Hospital Liens vs. Debts – A Distinction with a BIG Difference

By Guest Author Michael Walrath, Esq. – Director of Synergy’s Medical Bill Clinic

Introduction

Plaintiffs’ lawyers largely understand settlement proceeds which are subject to a claim of lien must be protected in trust, even against the client’s interests or wishes. An attorney may not serve as the “sole arbiter” of a lien dispute, take it upon herself or himself to decide the dispute in the client’s favor and distribute the disputed funds. Generally, liens must be amicably resolved or adjudicated at impasse. Perhaps the most misunderstood concept in the resolution of direct hospital/provider liens, is what I call the “lien debt dichotomy.” The lien debt dichotomy is simply a name I have given to the myriad of issues and decisions that flow from or turn upon, the distinction between a lien and a mere debt.

Reimbursement Liens vs. Direct Provider Liens

I have long believed the disconnect and the root of much of the confusion regarding direct provider liens versus mere medical debts, flows from their place in an entirely different silo in the lien resolution world. Upwards of 80% of clients are covered by some form of health insurance. Whether public (Medicare, Medicaid or certain state, county or municipal “Health Care Districts”) or private insurance (the Blues, Uniteds, Cignas, and Aetnas, to name the big plans), or even self-funded or insured ERISA plans–health insurers in most states, and under federal law in the case of ERISA, have “reimbursement lien rights” against tort recoveries. Accordingly, Plaintiffs’ attorneys must identify, negotiate, and resolve reimbursement liens in more than eight out of ten clients’ recoveries. As we all know from common experience, we do not owe a debt to our health insurers when they pay out our health benefits. We, and our injured clients, have benefits under a plan, that plan pays for our healthcare, and that is it; but when there is a tort recovery, everything changes. Tort recoveries themselves, under various legal doctrines, contracts and statutory regimes, create a right of reimbursement: a lien against the settlement proceeds allowing these plans to recover (to be reimbursed) the benefits they have paid. The very high percentage of clients facing these reimbursement liens has, in the Author’s opinion, trained many lawyers to believe accident-related medical care automatically creates a lien (it does not); and to ignore the importance of debts when it comes to direct provider liens (which is a mistake).

When a patient does not have health benefits, or a patient’s healthcare providers do not bill a patient’s health plan, there are no payments to reimburse. Stated simply, if a provider was paid by a plan, the plan often has a reimbursement lien, but if the provider has not been paid at all for accident-related care, the provider may (or may not) have a direct provider lien. This article focuses on the latter: providers who have treated a tort victim and have not yet been paid.

How Providers get Lien Rights

As stated at the outset, liens against settlement proceeds must be resolved or adjudicated, and Plaintiffs’ attorneys face significant exposure, both ethically and legally, if liens are ignored. There are essentially only two (2) ways a provider gets a direct lien against a tort recovery. Firstly, direct provider liens can be created by contract. The most familiar version of these contractual liens is the Letter of Protection (LOP) or some similarly styled agreement between a lawyer and a provider (or a client and a provider) in which the client agrees to pay the provider from a future settlement if the provider agrees to treat and forbear collection until the tort case settles. These agreements are often the only way an uninsured accident victim can obtain non-emergency accident-related care. While Emergency Medical Treatment and Labor Act (EMTALA) ensures hospital emergency rooms will treat and stabilize an uninsured injury victim, the same is not true of future, scheduled care. The contract itself is the genesis of the providers’ lien rights, as well as the “law of the case.”  Therefore, the terms, requirements, and legal exposure depend entirely upon the language of the agreement. The second way a provider is given direct lien rights against recovery proceeds is by statute (or in some cases, by County Ordinance). These “statutory” liens often include perfection requirements and carry impairment provisions, set priority, and even limit or define lien amounts. If unsure, the best way to determine whether a provider has a lien against a settlement is to ask. At the outset of every post-settlement negotiation, the Author’s practice is to inquire whether each known provider is pursuing a lien, and if so, request documentation supporting their alleged lien rights.

Why the “Lien Debt Dichotomy” Matters

In short, liens attach to settlements, while debts attach to people. A lien secures a debt to the settlement proceeds, requiring the lien amount to be protected in trust. Absent a lien, a provider is a mere creditor with an unsecured debt. The fact that a provider rendered accident-related care is irrelevant to whether their interest is a lien or a mere debt. Perhaps the best analogy is a mortgage and a home loan. A mortgage is a security instrument, an agreement that attaches a debt to real property. If a bank merely loaned money to purchase a house but did not require a security interest to protect the loan, the homeowner could simply sell the home, spend the proceeds, and never pay the bank back. The same is true of a non-lienor medical provider. If a surgeon, for example, performs a spinal fusion on a tort victim and fails to require a contractual lien against the settlement, the patient could recover his damages from the tortfeasor and refuse to pay the doctor whose bills the medical special damages were based upon. Accordingly, determining whether a medical provider has a lien against the settlement, versus a mere debt against the patient, is not only required to analyze the attorney’s ethical and legal requirements and exposure, but it also drives negotiation strategies and distribution procedures. If there is not a lien, it is up to the client whether they wish to pay a provider anything at all from the settlement. Clients are free to refuse such payment and force providers to pursue traditional collection actions to collect on their debts.

Equitable Distribution

Most Plaintiffs’ attorneys are familiar with the concept of equitable distribution. While procedure and formulae vary, an equitable distribution is essentially a court ordered “fair” division of a limited settlement. The most common split is to award a third to each of the interested parties: one third to the attorney, one third to the client, and the last third split pro-rata among the medical lienholders. But remember, only lienholders have claims to the settlement proceeds. Providers who do not have any such lien rights are mere creditors and should not properly participate in an equitable distribution. After all, lienholders went to the trouble of obtaining a security interest while mere creditors did not; why should the mere creditors who did not, be permitted to dilute the positions of the lienholders as related to their share of the settlement? Again, consider the mortgage analogy. Only lienholders would be able to lay claim to the proceeds of a sale, while mere creditors would have to secure and execute traditional judgements against the general assets of the debtor, which may or may not include remaining proceeds from the sale of the property.

Negotiation of Direct Medical Liens

Once a lien has been identified, a Plaintiff’s lawyer’s marching orders are clear: amicably resolve the lien or have it adjudicated. This legal interest in the settlement proceeds must be respected, and protected, until such time as the lien rights are released. The first step is always to identify all the known terms of the lien (whether found in a contractual agreement, statute or ordinance). Once the lien terms are clear, and their meaning agreed upon with the lienholder, attorneys must determine whether a deeper reduction is available through an equitable reduction, or a reduction to reasonable value. This decision typically turns on the amounts of the settlement and of other liens. If a settlement is limited, and an equitable distribution is likely to obtain better results for the client, agreements with all lienholders should be sought, in accordance with a distribution schedule setting out their pro-rata shares of a “fair” position of the proceeds (such as one third, as discussed above). Be careful to make offers contingent on the agreement of all lienholders and be prepared to file for formal equitable distribution with the Court, if all such agreements cannot be secured amicably.

Negotiation of Medical Debts

When it is confirmed that a provider does not have lien rights (a confirmation the Author highly recommends be obtained in writing), all bets are off and negotiation leverage swings heavily to your favor. Best practices include explaining the client’s options, including paying the debt from the proceeds, or electing not to and instead awaiting traditional collections activity from the provider. It is unquestionably in the client’s best interests to resolve debts when possible, while they have proceeds and counsel (two things they likely will no longer have, by the time the provider sues them). Accordingly, clients should be made acutely aware of the potential exposure and adverse effects of such a future collection action and reminded they will be unrepresented at that time; however, the providers do not know the client’s true intentions. The leverage created by threatening to give the money to the client and pay the provider nothing from the settlement, is substantial and effective.

Conclusion

Understanding the “lien debt dichotomy” is paramount to ensuring effective resolution of direct provider liens. Identifying which medical providers have liens, and which have mere debts, is a critical first step. Once confirmed, liens can be negotiated based upon either equitable principles, or analysis and negotiation towards reasonable value. Mere debts should also be negotiated along both “equitable” and “reasonable value” lines, but your negotiation position is much stronger and providers, given the choice between something or nothing, often make the right decision.