Employee Health Plans: Good News / Bad News – State Claims Reporting Laws Do Not Apply, but Recovery of Overpayments Made More Difficult

Employee health plans recently received good and bad news from the Supreme Court. On the upside, the Court invalidated a State law that required self-insured employee health plans (and their third-party administrators) to report claims information to State maintained databases. On the downside, the Court made it harder for all health plans to recover overpayments to participants unless the health plan can show the participant still has the overpayment, or the items purchased with the overpayment, in his or her possession.

State Reporting Laws Do Not Apply

The decision involving the preemption of State claims reporting laws arose out of a challenge to a Vermont law that required all health plans to report claims information to a State maintained database. Because the Vermont law required personally identifiable information to be reported, an employee health plan operating in Vermont refused to submit its claims data fearing it would breach Federal privacy laws. The ensuing litigation over whether the health plan was required to submit claims data eventually made its way to the Supreme Court in Gobeille v. Liberty Mutual Insurance Co., 136 S.Ct. 936 (U.S. 2016).

The Supreme Court ruled the Employee Retirement Income Security Act (ERISA) preempted the Vermont claims data reporting law. The Court ruled that one of ERISA's primary goals is the establishment of a uniform reporting system of employee benefit plan information. Therefore, the Court ruled that ERISA's broad preemption provisions precluded any State law that creates additional reporting obligations. Importantly, the Court explained that ERISA preempted State laws mandating reporting by employee health plans even if the State law requirements do not conflict with (but are in addition to) ERISA's reporting requirements.

Recovery of Overpayments to Participants Becomes More Difficult

Regarding the recovery of overpayments to participants, the Supreme Court was not as favorable to employee health plans. In Montanile v. Board of Trustees of the National Elevator Industry Health Plan, 136 S.Ct. 651 (U.S. 2016), a health benefit plan paid over $120,000 to cover the treatment of injuries the participant sustained in a vehicle accident. Later, after the participant received a large settlement payment from the driver of the other vehicle, the health benefit plan sought reimbursement from the participant for the cost of the participant's medical care. Unfortunately, by the time the health plan sought to enforce the reimbursement agreement, the participant had spent all the settlement proceeds on non-traceable, consumable goods and services.

In Montanile, the Supreme Court ruled the health benefit plan could not recover reimbursement from a participant through a subrogation claim, even though: (i) the plan document required the participant to reimburse the health plan; and (ii) the participant had signed an agreement to reimburse the plan. The Court explained that if the health benefit plan were seeking reimbursement from specific funds within the participant's possession (e.g., an account into which the settlement proceeds were deposited), the health plan would be enforcing an equitable lien, which is a permissible equitable remedy under ERISA.

The Court concluded, however, that because the participant spent the disputed settlement funds, the health benefit plan was seeking a legal remedy (contrary to the plan's characterization of the suit as an equitable cause of action). The Court reasoned that this was a legal remedy because the only way the health plan could recover reimbursement from the participant was to secure a judgment against the participant's personal assets.

Going Forward

These decisions provide guidance to health benefit plans on several fronts. If an employee health benefit plan operates in a State with reporting or other laws similar to the Vermont reporting law, the health benefit plan (and its administrators) may be able to secure relief from the State law. Care and planning are needed to determine the most effective and legally permissible way to manage around any such State laws. It might be imprudent to disregard or ignore them entirely, but rather an approach involving compliance under protest might be advisable.

Regarding benefit overpayments and recovery from participants, the Court implied there are several avenues that ERISA plans can use to recover, even if a participant has spent all the disputed funds. For example, the Court hinted that if a participant has fraudulently or in bad faith dissipated the assets, the health benefit plan may enforce recovery from the participant's other personal assets. Also, the Court was clear that specific items on which disputed settlement money is spent, such as a vehicle or real property, can be subject to an equitable lien whenever the disputed assets are traceable to that item. The likely result is that courts will begin to build upon the "tracing" requirement and enforce recovery of amounts owed to health benefit plans through equitable liens against any property that is, or may have been, purchased with the disputed funds. It remains to be seen where the burden will lie in the tracing process, and whether there will be any presumptions in favor of ERISA plans.