This is a story about a threat to your clients of which you may not be aware, but that you can do something about. It starts with a woman named Deborah Shank who stocked shelves at a Missouri Wal-Mart. She was seriously injured in an automobile accident, was permanently disabled, and now lives in a nursing home. Her employer, which has garnered much criticism over its employment practices, appeared to stoop to a new low in November 2007 when it became public knowledge that the retail giant had sued Shank to recover the money it had paid out for her medical bills.
Shank was one of the "lucky" Wal-Mart employees in that she did have medical insurance, and indeed the policy paid out close to a half million dollars in medical bills. But when Shank's husband negotiated a settlement from the employer of the truck driver who hit her minivan broadside, Wal-Mart sought to recover that money in a process becoming increasingly more common: subrogation. The court stood with Wal-Mart, and Shank has lost every penny of the settlement that was meant to pay for her long-term care, even though the money was placed in a special needs trust. The settlement money, instead of being set aside for Shank's ongoing healthcare needs and legal fees, has gone to Wal-Mart instead.
When contacted about the Shank case, Wal-Mart Corporate Communications Director Daphne Moore wrote that the company was "sorry for any additional stress this has put on the Shank family," and that "Our current plan doesn't give us much flexibility, so we began reviewing the guidelines for the trust that pays medical costs for our associates and their family members." Moreover, Moore wrote that Wal-Mart has "decided to modify our plan to allow us more discretion for individual cases," said the company was "in the final stages of working out the details," and pledged it "will not seek any reimbursement for the money already spent on Ms. Shank's care, and we will work with the family to ensure the remaining amounts in the trust can be used for her ongoing care."
It Can't Happen Here
What is Ms. Moore talking about? Despite feeling bad for Shank, why should you care since, after all, your clients don't work for Wal-Mart? It might not matter. Subrogation is written into many health carriers' policies, and employees of many companies are not made aware of the terms in any meaningful way (other than in the fine print). Add to that the fact that many people don't bother to explore the more arcane terms of their medical coverage unless or until there is a problem, and you might have clients with disasters waiting to happen.
Even the victims of the Interstate 35W bridge collapse in Minnesota may be subject to recovery of any settlements, and lawmakers there are working to ensure that any money the victims receive will stay with them and not be subject to reimbursing their insurance companies.
What is subrogation? It is the practice of recovery by an insurance company of money paid out on behalf of someone who subsequently receives an award or settlement. According to attorney and planner Howard Roitman, of Howard Roitman and Associates in Las Vegas, the phenomenon is "certainly not isolated to Wal-Mart." In fact, he says, generally most employers, particularly large ones, operate their insurance plans as self-funded, with an administrator or with an insurance company to administer benefits. While these are considered ERISA plans, Roitman says that there is some dispute about whether they are or not ("Were the documents properly reviewed, did they do it right, did they fund it right? Just because you put a dollar of employer money into it, does it become ERISA?"). However, Roitman adds that in the plans' documentation "they all, or generally all, say that if you get recovery, we acquire a lien on any prospective recovery."
While their ability to recover is limited to actual recoveries, rather than funds such as an inheritance or other unrelated income--"there's a concept that you can't subrogate against your insured"--there is also a conflict between state and federal laws concerning whether insurers can lodge a claim against a third-party reimbursement. "There's always, always controversy on that subject whenever someone gets a recovery," Roitman says, "and it's gone to the U.S. Supreme Court on the ability of ERISA plans to recover." In Nevada, where he practices, he explains that the state law prevents insurers from recovering unless the insured is made whole; however, ERISA plans contend that federal law trumps state laws.
Federal law allows plans to be reimbursed for what they have paid out, depending on how they are structured; state laws vary, but some states in addition to Nevada allow reimbursement only after the individual has been compensated for her loss. With rising insurance costs, and with many companies self-insuring and then hiring an insurance company to handle administration, subrogation is becoming more common, particularly considering the amount of money involved in medical care these days.
Subrogation began as a way to keep beneficiaries from being paid twice for the same services. For instance, if both members of a couple worked and each carried the other on their health insurance plans, it was possible for each to file a claim on the same doctor visit or hospital stay and be paid by both insurance companies.
Now, however, not only are more companies seeking to recover money, but insurers may refuse to pay unless the ill or injured party provides information about how the illness or injury occurred--setting the stage for recovery before the patient is out of the hospital.
How It Can Happen
Andrew Tignanelli, an advisor and president of The Financial Consulate, Inc. in Lutherville, Maryland, lays out the following scenario: Your client is driving down the road when he's hit by another car and seriously injured. Not only has the accident totaled your client's car, but he's flown to a shock trauma treatment center and then spends over a year in rehabilitation. When he comes out, he not only bears numerous scars but also has lost various abilities. And he wants to recover what he's lost.
Calculating the total can add up to serious money. Hefty medical bills of perhaps half a million dollars have brought him back this far, although he still has a way to go. When your client was driving down the road, he was a successful businessman. Now he's a shell of his former self, having lost more than a year's income and his business to boot. At $200,000 a year in income and a business worth substantially more, and perhaps a marriage that suffered along with your client, the total is rising. When you add pain and suffering into the mix, the total gets even higher.
Once that total is reached, the lawyers negotiate--assuming that the person who hit your client was insured. (If he wasn't, your client may only get what his own auto insurer will pay.) Perhaps an agreement is made to settle for $1 million, based on insurance, assets available, etc. That is when you find out that your client's medical insurance has an "absolute right to subrogate against someone who causes medical damage to you that requires them to pay out medical payments to you." If any part of that settlement is for medical expenses, the insurer can take it away again.
Where Advisors Come In
According to Tignanelli, an advisor can help in a situation like this in two ways. First, she can help the client to understand what the settlement will be, and second, perhaps she can help negotiate the settlement, working with the attorney to get the best possible outcome. "Maybe getting [the case] settled is not in the best interests of the client," he adds, pointing out that structured settlements can work more in favor of the client than a lump sum.
Referring to the Wal-Mart case, Tignanelli speculates that a good plaintiff's attorney would bring up the point that Wal-Mart's medical insurance has a $400,000 lien against the settlement, and "it has to be considered that if we settle this client for only $600,000, Wal-Mart has the possibility to take $400,000 off the table." In such a case, he says, ideally the plaintiff's attorney and the defense attorney would have to go to Wal-Mart and ask if the company is willing to settle for a lesser sum. If the company's attorneys say yes, that affects the overall total of the settlement and the way it has to be structured.
Roitman says that, according to the common fund doctrine, whatever you pay your lawyer to get reimbursement from a third party, the plan has to bear its own cost of getting the recovery. He adds, however, that "Now all the ERISA plans have language in them that says, 'We don't agree to the common fund doctrine.'" In practice, he says, "you can usually call them up and make a deal. Unless you're a real jerk, they'll knock some off [their recovery] because you got the money."
If your client was covered by a non-ERISA plan, says Roitman, and the insurer tries to recover money, your client can bring a bad faith case against a badly behaved insurer. He adds that this applies not just to health insurance but also "very deeply" to collision insurance and medical payments coverage under a collision policy.
Show Me the Money
Advisors, says Tignanelli, have a responsibility to understand how settlements work, and how to advise clients as they work through settlements. The Wal-Mart case, he adds, is the perfect example of how a structured settlement could have helped. Most advisors, he explains, "have a bias in wanting the client to take a lump sum," since they will get to invest the money. If clients take a structured settlement, he points out, the advisor won't get anything, but "most of the time" it's in the client's best interests to take a structured settlement. "Wal-Mart would have walked away if they were going to tie up a million dollars in a structured settlement."
So what is a structured settlement? It's an agreement by the insurance company and the plaintiff to a payout over a period of time as opposed to a lump sum payment. It's usually funded, says Tignanelli, with a hybrid of an annuity; "it can be pretty much structured to do anything you want it to"--such as getting a client a monthly income, perhaps with an inflation factor. It can occasionally be done with a lump sum as well, he says. The insurance company will calculate the lump sum it wants to present to generate the agreed-upon stream of income.
"If you think about it, what a financial advisor should be doing when someone's in a severe litigation for money designed to help care for that person for the rest of their life," he explains, is to help with that settlement so that it meets the client's needs. To that end, he says that advisors need to understand how to take a lump sum, how to do a structured settlement, and how to do a special needs trust so that the person is still eligible for medical assistance from the government as well as having money in trust.
The plaintiff's attorney, he suggests, has a responsibility to get an advisor who advises the client honestly on how a structured settlement or other sophisticated techniques work. Medicare, Medicaid, and worker's compensation "will lien against settlements," he warns. They "have a legal right to put their hands out" and it is the plaintiff's attorney's responsibility to be sure the settlement is large enough to allow this.
I'm Calling My Lawyer
There's another factor to consider, says Roitman. You should make sure your client has a lawyer who understands lien law, and you should make sure you understand it as well. He adds a particular caution, beyond protecting your client: "Do you have an obligation to call Wal-Mart up and tell them [if a settlement has been reached]? You certainly do for Medicaid and Medicare. It is so case-specific--it depends."
He recommends going through all documentation, becoming thoroughly familiar with it, and then "get everybody's phone number and call them and act tough." In a case with a large settlement, if you or an attorney has won money for your client, and then the insurer comes along wanting that money, you should be firm. As he says, "'Why should we even try to recover if you're going to get it all?' I've had that situation a lot and it's complicated. You have to be a good negotiator and beat people down."
Rick Shapiro, of Investment & Financial Counselors in West Hartford, Connecticut, goes a step further, suggesting that planners should contact lawmakers and educate their clients to do so. "People have to know about this," he says. Unless the law is changed, money meant for future care for the sick and injured will instead go to make insurance companies whole instead of the injured parties.
Getting Around the Situation
Shapiro further suggests, as do Tignanelli and Roitman, to insure against such a situation by, literally, insuring. Roitman suggests uninsured motorist coverage, or UIM, "preferably some kind of umbrella policy that runs $2 million to $5 million; the key being that much UIM coverage, not just liability coverage." He also suggests taking the maximum amount of medical payments coverage available from auto insurance, and getting supplemental health insurance coverage.
Shapiro further says that clients should carry both disability and long-term care insurance, which will go a long way toward mitigating such a situation. Tignanelli concurs on the disability insurance, agreeing with Shapiro that clients should review employer policies and consider taking out their own disability insurance, paid for with their own money. He further points out that group disability insurance is often reduced by other income, such as Social Security or unemployment coverage.
A private policy won't do that unless that's the option the insured selects.
The final word on protection, of course, is your client's. It's up to you to educate him and make sure he understands the risks and the high cost of ignorance.
Marlene Y. Satter, a freelance business writer based in New Jersey, can be reached at firstname.lastname@example.org.