Paying Back Your Health Insurer – A Necessary Evil

If your health insurance company paid for medical bills stemming from your personal injury claim, it will want to be paid back after the claim is settled (or you get paid from a judgment after trial). The same is true for Medicare and Medicaid. Although this right to reimbursement should in theory prevent the plaintiff from receiving a windfall (recovering money for medical expenses his insurer, and not he, incurred), in practice it can often result in the personal injury plaintiff not being fully compensated for his injuries. Expect some haggling over this issue with your health insurer when your lawsuit concludes.

Why Should My Health Insurer Get Any of My Settlement Money?

Simply put, your health insurer will always include language in its insurance contract which gives it a right to be reimbursed if you are injured by a defendant and recover money damages against that defendant. Usually, this will be in a specific section of the insurance contract clearly marked “right to reimbursement” or “subrogation.” Medicare and Medicaid get reimbursed according to federal and state statutes. It does make sense that the defendant, and not your health insurer, should have to pay for medical bills caused by his negligence. However, problems will frequently arise when you don’t recover enough money to both fairly compensate you and reimburse your health insurer.

What Happens if I Settle for Less Than the Full Value of My Injuries?

Most lawsuits do not result in a plaintiff getting what he would consider the “full value” of his injuries. Why? Frequently, a lawsuit will settle for the defendant’s insurance policy limits, which may not be enough to fully compensate you. There could be issues of comparative negligence (you are partly at fault) which result in your damages being reduced by the percentage of your own fault. You could simply get screwed by a bad jury that doesn’t award you damages for all of your injuries (they may think some injuries are unrelated to the accident) or shortchanges you in some other way.

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When you recover less than the full amount of your damages, you are not “made whole.” So why should your health insurer get reimbursed one hundred percent when you are getting only pennies on the dollar? Well, it shouldn’t. Enter the “make whole” doctrine.

The “Make Whole Doctrine”

The make whole doctrine is a common law (judge-made law, not a statute) rule of thumb that states that a health insurer should be reimbursed only if the plaintiff has been “made whole” by the settlement/judgment, and only to the extent that the settlement/judgment exceeds the “make whole” amount. So, for example, if you would be made whole by $80,000.00 (excluding the medical bills paid for by your insurer), you would only have to pay back your health insurer if you recovered more than $80,000.00, and only to the extent that your recovery exceeds $80,000.00. Unfortunately, this “make whole” rule has not been adopted in all states, and in the states where it is adopted, there are exceptions to it.

If your health insurance is governed by the federal law known as ERISA, federal “make whole” rules will apply. How do you know if you have an ERISA health insurance plan? For one, it will say so in the insurance contract. Also, if you get your health insurance through an employer-based plan (as most people do) and the employer who provides the plan isn’t a government or church, odds are your plan is governed by ERISA. When in doubt, ask your lawyer. So what are the federal “make whole” rules? Unfortunately, they vary among the 12 geographically assigned federal circuits. Some hold that the “make whole” doctrine is applicable in ERISA cases; some say it is not. Among those that adopt the “make whole” doctrine, they give the insurance company the option to opt out of this rule by including a provision in their insurance policies expressly stating that they will be reimbursed regardless of whether the plaintiff is made whole. Most modern health insurance policies will include this provision, so expect that you will have to pay your health insurer back (at least in part) under most circumstances.

State laws will control whether the make-whole doctrine applies to health insurance policies purchased privately (not through an employer). Covering every state is beyond the scope of this article, so ask your lawyer what the rules are for your state.

How Much Do I Have to Pay Back?

Most of the time, your lawyer can negotiate a fair reimbursement amount with your health insurer, even when the make whole doctrine doesn’t apply to you. Usually, your attorney will start the negotiation by pointing out that you are not recovering all of the settlement money — a healthy percentage of that will go towards attorney’s fees. Therefore, your insurer should reduce the amount of its reimbursement request (its “lien”) by at least the same percentage as your attorney’s fees (otherwise, it would be getting your attorney’s services for free). For example, if your insurer paid $40,000.00 in medical bills and your attorney’s fees are 40% of your recovery, the insurer should reduce its lien to $24,000.00 ($40,000.00 – 40%). Medicare will automatically credit you for this.

Your attorney will often haggle with whatever other ammo he has available to reduce the amount further from there. If you took a low settlement because of the defendant’s low policy limits, your attorney can point out the amount you recovered versus the amount your case was worth. For example, he could argue that you had to take $50,000.00 to settle a case that was worth $200,000.00. Therefore, because you only got 1/4th of the value of the case, the insurer should not recover more than 1/4th the value of its lien. Clearly, the attorney can mix and match any number of arguments to try to reduce the amount of the health insurer’s lien. Whether he is successful depends largely on the health insurer — some are more reasonable than others.

Interpleader — The Atomic Bomb of Negotiation Tactics

When all else fails and your lawyer can not reach a reasonable settlement of your health insurance lien, he can threaten to deposit the funds with the court (a procedure called interpleader) and let a judge decide how much the health insurer gets. I call this the atomic bomb of negotiating tactics because neither side wants this to happen and both sides will be damaged if it does. Interpleading the funds will make you unhappy because it will tie your money up for quite some time, just at the point you were going to get paid. It will make your lawyer unhappy because he will now have to do a lot of extra work that will not generate any more income for him. It will make the insurer unhappy because now it must pay a lawyer to pursue the money in the interpleader case. Of course, everyone will be nervous because you’ve now put the ultimate decision of how the money will be split up in the hands of a judge. Interpleader should only be used when your insurer is being completely unreasonable about how much it should get out of your settlement. Usually, the threat of it is enough to force the insurer to be more reasonable.

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Expect to Pay Something Back

It is extremely rare for a health insurer to waive reimbursement entirely. Expect to have to pay something back. Make sure that your lawyer knows about any medical treatment you received since the accident which is unrelated, as often insurance companies will try to recover for all the medical bills they paid during the relevant time frame. Ultimately, dealing with your health insurer is like negotiating a second settlement entirely, so expect it to take some time. You don’t want to rush your lawyer at this point. Because his attorney’s fees are almost always taken out before the health insurer gets paid, every dollar he saves you by negotiating with your health insurer is another dollar in your pocket.

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