On April 16, 2013, the U.S. Supreme Court issued its opinion in U.S. Airways, Inc. v. McCutchen http://www.supremecourt.gov/opinions/12pdf/11-1285_i4dk.pdf finding in favor of U.S. Airways in its quest to recover $66,866 in medical expenses incurred by its employee as a result of a traffic accident.

McCutchen was a participant in the U.S. Airways Group Health Plan (the “Plan”). McCutchen was injured in an automobile accident and incurred $66,866 in medical expenses which were reimbursed under the Plan. He retained an attorney, sued the other driver, and recovered $110,000 from the third-party and/or its insurers.  McCutchen’s attorney extracted a $44,000 (40%) contingency fee, so McCutchen netted $66,000. U.S. Airways demanded reimbursement for the full $66,866 it paid from the Plan based on a plan provision which requires Plan participants to repay the Plan for any amounts recovered from third party payers.  McCutchen refused and U.S. Airways brought suit.

The District Court ruled in favor of U.S. Airways based upon the Plan language. However, the Third Circuit Court of Appeals vacated the award on the basis that such a recovery would be unjust enrichment in favor of the Plan sponsor. Based upon a split in the circuits, the U.S. Supreme Court granted certiorari and heard oral arguments on November 27, 2012. Justice Kagan in her majority opinion stated that health plan administrators may use ERISA Section 502(a)(3) in the courts to obtain appropriate equitable relief to enforce the terms of the Plan. Rejecting McCutchen’s claims of unjust enrichment, the Court vacated the Third Circuit decision and remanded the case. However, interpreting the recovery provision in the Plan, the Court determined that the terms were ambiguous with respect to whether recovery could be obtained against the gross amount (the $110,000 award) or the net recovery after attorneys’ fees ($66,000). As the Supreme Court had found that there was a contractual gap, it then applied the “common fund” doctrine under which attorneys’ fees are allocated between the Plan and the Plan participant so that the Plan would not benefit from the participant bearing the burden of all the attorneys’ fees as a collection agent for the employer. Accordingly, the case was remanded back to the District Court for further proceedings.

The McCutchen case means that reimbursement provisions in group health plans will be enforced by the courts on the basis of contract theory.  As a condition to enrolling in a group health plan, plan participants and beneficiaries may be required to agree that in a scenario where the medical expenses are a result of an injury caused by third parties, any recovery from those third parties must be shared with the group health plan.  The plan language could also be explicit about which party bears the cost of the attorneys’ fees. The Supreme Court’s decision implies that a plan does not have to share in the costs of the participant’s lawsuit if the plan provisions expressly state that the plan recovers first, without regard to attorneys’ fees that must be paid.

Employers will want to review their plan language in light of this decision to determine the extent to which the plan expects to be reimbursed from these types of recoveries and the extent to which the plan will pay a portion of the costs of that recovery.