HMO’s and their Lien Rights
An HMO’s Lien Rights May be Affected by ERISA, Medi-Care, and Other Laws
It is the authors’ experience that most of their clients have health care paid by an employee benefit plan which has contracted with an HMO or other health care service plan to provide health care or by Medi-Care. If the relationship is created by an employee benefit plan, the rights and obligations of the plan fiduciary, and those who claim rights reserved to the plan fiduciaries and the beneficiary of the plan are established and regulated by the provisions of ERISA. For a discussion of how ERISA may affect those rights and obligations, the reader is referred to the article written by Jonathan E. Gertler entitled “Understanding ERISA Liens in the Wake of Great-West Life and Westaff” which was published in the March, 2003 edition of the FORUM. A discussion of those issues exceeds the scope of this article.
There are also HMOs which are implementation of the Medi-Cal and Medi-Care programs. A discussion of the rights secured for these health care providers under federal law, and how those rights conflict with contractual rights, is beyond the reach of this article.
The HMO/Health Care Service Plan has the right to a lien, the amount of the lien is established by Civil Code Section 3040.
In 2000, the California Legislature enacted what became California Civil Code Section 3040. This act addresses the inequities which might arise from a contractual lien asserted by a health care insurer when there is a conflict between a recovery by the injured person and a reimbursement by the insurer or other payor who has already received payment of a policy premium as consideration for its payment for services. [See, for example, Samura v. Kaiser (1993) 17 Cal.App.4th 1284, 22 Cal.Rptr.2d 20, in which the Court discusses, in part, the Court’s recognition of the enforceability of plan language reserving for Kaiser the “first” position in being paid its recovery “regardless of whether the total amount of the recovery of the Member (or his or her estate, parent or legal guardian) on account of the injury or illness is less than the actual loss suffered by the Member (or his or her estate, parent or legal guardian)” (Id. at 1298.), in contrast with the usual rule of law under which the right of subrogation does not arise until the injured person is “made whole” (Sapiano v. Williamsburg Nat. Ins. Co. (1994) 28 Cal.App.4th 533, 33 Cal.Rptr.2d 659), and also discusses the unwritten “policy” by which Kaiser might allow a “common fund” type reduction in its recovery.] The act establishes an algorithm for the calculation of the right of a health insurer, health care service plan, or a health care provider who claims a right of payment because of the contractual rights retained to the health insurer or heath care service plan in its plan documents. This act created some balance in the resolution of the conflict between the injured plaintiff and the entity which paid for that plaintiff’s health care made necessary by his injuries.
A. The Amount of the Reimbursement Secured by the Lien
The amount of the lien, before reduction or the imposition of a cap, which can be asserted by a health insurance company, health care service plan, or by a health care provider whose lien rights are created by its contract with those payors, depends on whether the payments under the plan are “capitated” or “noncapitated”, and whether the services which were provided were “in contract” or “out of contract”. Before we discuss how these statuses affect repayment rights secured by a statutory lien under this scheme, an exploration of the terms is in order.
The historical payment by insurance to health care provider is a “fee for service” payment: the doctor performs a surgery, she is paid a fee for that surgery; a hospital performs an MRI on a patient, and it is paid a fee for that service. One of the empirical cost reducing factors of a HMO or other health care service plan is based upon a monthly or other periodic fee paid to a care provider (whether an individual or medical group or other contracting group of providers) based on the number of “heads” whose care that provider is servicing for the plan. It is left to the care provider to “share the risk” of the ultimate cost of providing care for the enrollees of the plan. When its enrollee population is heathier than was anticipated in setting the capitation rate, the care provider makes a profit. However, if the risk was a bad one, and the cost of providing care (either directly or through other providers) exceeds the capitation fee, the care provider must make up the shortfall in this equation. In the Knox-Keene Act, providers who are not health care service plans and are paid a capitated fee are said to be “risk bearing”.
Some providers are “in contract”: that is, they are bound by the same or similar contract payment (cost saving) terms and have agreed to accept the payment from the payor (alone or with some deductible or co-pay) as payment in full. These providers are often identified by the term “preferred provider”. Payment to these preferred providers might be capitated payments, or they might be fee for service payments. Other health care providers have not created the “preferred provider” or other such relationship with the payor. The payment to these providers are usually not accepted by the provider as payment in full. The payment to these providers is often larger than the payment to a “preferred provider”.
With the vocabulary worked out, let’s look at the terms of Section 3040(a) and (b).
In subsection (a), the amount of the reimbursement secured by the lien for care is the amount paid to “fee for service” providers by insurance companies or health care service plans, or “the amount equal to 80 percent of the usual and customary charge for the same services by medical providers that provide health care services on a noncaptiated basis in the geographic region in which the services were rendered” by capitated providers. [Sounds like a great recipe for litigation – or negotiation.]
In subsection (b), when an “in contract” provider is capitated, and must turn around and pay a “fee for service” provider for some or all of the care [for example, if the auto accident occurs in Sacramento and the preferred provider is in Santa Ana, the emergency room and hospitalization in Sacrament will usually be “out of contract” on a fee for service basis] then that “risk bearing” provider has the right to recover the sum of the amounts established under subsection (a): the fees it paid to the fee for service provider for care given to its enrollee, plus its own “80 percent of the usual and customary charge” for its own services.
B. Reductions in the Amount Reimburseable by the Lien
The best news in Section 3040 is that the Legislature has adopted in statute (subsection (f)) the previously “judicially adopted” “common fund” doctrine, by which all people who have an interest in the fund of money generated through the expense incurred by only one (or a limited number) of the owners of the fund must share, pro-rata, in the expense of generating the fund. In other words, if an insurance company or HMO or a health care provider who is seeking reimbursement because of an assignment of a right from an insurance company or HMO, is going to be paid from the judgment, compromise, or settlement, that claimant must reduce its recovery by its share of the attorney’s fees and case costs. For example, Kaiser Foundation Health Plan had a policy of “offering a reduction” to its claim for reimbursement, but that policy was not clearly defined nor binding on Kaiser. (See Samura v. Kaiser Foundation Health Plan, Inc., supra.) With the adoption of Section 3040, any insurance and health care service plan and the contracting provider who seeks reimbursement is required to reduce its claim by its share of fees and costs.
In addition, subsection (e) provides that if the injured person is found to be partially at fault in “a special finding by a judge, jury, or arbitrator”, then the lien is reduced by the injured person’s comparative fault percentage.
C. A Cap on the Reimbursement Secured by the Lien
Similar to the cap on the reimbursement recoverable by the Director of the Department of Health Services under Welfare & Institutions Code Section 14124.72, and hospitals under the Hospital Lien Act at Civil Code §3045.1, et seq., the Legislature imposed a cap on the amount which is payable from the claimant/patient’s recovery to health insurance company or health care service plan or contracting health care provider. That cap is set as a percentage of “any final judgment, compromise, or settlement agreement” as follows:
- If the claimant/patient hired an attorney to prosecute his claim, one-third of the moneys recovered (Civil Code Section 3040(c)(2); or
- If the claimant/patient did not hire an attorney, one-half of the recovery (Civil Code Section 3040(d)(2).
D. A Sample Calculation
Bring to mind the all-too-frequent unfortunate case, in which a seriously injured client has been involved in an automobile accident caused by a minimally insured driver. Your client has incurred $50,000.00 in medical bills with a hospital and physicans, all of whom have been paid by your client’s Kaiser Plan (not an employee benefit, to avoid that argument). How much does your client have to pay Kaiser out of his $15,000 recovery? Yup, $5,000.00.
Let’s up the ante to coverage limits of $100,000.00. Your attorney’s fees are 40%; your client incurred $10,000 in costs for the case. Your client’s Aetna health insurance (not an employee benefit) paid $10,000.00, in keeping with its contracts with your client’s health care providers, to pay this debt in full. What will your client need to pay Aetna on its lien? It paid $10,000 “to perfect its lien” (see Section 3040(a)(1)), so that it where you start your calculation. Now, you would subtract $4,000.00 (fees) and $1,000.00 (pro-rata portion of costs $10,000/$100,000). This leaves $5,000.00 owing to Aetna, which is less than one-third of the recovery, so your client would owe Aetna $5,000.00.
Now, think about the same case, but your client was found by the judge, jury, or arbitrator to be 20% at fault. That finding would reduce Aetna’s payment from the recovery another $1,000, to $4,000.
Just like so many other of the issues which are being discussed in articles in this month’s Forum, the final word on the nature and extent of the right of an HMO to enforce a claim of lien is yet to be written. It is important that all practitioners who represent claimant/plaintiffs in personal injury claims keep up to date with the developing law in this area. The money you save is your client’s, and will be more meaningful to and have more of an impact on them than a moderately larger recovery.