The Importance of Well Crafted Plan Language

In order to conserve and recover the maximum amount of Plan benefits and to make the third party recovery program as practical and cost efficient as possible, health care plans should have clear, well designed plan language. Non-ERISA plans must conform to insurance department guidelines. As previously discussed, the ability to recover health plan payments from a responsible third party or tortfeasor is dependent upon the plan's ability to recover either in equity or contractually. The importance of well designed plan language is critical as many state jurisdictions employ various equitable principles to defeat health plans' subrogation claims even where there is clear contractual language.

There are various state-law rules which prevent claim recovery such as the "made whole rule," the "collateral source rule," comparative negligence, and many state imposed anti-subrogation laws. An effective recovery program should be based upon the exclusion from coverage of expenses for which a third party is otherwise responsible. As it is often difficult at the time the claim is received to determine if a third party is responsible for medical expenses incurred, (dependent upon whether there is other liability coverage available), the plan language should have the ability to "advance" plan benefits until there is a determination that the third party is responsible for paying the costs of any resulting injury or illness. When the plan language contains an express exclusion for any liability from expenses arising from the negligence or wrongful acts of a third party, or for any expenses otherwise covered by other insurance, to the extent that the plan pays as an accommodation, the plan will have a right to recoup those funds in the event that it is determined that another party is liable.

This plan language is particularly helpful when the state applies a "collateral source" rule. The collateral source rule prohibits the pleading and proving of medical expenses which duplicate expenses which have already been paid for by a health care or other source. Thus, when a plan provides medical benefits to an injured party who is covered under the plan, the collateral source rule has the effect of imposing the costs of these expenses on the health care plan because the rule bars the introduction of those expenses as recoverable damages in the third party action.

When these expenses have been "advanced" under the plan, and are not otherwise covered, then the plan participant or the plan may introduce these expenses as they merely have been advanced pending the outcome of the liability litigation. But for the reference to the expenses as an advance, the collateral source rule would otherwise prohibit introduction and recovery of these expenses.

Some states have also adopted a "made whole doctrine" which specifically discriminates against health benefit plans and insurers. This doctrine provides that the plan is not to be reimbursed unless the plaintiff or injured person is first "made whole" as to their damages. There are few attorneys who will willingly agree that their client has received full compensation for his or her injuries. To the extent that the participant or beneficiary is not made whole by the settlement or resolution of a case, the health plan's right to subrogation or reimbursement is reduced or eliminated. This however only applies to fully-insured arrangements subject to state law. In most jurisdictions ERISA self-funded plans can avoid the made whole rule if they contain appropriate language.

Still other states have adopted comparative negligence statutes to be applied in subrogation and reimbursement cases. Comparative negligence statutes generally subject plans to state laws that attempt to treat the plan equitably regardless of the plan language. If the participant is 40% negligent and the participant's award is reduced by 40% then the plan's interest will similarly be reduced by a proportionate percentage. As subrogation began as an equitable common law doctrine, health plans have often found themselves on the losing side of the equities when they are contesting the division of limited third party proceeds. This is particularly true in limited recovery situations where there is a minimal amount of coverage available.

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