Health insurers and health insurance professionals can close their eyes and hope that the so-called Patient Protection and Affordable Care Act (ACA) becomes a distant memory in their rear-view mirror, but the truth is that for now, it is the law, and it may be here to stay. While we are told that the number of previously uninsured Americans who have found affordable health care insurance under the provisions of this law cannot be accurately determined, the Congressional Budget Office itself projects that more than 6 million previously insured people will lose or have lost their current health insurance. What’s worse, according to an analysis in the journal Health Affairs, and as reported in the Washington Post, more than 30 million Americans still will not have coverage under the controversial new law. Less well-known among the various political and economic issues affected by Obamacare, however, is its effect on subrogation and health insurance reimbursement under the Employee Retirement and Income Security Act (ERISA).
One undeniable effect of Obamacare is that a much larger percentage of working Americans will no longer be covered by employer-sponsored group Plans governed by the ERISA, the federal law that sets the standards for and governs employee health benefit Plans. They will, instead, be forced onto more expensive and less-desirable non-employer-sponsored private Plans eventually extracted from the most expensive and least-functional website in history – Healthcare.gov. This means that an ever-increasing number of Plans will no longer be protected by the subrogation and reimbursement security afforded through the magic of ERISA preemption. A growing arsenal of anti-subrogation measures, pushed into law by trial lawyers associations across the country, will now be accessible to reduce subrogation recoveries significantly or eliminate them altogether.
The Obamacare Bill itself contains 11½ million words – which is 2½ times longer than the Bible. Ironically, the word “subrogation” does not appear even once in the law. The subrogation and reimbursement rights of a health Plan are primarily governed by three factors: (1) the language of the Plan, (2) the anti-subrogation laws of the state involved, and (3) the availability of federal preemption of those laws under ERISA. Without the latter, the important subrogation rights of health Plans can easily be reduced or destroyed outright by existing state law.
Under § 1003(a), ERISA applies to any employee benefit Plan established or maintained by any employer (or employee organization) engaged in commerce or in any industry or activity affecting commerce. If the Plan is not an ERISA-regulated Plan per § 1003(a), then state law will not be preempted. Given the expansive definition of “commerce” under federal constitutional law, almost all employee-benefit Plans will fall under § 1003(a) and will be subject to ERISA’s broad preemption provisions. But, exactly how does preemption work and what is preempted? The preemption section of ERISA is found in § 1144. This section is unique in its magnitude and interplay between its three main clauses, the preemption clause, saving clause, and deemer clause. It is the breadth of this preemptive power as well as the interplay between these clauses that makes ERISA useful, but also unpredictable, in subrogation cases.
The three clauses that constitute the mumbo-jumbo at the root of so much confusion with regard to ERISA preemption are the following:
Preemption Clause – 29 U.S.C. § 1144(a)(1988).
All state law is preempted insofar as it “relates to employee benefit Plans.”
Except as provided in subsection (b) of this section, the provisions of this subchapter III of this chapter shall supersede any and all State laws in so far as they may now or hereafter relate to any employee benefit Plan…
Saving Clause – 29 U.S.C. § 1144(b)(2)(A)(2000).
“Saves” from preemption those state laws which regulate insurance.
Except as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.
Deemer Clause – 29 U.S.C. § 1144(b)(2)(B)(2000).
Prevents states from “opting out” of Federal preemption of employee benefit law by “deeming” Plans to be the subject of the saving clause. States may not deem self-funded employee benefit Plans to be insurance companies or engaged in business of insurance for purposes of direct state regulation.
Neither an employee benefit Plan described in § 1003(a) of this title, which is not exempt under § 1003(b) of this title, (other than a Plan established primarily for the purpose of providing death benefits), nor any trust established under such a Plan, shall be deemed to be an insurance company or other insurer…or to be engaged in the business of insurance…for purposes of any law of any state purporting to regulate insurance companies, [or] insurance contracts.
The “preemption clause” establishes as an area of exclusive federal concern the subject of every state law that “relates to” a Plan. The “saving clause” returns to the state the power to enforce state laws which “regulate insurance,” except as provided in the “deemer clause,” under which a Plan may not be “deemed” an insurer for the purpose of state laws “purporting to regulate” insurance companies or contracts. As more and more Plans move away from the employer-sponsored group health Plans which have predominated for generations, the preemption magic of ERISA is watered down, effectively reducing subrogation and reimbursement rights at a time when any society looking to hold down the costs of health insurance premiums should be strengthening them.
The Benefits of Subrogation
One of the societal benefits of subrogation is to place the ultimate responsibility for a loss or accident on the tortfeasor responsible for causing it. However, a bigger function of subrogation is actually in harmony with one of the stated purposes of Obamacare – lowering insurance premiums. While Obamacare has failed and will continue to fail in accomplishing this stated goal, subrogation accomplishes this goal. If a health insurer contracts only to indemnify the insured for losses incurred, denying the insurer subrogation rights in effect rewrites the policy and allows the insured to retain benefits not contracted for. Subrogation is a key in helping to hold down insurance premiums. An insurance company sets its rates based on historical net costs. Thus, if the insurer had 100 policyholders in the experience period, and experienced a total of $20,000 in claim costs, it will set its actuarial premiums at $200 per policyholder. If, on the other hand, the insurance company experienced $20,000 in claim costs and received $5,000 in subrogation, it will set its actuarial premiums at $150 per policyholder. Revenue gained by the insurer, whether through subrogation collection or otherwise, is applied toward responding to the actual risk that is required to be paid by the insurer under the terms of the contract or policy. As a source of revenue, subrogation operates to reduce the actual past cost total used in the calculation of probable future insurable risk or loss on which future premiums will be based.
Courts throughout the country agree that subrogation assists society by lowering insurance costs and preventing double recoveries. See, Brooks v. A.M.F., Inc., 278 N.W.2d 310, 313 (Minn. 1979). As a recent example, the 8th Circuit Court of Appeals, considering a Missouri case, held that by denying health Plans the right of subrogation, the cost of insurance for all Plan members increases. Administrative Committee of Wal-Mart Stores, Inc. v. Shank, 2007 WL 2457664 (8th Cir., Aug. 31, 2007). That Court acknowledged that although the individual beneficiary who was injured in the accident would benefit by denying the health Plan the right to subrogation, “…all other Plan members would bear the cost in the form of higher premiums.” Id. at 4, citing Harris v. Harvard Pilgrim Health Care, Inc., 208 F.3d 274, 280-81 (1st Cir. 2000). In addition, courts have recognized that subrogation and reimbursement is especially vital to the financial stability of small group and self-funded Plans. Bill Gray Enter., Inc. v. Gourley, 248 F.3d 206, 214 (3rd Cir. 2001); Admin. Committee of Wal-Mart Associates Health & Welfare Plan v. Willard, 302 F.Supp.2d 1267 (D. Kan. 2004). For a certain price or “premium”, the insured is offered an opportunity to share the costs of a defined possible economic loss or risk. DuBray, Joseph F, A Response To The Anti-Subrogation Argument: What Really Emerged From Pandora’s Box, 41 S.D. L. Rev. 264 (1996). This risk sharing is normally done by an insurance company or health Plan, although persons may choose to self-insure or spread the effects of a risk through group Plans. Since the risk or loss covered by the insurance is in the future, the exact risk or loss is not known when the insurance contractor or policy is issued. Id. The parties sharing the risk – insurer and insured – view the risk as the probable amount of loss, and the amount of coverage and the premium for the insurance actually purchased are calculated on this unknown.
Correct measurement and assessment of the loss potential is the very foundation of any system of insurance. This assessment is accomplished only through the careful analysis or prior experience with loss, costs of administration of the insurance, the application of probability, or the mathematics of chance, as well as the likelihood that any loss will be recouped through the vehicle of subrogation. The insured decides, before he pays the premium, how much of the potential loss he wishes to bear, when he decides on the limits of coverage desired and whether he wishes to purchase a contract of insurance that provides for subrogation. Any negative financial implications of subrogation for the insured can be avoided by specifically requesting a policy without a subrogation or reimbursement clause. If subrogation recovery were not available for insurance companies – as is increasingly becoming the case in some states – the actual cost of insuring the past known risk would increase accordingly and the projected future costs would likewise have to be adjusted upward in the form of increased premiums. Id.
Subrogation also reduces the number of lawsuits filed, contrary to claims of anti-subrogation advocates. Without subrogation many plaintiffs are free to bring a lawsuit without concern for whether he or she must repay their subrogated carrier. If plaintiffs were forced to repay their health insurers after a third-party recovery, many doubtful or borderline cases would not be brought. In fact, many lawyers would advise their clients that because the insurance company has the right to recover all of the benefits paid to the individual, filing suit does not make economic sense. The burden would fall to the carrier to enforce its subrogation rights, which are more easily settled because such subrogation rights seek to recover only the most basic economic damages – medical expenses and lost wages – which the liability carrier can easily agree to.
Obamacare’s Destructive Effect on Subrogation
As participation in non-ERISA individual health Plans increases and participation in group Plans decreases, subrogation begins to wither on the vine. It is foreseeable in the future that at some point the vast majority of Americans will receive their health care through the individual market – including the Obamacare website. In February, the White House delayed until 2016 the devastating employer mandate in Obamacare which forces employers of more than 50 full-time employees to provide healthcare to its full-time employees, or pay a fine (or “tax” depending on the Administration’s mood at the time) of approximately $2,000 per employee. It will be cheaper for most employers to simply drop health insurance as an employment benefit and pay the fine. This delayed feature of Obamacare will be the most devastating to health insurance subrogation, so the worst is yet to come. Data suggests that 220 million Americans under the age of 65 have health insurance coverage and 156 million of those receive this coverage through their employer.
There are two components of the ACA and each will have a different effect on health insurance subrogation/reimbursement. There is the public health insurance component, which greatly expands Medicaid in most states, and there are the health insurance exchanges, which resemble a traditional health insurance Plan with its premiums, deductibles, and co-pays. Private Plans under the ACA will likely continue to enjoy the same subrogation and reimbursement rights as their traditional counter-parts enjoy, burdened of course by the potential loss of preemption as described above. Obamacare attempts to insure an additional 17 million uninsured individuals by raising the level of income below which families and individuals are eligible for Medicaid. While Obamacare destroys preemption for non-ERISA health Plans, the laws in many states exempts taxpayer-funded programs such as Medicare from anti-subrogation laws. In California, for example, Medi-Cal liens are given special preferences and protections.
Other Effects of Obamacare
There will be fallout from the ACA that won’t directly affect subrogation, but it will have an impact on the insurance industry. Assuming that Obamacare achieves its goal of increasing the number of people with health insurance, if the number of insured Americans increases, there should be fewer assignments of benefits (sometimes referred to as A & As) directly from doctor’s offices. Known as “A & As”, these are procedures whereby a beneficiary or patient authorizes the administrator of a health insurance Plan or program to forward payment for a covered procedure directly to the treating health care provider. The ACA should reduce the number of liens and assignments on an insured’s personal injury case to just one: the health insurer.
The role of Third-Party Administrators (TPAs) should see a spike as well. While poorly-written and enacted in a completely non-bipartisan manner, the ACA is considered the most significant law passed in the last 50 years. As regulators and bureaucrats attempt to decipher and comply with the details needed for the law to be fully implemented, unprecedented new administrative and compliance burdens are looming for employers. TPAs have considerable experience guiding employers through the pitfalls of government rules and requirements and, if the law remains in place, will be leaned on heavily during the long transition phase. They become invaluable to employers trying to mitigate the impact of health care reform.
Defense lawyers have wasted no time in claiming the ACA to be a “collateral source” which they claim should reduce an injured plaintiff’s recovery under the Collateral Source Rule. Defense publications are suggesting that the ACA should reduce the calculation of future medical damages by limiting recovery of those damages to “health insurance premiums and out-of-pocket limits less any pre-injury expected medical costs and penalties if uninsured.” How courts and legislatures will react to these new challenges remains to be seen, but defense lawyers are strongly urging juries to award only six months of future medical expenses and the premiums, deductibles, and co-pays for a bronze level health insurance coverage under the ACA since full coverage would kick in after six months of uninsured status.
The Future of Private Health Insurance
The future of private health insurance in America is unknown, but many have predicted Obamacare will place it on life support. It is possible that in the future health insurance will be delivered in a manner similar to the current 401(k) retirement system, in which employers contribute to their employees’ individual health Plans acquired through the Obamacare exchanges. This potential future would nullify the last two decades of ERISA subrogation law and virtually eliminate health insurance reimbursement in America. This is music to the ears of trial lawyers, but devastating to Obamacare’s stated goal of reducing insurance premiums.
Notwithstanding all of the above, a significant factor in the possible future disappearance of private health insurance is found in the fine print of Obamacare:
§ 1101(d) Eligible Individual. An individual shall be deemed to be an eligible individual for purposes of this section if such individual — (3) has a pre-existing condition, as determined in a manner consistent with guidance issued by the Secretary.
§ 1331(c)(2)(B). Nothing in this subparagraph shall be construed as allowing discrimination on the basis of pre-existing conditions or other health status-related factors.
The entire insurance industry is based on common sense discrimination. Expensive homes cost more to insure. Riskier occupations carry higher workers’ compensation premiums. Replacement value policies cost more than market value policies. Life insurance for older people costs more than for younger people. It’s not discrimination – its math. If a property insurance company was required by the federal government to insure a house engulfed in flames with a simple phone call from the hysterical homeowner, there would be no reason for anybody to buy insurance – until they needed it. It’s the same with health insurance. Insurance has always discriminated based on sex, age, health history, personal habits, tobacco usage, and other valuable considerations necessary in determining a risk. The last time the government told the private market not to “discriminate,” we ended up with the subprime mortgage crisis.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].