United States: Recent Supreme Court Rulings Affecting Employer-Sponsored Health Plans

On June 21, 2004, in Aetna v. Davila, the U.S. Supreme Court unanimously held that ERISA completely preempts state law tort claims against HMOs for injuries allegedly suffered as the result of the HMO's failure to authorize physician-recommended care. The decision struck down a Texas law, the Texas Health Care Liability Act, which made insurers and managed care companies liable for damages caused by their failure to exercise ordinary care in making treatment decisions, and limited the application of the Court's decision in Pegram v. Herdrich, 430 U.S. 211 (2000), in which the Supreme Court had found that ERISA did not preempt claims against HMOs making "mixed" treatment and eligibility decisions. In the new case, the court clarified that the "Pegram exception" to ERISA preemption only applies where the underlying harm is caused by a treating physician exercising medical judgment. In the Pegram case the HMO doctor had determined both the course of treatment and whether the treatment would be covered by the HMO, whereas in the Davila case the HMO had only decided whether a certain treatment would be covered under the terms of the plan.

Davila means that individuals enrolled in ERISA plans will only be able to sue HMOs to recover the cost of the benefits that were not provided or to enforce their rights under the terms of the plan; they will not be able to recover punitive damages or damages for pain and suffering.

Although the Supreme Court decision was unanimous and solidly grounded in the statutory language of ERISA, Supreme Court Justice Ginsberg, in her concurring opinion, called on Congress to "revisit what is an unjust and increasingly tangled ERISA regime." Congress responded swiftly by proposing the Patients' Bill of Rights Act of 2004 (Proposed H.R. 4628) that would require, among other things, the right to hold an HMO liable if an HMO's negligent medical decision results in injury or harm. Whether such legislation will be enacted, however, remains to be seen.

Health plan subrogation rights, i.e., rights to recover money for benefits paid on behalf of a participant who later receives a third-party personal injury settlement, have been uncertain since the Supreme Court's 2002 decision, Great-West Life & Annuity Insurance v. Knudson. Recently, however, the Supreme Court let stand two lower court decisions, both of which allowed plan sponsors to sue under ERISA to recover these costs.

The Great-West case held that an ERISA plan could not seek reimbursement from a beneficiary after the settlement or award from a lawsuit against a third-party had been disbursed. Employers are limited to seeking equitable relief (such as an injunction) against identifiable funds (such as funds kept in an attorney's trust account).

In both of the newer decisions, the lower court had found that the plan's actions were permitted under ERISA. In Varco v. Administrative Committee of Wal-Mart Stores, Inc. Associates' Health and Welfare Plan, the plan paid medical expenses on behalf of Varco, who had been injured in an automobile accident, and asked that a "constructive trust" be imposed on any funds received in settlement of the claims arising from the accident, so as to protect the plan's subrogation rights. When Varco reached a settlement, the plan obtained a preliminary injunction prohibiting the disbursement of the settlement funds until the plan had been repaid. The Seventh Circuit concluded that Varco was distinguishable from Great- West, because the funds had not been disbursed and were not in the beneficiary's possession, and so the plan's claim for restitution was an equitable claim permitted by ERISA. Similarly, in Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, the Fifth Circuit concluded that a plan's lawsuit seeking to impose a "constructive trust" on settlement funds that were held in an attorney's trust fund was equitable in nature. In both cases, by letting the lower court decisions stand, the Supreme Court has signaled that it agrees that health plan subrogation rights still can be enforced in certain circumstances.

The facts in Varco and in Bombardier highlight the importance of taking appropriate steps to protect your plan. In both decisions, the plan documents specifically said that the plan participant was required to reimburse the plan for benefits paid if the participant also received compensation from a third party for the same claim, and, further, that the participant was responsible for all attorney's fees (thus preempting the "common fund doctrine" which otherwise would have required the plan to share proportionately in the costs of the attorney's fees incurred by the participant to settle the claim).

Employers should review their plans and summary plan descriptions to make sure that the subrogation/reimbursement section has been updated to reflect current law. Plans may also provide that partici pants are responsible for all attorney's fees and court costs in any third-party litigation. Plan Administrators should monitor any personal injury or other claims of participants receiving benefits under their plan, and be prepared to take quick action if a settlement or other award is made.