As discussed in our February 2001 On the Subject…, "Subrogation Enforcement Issues Under ERISA Group Health Plans," which can be found at http://www.mwe.com/news/ots0201c.htm, almost all group health plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) as amended have provisions that purport to be "subrogation" provisions. These provisions generally provide for immediate payment of the medical expenses of a participant by the plan in exchange for the promise that if the participant obtains a later recovery of these same expenses from another party (e.g., a party responsible for the injury), the participant is obligated to reimburse the group health plan for the plan’s payment of such expenses.
Under ERISA, the characterization of these provisions affects whether the provision is enforceable by the group health plan against the participant. The ERISA provision that a health care plan would use to require a participant to repay the plan, Section 502(a)(3)(B), allows an action only for "appropriate equitable relief." An action providing for "legal" relief (traditionally the payment of money for personal liability) is not an authorized action under Section 502(a)(3)(B). The problem with the typical subrogation provision in many ERISA medical plans is that a court may characterize the provision as involving only the payment of money (i.e., legal rather than equitable relief) and, therefore, not authorized under ERISA.
Observers had hoped that the recent U.S. Supreme Court decision in Great-West Life v. Knudson would clarify that the typical subrogation provision is an equitable action. The court, however, issued an opinion that will undoubtedly lead to conflicting analyses as to whether the enforcement of a particular provision would be a legal or equitable action. Writing for the majority, Justice Scalia emphasized that the characterization and mechanics of a subrogation provision would determine whether or not the subrogation relief is authorized. In other words, it was the form of the obligation and the action to recover benefits that determined whether a particular subrogation provision was legal or equitable.
In Great-West Life, the group health plan was seeking the funds from the participant himself, even though the state court had directed that the recovery be divided and paid into a trust fund for his benefit and to his attorney. The fact that the relief was sought from the participant himself, who had not actually received the recovery, made all the difference: the relief sought was personal, legal relief in the eyes of the Supreme Court majority and not available under ERISA.
Monetary recovery may still be available, however, through equitable theories. As indicated by the majority and expanded upon by Justice Ginsburg’s stinging dissent, a constructive trust may be imposed for the benefit of the plan if the source of the funds is traceable. In other words, if the group health plan in Great-West Life had named the trustee or the participant’s attorney as a defendant, the funds might have been characterized as an equitable action and enforceable under ERISA.
In light of the new emphasis on form and mechanics in Great-West Life, carefully crafted subrogation provisions incorporating the constructive trust and other equitable theories are vital to group health plans in enforcing recovery rights. All plan sponsors should carefully analyze their plan operations and alternatives in the wake of this decision.