Understanding the Mechanics of Subrogation: How subrogation and reimbursement claims impact the injury victim’s settlement

How subrogation and reimbursement claims impact the injury victim’s settlement.

When an individual suffers an injury and seeks medical attention, typically that care is paid for by an insurance carrier. Those bills might be paid by Medicare, Medicaid, TRICARE, or a plan provided through their employer. This is true even if the injury suffered was caused by a third party. The surety of payment for medical services is why individuals are willing to pay high premiums for insurance coverage or to comply with cumbersome federal/state regulations to retain benefits.

However, most purchasers or beneficiaries of these plans and polices are unaware that there are circumstances wherein they will be required to repay these plans thousands or even millions of dollars. The little known and often misunderstood legal principles behind this obligation are subrogation and reimbursement.

Having spent more than 20 years in the health insurance subrogation/reimbursement industry, I have learned that a case example is the best way to explain how subrogation/reimbursement claims impact the individual injury victim.

A Typical Injury Case Example

In the typical case, an individual is injured in a motor vehicle accident. The individual then retains an attorney to assert a claim against the allegedly negligent driver. During the course of pursuing that claim, the attorney is advised that his client’s health insurance carrier paid $20,000 to various medical providers for injuries suffered in the accident. This notice advises the attorney that they are required to repay this amount upon settlement of the motor vehicle case. It is the position of the various insurance providers, government agencies, and courts that it was the at-fault party who should have paid the medical bills, not the injury victim’s own insurance carrier. Therefore, $20,000 from the settlement funds obtained by the injury victim’s attorney to compensate them for their injuries goes back to the insurance company. In many situations, primarily with Medicare, the facts and numbers can mean that the injury victim receives no portion of the settlement, and all of it goes back to the insurance carrier.

Subrogation and Reimbursement Explained

The terms subrogation and reimbursement are used interchangeably both within the industry and often by the courts. Despite this conflation, the two are different legal concepts and hold different perils for the injury victim attempting to obtain compensation for their injuries. Subrogation means to substitute one person for another.  Often subrogation is analogized to “standing in someone else’s shoes.” Within our context it means that the health insurance carrier can “stand in the shoes” of the injury victim–essentially becoming the injury victim for the limited purpose of asserting a claim against the at-fault party for the amount of medical benefits they have provided. The insurance carrier asserts a claim independent of the claim being asserted by the actual injury victim. Reimbursement, on the other hand, is when the insurance carrier claims that their insured recovered money from the at-fault party for expenses which the insurance carrier, and not the injury victim, paid. The concept of reimbursement guards against an individual receiving a “windfall” by recovering money for an expense that was paid by another.

To add to this already confusing analysis is that each type of health insurance coverage has different recovery rights. These rights may be governed by state law, federal law or a combination of both.

Repayment considerations with the Medicare Secondary Payer Act

Medicare and Medicare Advantage beneficiaries will face the Medicare Secondary Payer Act when they are attempting to resolve a repayment demand being asserted against any settlement or award they obtain. Under this Act, Medicare is identified as a “payor of last resort” and creates what is often referred to as a “super lien.” The amount due back is calculated per federal regulation and is dependent on the size of the settlement relative to the amount of benefits provided as follows:

• C.F.R. 411.37(c)
  • Medicare payments are less than the judgment or settlement.
    • Add (Attorney’s Fees) and (Costs) = Procurement Costs
    • (Procurement Costs) / (Gross Settlement Amount) = Ratio
    • Multiply (Lien Amount) by (Ratio) = Reduction Amount
    • (Lien Amount) – (Reduction Amount) = Medicare Demand
• C.F.R. 411.37(d)
  • Medicare payments are equal to or exceed the judgment or settlement.
    • Add (Attorney’s Fees) and (Costs) = Procurement Costs

• (Settlement Amount) – (Procurement Costs) = Medicare Demand

This “super lien” must be repaid within sixty (60) days of their post-settlement demand. Failure to repay the amount demanded could result in garnishment of Social Security benefits, interest being added to the amount owed, or even a doubling of the amount due, and a direct lawsuit against the injury victim and/or their attorney.  There are alternative ways to resolve a conditional payment amount that involves a compromise or waiver request.

Repayment Demands and Medicaid

Another federal government health insurance program that will assert a repayment demand against its beneficiaries is Medicaid. The Medicaid program is funded by the federal government but administered by each state. Part of the requirement for the states to receive Medicaid funds is to assert repayment demands in cases where another party has become responsible for items or services that Medicaid has already provided. The repayment formulas, process, and requirements vary greatly from state to state. Though all of them have statutory rights to repayment under both federal law and state law. Additionally, most states provide for both civil and criminal penalties for individuals, or their attorneys, who fail to repay Medicaid.

Repayment Demands and Medicaid

Federal employees, both civilian and military, also face a daunting challenge when attempting to resolve their personal injury actions.  Many civilian federal employees received their health insurance via the Federal Employee Health Benefits Act (FEHBA). These plans are quasi-government plans that are administered by private insurance carriers but overseen by the Office of Personnel Management. (OPM). Recently FEHBA plans achieved a significant victory before the United States Supreme Court in case called Nevils. In this case, the FEHBA plans were able to obtain a ruling which allows them to circumvent state law and enforce the terms of their plan as written. Since this is as relatively new change in interpretation there have been no cases yet limiting the rights of these plans. Fortunately, these plans are all available for review online at the Office of Personal Management website

Repayment demands from Veteran Affairs and TRICARE

Members of the military and their families must confront repayment demands from both Veterans Affairs (VA) and TRICARE. Both forms of insurance require the beneficiary to notify them of the potential for a third party to be responsible for the items or services they have provided.  What is especially unique about military repayment demands is their request that the injury victim’s attorney represent the United States government free of charge.  While there is no requirement that an attorney agree to this representation, the government can make resolving their interest more cumbersome in the event they refuse to sign the form. This is another example of the kind of leverage the government and insurance providers use on the trial attorney in an effort to obtain repayment.

Repayment demands and ERISA

Though tens of millions of Americans receive their insurance coverage via a government-sponsored plan, most are covered by an employer-sponsored health plan. These plans are established under the Employee Retirement Income Security Act (ERISA). An ERISA plan’s rights to repayment from an injury victim’s settlement or award is greatly dependent on how the ERISA plan is funded. Large employers with substantial assets often have a “self-funded” ERISA plan. This means that claims are paid by the company itself (or a fund it establishes) rather than by an insurance company. The law gives these “self-funded” ERISA plans extremely strong recovery rights. These same rights do not exist if the employer has a “fully insured” plan wherein an insurance carrier pays claims.

It is the “self-funded” ERISA plans which most often exercise subrogation and reimbursement rights as separate causes of action. An ERISA plan may have the right to initiate a law suit in the name of one of its plan members without even informing the individual. The “self-funded” ERISA recovery industry returned over $1,000,000,000.00 to ERISA plans in 2014 alone. This is $1 billion in settlement proceeds taken from injury victims each year. The rationale the United States Supreme Court gave when they last opined on ERISA was that the employee “bargained” for the subrogation/reimbursement rights that were contained in their contract for insurance.

Repayment demands and Hospitals/Providers

In addition to the repayment of insurance providers, there are situations where a hospital or provider may assert a repayment demand themselves. Often these repayment demands from providers is due to a lack of insurance, or a choice on the part of the provider not to bill insurance. Addressing these types of repayment demands may involve not only state statutes, but perhaps even county ordinances.

Identifying and resolving healthcare repayment obligations is a challenging part of any modern-day personal injury claim. Failure to properly address these claims could result in the loss of benefits, the accrual of interest, or even the imposition of civil or criminal penalties against both the injury victim and their attorney.