A federal employee who was injured in a car accident and subsequently received a settlement payment from the other driver’s insurer was required to reimburse her health insurance plan for benefits it had paid in connection with her injuries, the U.S. Court of Appeals for the Tenth Circuit ruled, affirming the Kansas federal court. Contrary to the employee’s assertion, a state regulation prohibiting insurance contracts from containing a subrogation/reimbursement clause was displaced by federal common law and preempted by the Federal Employees Health Benefits Act of 1959 (FEHBA) (Helfrich v. Blue Cross and Blue Shield Association, October 29, 2015, Hartz, H.).

Background. Lee Ann Helfrich was a federal employee enrolled in a health insurance plan provided by Blue Cross and Blue Shield Association pursuant to a contract with the U.S. Office of Personnel Management (OPM) under FEHBA. The plan was administered locally by Blue Cross and Blue Shield of Kansas City.

Helfrich was seriously injured in an automobile accident and received $76,561.88 in benefits from the Blue Cross plan. Helfrich also settled with the other driver’s insurer for the policy limit of $100,000. Blue Cross then sought reimbursement from Helfrich for the benefits it had paid under the plan, which contained a subrogation provision authorizing the carrier to:

recover directly from the [enrollee] all amounts received by the [enrollee] by suit, settlement, or otherwise from any third party or its insurer … for benefits which have also been paid under [the] contract.

Helfrich asserted that this provision was unenforceable because a Kansas regulation prohibits subrogation and reimbursement clauses in insurance contracts. The regulation states that:

[n]o insurance company or health insurer … may issue any contract or certificate of insurance in Kansas containing a subrogation clause, or any other policy provision having a purpose or effect similar to that of a subrogation clause, applicable to coverages providing for reimbursement of medical, surgical, hospital, or funeral expenses.

Federal common law. The appeals court found that the Kansas anti-subrogation regulation was displaced by federal common law in this case. In the court’s view, the contract between Blue Cross and OPM and the provision of affordable quality healthcare to government employees were both matters of uniquely federal interest. Moreover, the plan’s reimbursement provision served important purposes that were undermined by anti-subrogation laws. For example, for experience-rated carriers such as Blue Cross, the money recovered through subrogation or reimbursement is used either to reduce premiums (paid largely by the government) or to increase coverage. According to the court, the conflict between the state regulation and the federal contractual requirement that Blue Cross pursue the reimbursement claim against Helfrich was a stark one.

There is also a strong federal interest in uniformity that would be undermined by allowing state law to override the subrogation and reimbursement requirements of the federal contract. Recognition of state anti-subrogation laws would create unfairness, as government employees in states without those laws would have to pay reimbursements that are then used to benefit enrollees throughout the country, even those who live in states where enrollees are allowed to keep their tort recoveries without paying reimbursements.

Further, in its contract with OPM, Blue Cross acted only as a service agent between the federal government and its employees, and the relationship between the government and its employees is generally immune from state interference. To allow state law to override a provision in the contract at issue would permit interference with federal functions. According to the court, it would make little sense to allow the government to enforce a reimbursement requirement when it administers the plan itself but not when it contracts out the administration.

Express preemption. Blue Cross also asserted that FEHBA’s preemption provision (5 U.S.C. §8902(m)(1)) was a ground for overriding the Kansas anti-subrogation regulation. The provision states:

The terms of any contract under this chapter which relate to the nature, provision, or extent of coverage or benefits (including payments with respect to benefits) shall supersede and preempt any State or local law, or any regulation issued thereunder, which relates to health insurance or plans.

The court found that the subrogation and reimbursement requirements in the Blue Cross plan were tied directly to “payments with respect to benefits.” A carrier’s contractual right to reimbursement and subrogation arises from its payment of benefits; and an enrollee’s ultimate entitlement to benefit payments is conditioned upon providing reimbursement from any later recovery. Several circuit courts have interpreted an ERISA provision authorizing civil actions to “recover benefits due … under the terms of [a] plan” as encompassing suits disputing a plan’s reimbursement efforts.

The plan’s reimbursement and subrogation provisions had another close connection to benefits: any recovery through those provisions goes to a Treasury fund that may be used to reduce premiums or to increase benefits. In addition, the legislative history of §8902(m)(1) reveals a concern about state interference with cost-cutting measures and the uniform treatment of federal employees across the nation.

Other federal courts have held that FEHBA preempts state laws limiting subrogation and reimbursement. Supporting those decisions is a recent regulation issued by OPM, which administers FEHBA. The regulation requires all contracts to impose the subrogation and reimbursement requirements as a “condition of and a limitation on the nature of benefits or benefit payments and on the provision of benefits under the plan’s coverage.” The regulation also describes the scope of the requirements and concludes that they “relate to the nature, provision, and extent of coverage or benefits (including payments with respect to benefits) within the meaning of 5 U.S.C. §8902(m)(1).”

OPM’s proposed rule explained that this interpretation of §8902(m)(1): (1) furthers Congress’s goal of reducing healthcare costs because subrogation and reimbursement recoveries tend to lead to lower premiums, most of which are paid by the federal government; (2) advances the federal interest in national uniformity in benefits and administration in order to avoid uncertainty, litigation, and disparate treatment of enrollees; and (3) is consistent with OPM’s understanding that a carrier’s right to subrogation and reimbursement recovery is “a condition of the payments that enrollees are eligible to receive for benefits.”

Given OPM’s deep knowledge of the impact and interrelationships of the provisions in FEHBA contracts, its view that subrogation and reimbursement provisions are directly tied to employee health benefits and advance the congressional purposes served by §8902(m)(1) persuaded the court in the instant case to agree with its conclusion regarding preemption. Accordingly, the court held that the reimbursement provision in the plan at issue “relate[s] to the nature, provision, or extent of coverage or benefits” and, as such, supersedes state law.

The case is No. 14-3179.

Attorneys: F. Paul Bland, Jr. (Public Justice, P.C.) for Lee Ann Helfrich. Adam P. Feinberg (Miller Chevalier) for Blue Cross and Blue Shield of Kansas City and Blue Cross and Blue Shield Association.

Companies: Blue Cross and Blue Shield of Kansas City; Blue Cross and Blue Shield Association