption” doctrine, meaning that the pre-emption power is so great that it converts certain state law claims into ERISA claims. Fossen v. Blue Cross & Blue Shield of Montana, Inc., 660 F.3d 1102, 1107 (9th Cir. 2011). Additionally, if a state law conflicts with ERISA’s limited remedial scheme, that state law is also pre-empted by ERISA, which is known as “conflict pre-emption.” Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004) (“any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy conflicts with the clear congressional intent to make the ERISA remedy exclusive and is therefore pre-empted.”)
However, ERISA contains a significant pre-emption carve-out for state laws that “regulate insurance, banking, or securities,” commonly known as the “Savings Clause” of ERISA. 29 U.S.C. § 1144(b)(2)(A). To determine if a state law regulates insurance, the court considers whether the regulation fits within the “business of insurance,” whether it affects the policyholder’s risk, whether the regulation is an integral part of the policy relationship between insurer and insured; and whether it is limited to insurance industry entities. For example, California’s Notice Prejudice rule is saved from ERISA preemption because it regulates insurance as a matter of “common sense.” Unum Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 359 (1999). In Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, Plan No. 625, 856 F.3d 686, 693 (9th Cir. 2017), the Ninth Circuit determined that a California insurance regulation that prohibits the application of an “abuse of discretion” judicial standard of review is not pre-empted by ERISA because it regulates insurance.
There is some precedent for the idea that anti-subrogation statutes are not preempted by ERISA. See, e.g., Singh v. Prudential Health Care Plan, Inc., 335 F.3d 278 (4th Cir. 2003) (holding Maryland anti-subrogation provision not preempted by ERISA); FMC v. Holliday, 498 U.S. 52 (1990) (holding a Pennsylvania anti-subrogation statute falls within the savings clause). In Rudel, the Ninth Circuit brought the issue to new prominence with a careful analysis of the pre-emption challenges to Hawaii’s anti-subrogation law. First, applying the “complete pre-emption” doctrine, the Court concluded that Mr. Rudel did have an ERISA claim that preempts his state law claims: He could have brought a claim under ERISA § 1132(a)(1)(B) to clarify his right to future benefits under the medical plan due to his plan claiming he owed it $400,000. Rudel, 2019 WL 4283633, at *6. Second, the Court analyzed whether the “Savings Clause” saved Hawaii’s anti-subrogation statutes from complete preemption; it found that they were saved because 1) the statutes were “specifically directed toward entities engaged in insurance,” relying on legislative history to support its finding; and 2) the statutes affect risk pooling because they impact payments to plan members. Id. at *9 (“In sum, the district court correctly concluded that the Hawai’i Statutes are saved from express preemption under § 514 because they are directed at insurance practices and impact risk pooling.”). Third, the Court found no “conflict pre-emption” because the remedy provided (i.e., Mr. Rudel gets to keep his recovery rather than pay $400,000 to his health insurer) is not beyond the scope of an ERISA claim for benefits. Id. at *10. “The Hawai’i Statutes operate to define the scope of a benefit provided by the Plan; they do not create additional remedies not permitted by ERISA.” Id. at *11.
The end result is that Mr. Rudel’s insurer was forced to provide insurance for him as promised and without reimbursement, and Mr. Rudel was entitled to keep his personal injury recovery. The lesson of Rudel is compelling: With legislative action, state insurance laws can re-direct personal injury recoveries back to the persons injured. A national trend could certainly follow.