Is Your “Cadillac” Health Care Plan Really Just A Yugo In Disguise?

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As the Affordable Care Act came into effect, many discussions took place as to whether certain health plans would be considered “Cadillac” plans, subjecting their sponsors to an excise tax because of too generous benefits. However, due to “subrogation” provisions, which enable a plan to gobble-up any personal injury award a plan participant obtains from the party who caused the injury, when you lift up the hood, some of these Virginia plans turn out not to be Cadillacs at all, but more like Yugos in disguise.

Subrogation

“Subrogation” is a legal principle that means that someone, usually an insurance company “stands in the shoes” of another. If an insurance company has paid an insured on account of a loss, the subrogated insurer is entitled to sue the party that caused the loss, in the insured’s name. It also means that if the insured has already received payment from the party that caused the loss, the insurance company is entitled to take that payment away from the insured to the extent of any payments the company has made.

Specifically, in the case of health care plans it means that a subrogated plan can not only sue the third-party that caused the injury to a plan participant, but, more importantly, it can take away from an injured participant any money he/she receives from the party that caused the injury, to the extent of any payments the plan has made.

At first glance, this may seem to some like a reasonable outcome. Upon analysis, however, it becomes apparent that the effect of subrogation is to deny an injured health plan participant fair compensation for his/her injuries. In the case of an employer-sponsored health plan it is an egregious example of employer overreach that leaves injured employees uncompensated for their injuries.

When an injured person receives a monetary award on behalf of the party that caused the injury, either as a result of a law suit or by payment from the wrongdoer’s insurer, it is compensation for the injury, pain, suffering, permanent damage to health, any damage to property, and the inevitably incidental expenses that result from an injury. One element always considered is the amount of the injured party’s medical bills, even if all the medical bills were paid by the injured party’s health plan. The reason is that medical bills serve as a necessary proxy for how badly the person was hurt.  No one can say exactly how much a broken pelvis is worth, but the medical bills incurred for treatment give you a pretty good idea of the extent of the injury. Therefore, when a health plan recovers the amount it paid for treatment from an injured participant, it is really depriving that participant of the fair compensation he/she should receive for the injury.

How It Works

Take this case: A health plan participant is hit by a drunk driver, is seriously injured, incurs a long hospitalization and a painful recovery. Although the participant will be able to return to work, there is some permanent damage. The plan pays $100,000 towards the participant’s medical costs. The drunk driver has no financial assets, but his insurance company pays the $100,000 policy limit. That equals the amount the participant’s health plan paid for treatment. The participant has his medical bills paid, but is left with absolutely nothing as compensation for his injuries. Nothing for pain and suffering, time lost in the hospital and recuperating at home, ongoing health problems, perhaps not even anything for damaged property. Nothing. Does anyone think that’s fair?

But wait, it gets much worse. It is very common for plans with subrogation provisions to deny the participant any credit for sums the participant spent to obtain the recovery. They also often provide that no account is to be taken of whether or not any part of the recovery was for on-going health problems requiring continuing care. Consider, in the example above, that in order for the participant to secure the $100,000 payment from the drunk driver, he had to engage a personal injury lawyer on a 30% contingency. So now, the participant has received the $100,000 settlement, all of which can be claimed by his health plan through subrogation, and, also owes his lawyer, who successfully obtained the settlement, $30,000 for the representation. The injured participant in a health plan with subrogation not only gets nothing for the injury, he/she can end up in serious debt for having successfully pursued a claim against the party that caused the injury. Does anyone think that’s fair?

Virginia’s Anti-Subrogation Law

That result is, of course, appalling.  We have known that in Virginia since at least 1973, when Virginia enacted Virginia Code Section 38.2-3405, which prohibits “any insurance contract providing hospital, medical, surgical and similar benefits” and any “health services plan”  “providing for payment of benefits to or on behalf of persons residing in or employed in this Commonwealth” from  containing “any provision providing for subrogation.” This makes Virginia an anti-subrogation state. The problem, really the tragedy, is that, over the ensuing years, so many exceptions have arisen that they have almost devoured the rule.

ERISA

The first group to lose the protection of Virginia’s anti-subrogation law were employees covered by plans governed by “ERISA,” the Employees Retirement Income Security Act. While intended to protect pensions and other employee benefits, ERISA contains a “preemption” provision overriding state laws with respect to employee benefit plans falling under its coverage. But it leaves state insurance laws unaffected. The result is that a health benefit plan provided through an insurance policy still cannot contain subrogation provisions in Virginia. On the other hand, if the employer has an ERISA compliant “self-funded” health care plan, the employer may include the noxious subrogation provisions.

Federal Employees

The next group deprived of the benefits of Virginia’s anti-subrogation law are federal workers living or working in Virginia. The Federal Employees Health Benefits Act of 1959 authorizes the Office of Personnel Management (“OPM”) to contract with private carriers for federal employees’ health insurance. That Act also provides that the terms of any contract OPM enters into supersede and preempt any state law that relates to health insurance or plans. It is the practice of OPM to require subrogation in all its contracts with private health insurers covering federal workers, so they too lose the benefit of the anti-subrogation law.

Virginia Local Government Employees

The third group who are denied protection under Virginia’s anti-subrogation law is a surprising one. It is employees of Virginia political subdivisions such as counties and authorities created by state law, which have self-funded plans. While the law remains at least somewhat unsettled in this regard, in 2001 the General. Assembly added a new definition of insurance to the Virginia Code, which does not include self-insured health plans sponsored by political subdivisions. In addition, such plans do not fall within the definition of a “health service plan” under another state law, Virginia Code § 38.2-100 (2017). Finally, some political subdivisions operate under separate statutory grants of authority authorizing them to create their own health plans.  All of these provisions may be relied upon by Virginia political subdivisions with self-funded plans to deny their employees the benefits of the anti-subrogation law.

Why Require Subrogation?

Three basic arguments are advanced to justify subrogation, allowing health insurance plans to seize their participants’ personal injury recoveries. None can withstand analysis. The first of these is that subrogation is necessary to avoid a so-called “double recovery” by the injured participant.  In reality, there is no such thing. The payment an injured party receives from the third-party who caused the injury is compensation for his/her injuries. Any payment the health plan made went ultimately to hospitals, doctors and other providers for medical care. The participant has received no double payment that should be recovered by the plan.

Next, it is argued that third-parties who injure a plan participant should be required to reimburse the plan for the excess costs resulting from that injury.  There would be some validity to this argument if the plan were getting its reimbursement directly from the third-party that caused the injury and the participant had decided not to pursue his/her own  claim. That, however, is not the usual case. Most often, a plan is seeking its reimbursement from the injured participant who received a third-party payment as compensation for his/her injuries.

It can also be argued that there is no more reason for a plan to be entitled to reimbursement for an expense occasioned by the acts of a third-party than for an expense occasioned by the acts of the participant himself. Indeed, perhaps the contrary should be true. If a plan is entitled to be reimbursed for expenses incurred because of an injury to a participant in, say, a traffic accident, shouldn’t it equally be entitled to reimbursement for expenses incurred on behalf of a participant who is careless while climbing on a ladder or working with knives in the kitchen. If plans don’t seek reimbursement for expenses for treating participants who suffer heart attacks or diabetes related to being overweight or inactive, why should they be allowed to obtain reimbursement from a participant hit by a car while crossing the street? Plans seek recovery for their expenses from injured participants who have received a third-party recovery based on opportunism, simply because there is some money there.

Subrogation Is A Health Plan Windfall

In fact, recoveries obtained by plans through subrogation are not really reimbursements for their expenses, they constitute a windfall for the plan. When plans set their rates of contributions to be made from employers and employees they do so based on their claim experience. How much do they reasonably expect to pay out for illnesses and injuries in a particular year adjusted for anticipated inflation, administrative costs and any other expenses that can be reasonably estimated. In other words, the likelihood that a plan will incur expenses for participants’ injuries are already “baked into the cake” when the contribution rates are set.  At the risk of mixing culinary metaphors, any recovery, through subrogation, of the highly contingent third-party payment an injured participant may receive is pure gravy.

False Economy

The final and perhaps most voluble assertion on behalf of subrogation is that it is necessary as a cost control measure. Even if you accept that it is appropriate to control health care cost by depriving injured plan participants of fair compensation, this doesn’t hold much water. While I have not had access to comparative cost data for plans with and without subrogation in preparing this article, the long persistence in the marketplace of plans without subrogation suggests that subrogation is not an imperative to control rapidly escalating health care costs.

While many self-funded plans require subrogation, plans underwritten by commercial insurers in Virginia and subject to the anti-subrogation law do not.  Among public employers, some Virginia counties with self-funded plans require subrogation, but others do not. Arlington County requires subrogation, but Prince William County does not, nor does the Commonwealth with respect to its own civil service. Among utilities, Fairfax Water required subrogation until September 28, when its governing board voted seven to two to rescind those provisions. Next door, Loudon Water and the Prince William Service Authority do not require subrogation.  The plan for the Alexandria public schools requires subrogation, while the Fairfax County public schools plan does not appear to require subrogation, although it does provide for the usual coordination of benefits with other health insurance.

Over the long run subrogation is very unlikely to make an effective contribution to health care cost control. Indeed, the highly contingent possibility of recovery from a third party responsible for a participant’s injury is a very thin reed upon which to base any part of a plan’s financing.  Moreover, subrogation is a self-defeating strategy. As participants become aware that recovering damages from a third party is a highly contingent, time consuming, vexatious process that involves assembling documents and other paper work, likely hiring a lawyer, sitting for depositions, and, after all that, their recovery will be taken by their plan, they will simply stop seeking third-party recoveries. That leaves the plan in the business of pursuing recoveries against third-parties itself, without cooperation from the injured person.

Personal injury lawyers know about subrogation of course, and are unlikely to take on cases in which the proceeds can be claimed by a health plan.   Because of the disincentive that subrogation brings to pursuing personal injury claims, the real beneficiaries are not plans or their participants, but tortfeasors who injure plan participants.

What to Do

If you are one of the few who is fortunate enough to have high demand skills that give you a choice of employment options, you might well wish to carefully review your benefits, although without a contract they can be changed. You may decide to take a package that provides health care offered through a commercial insurer subject to the anti-subrogation law, rather than the wooden nickel of a self-funded plan with a subrogation provision.

If you are a Virginia local government employee you may wish to be in persistent contact with your state representatives and ask them to clarify the law so that the anti-subrogation public policy expressed in our statute is applied to all local government plans.

If you are a federal employee you may wish to be in persistent contact with your members of Congress and insist that they stop OPM from requiring subrogation provisions in health care insurance contracts covering employees in states with anti-subrogation laws.

Or you can do nothing. In that case you may just find that following an injury when you are most vulnerable, what you thought was a Cadillac health care plan is really just a Yugo in disguise.

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About Burton Jay Rubin

Burton Jay Rubin is an attorney and civic activist in Northern Virginia. For over 25 years he has served as a Member-Commissioner on the Fairfax County Water Authority, the public utility providing drinking water to over a million people throughout Northern Virginia. He served as Special Counsel to FlyersRights.com during its successful effort to require airlines to provide passengers with food, water and sanitary facilities and allow them to deplane after tarmac delays exceeding three hours. His writings have appeared in The Washington Post, Jefferson Policy Journal and elsewhere.
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