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Supreme Court Addresses Health Plan Reimbursement Dispute
Practical Law Legal Update 7-525-8114 (Approx. 4 pages)
Supreme Court Addresses Health Plan Reimbursement Dispute
by PLC Employee Benefits & Executive Compensation
| Published on 16 Apr 2013 • USA (National/Federal) |
In US Airways v. McCutchen, the Supreme Court held that equitable defenses cannot override clear plan terms in an action for equitable relief under Section 502(a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA). However, the court also held that equitable rules can be used to fill a gap where the plan does not expressly address an aspect of reimbursement involving third-party recovery.
Key Litigated Issue
In US Airways, Inc. v. McCutchen, the key litigated issue was how two equitable defenses (the first, which would limit a plan's reimbursement to the amount of a participant's "double recovery," and the second, which would address allocation of the costs of securing a recovery) applied in the context of a health plan's reimbursement claim under ERISA Section 502(a)(3).
Background
James McCutchen was a participant in a self-funded ERISA health plan sponsored by his employer, US Airways. McCutchen was seriously injured when another driver lost control of her car and collided with McCutchen's vehicle. The plan paid $66,866 towards McCutchen's medical expenses resulting from the incident.
McCutchen subsequently recovered $110,000 from third parties, but was required to pay 40% of the award in legal fees. US Airways demanded full reimbursement of the $66,866, under a provision described in the plan's summary plan description (SPD) (and which was treated for purposes of the litigation as if it came from the plan). McCutchen's attorneys placed $41,500 of his award, representing the amount of US Airways' full claim minus a share of the promised attorneys' fees, in a trust account.
After McCutchen rejected US Airways' demand for full reimbursement, the employer brought suit under ERISA Section 502(a)(3) for "appropriate equitable relief" to enforce the plan's reimbursement provision. McCutchen countered that US Airways:
- Could not be reimbursed because McCutchen had recovered only a small portion of his total damages, and the right to reimbursement did not apply unless he obtained a "double recovery" (that is, an amount from a third party that compensated him for the same loss covered by the plan).
- Would be unjustly enriched if allowed to take full recovery, because it could recover the full amount for the plan without contributing to McCutchen's legal costs.
The district court rejected these arguments and granted summary judgment to US Airways on the ground that the plan terms clearly provided for full reimbursement of medical expenses. The US Court of Appeals for the Third Circuit vacated the district court's order, holding that an award of "appropriate equitable relief" under ERISA Section 502(a)(3) may be limited by equitable defenses and principles, including unjust enrichment (see Legal Update, ERISA Plan Reimbursement Limited by Equitable Principles: Third Circuit).
Citing a circuit split on the question of whether equitable defenses can override an ERISA plan's reimbursement provision, the Supreme Court granted certiorari.
Decision
In a decision issued April 16, 2013, the Supreme Court held that in an ERISA Section 502(a)(3) action based on an equitable lien by agreement, equitable defenses cannot override clear plan terms. The court also held, however, that equitable rules can be used to fill a gap where the plan is silent regarding an aspect of the reimbursement (namely, the allocation of recovery costs). Because the plan did not expressly address the allocation of attorneys' fees, the court held that the common-fund doctrine, an equitable rule requiring the party seeking reimbursement to pay a share of the attorney's fees incurred in securing funds from the third party, was appropriate to fill the gap.
Reimbursement Claim
Regarding US Airways' reimbursement claim, the Supreme Court held that an equitable defense limiting reimbursement to the amount of McCutchen's "double recovery" (which would give the participant first claim on the portion of the recovery compensating him for losses not covered by the plan) could not override clear plan terms (which gave US Airways first claim to the participant's entire recovery). The Court noted that under Sereboff v. Mid Atlantic Medical Services, Inc., a health plan administrator could enforce a plan's reimbursement clause as "equitable relief" under ERISA Section 502(a)(3). In Sereboff, the Court concluded that the reimbursement claim was the modern equivalent of an action in equity to enforce a contract-based lien (called an "equitable lien by agreement"). Although Sereboff expressly reserved the question of whether equitable principles and defenses would apply to such a Section 502(a)(3) claim, US Airways' claim required the Court to reach this question.
As in Sereboff, US Airways sought to enforce the equivalent of an equitable lien by agreement. However, the Court reasoned that this lien arose from and served to carry out plan provisions entitling US Airways to reimbursement. Enforcing such a lien, the Court concluded, meant declining to apply an equitable "double recovery" rule that was at odds with the parties' contractual commitments, as expressed in the plan.
Common-Fund Claim
The Court's double recovery analysis also applied to the equitable common-fund doctrine (which would have otherwise permitted McCutchen to pass on to US Airways a share of his attorneys' fees in obtaining the recovery from third parties). Unlike for the double recovery defense, however, the plan terms said nothing specific about how to pay the costs of obtaining a recovery. Given the plan's silence on allocating the costs of recovery, the Court concluded that the common fund rule could be used to interpret US Airways' reimbursement provision. The Court noted that the "overwhelming majority" of state courts used the common-fund rule for allocating costs of third-party recoveries between insurers and beneficiaries.
Because of these rulings, the Court:
- Vacated the Third Circuit's judgment.
- Remanded the case for further proceedings consistent with the Court's opinion.
Practical Impact
At least two points regarding plan documentation bear mention. First, in a footnote, the Supreme Court pointed out that the reimbursement language litigated in this dispute came from the plan's summary plan description, rather than from the plan itself. The footnote does not indicate how application of the actual plan language (which was not made available until the case reached the Supreme Court) might have affected the outcome. Second, plans wishing to avoid application of the common-fund doctrine should expressly address in their subrogation/reimbursement provisions how costs of recovery will be handled.