Public Policy Considerations Warranting Denial of Reimbursement to Erisa Plans: It's Time to Recognize the Elephant in the Courtroom - Roger M. Baron

• Publication year: 2004

Public Policy Considerations Warranting Denial of Reimbursement to ERISA Plans: It's Time to Recognize the Elephant in the Courtroomby Roger M. Baron^*

I. Introduction .....................596

II. Existing Federal Decisions Denying Reimbursement .............597

A. Knudson, The Point of Beginning................597

B. The Preemptive Nature of ERISA vis-a-vis the Matter of Reimbursement..............601

C. Federal Judicial Opinions Subsequent to Knudson....................604

1. Fifth Circuit Court of Appeals..................604

2. Seventh Circuit Court of Appeals .................606

3. Ninth Circuit Court of Appeals...................608

4. Other Federal Opinions ......................609

5. Continued Absence of Public Policy Considerations ..............612

III. Public Policy Considerations Surrounding the Reimbursement Question................613

A. Historically Disfavored .....................613

B. "Because We Say So"—The Unilateral Nature of Reimbursement............616

C. Compensation of Windfall?............620

D. Rates.................627

IV. Constitutional Dimension ..............631

V. Conclusion..................633

I. Introduction

A number of recent federal court opinions,¹ including a decision by the United States Supreme Court, have denied plans falling under the Employee Retirement Income Security Act of 1974 ("ERISA")² the opportunity to seek reimbursement for medical expenses paid for plan members.³ Without delving into the weighty policy considerations that support these decisions, the courts rendering these decisions have constrained their analyses to simple statutory construction of the relevant provisions of ERISA. As a result, these decisions might appear to be hyper-technical on the surface. However, significant policy considerations underlie the results. This Article will explore the policy considerations that support the notion that reimbursement should be denied to ERISA plans. As suggested in the title to this Article, one does not have to go far to find them; they are as significant and as obvious as an elephant would be in the courtroom; an elephant that exists but is not acknowledged. This Article will also address opposing considerations, which are urged in support of reimbursement.

Given that these decisions reach the right result, the reader might question the need for this Article. Why write an article that "supports" these decisions? The answer is simple. The law is far from settled. The leading case in this area, Great-West Life & Annuity Insurance Co. v. Knudson,⁴ was decided by the United States Supreme Court and leaves many unanswered questions. Litigation over reimbursement abounds. Furthermore, a few federal courts have established new reasons to permit reimbursement.⁵ As this intense struggle continues in our judicial system, the time has come for the courts to look directly at the significant policy considerations at hand.

This Article will demonstrate that the public policy considerations that warrant denial of reimbursement are deeply rooted in equity and in common law. Furthermore, these historical considerations remain intact because ERISA itself neither permits nor endorses the concept of reimbursement. To the contrary, the declaration of congressional policy found in ERISA suggests that the scheme was designed to assure an "equitable character of such plans" for the benefit of "the interests of employees and their beneficiaries."⁶ Against the historical background that existed at the time ERISA was enacted, Congress has indicated that the goal of full and just compensation for employees and their beneficiaries should carry a higher priority than the goal of strictly upholding plan documents as unilaterally drafted and amended by ERISA plans.

This Article will also address the related assertion by ERISA plans and their insurers that without reimbursement, plan funds are drained, which adversely and significantly impacts rates. This Article will also address the argument that without reimbursement, the insured receives a "windfall"—an argument which still occasionally arises. The sad fact in the vast majority of these critical injury cases is that the insured is left not only seriously impaired for life, but, if reimbursement is permitted, the insured is also left financially destitute.

II. Existing Federal Decisions Denying Reimbursement

A. Knudson, The Point of Beginning

The chronological point of beginning lies in the decisional law of the United States Court of Appeals for the Ninth Circuit.⁷ The most appropriate place to begin this discussion, however, is with the United States Supreme Court decision in Great-West Life & Annuity Insurance Co. v. Knudson,⁸ which was decided on January 8, 2002. This case arose in California and was just one of many cases in which the Ninth Circuit simply followed its well-established rule in cases of this nature.⁹

Janette Knudson was injured in a car accident and rendered a quadriplegic. The ERISA plan paid $411,157.11 of her medical expenses. Actually, the plan covered $75,000 of the expenses, and the remainder was paid by Great-West Life & Annuity Insurance Company pursuant to its "stop-loss" agreement maintained with the plan. Knudson sued the manufacturer of the car in which she was riding and other alleged tortfeasors in California state court. A settlement of $650,000 was negotiated. Proceeds were allocated as follows: $373,426 for attorney fees and costs; $256,745.30 to a Special Needs Trust, which under California law exists to provide for continuing medical care for Knudson; $5000 to the California state Medicaid program; and $13,828.70 for reimbursement to the ERISA plan and supporting insurer. Eventually Great-West filed suit in federal court in California seeking injunctive and declaratory relief asking that the "reimbursement" provision of the plan be enforced and that Knudson be required to pay the entire $411,157.11 to the plan and to Great-West.¹⁰ Jurisdiction had been predicated upon Sec. 502(a)(3) of ERISA, which provides as follows:

(a) ... A civil action may be brought—

. . . .

(3) by a participant, beneficiary, or fiduciary

(A) to enjoin any act or practice which violates . . . the terms of the plan, or

(B) to obtain other appropriate equitable relief

(i) to redress such violations or

(ii) to enforce any provisions of . . . the terms of the plan.¹¹

Existing case law in the Ninth Circuit had established that an action seeking a judicial decree of reimbursement was not "equitable" relief under this statutory provision and that such an action was, therefore, not authorized by ERISA.¹² Both the federal trial court and the Ninth Circuit held that relief could not be granted to the plan.¹³

The Supreme Court affirmed the Ninth Circuit.¹⁴ Four justices dissented.¹⁵ The majority opinion by Justice Scalia construed the ERISA provisions narrowly, restating the Court's view that "'strong evidence [exists] that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.'"¹⁶ The Court recognized that Knudson was, in essence, simply a suit for personal liability—a suit for money damages.¹⁷ The Court also rejected various arguments seeking to characterize the relief sought as "injunctive"¹⁸ or as some other form of "equitable relief,"¹⁹ stating,

The basis for petitioners' claim is . . . that petitioners are contractually entitled to some funds for benefits that they conferred. The kind of restitution that petitioners seek, therefore, is not equitable—the imposition of a constructive trust or equitable lien on particular property—but legal—the imposition of personal liability for the benefits that they conferred upon respondents.²⁰

The opinion's effect is to deny reimbursement simply because such a suit is not authorized by the provisions of ERISA, not because reimbursement is unlawful or would violate public policy considerations. Of course, the end result was that allocation of the settlement proceeds for Janette Knudson was not disturbed. All of the money allocated under the settlement to the Special Needs Trust for Janette Knudson remained intact. Nor was there any disturbance in the payment of attorney fees and costs.²¹

On the other hand, had reimbursement been permitted, nothing would be left from the $650,000 settlement for Janette Knudson, a quadriplegic victim. All of the funds would be expended for reimbursement to the ERISA plan, attorney fees, and costs.

The Supreme Court's entire resolution of this case hinged on the statutory language found in ERISA, whether the suit was "equitable,"²² and whether the plan was authorized to bring this sort of suit by the ERISA statute.²³ The Court did not discuss the appropriateness of allowing reimbursement. Nor did the Court mention the significant public policy considerations that support the proposition that reimbursement, in a situation like this, should be denied as a matter of law.

According to the Knudson majority, whether reimbursement would be available in other cases remains an open question:

We note, though it is not necessary to our decision, that there may have been other means for petitioners to obtain the essentially legal relief that they seek. We express no opinion as to whether petitioners could have intervened in the state-court action brought by the respondents or whether a direct action by petitioners against respondents asserting state-law claims such as breach of contract would have been pre-empted by ERISA. Nor do we decide whether petitioners could have obtained equitable relief against respondents' attorney and the trustee of the Special Needs Trust, since petitioners did not appeal the District Court's denial of their motion to amend their complaint to add these individuals as codefendants.²⁴

This concession by the majority might appear beneficial for plans seeking reimbursement in subsequent cases, but the dissenting opinion by Justice Ginsburg aptly puts things in perspective by pointing out...