The subject of pre-emption under the Employee Retirement Income Security Act is challenging, as illustrated by multiple Supreme Court rulings that have attempted to address pre-emption issues. The general rule is that any state law which relates to employee benefit plans is pre-empted if the law conflicts with the administration of an ERISA claim.
However, laws that regulate insurance (and banking and securities) are “saved” from pre-emption unless such laws supplement or supplant ERISA causes of action or remedies. Nonetheless, self-funded plans are not deemed to be impacted by state laws regulating insurance.
A recent appellate ruling, Rudel v. Hawaii Management Alliance Association, 2019 WL 4283633 (9th Cir., Sept. 11, 2019), illustrates these issues. There, the court addressed whether two Hawaii anti-subrogation statutes are pre-empted by ERISA.
The case involved serious injuries sustained by Randy Rudel as the result of negligence by a third-party. Rudel’s medical insurer, HMAA, paid $400,000 for treatment of his injuries and sought to recoup those payments out of his tort injury settlement, which he received without any itemization of the specific elements of damages for which he recouped payment.
Two Hawaii statutes — Hawaii Revised Statutes (“HRS”) Sections 431:13-103(a)(10) and 663-10 — prohibit insurance providers from seeking reimbursement out of general damages paid as a result of a third-party settlement, although special damages can be recovered if a court determines the validity of the insurer’s lien.
One of the statutes, Haw. Rev. Stat. Section 431:13-103, which is found in the insurance code, addresses unfair methods of competition and unfair or deceptive acts or practices in the business of insurance, which include restricting benefits where an insured “may have a third-party claim for recovery of damages.”
The other provision, Section 663-10(a), places limits on reimbursement permitted under such circumstances and permits a valid lien for reimbursement but only in relation to “special damages recovered by the judgment or settlement.”
Since Rudel’s tort settlement did not specify what portion of the settlement was attributable to medical expenses, he challenged HMAA’s right to reimbursement. HMAA countered by alleging the Hawaii statutes were pre-empted by ERISA. The U.S. District Court disagreed and found the Hawaii statutes were saved from pre-emption. Further, the court of appeals affirmed.
The court framed the issues as requiring it to first determine its jurisdiction, then to decide whether the Hawaii statutes were saved from pre-emption, and if so, whether those statutes provide the rule of decision to decide HMAA’s right to recoup the medical expenses.
Examining the underlying action, the court first asked whether Rudel could have brought his claim under ERISA Section 502(a) and found he could because “in substance, Rudel’s claim was one to recover benefits or to clarify his rights to benefits pursuant to the plan. See 29 U.S.C. Section1132(a)(1)(B).”
In sum, Rudel did not receive reimbursement for his medical treatment free of liens. He was suing to adjudicate whether HMAA possessed a valid lien. Thus, the federal court had subject-matter jurisdiction.
Next, the court focused on whether the Hawaii statutes were saved from pre-emption. The ERISA saving clause asks a court to determine whether the statute in question “(1) is specifically directed toward entities engaged in insurance; and (2) substantially affect[s] the risk pooling arrangement between the insurer and the insured. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, Plan No. 625, 856 F.3d 686, 693 (9th Cir. 2017) (quoting Kentucky Association of Health Plans Inc. v. Miller, 538 U.S. 329, 342, 123 S.Ct. 1471, 155 L.Ed.2d 468 (2003)) (internal quotations omitted).
The court answered those questions in the affirmative. While the call was easy with respect to the Hawaii statute Section 431:13-103 since it was contained in the Hawaii Insurance Code, the other statute, Section 663-10, is a general statute for determination of civil remedies.
The court thus asked “whether Section 663-10 and Section 431:13-103 should be read together as laws that regulate insurance or whether they are completely independent statutory provisions.”
The court found that the insurance statute explicitly cross-referenced Section 663-10. Moreover, the legislative history of Section 663-10 shows it was specifically directed toward health insurers.
Hence, the court found the two statutes had to be read together. Accordingly, the laws fell within the first requirement that they needed to be specifically directed toward entities engaged in insurance.
The court also determined the laws in question affected risk pooling, the other criterion for applicability of the savings clause. The court explained, “A state statute substantially affects the risk pooling arrangement between the insurer and the insured when it impacts the terms by which insurance providers must pay plan members.”
In other words, the law must affect insurance practices rather than just insurance companies. Because the Hawaii laws impacted whether health insurers could recoup payments, it increased the risk faced by insurers, such as HMAA.
The final issue to be resolved, since the two Hawaii statutes were saved from pre-emption, was whether those laws supply the rule of decision to resolve the underlying claim. The court found it did because the laws did not supplement or supplant the existing ERISA remedies enumerated in 29 U.S.C. Section 1132(a).
Instead, those laws “merely provide the analytical framework by which the court is to” determine what, if any, recovery HMAA is permitted out of the personal-injury settlement.
The court framed the issues well and logically progressed through an analysis of the savings clause consistent with the Supreme Court’s jurisprudence.
Although the insurer’s lien would have been preserved had a portion of the settlement been denominated as reimbursement for medical “special damages,” that did not occur and the health insurer was left without a means of enforcing its claimed lien to recoup the money it had paid.
Rudel is a fascinating decision that is extremely helpful in understanding ERISA pre-emption.