Health Insurance Subrogation and Ohio's Make-Whole Rule

Published November 11, 2014 · Injury Law Basics

The settlement check arrives, and so does a letter from your health insurance company. It paid $38,000 in hospital and therapy bills after your crash, and it wants that money back out of your recovery. Clients are often stunned. They paid premiums for years; why does the insurer get a cut of money meant to compensate their pain and lost wages? The answer is a doctrine called subrogation, and how it is handled can change what you actually take home by tens of thousands of dollars.

What subrogation is

Subrogation is a legal mechanism by which someone who pays a loss steps into the shoes of the person they paid and pursues the party responsible. When your health plan pays your crash-related medical bills, it acquires a right to be reimbursed from whatever you recover from the at-fault driver. Most health plans spell this out in the policy or plan document, and many require you to sign a reimbursement agreement before they will pay bills from an injury caused by someone else.

The same concept appears elsewhere in an injury case. The Bureau of Workers' Compensation has a statutory lien on a work-injury recovery, which we discussed in our post on the BWC lien. Your own auto insurer may claim reimbursement of MedPay benefits. Medicare and Medicaid have their own federal and state recovery rights. Each of these is a claim against your settlement, and together they are usually the largest deduction from a recovery after the attorney fee.

The make-whole rule

Ohio courts have long recognized an equitable limit on subrogation known as the "make-whole" doctrine. The idea is fair and simple: an insurer that paid part of your loss should not be reimbursed until you have been fully compensated for all of your loss. If the at-fault driver carried only $25,000 in coverage and your damages are $200,000, you have not been made whole, and the equitable rule says the insurer's reimbursement claim must wait, which in practice means it goes unpaid.

The Ohio Supreme Court confirmed in Northern Buckeye Edn. Council Group Health Benefits Plan v. Lawson, 103 Ohio St.3d 188 (2004), that the make-whole doctrine applies by default whenever a subrogation or reimbursement contract does not say otherwise. In that case a child was seriously injured in an auto crash, the family recovered $100,000 from the at-fault driver and $150,000 from its own underinsured motorist coverage, and the health plan demanded reimbursement of the $85,945.37 it had paid. The family argued the child had not been made whole by $250,000.

The catch: a clear contract overrides the rule

The family lost. The Court held that a health plan and an insured may agree, before benefits are paid, that the plan will be reimbursed from any recovery regardless of whether the insured is fully compensated, and that such an agreement is enforceable. It adopted a two-part test: the make-whole doctrine is avoided only if the plan language clearly establishes both that the plan has a right to be reimbursed from a full or partial recovery and that the plan's claim has priority over the insured's right to keep the money until made whole. The plan in Lawson had required the mother to sign an agreement promising reimbursement "irrespective of whether" the settlement compensated her for all of the child's damages, and the Court enforced it.

The decision is a reminder that the make-whole rule is a default, not a guarantee. Many health plans, after Lawson, rewrote their documents with exactly the priority language the Court described. Whether your plan did so is a question that can be answered only by reading the plan.

Self-funded plans, Medicare, and Medicaid play by federal rules

A second layer complicates things. Many large employers do not buy insurance; they pay employee health claims from their own funds and hire an insurance company only to administer the plan. These "self-funded" plans are governed by a federal law, ERISA, which generally preempts state insurance law. Federal courts, including the Sixth Circuit that covers Ohio, have applied a make-whole default to ERISA plans as well, but again only where the plan language does not clearly claim priority, and most self-funded plans now do. Medicare and Medicaid have statutory recovery rights with their own procedures, deadlines, and reduction formulas.

The practical result is that two clients with identical injuries and identical settlements can keep very different amounts depending on who paid their medical bills and what the plan document says.

Why using your health insurance still makes sense

Given all this, clients sometimes ask whether they should avoid using health insurance after a crash so there is no lien. The answer is almost always no, for reasons we discussed in our post on the collateral-source rule and billed versus paid medical expenses.

• Health insurers pay negotiated rates. A $38,000 hospital bill may be satisfied for $14,000, and the lien is for what the plan paid, not what was billed.
• Unpaid bills go to collections and damage your credit while the claim is pending, which can take years.
• Providers who are not paid may assert their own claims against the settlement, often for the full billed amount, which is worse than a plan lien.
• Treating consistently, without worrying about cost, produces the medical record that proves your injury.

Negotiating the lien is part of the job

Every lien is negotiable to some degree, and reducing it is one of the most valuable things an injury lawyer does. The arguments include the make-whole doctrine where the plan language allows it, the plan's share of the attorney fee and costs it took to produce the recovery, disputes over whether particular charges were related to the crash, and the simple reality that a plan recovers nothing if the case is not settled. On a modest settlement, the difference between a lien paid in full and a lien reduced by half can be the difference between a client who nets something meaningful and one who nets almost nothing.

We walk clients through this math before any settlement is accepted, alongside the attorney fee we described in our post on how contingency fees work, so there are no surprises when the check arrives.

What this means for you

If you were seriously hurt and your health insurance is paying the bills, three steps protect you. Keep every explanation of benefits and every letter from the plan or its recovery contractor. Do not sign a reimbursement agreement or respond to a lien letter without having a lawyer read the plan language first, because that language decides whether the make-whole rule protects you. And do not settle any part of the claim, including a quick property-damage or MedPay payment, until the liens have been identified and addressed, because a settlement that ignores a lien can leave you personally liable for it.

Insurance companies on both sides of a crash claim know these rules well. Learn more about how we handle the medical-bill and lien side of a personal injury case.