Health plans' third-party recovery provisions may need attention

July 1, 2006

In a unanimous decision (Sereboff v. Mid-Atlantic Med. Svcs.) released on May 15, 2006, the U.S. Supreme Court permitted a health insurer to enforce a reimbursement provision against a participant. The plan had paid approximately $75,000 for the treatment of injuries suffered by the participant, Marlene Sereboff, and her spouse, who subsequently received $750,000 pursuant to a third-party tort settlement. The health plan provided that a participant who is injured by another person and receives benefits under the plan for such injuries must reimburse the plan from any amount recovered, without reduction, for failure to receive the full damages claimed. When the participant refused to comply with this reimbursement provision, the insurer obtained an injunction requiring the Sereboffs to set aside sufficient funds from the settlement, pending a final ruling in the case.

In a unanimous decision (Sereboff v. Mid-Atlantic Med. Svcs.) released on May 15, 2006, the U.S. Supreme Court permitted a health insurer to enforce a reimbursement provision against a participant. The plan had paid approximately $75,000 for the treatment of injuries suffered by the participant, Marlene Sereboff, and her spouse, who subsequently received $750,000 pursuant to a third-party tort settlement. The health plan provided that a participant who is injured by another person and receives benefits under the plan for such injuries must reimburse the plan from any amount recovered, without reduction, for failure to receive the full damages claimed. When the participant refused to comply with this reimbursement provision, the insurer obtained an injunction requiring the Sereboffs to set aside sufficient funds from the settlement, pending a final ruling in the case.

The full implications of this decision will unfold over time. However, health insurers or plan sponsors should review and, if necessary, amend the plan's third-party recovery provisions. Counsel for Sereboff argued for a strict "tracing requirement" on all recoveries, i.e. that the funds the plan sought to recover must be directly traceable to those the plan had advanced. Chief Justice John Roberts, however, distinguished between an equitable lien sought as a matter of restitution and an equitable lien imposed by agreement. Only the former required strict tracing. Chief Justice Roberts concluded that the fund over which the lien is asserted need not be in existence when the contract containing the lien provision is executed. Thus, for a plan fiduciary to obtain recovery, as a threshold matter the plan document (as well as, presumably, the summary plan description) must clearly obligate the participant to reimburse the plan from specifically identifiable funds.

This column is written for informational purposes only and should not be construed as legal advice.