Part One: The Basics
Often, the most technical cases are the most fun. When I was clerking, my co-clerks amiably mocked the fact that my first case was a contract dispute between a shopping center and its tenant (“How’s Minges Creek?” they would chide). I loved that case.
You may never have considered your view on whether the Federal Employees Health Benefits Act (FEHBA) pre-empts state laws that bar insurance carriers from seeking subrogation. However, considering this issue promises to be a good time. Cases involving abstruse, interlocking statutes or technical contractual language require judges and lawyers to puzzle through logical challenges in order to reach a coherent, satisfying solution. The difficulty of reconciling analytical inconsistencies and assimilating technical knowledge overshadows any obvious political valence. The case becomes more about making the parts fit together within the statutory parameters. Courts must provide workable conceptual principles for future cases, which will present vastly different policy issues. So it is with insurance subrogation and the Supremacy Clause.
Last week, the Supreme Court heard oral argument in one case involving federal pre-emption and insurance subrogation, and next week, the Court will decide what to do with another. Previous iterations of these two cases were vacated and remanded by the Supreme Court, in light of later promulgated federal regulations making it clear that federal law supersedes state anti-subrogation provisions. These cases raise meaty issues about federal versus state power, judicial deference to agency determinations, and statutory interpretation. More specifically, the resolution of these cases will affect the health insurance plans of all federal employees.
There is a lot to wade through in these cases, and I want to take you through all of it. In this post, I’ll explain insurance subrogation and the basic question presented by these cases.
First, subrogation is a common feature of insurance contracts. Subrogation gives insurance companies who have paid for a loss the rights of policyholders with respect to third parties, to the extent of the loss paid. The insurance company basically acquires the rights of the policyholder because it has paid for the losses of the policyholder. So, if you receive hospital care because a third party injured you, your insurance company will pay your hospital bills, and then seek reimbursement from the third party. Ultimately, money transfers from the third party who committed the wrongful act to the plaintiff, with the insurance company owing nothing.
Subrogation is an important insurance principle because it both lowers insurance premiums (the insurance company can be reimbursed for losses caused by a third party), and it prevents policyholders from recovering twice for the same injury. Preventing this double recovery reduces moral hazard – if a policyholder receives double the actual cost of a loss, he is incentivized to incur that loss, or at least not be as careful with respect to the loss.
For example, Jodie Nevils, the plaintiff in Coventry Health Care v. Nevils, was injured in an auto accident and successfully sued the driver who injured him. His insurance company then asserted a lien on this settlement, because the terms of Nevils’ insurance policy provide for this type of subrogation. Coventry Health Care sought reimbursement for the money it paid Nevils, since Nevils was also paid by the party who injured him.
But here’s the wrinkle. Nevils lives in Missouri, where common law prohibits this type of subrogation reimbursement. States limit subrogation to varying degrees, some using the rationale that policyholders, who have paid their premiums, should be entitled to their benefits regardless of double recovery, and should not have to act like collection agencies for insurance companies. Missouri would thus allow Nevils to keep his tort settlement against the third party and retain his benefits from his insurer, Coventry Health Care.
But here’s the second wrinkle. Coventry argues that Missouri anti-subrogation law is superseded by federal law and thus does not apply. Nevils, a postal worker, was a federal employee at the time of his injury. Federal health insurance is administered by the Office of Personnel Management (OPM) pursuant to the Federal Employees Health Benefits Act. Because the federal government is not its own health insurance company, and lacks the necessary expertise, OPM contracts with private insurers, many of whom, like Coventry, allow for subrogation. And, because Congress wanted federal employees to receive the same competitive insurance policies as private employees, the FEHBA includes an express provision pre-empting state regulations that might affect insurance coverage and benefits. This provision, at the heart of both subrogation cases, 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.”
Ultimately, at issue in both of the subrogation cases is whether this provision of the FEHBA pre-empts Missouri and Arizona law (and many other state laws barring subrogation). This question turns upon many sub issues. If the language of this provision clearly and unambiguously pre-empts state law (because subrogation relates to the “nature, provision, or extent of coverage or benefits”), then Coventry can exercise its subrogation rights to the money from Nevils’ settlement.
If the language of this provision is ambiguous, then the question becomes how much deference the Court should give to federal regulations interpreting the FEHBA to pre-empt state anti-subrogation doctrines. The Court must decide whether agencies receive less deference when deciding the pre-emptive force of a statute than they receive when interpreting the meaning of statutes. If the Court defers to OPM’s federal regulations, Coventry again can exercise its subrogation rights.
However, if the FEHBA is ambiguous and the federal agency’s regulations are not given weight, the Supreme Court could decide that Missouri’s anti-subrogation doctrine still applies, and Nevils can keep his double payment. Every question the Court is considering is a difficult one, with implications far beyond this case. The Court must preserve the coherence of pre-emption doctrine and satisfactorily resolve rules regarding agency deference – rules which will resound far beyond this case.
One final wrinkle. Nevils argues that the FEHBA is actually unconstitutional, because it allows private contracts to pre-empt state laws. The Constitution’s Supremacy Clause allows only federal laws, treaties, and regulations to be “the supreme law of the land.” Thus, the Court must also decide whether the FEHBA actually makes contracts pre-empt state law (this would be unconstitutional) or whether the FEHBA itself pre-empts state law and simply incorporates private contracts into the scope of its pre-emption provision. In that case, the FEHBA would be constitutional, but its ability to allow private contracts primacy over state law bothered the Justices at oral argument in Nevils.
Stay tuned for much more fulsome discussion into these thorny issues.
[Here is Part Two.}