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Ninth Circuit: Hawaii Laws Prevent Health Plan's Insurer from Being Reimbursed
Practical Law Legal Update w-022-0364 (Approx. 5 pages)
Ninth Circuit: Hawaii Laws Prevent Health Plan's Insurer from Being Reimbursed
by Practical Law Employee Benefits & Executive Compensation
| Published on 17 Sep 2019 • USA (National/Federal) |
In a reimbursement dispute between a health insurer and health plan participant who received benefits under the plan for injuries sustained in a motorcycle accident, the Ninth Circuit held that the Employee Retirement Income Security Act of 1974 (ERISA) did not preempt the participant's claims that the insurer's lien on his third-party settlement proceeds was invalid.
In a reimbursement dispute between a health insurer and health plan participant who received benefits under the plan for injuries sustained in a motorcycle accident, the Ninth Circuit held that ERISA did not preempt the participant's claims that the insurer's lien on his third-party settlement proceeds was invalid (Rudel v. Hawai'i Mgmt. All. Ass'n, (9th Cir. Sept. 11, 2019)).
Motorcycle Injuries Lead to Health Plan Reimbursement Dispute
The participant in this case was severely injured in a motorcycle accident. After receiving more than $400,000 in benefits under an ERISA health plan, the participant settled a lawsuit with the other driver involved in the accident and received a tort settlement of $1.5 million. The settlement specified that the payment was for "general damages" and did not include "special damages" that would duplicate other types of payments. The relevant plan terms allowed the plan's insurer to be reimbursed for benefits paid to a participant from general damages that the participant recovered from a third party (see Standard Clause, SPD Language, Subrogation and Reimbursement). Relying on this plan language, the insurer placed a lien on the participant's third-party settlement.
The participant sued the insurer in state court, seeking a determination that the insurer's lien was invalid because two Hawaii laws prohibited the insurer from seeking reimbursement for general damages (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): Anti-Subrogation Laws). The insurer removed the case to federal court, arguing that the claim was ERISA-preempted.
After concluding that the participant's claim belonged in federal court, the district court – applying a conflict preemption analysis – concluded that ERISA did not preempt the Hawaii laws (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): Conflict Preemption Analysis). The court ordered additional proceedings concerning the lien's validity and amount, but the participant and health insurer stipulated that if the Hawaii laws provided the relevant rule of decision, then the insurer had no valid lien claim. The insurer timely appealed the district court's ruling.
Outcome
The Ninth Circuit affirmed the district court on appeal, in a decision that included both complete and conflict preemption analyses under ERISA (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): Complete Preemption Analysis). The Ninth Circuit held that the Hawaii laws were:
- Completely preempted for purposes of jurisdiction, and therefore removal was proper.
- Not conflict-preempted.
Under a Complete Preemption Analysis, Removal to Federal Court Was Proper
On the issue of removal, the Ninth Circuit held that ERISA completely preempted the participant's claims, for purposes of jurisdiction, and therefore the district court had federal jurisdiction over the action. In doing so, the Ninth Circuit applied the Supreme Court's two-part complete preemption test, as articulated in Davila, and concluded that:
- The participant could have brought his claims under ERISA because they concerned his right to keep benefits he received under the plan (the first part of Davila's test).
- The legal duties implicated by the insurer's actions arose solely from ERISA (the second part of Davila's test).
In reaching these conclusions, the Ninth Circuit joined three other circuits in holding that a plan's right to reimbursement is properly characterized as an ERISA claim. Regarding the second part of Davila's test, the Ninth Circuit reasoned that any legal duty the plan owed the participant depended on the amount owed and paid under the plan. This undercut the participant's argument that the Hawaii laws provided an independent legal duty.
Under Conflict Preemption Analysis, Hawaii Laws Were Saved from Preemption
The Ninth Circuit next addressed whether ERISA expressly preempted the Hawaii laws. ERISA preempts any state law that may "relate to" a benefit plan, but includes an exception for state insurance laws. Under the Supreme Court's Miller test, a state law regulates insurance for this purpose if it:
- Is specifically directed toward entities engaged in insurance.
- Substantially affects the risk pooling arrangement between an insurer and insured.
Because the Hawaii laws clearly related to benefit plans, the Ninth Circuit addressed whether the saving clause exception applied. The court concluded that the laws were saved from preemption because the laws:
- When read together, were directed at the insurance industry.
- Substantially affected risk pooling because they impacted amounts participants ultimately received by prohibiting insurers from seeking certain types of reimbursement.
Hawaii Laws Provided the Relevant Rule of Decision
Regarding the converted ERISA Section 502(a) claims, the Ninth Circuit held that the Hawaii laws provided the relevant rule of decision for the claims (see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502). The court reasoned that the laws did not "impermissibly expand the scope of liability" under ERISA Section 502(a). Instead, they defined the scope of benefits available under the plan.
Accordingly, the Hawaii laws:
- Were saved from preemption under the savings clause exception to ERISA's general preemption rule.
- Did not impermissibly expand the remedies available under ERISA, meaning they were not invalid under a complete preemption analysis.
- Provided the relevant rule of decision for the participant's claims.
Practical Impact: ERISA Preemption in the Federal Courts
Although the federal courts have been deciding ERISA preemption claims for decades, this case illustrates the complexity – and unpredictability – of litigating an ERISA preemption dispute in the health plan subrogation/reimbursement space. In Levine, for example, one of the cases cited with favor by the Ninth Circuit, the Third Circuit similarly concluded that a plan's right to reimbursement was properly characterized as an ERISA claim (402 F.3d 156 (3d Cir. 2005)). In contrast to the Ninth Circuit's conclusion, however, the Third Circuit in Levine further held that ERISA preempted the New Jersey anti-subrogation statutes at issue, meaning that the claims at issue in that case should have been dismissed.
The same day that the Ninth Circuit decided Rudel, the Fifth Circuit resolved a dispute in another ERISA preemption context: state laws governing assignments of benefits (Dialysis Newco, Inc., v. Cmty. Health Sys. Grp. Health Plan, (5th Cir. Sept. 11, 2019); see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): Assignment of Benefit Laws). In Dialysis Newco, the Fifth Circuit held that ERISA preempted a Tennessee law purporting to invalidate anti-assignment clauses in ERISA benefit plans, reasoning that the law impacted a central matter of plan administration.