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When An Insured Is Injured, Who Pays?

One day last summer, an exuberant little boy rammed his arm through a glass door. His parents rushed him to the emergency room, where doctors fixed him up good as new.

The boy’s family was covered by Oxford Health Plans, a major health maintenance organization in the Northeast, through the father’s employer. Oxford picked up the emergency room tab except for a small co-payment. They all lived happily ever after — almost.

Six months after the incident, Oxford sent the boy’s father a questionnaire. Did the treatment result from an accident or injury? Was it an auto accident? Did the injury occur on another person’s property? If so, provide names of the other parties and their insurance companies. Was the injury related to employment? Do you intend to make claims? Have you hired an attorney? Have you received any settlement money?

The questionnaire asked Dad to sign below the words: "The foregoing is true and correct to the best of my knowledge."

Sensing an unwanted lawsuit in the making, Dad ignored the questionnaire. About a month later, he received another copy. This one came with a cover letter from The Rawlings Company LLC of Louisville, Ky.

"Oxford needs information concerning any claim which may be related to an accident, and therefore might be the responsibility of another person, organization or insurer," Rawlings wrote. "As mentioned in the first notification, our firm is working with Oxford Health Plans in this health plan cost savings program. Again, we ask that you please cooperate with your health plan by completing the form on the back of this page concerning the treatment provided to the above-listed patient."

The letter did not mention that The Rawlings Company is affiliated with the Louisville law firm of Rawlings & Associates. That firm publishes a legal reference book for insurance plans that want to recoup the costs of caring for injured participants.

Dad asked me what I thought he should do about the second questionnaire. This is how I became aware of a high-stakes, three-dimensional chess game that could affect any American with health insurance who is ever injured in an accident. (I’ll give you my response to Dad, and others who receive similar inquiries, at the end of this article.)

The chess game is being played at both the federal and state levels in courts, statehouses and insurance regulatory agencies. The players are health care providers and their malpractice insurers, accident victims and their attorneys, manufacturers and property owners and their liability insurers, and, of course, health insurers and HMOs. The ultimate issue: Who should pay for medical care when a person who has health insurance gets hurt?

The popular press has carried very little about this multiparty tug-of-war. I suspect that is because the issues are complicated and, at first glance, kind of boring. If this sounds dull, just think about our little friend and his accident last summer.

Does Grandma Get Sued?

What might have happened had the mishap occurred at Grandma’s house, and Mom and Dad were worried that Oxford might sue her? Might they have tried to treat the injuries at home rather than get prompt emergency medical care? If the accident happened at the boy’s home, did his parents risk having their own HMO sue them when they rushed their injured child to the hospital?

The roots of the controversy lie in a centuries-old common-law principle called the "collateral source rule." That rule held that if you injured someone by your actions or negligence, you could not reduce the damages you owed the injured party if the injured party had collected compensation from a "collateral source," such as an insurance company. The idea was to hold culpable defendants responsible for the full cost of their actions, even if an injured party was thereby compensated twice.

Liability carriers who insure potential defendants began arguing in the 1980s that this double compensation was driving the cost of insurance coverage to crisis levels. State lawmakers responded with a variety of tort-reform plans. One approach, used in at least 10 states including Florida, Connecticut and Michigan, allows defendants to reduce their liability when plaintiffs collect payments from collateral sources, with two exceptions: 1) If the plaintiff is obliged to reimburse the collateral source, and 2) If the collateral source has "subrogation" rights. Subrogation means that the third-party payer, which is usually an insurance company, has the right to step into the injured party’s shoes and file its own suit for damages against the alleged wrongdoer.

A few states, notably California, flatly prohibited health insurers from including reimbursement or subrogation provisions in their contracts. In those places, liability carriers were allowed to reduce their payments to the extent of health insurance reimbursements received by injured parties, to eliminate double compensation.

At the other extreme, South Carolina granted automatic reimbursement and subrogation rights to health insurance carriers. This would solve the double-payment "problem" from the other direction, by making liability carriers bear the full cost of injuries and allowing health insurers to recoup their expenses.

Still, disputes over who must pay, and who is entitled to receive, compensation in accident cases continued on many fronts. Some states, including New Jersey and New York, did not directly address reimbursement and subrogation in their laws.

Rejected In Jersey

Two years ago, the New Jersey Supreme Court unanimously struck down health insurers’ claims for reimbursement and subrogation rights. Oxford went to court to recover $7,357 for medical expenses it incurred for Takako Beninato, a dog groomer who was bitten by a client’s pet, and about $13,000 for Maria Perreira, after Mrs. Perreira was injured in a fall at a bank branch. Ms. Beninato and Mrs. Perreira each had obtained settlements from which Oxford wanted to be reimbursed.

New Jersey had amended its statute in 1987 to allow defendants to reduce their liability to the extent of collateral source payments, except for workers’ compensation and life insurance. At that time, the state prohibited health insurers from including reimbursement and subrogation clauses in their contracts. A few years later, the state’s insurance commissioner permitted those clauses, which the state’s highest court found was unauthorized by the law.

But our friend, the little boy, lived in New York, where his father also worked. The state’s Insurance Department issued an opinion last year stating that because New York law is silent on the subject, health insurers are free to include subrogation and reimbursement clauses in their contracts.

Oxford’s agreement with Dad’s employer provided: "If you are injured or become ill through the act of a third party, We will provide coverage for the treatment of such injury or sickness. Your acceptance of such Covered Services will constitute consent to the provisions of this section.

"Upon providing treatment for such injury or sickness…We shall be permitted to recover the reasonable value of such care for injury or sickness, when payment is made directly to you in third-party settlements or satisfied judgments. However, this recovery will be made only to the extent that the settlement or judgment specifically identifies amounts paid for healthcare services. You agree to cooperate fully to assist Us in protecting Our rights under this section."

This language does not appear to give Oxford any subrogation rights at all, meaning it could not sue a third party, such as Grandma. But if the little boy were to win a judgment or obtain a settlement from Grandma, Oxford would argue that it is entitled to "recover the reasonable value" of the medical services it provided. Oxford might, however, be prepared to argue that it has a common-law right to subrogation even though the contract does not provide for this. It tried this, unsuccessfully, in the New Jersey Supreme Court case.

The Court of Appeals, New York’s highest court, ruled in 1996 that a medical insurer can intervene in an injured party’s lawsuit in order to assert its reimbursement or subrogation claims. In that case, the mother of Michelle Teichman obtained a $4.5 million settlement after complications during delivery left the little girl with cerebral palsy. Metropolitan Life sought to recover more than $100,000 it had spent to date on Michelle’s care. Because the settlement did not disclose how much, if anything, was allocable to Michelle’s medical costs, the high court sent the case back for further proceedings.

The logical response to Teichman is to structure judgments and settlements so as not to allocate anything specifically for medical expenses. If the injured party does not receive anything for those costs, there would be no reimbursement due to the medical carrier. This logic has been followed in most of New York’s appellate courts since Teichman was decided.

ERISA Preemption

Some health insurers have argued that the federal Employee Retirement Income Security Act of 1974 (ERISA) preempts state laws that limit rights of reimbursement and subrogation for most employer-provided health plans. The U.S. Supreme Court threw cold water on that argument last year when it ruled that Great-West Life & Annuity could not use ERISA to obtain $411,000 that the health plan had paid to care for a woman left quadriplegic by an auto accident.

Janette Knudson obtained a $650,000 settlement from Hyundai. The settlement allocated just $13,829 for the woman’s medical expenses, which was offered to Great-West to satisfy the plan’s reimbursement provision. Most of the rest went to a special needs trust for Mrs. Knudson and to the woman’s attorney. The high court’s 5-4 majority ruled that because Mrs. Knudson did not actually receive the money herself, ERISA did not entitle the insurer to seek reimbursement from her. The court did not address whether the insurer could have sued to obtain the money from the special needs trust, or whether it could have intervened in the case to protect its interests before the settlement was reached.

Some commentators have suggested that health insurers may respond to the Great-West decision by delaying payment to doctors in accident cases until the insurers know whether there is a legal case pending in which the insurer can assert its right to be reimbursed or, under subrogation, to sue the injuring party directly.

As an employer who pays a lot of money for employee health insurance, I applaud the states that have forbidden subrogation and reimbursement clauses in health insurance plans. Little boys put their arms through glass doors. Babies get injured in childbirth. These are known, quantifiable risks that are — or should be — built into the premiums we pay for health insurance.

Do we want to create a system in which parents have to call their lawyer for advice before they call their pediatrician for advice when a child gets hurt? I don’t think so.

By the way, what are the ethical implications of a law firm such as Rawlings & Associates using its non-lawyer affiliate to solicit information from an insured patient under the guise of cost containment, then using that information to try to recoup money from the patient himself?

I am not an attorney, so I am not qualified to give legal advice to Dad. He should consult counsel. Still, if I were in his place, I would be inclined to ignore the letter from The Rawlings Company. Oxford’s policy language did not give it any subrogation right to bring its own suit; it merely has the right — if the contract language is valid — to be reimbursed out of any legal proceeding Mom and Dad might bring. No such proceeding is contemplated. So, if Rawlings and Oxford want to sue Mom and Dad to force them to complete the questionnaire, let them. It does not look like any payday will be in the offing for the insurance company.