On Tuesday, November 27th, the Supreme Court will hear oral arguments in U.S. Airways v. McCutchen. The case will address a medical plan’s ability to recover the cost of medical benefits for injuries caused by a third party. McCutchen is important to employers, because a ruling against U.S. Airways might significantly increase the cost of providing medical and other benefits.
Medical plans often provide that if a participant is injured in an accident, benefits payable under the plan will be reduced by compensation that the participant receives from the person who caused the accident. The reduction is typically achieved in one of two ways:
- Reimbursement, where a participant must reimburse the plan for benefits paid, using any proceeds received from the person who caused the accident; or
- Subrogation, where a plan stands in the shoes of the participant to recover damages from the person who caused the accident.
In 2006, the Supreme Court held that a plan could exercise reimbursement or subrogation rights against funds received from the person who caused the injury, if the plan specified the funds from which it would recover. For example, if a plan clearly stated the plan’s right to funds received from the person who caused the injury, the plan could be reimbursed from those funds–up to the amount of benefits paid by the plan. In contrast, a plan could not be reimbursed from the participant’s general assets.
Since the 2006 case, several federal courts of appeals have held that a plan can be reimbursed, if:
- The plan’s right to reimbursement is clearly set forth in the plan; and
- The plan’s terms identify specific funds against which the plan may recover (through a so-called “equitable lien” or “constructive trust”).
The courts have further held that participants may not assert equitable doctrines, such as the “make whole” doctrine or the “common fund” doctrine, to override the plan’s explicit rights. For example, suppose a participant incurs $100,000 in damages from an injury and the plan has paid $80,000 in medical expenses related to the injury. If the participant later recovers $80,000 from the person who caused the injury, the courts have held that the plan is entitled to the full $80,000–even though the plan’s recovery will result in the participant not being compensated for a $20,000 loss.
U.S. Airways v. McCutchen
In McCutchen, the Third Circuit broke from the courts described above, and held that a plan’s right to recover is limited by general principles of fairness, to an amount that the court determines is “appropriate” under the circumstances. (U.S. Airways v. McCutchen, 663 F.3d 671 (3rd Cir. 2011).)
In McCutchen, a plan paid $66,866 in benefits and sought to recover that amount from a $110,000 settlement (before attorneys’ fees). As in the cases described above, the plan document and summary plan description clearly set forth the plan’s reimbursement and subrogation rights, and said that the plan was entitled to funds received from the person who caused the injury–even if the participant was not made whole. Nevertheless, the court held that a full recovery to the plan would not be appropriate, because:
- After attorneys’ fees, McCutchen was left with only $66,000, which was not enough to cover the $66,866 in medical expenses paid by the plan on his behalf. The court noted that paying $66,866 back to the plan would put McCutchen in a worse position than if he had not tried to recover from the person who caused the injury.
- The plan did not contribute to the cost of obtaining the settlement, and did not make any adjustment for the attorneys’ fees that McCutchen incurred to recover from the person who caused the injury.
The court reasoned that allowing the plan to get a full recovery under these circumstances would amount to unjust enrichment–a “windfall” to the plan. In other words, the court reasoned that it would be unjust to give the plan funds that were obtained through the efforts, and at the expense, of someone else. (The outcome might have been different if, instead of seeking reimbursement, the plan had exercised its subrogation rights and taken a more active role in the case against the person who caused the injury.)
A recent Ninth Circuit case followed McCutchen. Applying the Third Circuit’s unjust enrichment and make-whole analysis, the Ninth Circuit concluded that it might not be appropriate for a plan to recover $32,000 from a $376,000 settlement. (CGI Techs. & Solutions v. Rose, 683 F.3d 1113 (9th Cir. 2012).)
The Supreme Court’s Decision
The Supreme Court has been asked to decide whether a participant may assert fairness principles to override a plan’s clear terms. The Court could keep things simple by holding that a plan’s clear terms govern. This approach would be consistent with the Court’s holding in Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 555 U.S. 285 (2009). If the Court takes this approach, a well-drafted plan can be reimbursed, even if the participant is not made whole and the plan does not contribute to the cost of recovering from the person who caused the injury.
If, on the other hand, the Court upholds the Third Circuit’s decision in McCutchen, it will become significantly more difficult and expensive to enforce subrogation and reimbursement provisions. Plans might have to share in the cost and other burdens of recovering from the person who caused the injury. In addition, if the ability to recover is subject to a fairness determination, plans will be forced to litigate even the most routine cases. The cost and uncertainty will ultimately increase the cost of providing benefits.
An adverse ruling could also affect other types of plans and provisions. For example, fairness principles might interfere with a retirement plan’s ability to recoup overpayments.
We will be watching the McCutchen case closely, and will provide further analysis as the case unfolds. For more information on the development of McCutchen to this point, please see SCOTUSblog’s information page.