Why Your Health Insurance Company (and Even Medicare or Medi-Cal) Must be Repaid Out of Your Lawsuit Recovery

Our clients, who are all personal injury victims (also known as “plaintiffs” when a lawsuit is filed to recover fair compensation for their injuries), are always surprised to learn that they will be required to repay the money that their health insurance company, Medicare or Medi-Cal paid for their medical treatment out of the money recovered for them in the lawsuit. This feeling of frustration is felt because the client has paid premiums to their health insurance company or contributed to Medicare through employment contributions for years or even decades. Now, when the client actually needs to take advantage of those paid-for benefits, the insurance carrier or government comes back with an open hand demanding repayment. It doesn’t seem fair.

The basis for the health insurance company’s ability to recover the money spent for the member’s medical treatment is right in the language of the policy itself. Not surprisingly, most of us do not read the policy language from cover to cover, so this contractual right the insurance company protects for itself—called “subrogation”—is a surprise. The subrogation provision within the policy simply states that the health insurer is entitled to be paid back for any medical expenses paid from the third party wrongdoer’s insurance company when the lawsuit is settled or a judgment is entered after a trial.

Reimbursement to the Medicare or Medi-Cal governmental programs from a Plaintiff’s recovery is authorized not by contractual language but instead by Federal and State statutes (laws). Those laws mandate that the governmental entity (Federal or State) has a “super lien” which takes priority over any other and must be repaid if a recovery is obtained in a lawsuit seeking damages for the injury that required medical care which was paid for by Medicare or Medi-Cal.

Our clients understandably feel it is unfair to be forced to pay back the benefits they have earned through their premiums or contributions to Medicare. After all, if the medical treatment was paid for and no lawsuit was pursued, the heath insurer or Medicare/Medi-Cal would never have expected or gotten a penny back. It seems to be a windfall for the health insurance company or government to get money back just because we have successfully fought hard to obtain a recovery in a lawsuit. On the other hand, the insurance company or Medicare/Medi-Cal argues that it would be a windfall to our client, or any plaintiff, who brings a lawsuit to be paid money for the medical bills when it was the health insurance company or governmental program that actually paid the bills that are now being reimbursed by the responsible defendant’s insurance company.

The small bit of good news is that in most situations the health insurer, and even the governmental programs administering Medicare or Medi-Cal, will agree to reduce the lien they assert on our client’s recovery based upon a rule of law known as the “Common Fund Doctrine”. The Common Fund Doctrine was established by the United States Supreme Court in 1881, and was based on a recognition that a litigant or lawyer who recovers a “common fund” for the benefit of persons other than himself or his client is entitled to take reasonable attorneys fees from the fund. Trustees v. Greenough (1881) 105 U.S. 527, 533.

As applied to the repayment or reimbursement of medical expenses paid by a health insurance company, our client and our law firm have created the “common fund” and, as a result, we are entitled to charge the health insurance company our attorneys fees and a pro-rata share of our costs which were expended in order to allow for the recovery of that common fund. By way of example, if our client has been severely inured and his or her health insurer paid $250,000 in medical expenses, the health insurer would be entitled to assert its contractual “lien” on our client’s recovery for the amount paid. Let’s also assume that we were able to obtain a $1,000,000 settlement or judgment after trial for our client, and our attorney’s fees percentage is 40% and the costs expended on behalf of the client to maximize the recovery total $25,000. The Common Fund Doctrine would be applied to reduce the $250,000 health insurance company lien on our client’s recovery. The health insurance company would be required to reduce its $250,000 lien claim by $100,000 which is 40% of its full $250,000 lien, as well as a pro-rata share of the costs incurred in the lawsuit. The health insurance company’s lien is 25% of the total recovery ($1,000,000 total recovery compared to $250,000 lien claim); as a result, the health insurance company would also be required to reduce its lien claim by an additional $6,250 (25% of the $25,000 costs). As a result, under the example above, although the health insurance company would claim an entitlement to the $250,000 it expended for our client’s medical care, it would be entitled to no more than $143,750. While this would be the maximum recovery the health insurance company would be entitled to pursuant to the Common Fund Doctrine, often times we are successful in negotiating with health insurance companies in advance of any settlement or trial judgment to convince them to accept a sum even smaller than what they might ultimately be entitled to.

In dealing with governmental programs and the statutory basis for their rights to reimbursement of money expended, the negotiations are often more time-consuming when dealing with governmental bureaucracies, and also more difficult to negotiate. The Health Care Financing Administration (HCFA) of the Department of Health and Human Services has promulgated Federal rules with respect to the recovery of sums paid on behalf of injured parties (42 CFR §411.37). Although the rules set forth in that statute would require a similar analysis with respect to the reduction of the Medicare lien amount, in reality Medicare routinely agrees to only a 25% reduction of the lien claim along with a pro-rata share of costs expended by the plaintiff’s law firm. As a result, under the examples set forth above ($250,000 Medicare lien claim, 40% attorneys fees and $25,000 of costs incurred and a $1,000,000 settlement or judgment), Medicare would routinely agree to accept $181,250 ($250,000 lien minus $68,750 equaling 25% reduction for attorney fees plus 25% of the $25,000 costs incurred). California administrators of the Medi-Cal programs generally follow the recovery analysis set forth in the Federal Medicare Statutes, although the Medi-Cal recovery is promulgated in Welfare & Institutions Code §§14124.73 and 14124.74. While governmental entities are routinely less reasonable than health insurance companies when it comes to lien reimbursement negotiations, our law firm will tirelessly attempt to negotiate with Medicare and Medi-Cal to obtain more generous and fair lien reductions on behalf of our clients.

Although our clients fully understand and expect to pay a fair attorney’s fee for the services provided to obtain their settlement or trial judgment, and also expect to reimburse our law firm for the costs which we advance in order to maximize their recovery, our clients are almost always unaware of their obligation to repay their health insurance company or the government programs which have paid their medical bills. Understanding these reimbursement or subrogation obligations is important for our clients to understand, so that they can have a more accurate and complete picture of the obligations which will effect their potential recovery.