ERISA, Health Insurance and the "Make Whole" Doctrine in Colorado
Your client's auto crash injury medical bills were paid by the client's employer's health insurance. Your client aks: "My health insurer says that it is entitled to 100% reimbursement from my settlement. Can they do that?"
Indeed, can they do that?
If you're giving one word answers to that question then contact your malpractice carrier. Whenever I get that question I have to psych myself up to deliver the ERISA lecture as well as to prepare the client to receive it. I won't deliver the ERISA lecture here, but I will give a synopsis.
States historically have regulated insurance. But in 1944 the U.S. Supreme Court held that Congress could regulate insurance. In 1945, Congress passed the McCarran-Ferguson Act - which allowed states to continue to regulate insurance.
In 1974, Congress passed the Employment Retirement Income Security Act (ERISA). The intention of ERISA was to regulate employee benefit plans, but health insurance got pulled into the mix. In 1975, Congress added the Preemption Clause, the Savings Clause, and the Deemer clause. ERISA preempts state law except those laws that have been saved from preemption (e.g., laws that regulate insurance) and employee benefit plans are not deemed to be in the insurance business.
In 1987, the U.S. Supreme Court held in Pilot Life Insurance Co. v. Dedaux, 481 U.S. at 41that state law will be found to "relate to" an ERISA plan if the state law has a connection with or reference to such a plan. This made ERISA preemption very broad.
In 1990, the U.S. Supreme Court held in FMC Corp. v. Holliday, 498 U.S. 52 (1990) that a Pennsylvania anti-subrogation statute regulated insurance so it was not preempted by ERISA. The case distinguished self funded plans and insured plans. In a self funded plan, the employer pays the benefits directly or through a trust. In an insured plan, the employer does not pay the benefits, but rather the employer purchases an insurance policy and the insurance company pay the losses.
The effect of FMC Corp. is that: (1) self funded plans are not subject to state law; and (2) insured plans are subject to state laws such as the "make whole" doctrine and the "common fund" doctrine.
Colorado follows the "make whole" and "common fund" doctrines in some contexts, but the question has not been specifically answered as to health insurance. That's why ERISA plans in Colorado try to intimidate plaintiffs and plaintiff attorneys into fully reimbursing the plan.
But only true self funded plans are exempt from the "make whole" and "common fund" doctrines. If the plan is insured, then you should tell them to pound sand. You will begin reimbursing them only after the plaintiff has been made whole by recovering 100% of his or her damages.
And, contrary to ERISA plan assertions, Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006) did not change anything with respect to insured plans.
The Colorado appellate courts will probably apply the "make whole" and "common fund" doctrines to ERISA plans when the question is presented for determination but until that day, it will probably be adviseable in most cases, as a practical matter, to negotiate some small level of reimbursement so as to avoid ERISA litigation.
Mertens v. Hewitt Assocs., 508 U.S. 248 (1993), Knudson v. Great-West Life, 534 U.S. 204 (2002), and Sereboff will be discussed in a subsequent article.
