What is Subrogation?
Subrogation essentially allows an insurer to “stand in the shoes” of their insured to recover from a tortfeasor. The underlying theories of subrogation are equitable in nature: 1) to place responsibility for a loss on the tortfeasor and reimburse any innocent party who was compelled to pay and 2.) prevent a party from receiving a ‘double recovery’, thus being unjustly enriched.
Premise:
The equitable theory of which subrogation relies or the desire to prevent unjust enrichment is Kantian in nature, but Utilitarian by design. For example, if a store patron accepts an additional $10 bill in change - knowingly or unknowingly - he has been unjustly enriched. The patron has a duty to return the additional $10 bill to which the store owner has a right. This can be willed universally without contradiction.
Uniquely, the function of subrogation and its use by insurance policies is utilitarian by design in that it reduces (theoretically) overall costs for all of its policy holders. Although healthcare subrogation hasn’t gained notoriety until recently, the practice of subrogation has been around for centuries. Its recent expansion can be attributed to the ever-increasing costs of health care and health insurers attempt to mitigate them. By transferring these savings to policy holders (don’t hold your breath) it essentially benefits the entire insurance pool. After all, the very concept of insurance is utilitarian by nature: balancing and managing risk.
Because insurance is regulated by the states, many have implemented regulations in place to protect consumers from insurers that try to overstep the equitable bounds of subrogation. For example, some states have implemented a “Made Whole Doctrine” that essentially bars subrogation in matters where the victim has not recovered an amount equal to their economic losses. The made-whole doctrine is common law but varies from state to state.
For example, in Wisconsin, subrogation is barred completely in made whole matters. In other states, such as Indiana and Florida, there is a pro-rata system of reduction. For example, in Florida, if an injured party only recovers a portion of the value of their claim, the subrogee must accept a proportionate reduction of their interest. So if a person incurs $20,000 in medical damages and lost wages (total economic losses) and the tortfeasor only carried $10,000 in liability coverage, it could be said that the person is only able to recover 50% of the value of their claim. Therefore, any subrogee would be obligated under Florida’s “equitable distribution theory” to reduce the amount needed to satisfy their interest by the same 50% in addition to any ‘common fund doctrine’ (attorney fees). Of course, case valuations are somewhat arbitrary and open to interpretation and negotiations. I think most people would agree that this type of recovery is fair and just.
The Problem:
However, if a health benefit plan is self-funded, they can qualify for ERISA status. Although ERISA was never intended to regulate health benefits, ERISA is now most commonly associated with employer/employee self-funded health benefit plans. But I digress. The bottom line is: ERISA qualified plans are not governed by state insurance laws – including the consumer protections that come with them – thereby circumventing policy requirements and preempting any made whole doctrines or other distributive justice resolution techniques.
An increasing number of employers are opting to self fund their health benefit plan in lieu of traditional health insurance. The savings incentives and deregulatory attributes are attracting a much wider employer audience. At one time, only employers with 10,000 or more employees would consider self-funding, but today, it is not uncommon for firms as small as 200 employees to consider self-funding. The increase in health care costs has produced very creative plans utilizing various combinations of ‘consumer driven health plans’ and stop-loss protection. In 2008, approximately 17% of all health benefit plans were self-funded ERISA plans; that number has now grown to 49% in 2010.
Why We Should Subrogate Health Claims At All:
Being that some states ban health insurance subrogation in its entirety, it is apparent that the inherent value of human health is recognized by some as a sanctity that transcends equitable law. However, if health care subrogation exists, it should be subject to the equitable distribution and the common fund doctrines. I would argue that subrogation subject to this rule allows the greatest number of its members the benefits of lower premiums while not depriving the subrogee or the subrogor of their right to compensatory justice. I also contend that this practice would satisfy Kant’s first categorical imperative of being generally accepted universally. I say ‘generally’ because victims of torts who have sustained a personal injury often tend to demonstrate egoistic traits in their pursuit of justice. Many would argue that you can not assess the value of any injury or life – but sadly, yet realistically, we all know this is not the case. It’s necessary in order to award compensatory damage awards in the first place.
The problem, is that while ERISA plans may prove beneficial to employers, they often eliminate an injured party's ability to be find compensatory justice for incurred economic damages. In addition, ERISA does not require employers to provide or maintain benefit plans at any level. An employer is free to increase or decrease benefits without the consent of the employee.
An employer has no obligation to provide coverage for its employees (soon to change for larger employers thanks to Health Care Reform). However, if they choose to provide coverage they should not be able to disenfranchise those affected by chronic disease or similar cost intensive treatment. Health Care Reform has addressed some of these problems listed above, but existing plans will be ‘grandfathered in’.
In Closing:
As the trend to self-fund allows employers to circumvent consumer protections and prevent injured persons from being made whole at an exponential rate, Congress needs to implement legislation that would create a subrogation process for self-funded plans that is more in-line with the underlying theory that supports subrogation in the first place.
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