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Tenth Circuit Hands Down Health Plan Reimbursement Decision

In our August 2004 issue of Benefits in Brief, we surveyed recent developments in the law governing a health plan’s right to enforce its reimbursement provisions against a participant who receives payment from a third party for medical expenses the plan has already paid. In that article (You’ve Got to Be Kidding: Health Plan Reimbursement Rights After Knudson), we reported that federal courts have struggled to apply the Supreme Court’s decision in Great West Life & Annuity Insurance Co. v. Knudson, which drastically narrowed the circumstances under which an ERISA health plan may recover from a participant under the plan’s reimbursement provision. In our August 2004 issue of Benefits in Brief, we surveyed recent developments in the law governing a health plan’s right to enforce its reimbursement provisions against a participant who receives payment from a third party for medical expenses the plan has already paid. In that article (You’ve Got to Be Kidding: Health Plan Reimbursement Rights After Knudson), we reported that federal courts have struggled to apply the Supreme Court’s decision in Great West Life & Annuity Insurance Co. v. Knudson, which drastically narrowed the circumstances under which an ERISA health plan may recover from a participant under the plan’s reimbursement provision.

This narrowing results from the Court’s restrictive reading of an ERISA plan’s right to equitable relief. Because the imposition of a generic obligation to pay a sum of money is legal relief, and ERISA plans may sue only for equitable relief, the court held that an ERISA plan may recover under its reimbursement provision only when it seeks (1) specifically identifiable funds, that (2) in good conscience belong to the plan, and (3) are in the possession or control of the defendant.

The Knudson definition of equitable relief has resulted in a frankly bizarre rule: if Joe Participant receives money that belongs to his health plan, then spends it before the plan can sue, Joe doesn’t have to pay it back. In response, some federal circuit courts have, essentially, thrown up their hands, holding that any action to recover under a plan’s reimbursement provision constitutes forbidden legal relief. The recent Tenth Circuit decision in Administrative Committee of the Wal-Mart Associates Health & Welfare Plan v. Willard, is not among them. Instead, the case reinforces the advice we offered in August: follow the money.THE WILLARD DECISION

In courts that still acknowledge a health plan might have a right to enforce its reimbursement provision, the flex point in the Knudson analysis is usually the possession or control element. That is, in such courts the outcome will usually turn on where the money is. The Tenth Circuit decision in Willard is no exception.

The plaintiff in Willard, a participant in a Wal-Mart sponsored health plan, was injured when a Wal-Mart pharmacist filled his prescription with the wrong medication. After the plan covered more than $500,000 of the participant’s medical expenses, the participant sued Wal-Mart in tort. As part of the resulting settlement agreement, Wal-Mart deposited an amount equal to the plaintiff’s medical expenses into the court’s registry, pending the court’s decision as to whether it belonged to the plan or the participant.

Applying the three-part Knudson test, the Tenth Circuit determined that these funds were specifically identifiable because they resided in a separate account, and belonged in good conscience to the plan because the plan contained an unambiguous reimbursement provision. The rub came, as it often does in reimbursement cases, in determining whether the funds were within the defendant’s possession and control.

The participant, of course, argued that these funds were not, and never had been, in his possession. The court — while acknowledging that the funds had never actually been in the participant’s possession — held that they were, nonetheless, in his possession or control for purposes of the Knudson test. Reasoning that the participant had exercised some control over the funds when he agreed to segregate them from his general recovery against Wal-Mart, the court deemed them to be in his constructive possession.WHAT DOES THIS MEAN FOR PLAN SPONSORS?

As we said in August, the most sensible response plan sponsors can make to Knudson is to follow the money. That is, rather than mailing out a single reimbursement notice letter to a participant who might owe the plan a portion of his or her third party recovery, plan administrators should actively track litigation and settlement proceedings between the participant and any third-party tortfeasors. We also suggested amending plans to exclude coverage of, or provide an offset for, the amount of any potential third-party recovery (an approach the courts have not explicitly tested).

In Willard, Wal-Mart was in the unusual position of being both plan sponsor and tort defendant; it therefore had the opportunity to ensure that the plan’s money was segregated before the participant had the opportunity to dissipate it. (Had the participant dissipated the funds, under Knudson the plan would have permanently lost its right of reimbursement against him.)

While most plan sponsors won’t have the kind of leverage Wal-Mart had with respect to controlling the segregation, location, and control of the funds at issue, the principle holds: follow the money. Only if the plan administrator actively tracks litigation between the participant and the third-party tortfeasor will it have any opportunity to intervene in litigation and settlement proceedings to stake the plan’s claim to funds that, in good conscience, belong to it.