Ninth Circuit Holds that Health Plan Reimbursement and Subrogation Provisions are Enforceable Under State Law
The Supreme Court’s decision two years ago in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), has, in most circumstances, effectively precluded employee benefit plans from enforcing plan reimbursement or subrogation provisions. Such provisions are common in health plans and typically require plan participants to reimburse the plan for benefits they received to the extent that they subsequently recover funds for the same injury from another source. Relying on an ancient distinction in Anglo-American law, the Supreme Court in Great-West held that, except in extremely limited circumstances, a plan’s efforts to enforce such provisions would be an effort to obtain monetary or “legal” relief, which the relevant section of ERISA—§ 502(a)(3)—simply does not provide. Since that ruling, plan administrators have scratched their heads and wondered if there was any way to enforce such provisions.
The answer, more often than not, has been “no,” as courts have generally been loath to find the precise set of circumstances that would permit plans to recover benefits paid to participants in a way that is permissible under Great-West. Indeed, while the Supreme Court seemingly had left the door open for plans to seek reimbursement or subrogation in some situations—in particular, where the participant continues to possess specifically identifiable funds attributable to a recovery from a third party—many courts, including the U.S. Court of Appeals for the Ninth Circuit, have ruled that virtually any effort by a plan to recover money via subrogation or reimbursement provisions was not permitted under ERISA. To compound plan administrators’ headaches, when plans tried to enforce reimbursement or subrogation provisions under basic principles of state contract law, they found that avenue blocked as well, as many courts have ruled that such state law claims are preempted by ERISA. In other word,plan administrators were told that they could only enforce such provisions under ERISA—but enforcing the provisions under ERISA was virtually impossible because of the Great-West decision.
Providence Health Plan v. McDowell
Help may have finally arrived this spring from an unlikely place: the Ninth Circuit Court of Appeals.
In a decision that surprised many ERISA practitioners, a three-judge panel ruled that ERISA plans could enforce reimbursement and subrogation rights after all—not under ERISA, but by bringing a straightforward state law breach of contract action in state court. The decision, entitled Providence Health Plan v. McDowell, 361 F.3d 1243 (9th Cir. 2004), relies on a relatively narrow interpretation of ERISA’s preemption provision that is consistent with recent Supreme Court decisions that are generally acknowledged to have cut back on the scope of ERISA preemption.
The facts in McDowell were similar to dozens of other cases involving reimbursement or subrogation provisions. The McDowells were covered by an ERISA health plan that contained the following reimbursement provision:
Providence Health shall be entitled to the proceeds of any settlement, whether or not responsibility is accepted or denied by the third party for the condition, or any judgment that results in a recovery from a third party, up to the amount of benefits paid by Providence Health Plan for the condition, less a proportionate share of reasonable attorney fees, whether such benefits are paid by Providence Health Plan before or after the settlement or recovery.
In February 2000, the McDowells were injured in an automobile accident and received health benefits totaling more than $30,000 from the Providence Health Plan. In May 2000, the McDowells signed agreements directing their attorney to reimburse Providence Health for benefits paid in the event of any recovery from a third party. The McDowells sued the driver of the vehicle that hit them and, in February 2001, received a settlement of approximately $500,000. Providence Health then sought reimbursement from the McDowells in the amount of $21,727.55 pursuant to the reimbursement provision in the plan, but the McDowells refused to pay.
Providence Health initially filed suit against the McDowells in an Oregon state court, alleging that the McDowells had breached a contractual promise to reimburse the plan. The McDowells removed the contract action to federal court and moved to dismiss the lawsuit on the grounds that ERISA preempted the plan’s state law contract claim. The federal district court agreed, and dismissed the action.
Undeterred, Providence Health then brought a second lawsuit, this time in federal court, seeking what the plan described as “equitable relief” under ERISA § 502(a)(3)(B) in the hopes of avoiding Great-West’s bar on “legal,” or monetary relief. The plan requested that the court order the McDowells to “specifically perform” the reimbursement provision under the insurance contract. The federal court ignored the distinction the plan was trying to draw and dismissed this action as well, concluding that the plan was in reality seeking nothing more than money damages—precisely the remedy that the Supreme Court had ruled was generally not available under ERISA § 502(a)(3).
Ninth Circuit Decision
Providence Health appealed both district court decisions to the Ninth Circuit. While the appellate court affirmed the dismissal of the second lawsuit, which had been brought under ERISA, it held that Providence Health’s first lawsuit—the state court breach of contract action—was not preempted (and indeed was not even within the jurisdiction of the federal courts) because it did not have the requisite “connection with” or “reference to” an ERISA plan. Even though the provision that Providence Health was attempting to enforce was in the plan document, the Ninth Circuit interpreted recent Supreme Court pronouncements on ERISA preemption as requiring a “practical” analysis of the impact of a state law cause of action on an underlying ERISA plan, and concluded that, in this case, “adjudication of [Providence Health’s] claim does not require interpreting the plan or dictate any sort of distribution of benefits.” Thus, the court held, the plan’s state law contract claim was not preempted, and Providence Health was free to enforce its reimbursement rights in state court.
The McDowells have petitioned the full Ninth Circuit to reconsider its decision, and it remains to be seen whether the decision will stand and whether other jurisdictions will follow the Ninth Circuit’s lead. The McDowell decision is certainly not the last word on the subject, but, for now at least, it provides plan administrators with a valuable, efficient and much-sought tool with which to enforce properly drafted reimbursement and subrogation provisions that were in danger of becoming almost meaningless.