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Third Circuit Decision May Limit a Health Plan's Ability to Get Reimbursed for Benefits Paid When There Is a Third Party Recovery

January 17, 2012

A recent decision by the Third Circuit could have a significant impact on the subrogation and reimbursement policies of self-insured health plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). In US Airways, Inc. v. McCutchen, 663 F.3d 671 (3rd Cir. 2011), the U.S. Court of Appeals for the Third Circuit held that a participant could assert a defense of unjust enrichment to limit a plan’s attempt to recover medical expenses paid on the participant’s behalf, despite clear and unambiguous language in the plan document that it was to be reimbursed in full, out of any monies recovered by the participant due to injuries caused by a third party.

In this case, the plan participant, James McCutchen, was seriously injured in a car accident caused by a driver with limited insurance coverage. McCutchen settled with the other driver for $10,000 and received another $100,000 from his own underinsured motorist coverage, for a total recovery of $110,000. After paying attorneys’ fees, McCutchen’s net recovery was less than the $66,866 paid by the US Airways plan for medical expenses on his behalf.  

US Airways sought reimbursement of the full amount of its lien, relying on unambiguous plan language which provided that the participant must reimburse the plan for amounts paid for claims out of any monies recovered from a third party. McCutchen’s attorneys placed only $41,500 in trust, on the theory that any lien by US Airways would have to be reduced by a proportional amount of the legal costs. The District Court held in favor of US Airways, ordering McCutchen to pay US Airways the portion of the recovery held in trust, as well as to reach into his own pocket to pay the balance to the plan.

On appeal, the Third Circuit vacated the lower court’s decision, holding that Congress intended for equitable relief available to a fiduciary under ERISA to be subject to equitable defenses that were typically available in courts of equity at the time of the nation’s founding, such as unjust enrichment. Despite a long line of cases in the Third Circuit refusing to limit a plan’s right to reimbursement under unambiguous plan terms, the appeals court concluded that requiring McCutchen to pay the full amount to US Airways would bestow a windfall on US Airways. Not only did the lower court’s judgment exceed the participant’s net recovery from the third party, leaving him with “less than full payment for his emergency medical bills,” but US Airways did not contribute a penny to the cost of obtaining the third party recovery. The court remanded the case to the District Court for a re-determination of what US Airways should receive out of the settlement.

Stay tuned, as we likely have not heard the last word on this issue. US Airways may ask the U.S. Supreme Court to review this decision in light of conflicting decisions in other Circuit Courts. And the McCutchen court did not address whether the “make whole” doctrine, which requires that a participant be made whole before a plan can recover on its reimbursement claim, should limit a plan’s claim for “appropriate equitable relief,” even though the governing plan document says otherwise. A future court may resolve this open question. In the meantime, plan trustees may want to review their subrogation and reimbursement policies and make any appropriate changes in light of the Third Circuit’s decision in McCutchen.

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