Sammons & Parker

Insurance Defense

Legal Update

June 1995

Volume I, Number 2

SUBROGATION IN PERSONAL INJURY CLAIMS

by Clay M. White

A. WHAT IS SUBROGATION?

Black's Law Dictionary defines subrogation as "the right of one who has paid an obligation which another should have paid to be indemnified by the other." Subrogation is really a right to reimbursement, and as simple as the concept may sound, in many cases there are grave consequences should you fail to subrogate upon the payment or receipt of personal injury dollars whether you are aware of the subrogated interest or not.

B. A CASE ILLUSTRATION

A woman was injured in a car accident when struck by a taxicab while in the course and scope of her employment and the other driver's insurer will not pay. Assume that the woman's employer's workers' compensation carrier pays for her medical care and other statutory benefits in the amount of $27,000.00 during the time she is incapacitated by her injuries. Now assume, however, that the cab driver's insurance either decides to settle the woman's claim, or she sues and obtains a judgment against the cab driver. Under these facts, the workers' compensation carrier is subrogated to the rights of the injured employee to collect that money which it has already paid on behalf of her injuries and as a result of the defendant taxicab driver's negligence. Meaning, the insurance company is entitled to reimbursement of its $27,000.00 (the workers' compensation lien). Although the right to subrogation will apply in various circumstances, for purposes of our fact scenario, we will first examine subrogation in a workers' compensation setting.

1. The Workers' Compensation Lien

Like the woman in our scenario, if a claimant covered by workers' compensation insurance seeks compensation from the carrier, the workers' compensation carrier is subrogated to the injured workers' recovery against any third party defendant (the cab driver in our case) for the amount of its payments. If there is third party liability for injuries for which the insurance company has either paid compensation, or assumed responsibility for the payment of compensation, a workers' compensation carrier has a number of options. It can:

• (a) bring suit against the responsible third party itself (in the name of the employee or the employee's beneficiaries), and if it receives a settlement or judgment in excess of its lien, then it may reimburse itself first and pay for the costs of bringing the action; any excess is paid to the injured employee. TEX. REV. CIV. STAT. ANN. art. 8307, § 6a(a) (repealed 1989; effective January 1, 1991 Art. 8308 - 4.05(b) (repealed, 1993; nonsubstantive revisions effective September 1, 1993 adopting TEX. LABOR CODE ANN. § 417.001)(Vernon's).

• (b) intervene in any third party action that the employee or the employee's beneficiaries have already filed, or

• (c) do nothing.

Because carrier intervention is viewed by the courts as merely a matter of judicial economy, it doesn't matter whether or not the carrier actually intervenes in the third party suit. Subrogation is a statutory right that is not waived by an insurance company's failure to intervene. Traveler Insurance Co. v. Seidel, 705 S.W.2d 278, 280-281 (Tex. App. - San Antonio 1986, writ dism'd). However, because the workers' compensation carrier faces the same statute of limitations as the injured worker, if the worker does not file his or her third party suit within 2 years after the date the cause of action accrues (TEX. CIV. PRAC. & REM. CODE § 16.003), then the carrier must file suit on behalf of the injured worker to protect its interests. See Guillot v. Hix, 838 S.W.2d 230, 235 (Tex. 1992).

On the other hand, if the employee does bring a timely action against the negligent third party, the carrier's statute of limitations is tolled and it may then intervene at any time. Guillot, 838 S.W.2d at 235; but see FED. R. CIV. P. 24(a) (intervention must be timely). If the workers' compensation carrier intervenes in a third party action, it is reimbursed from the claimant's net recovery. That is, the carrier is paid only after the claimant takes care of his or her own costs and attorneys' fees. TEX. REV. CIV. STAT. ANN. art. 8307 §6a(a) (now TEX. LABOR CODE ANN. §417.001).

2. Second (Subsequent) Injury Fund

In those instances where an injured employee receives compensation through the second injury, or subsequent injury fund, the employee and third party must still subrogate the compensating party. In this instance, the party supplying the compensation would be the Workers' Compensation Commission, through the second or subsequent injury fund. For those benefits paid by the fund, the commission is entitled to subrogation reimbursement the same way and in the same manner as an insurance carrier. TEX. REV. CIV. STAT. ANN. art. 8307, Section 6a(d) (now TEX. LABOR CODE ANN. §417.001, et seq.).

3. Future Credit

In addition to reimbursement for what it paid for in the past, a carrier is furthermore entitled to a credit for any excess net recovery received by an injured employee as an offset or advance against future compensation payments. TEX. REV. CIV. STAT. ANN. art. 8307, §6a(c) (now TEX. LABOR CODE ANN. § 417.001, et seq.). Using our scenario again, and assuming that the injured worker settles her "third party suit" against the cab driver for $70,000.00, we know that the carrier will receive its $27,000.00 for past paid benefits and medical expenses from the worker's net recovery (after she pays court costs and her attorneys' fees). If her court costs and attorneys' fees amounted to $23,000.00, the injured worker would be left with a net recovery of $47,000.00 from the third party.

• 	$70,000.00		judgment
  	$23,000.00		court costs and attorneys' fees
  	$47,000.00		injured workers' net recovery

The carrier would therefore be entitled to its $27,000.00 from the worker's net recovery of $47,000.00, leaving the injured worker now with $20,000.00.

• 	$47,000.00		worker's net recovery
  	$27,000.00		workers' compensation lien
  	$20,000.00		"excess" net recovery

Let's also assume, though, that she will require future medical care as a result of her injuries. Because the worker received $20,000.00 in excess of costs, attorneys' fees, and the workers' compensation lien, that excess is treated as an advance against future payments for medical care. This means that if the injured employee's excess net recovery is enough to cover the future medical expenses in our example, then the carrier is not required to make any further payments. The injured worker is thus responsible for all future medical payments in the amount of the excess recovery. The carrier's obligation to pay for reasonable and necessary medical expenses resumes only when our claimant's future medical costs exceed $20,000.00, when the "advance" runs out. TEX. REV. CIV. STAT. ANN. art. 8307, § 6a(c) (now TEX. LABOR CODE ANN. §417.001, et seq.).

As you might imagine, the injured employee must use the advance only for benefits payments and medical expenses; expenditures for other purposes, such as a new house, a swimming pool, or van, will not exhaust the advance for purposes of resuming further carrier liability. Estate of Padilla v. Charter Oaks, 843 S.W.2d 196, 199-201 (Tex. App. - Dallas 1992, writ denied).

4. What the Comp Lien Doesn't Attach To

Although a workers' compensation insurance carrier's right to subrogation is statutory, there are certain instances where its right does not apply:

• A workers' compensation carrier who has paid benefits to an employee injured in an automobile accident may not subrogate itself to the employee's claims for uninsured motorists benefits. Bogart v. Twin City Fire Insurance Co., 473 F.2d 619 (5th Cir. 1973).

• A workers' compensation carrier is not entitled to receive any pre-judgment interest recovered via a third party action. Moseley v. State Department of Highways and Public Transportation, 748 S.W.2d 226, 226-227 (Tex. 1988); Jones v. Liberty Mutual Insurance Co., 745 S.W.2d 901, 903 (Tex. 1988).

Because subrogation is derivative, the insurance company will lose its right to subrogation if the injured employee on his or her own could not maintain a cause of action. For instance:

• An insurance company's subrogation claim will fail if the employee, in a claim against a governmental entity, failed to comply with notice requirements. City of Houston v. Twin City Fire Insurance, 578 S.W.2d 806, 808 (Tex. Civ. App. - Houston [1st Dist.] 1979, writ ref'd n.re).

• Where an injured employee has released his or her claim against a third party, the insurance company has no right to subrogation. Mendiola v. United States, 401 F.2d 695, 698 (5th Cir. 1968); but see Warnecke v. Argonaut Insurance Co., 407 S.W.2d 834, 838-839 (Tex. Civ. App. - El Paso 1966, writ ref's n.r.e.) (a claimant's release of a third party tortfeasor is also a bar to any compensation proceedings based upon the same matter).

• Because a workers' compensation carrier's claim for subrogation accrues at the same time the injured employee's cause of action against a third party accrues, (Guillot, 838 S.W.2d at 234-235), where an injured employee's claim against a third party is barred by an expired lapse of the applicable statute of limitations, the insurance company has no right to subrogation. Carter v. Van Meter, 495 S.W.2d 583, 587 (Tex. Civ. App. - Dallas 1973, writ dism'd).

5. Recovery of Attorneys' Fees

a. No Carrier Attorney Involvement

When the injured worker files a third party action through an attorney of his or her choice, and the carrier has not intervened with its own active representation, the claimant's attorney is entitled to charge the carrier a fee for recovering its subrogated interest. The amount of the attorneys' fee on the recovered amount may be agreed to between the attorney and the carrier, or may be ordered by the court in an amount not to exceed 1/3 of the subrogation recovery. In the absence of an agreement, the court will award the claimant's attorney a reasonable attorneys' fee and the proportionate share of costs, up to 1/3 of the carrier's subrogated recovery. TEX. REV. CIV. STAT. ANN. art. 8307, § 6a(a) (now TEX. LABOR CODE ANN. § 417.003).

Where the claimant's attorney agrees to represent the carrier for its subrogated interest for the payment of attorneys' fees, the attorney must make a written disclosure with acknowledgement by the claimant before actual employment of the attorney by the carrier. This signed disclosure must be sent to all parties, filed with the Texas Workers' Compensation Commission and with the claimant's pleadings. TEX. REV. CIV. STAT. ANN. art. 8307, § 6a(a) (now TEX. LABOR CODE ANN. § 417.003). Do not confuse an attorney's agreement to represent the carrier for attorneys' fees with attorneys' fees ordered by the court. Where attorneys' fees are recovered by court order, the attorney is not required to make a full disclosure and obtain the client's approval (because there are no conflicting interests). International Insurance Co. v. Burnett & Adhers, 601 S.W.2d 199, 201 (Tex. Civ. App. - El Paso 1980, writ ref'd n.r.e.)

b. Carrier's Interest Represented by Attorney

In those cases where the carrier has intervened, and its attorney actively participates in the third party action, the court will then apportion the attorneys' fee between the two attorneys. In no event, though, can the aggregate fee exceed 1/3 of the carrier's subrogated interest. TEX. REV. CIV. STAT. ANN. art. 8307, Section 6a(b) (now TEX. LABOR CODE ANN. § 417.003). The carrier's attorney is not entitled to attorney's fees for merely filing an intervention, though; he or she must take some meaningful action toward prosecuting the claim and actively participate in obtaining a recovery. Hartford Insurance Co. v. Branton & Mendelsohn, Inc., 670 S.W.2d 699, 702 (Tex. App. - San Antonio 1984, no writ) (it is not an abuse of discretion to award all of the attorneys' fees to the claimant's attorney when the carrier fails to actively participate in the recovery).

c. Fees on Death Benefits

Death benefits are weekly payments divided among the deceased worker's beneficiaries in the total amount of 66 2/3 % [before 1/1/91] or 75% [after 1/1/91] of the deceased workers' average weekly wage. They are payable to the beneficiary spouse for life or until his or her remarriage (in which case he or she is entitled to a lump sum of 104 weeks of death benefits), and are payable to children of the deceased worker until they reach the age of 18 (or 25 if enrolled in an accredited educational institution, and beyond if otherwise dependent). Other legal beneficiaries are entitled to benefits for a period of 360 weeks [before 1/1/91] or 364 weeks [after 1/1/91]. TEX. REV. CIV. STAT. ANN. art. 8306 § 8 (now TEX LABOR CODE ANN. § 408.181 et seq.).

A third party judgment will release the carrier's liability for payment of future death benefits, which can be substantial. Such a release constitutes a subrogation recovery and obligates the carrier to pay the claimant's attorneys' fees based upon the past and present value of the death benefits that the carrier has been relieved of paying. Illinois National Insurance Co. v. Perez, 794 S.W.2d 373, 377 (Tex. App. - Corpus Christi 1990, writ denied).

d. Recovery of Fees

If the carrier refuses to pay the claimant's attorney his or her fees on the subrogated amount recovered, the attorney may file a separate lawsuit against the carrier for the breach of an implied contract. TEX. CIV. PRAC. & REM. CODE ANN. § 38.001 (Vernon's 1994); Law Offices of Moore & Associates v. Aetna Insurance Co., 902 F.2d 418, 420-422 (5th Cir. 1990).

• NOTE: The Workers' Compensation Act does not provide for the attorney's recovery of out-of-pocket expenses. Aetna Casualty & Surety Co. v. Harjo, 766 S.W.2d 583, 584 (Tex. App. - Beaumont 1989, no writ).

e. Waiver of Attorney's Fees

If the attorney has entered into an agreement with the carrier, whereby he or she represents both the injured worker and the carrier, but fails to comply with the full disclosure requirements of the Act, (see 5(a), above), the attorney is not entitled to recover attorneys' fees on the subrogated amount. See TEX. REV. CIV. STAT. ANN. art. 8307, § 6a(a) (now TEX. LABOR CODE ANN. § 417.003).

An attorney may also waive a right to fees if he or she has knowledge of a carrier's lien, receives monies from a third party lawsuit, but fails to pay the carrier, forcing the carrier to file suit to recover its subrogated interest. TEX. REV. CIV. STAT. ANN. art 8307, § 6a(a) (now TEX. LABOR CODE ANN. § 417.001, et seq.); Prewitt and Sampson v. City of Dallas, 713 S.W.2d 720, 723 (Tex. App. - Dallas 1986, writ ref'd n.r.e.).

6. Liability for Failure to Satisfy the Comp. Lien

The paying defendant (the third party tortfeasor) and the claimant are jointly and severally liable to the subrogated insurance company for the entire subrogation claim. The subrogated carrier will get either (a) the entire payment the third party defendant actually made to the injured employee, or (b) the amount of the carrier's lien, whichever is less. Capitol Aggregates, Inc. v. Great American Insurance Co., 408 S.W.2d 922, 924 (Tex. 1966); TEX. REV. CIV. STAT. ANN. art 8307, § 6a(c) (now TEX. LABOR CODE ANN. § 417.001, et seq.).

The carrier is entitled to the full amount it had paid (or whatever amount the injured employee actually receives from the third party if less than 100% of the lien), whether or not the employee is found to be comparatively at fault in the third party action. Tolar v. Caterpillar Tractor Co., 793 F2d 654, 656 (5th Cir. 1986). The bottom line is, the subrogated insurance carrier can recover the amount of its lien from the injured employee or the negligent third party. See, e.g., Travelers Insurance Co. v. Seidel, 705 S.W.2d 278, 281 (Tex. App. - San Antonio 1986, writ dism'd) (even though the attorney hired by the carrier was cognizant of the settlement and approved the judgment, a settlement between the estate of the deceased worker and the third party tortfeasor reached without the consent of the employer's insurance carrier, which had paid death benefits to the representative, was unlawful, thereby rendering the tortfeasor and his insurer liable to the carrier for the sum paid in settlement to the representative).

B. HOSPITAL LIENS (STATUTORY)

"Doctor's Liens," there is no such animal in Texas (they are recognized in other states; Oklahoma, for example [Oklahoma Statutes, Title 42, Section 46]). When a patient seeks a doctor's care, the patient impliedly agrees to reimburse the doctor for his or her services. The rendering of those services creates an implied obligation, but the implied contract does not carry the statutory authority of the hospital lien in the state of Texas.

The hospital lien statute, TEX. PROP. CODE ANN. § 55.001, et seq. was created in order to span the gap between the needs of accident victims who may not be financially able to pay for the costs of medical care and the needs of increasingly financially strapped hospitals that are forbidden to deny emergency medical care on the basis of a patient's ability to pay. The intent of the statute was to ensure "that an accident victim will receive aid and that the hospital will be reimbursed for its services, thus reducing hospital costs." Baylor University Medical Center v. Borders, 581 S.W.2d 731, 733 (Tex. Civ. App. - Dallas 1979, writ ref'd n.r.e.).

1. Criteria for an Application of the Hospital Lien

• The Hospital Lien Statute applies to all hospitals, both public and private;

• a. It places a lien on all rights of action: suits, claims, counterclaims or demands, including judgments or settlements, of any person admitted and treated at a hospital because of the negligence of others. § 55.003;

• b. It attaches only where an accident victim is admitted into the hospital within 72 hours of the alleged negligence of another, and extends to both the admitting hospital as well as a hospital to which the injured person is transferred for treatment of the same injury. § 55.002(a), (b);

• c. While the patient remains liable for the entire hospital bill, the lien attaches only to the first 100 days of treatment, whether those days are continuous or not, and whether or not the treatment involves subsequent admissions to the same hospital as long as the original admission was within the 72 hour period. Baylor University Medical Center v. Travelers Insurance Co., 587 S.W.2d 501, 506 (Tex. Civ. App. - Dallas 1979, writ ref's n.r.e.);

• d. It covers all reasonable and regular charges, § 55.004, requiring "only a showing that a patient's charges to not exceed the comparable rates for the same services to other patients in the same hospital." Baylor University Medical Center v. Travelers Insurance Co., 587 S.W.2d at 506 (testimony by a hospital administrator and physician as to experience with hospital rates was sufficient to allow them to testify that the hospital rates were reasonable and regular; qualifications to give opinions as to what constitutes a reasonable and regular hospital rates is not limited to witnesses with medical training);

• e. While there is no requirement that the hospital prove the negligence of the injury-causing party, the hospital does have a burden to prove that its charge was not more than the reasonable and regular rate for services billed. Without such proof, the hospital does not establish its alleged cause of action on a hospital lien. Dallas County Hospital District v. Perrin, 694 S.W.2d 257, 260 (Tex. App. - Dallas 1985, writ ref'd n.r.e.).

• f. The Hospital Lien is limited to proceeds from personal injury claims, including product liability actions, and although Texas law has held that he lien will not attach to wrongful death actions (see below), it expressly applies to survival actions because the survival cause of action is based upon the personal injuries that were suffered by the decedent as a result of another's negligence. See TEX. CIV. PRAC. & REM. CODE ANN. § 71.021 (Vernon 1986). In this regard, the hospital may even apply for temporary administration of the estate of the deceased for the limited purpose of bringing an action against the negligent party under the Texas Survival Statute to recover for the decedent's estate in order to pay off debts, including the hospital lien.

2. What the Hospital Lien Does Not Attach To

The statute expressly forbids a lien's attachment to the following:

• Claims under the Texas Workers' Compensation Act, the Federal Employees Liability Act; the Federal Longshoremens' of Harbor Worker's Compensation Act, and claims against railroad companies who own the hospital in which the injured person is treated, § 55.003(b);

• Claims against the injured worker's own insurance policy proceeds, such as uninsured/underinsured motorists' coverage and PIP. §55.003; Members Mutual Insurance Co. v. Hermann Hospital, 664 S.W.2d 325, 28 (Tex. 1984) (uninsured/underinsured motorists benefits are not subject to statutory hospital lien).

• PRACTICE POINTER: Do not simply assume that the lien will not apply to uninsured/underinsured motorists' benefits and PIP payments because a hospital can still collect on those monies if it obtains an irrevocable assignment of insurance benefits from the patient, which some hospitals are now doing, in advance.

• Although the Hospital Lien attaches to survival actions (see above), it does not attach to proceeds from a wrongful death action. The Lien applies to personal injuries; because a wrongful death action is an action to recover those benefits the surviving family members would have received had the decedent not been killed, and is not for personal injuries, the hospital lien does not attach. Tarrant County Hospital District v. Jones, 664 S.W.2d 191, 195 (Tex. App. - Fort Worth 1984, no writ) (hospital liens attach only in cases where recovery for personal injury is sought; they do not attach to judgments or awards for wrongful death);

• Hospital liens do not attach for the costs of treatment of medical problems that are unrelated to the accident which is attributed to the negligence of another person. See Republic Insurance Co. v. Shotwell, 407 S.W.2d 864, 866-867 (Tex. Civ. App. - Amarillo 1966, writ ref'd n.r.e.) (insurance proceeds paid in collision were subject to hospital lien for treatment of those injuries sustained in the collision, not for treatment of medical problems unrelated to the collision).

Lastly, the lienholding hospital may not recover pre-judgment interest on the amount of its hospital lien, and, where it intervenes in a suit in order to recover its lien, it may not recover attorneys' fees, either. Hermann Hospital v. Vardeman, 775 S.W.2d 866, 867-868 (Tex. App. - Houston [1st Dist.] 1989, no writ).

3. How and Where the Lien is Filed

Although hospitals will often mail the injured person and his attorney notice of its lien, all the hospital need do is file written notice with the county clerk of the county where the injury occurred. The lien must be filed prior to the payment of proceeds as compensation for the injury and include the following information: (a) the name and address of the injured person; (b) the date of the accident; (c) the name and location of the hospital making the lien, and, if known, and (d) the name of the person alleged to be liable for the injuries. § 55.005.

The lien is discharged only when the hospital files a notice of release (a certificate by the hospital authorities) with the county clerk in the county where the injury occurred and the clerk records the memorandum of the certificate and its date of filing. § 55.006.

In addition, the statute provides that any release of a cause of action where a hospital lien is on file is not valid unless either (a) the hospital is a party to the release, or (b) the hospital charges were paid in full before the release, or, if not paid in full, the hospital receives the amount that the injured person was paid. § 55.007.

Unlike a workers' compensation carrier, whose cause of action accrues when the injured employee's cause of action accrues, (see above, Guillot v. Hix, 838 S.W.2d 230, 234-235 (Tex. 1992), a hospital's statute of limitations begins to run only when proceeds are actually paid by the negligent person responsible for the treated injuries, not when the hospital actually performs its services and the patient becomes obligated to pay the bill. Baylor University Medical Center v. Borders, 581 S.W.2d 731, 732-733 (Tex. Civ. App. - Dallas 1979, writ ref'd n.r.e.).

• PRACTICE POINTER: Always check the county property records in the county where the injury occurred to make sure that no lien is on file before you disburse any proceeds. The county clerks are required to index the information in the name of the injured person. Remember, in order to perfect its lien, the hospital must have filed its lien with the county before the money is paid to the injured person (and the attorneys).

4. Liability for Failure to Satisfy the Hospital Lien

If a hospital has properly filed its lien but the parties settle without paying the lien, a hospital has a cause of action against the injured person, or any person who pays or receives funds in derogation of the lien. Borders, 581 S.W.2d at 732-733 (emphasis added). Because attorneys receive a portion of the proceeds from their client's recovery, they can be sued by the lienholder for failing to resolve a hospital lien and may be liable - along with their client and the paying party - for the full amount of that lien. Should you clients be sued by the hospital for failing to pay the lien, you may find the Sheriff knocking on your door to serve you with notice of a lawsuit.

5. Attorneys' Fees Not Allowed

The lawyer for the injured party in a claim in which a hospital lien has been filed, should not expect to recover attorney's fees on the amount of the hospital lien. In 1985 the Texas Supreme Court decided Bashara v. Baptist Memorial Hospital System, 685 S.W.2d 307 (Tex. 1985) and held that "the language and intent of the [hospital lien] statute militate strongly against permitting recovery of a patients' attorney's fees from the corpus of the hospital lien." Bashara at 309. The attorney in that case further argued for a recoupment of his fees on a theory of quantum meruit. His argument failed. The Court considered that although the hospital had benefitted from the efforts of the injured party's attorney, the attorney did not undertake his efforts for the benefit of the hospital; the hospital's benefit was merely incidental to what the attorney would do for his client anyway. Bashara at 310.

C. MEDICARE LIENS

1. Medicare's Superior Lien

Federal law mandates a lien on behalf of Medicare over personal injury settlements and judgments for medical payments made on behalf of injured claimants. (Medicare is separate from Medicaid which is administered by the state). Under the law, Medicare subrogation is granted a superior lien to any other interest on settlement of judgment proceeds.

• TRAP: The Medicare lien does not require written or actual notice. If it paid, it has a superior lien, despite your, or the Plaintiff's lack of knowledge that Medicare made any payments. 42 U.S.C.A. § 1395(y)(b) (1992); 42 C.F.R. § § 411.20, 411.23, 411,24, 411.26.

2. How Do You Know if Medicare Has a Lien?

Medicare covers only certain individuals; if the injured person falls within any of the covered classes of individuals, then you can formulate your investigation accordingly to discover whether or not Medicare has a lien.

Medicare provides protection against the costs of medical bills, inpatient hospital care, extended care, home health care, and hospice care to the following groups of individuals:

• (a) persons 65 or older who are eligible for Social Security retirement benefits, some types of government employment, and railroad retirement systems;

• (b) persons under the age of 65 who have been entitled to at least 24 months of Social Security benefits (such as children and surviving spouses), or, again, those who are entitled to benefits under certain forms of government employment or railroad systems on the basis of disability; and

• (c) those individuals that do not specifically fall within the first two categories, but who are determined to have end-stage renal disease. 42. U.S.C. § 1395 (c) (1988).

If the injured person falls within any of the listed categories and has received medical treatment for personal injuries suffered as a result of another's negligence, chances are, Medicare has paid all or part of the injured person's medical bills.

3. Reimbursement Required Within 60 Days of Settlement

If Medicare pays the medical expenses for an injured claimant, that payment is subject to Medicare's superior lien. If the injured claimant (the beneficiary of the Medicare payments) receives a payment from a third party, the claimant "or other party" must reimburse Medicare within 60 days. 42 C.F.R. § 411.24(h).

a. Trap for the Claimant's Attorney

Federal regulations require that Medicare be notified of any settlement or judgment. 42 C.F.R. § 411.25. If you fail to notify Medicare (through the Health Care Financing Administration [HCFA], the agency that administers Medicare) of any forthcoming settlement or judgment, claimant's attorneys' fee can be attached in satisfaction of the lien in that Medicare is subrogated to any individual, provider, supplier, physician, insurer, state agency, or attorney who receives payment by a third-party payer or liability insurer. 42 C.F.R. § 411.26. The regulation's application to "any...insurer" also means that Medicare, unlike some other subrogated entities (workers' compensation, hospitals and private insurers, for example), is entitled to recoup what it paid from the injured person's own personal insurance - including personal injury protection payments (PIP) and uninsured/underinsured payments.

b. Trap for Those Paying on Behalf of the Negligent Third Party

An insurance company or other paying party may be subject to double liability if it does not ensure that a Medicare lien is paid because if Medicare is not reimbursed, it can collect not only from the injured claimant and his or her attorney, but may also collect from the third-party payor:

• ...If Medicare is not reimbursed as required by paragraph h of this section, the third-party payer must reimburse Medicare even though it has already reimbursed the beneficiary or other party.

41 C.F.R. § 411.24(l). This section applies when the third party payor is, or should be, aware that Medicare has made a conditional primary payment. 42 C.F.R. § 411.24(l)(2). The HCFA, the administration that oversees Medicare, is allowed a statutory private cause of action against any insurer liable to Medicare that refuses or fails to reimburse Medicare for expenses it has paid. This section further allows the HCFA to recover DOUBLE the disputed amount from the third-party insurer. 42 U.S.C.A. § 1935 (y)(b)(3)(A) (1992).

• PRACTICE POINTER: Make sure to read the hospital bills and records carefully; most often, the fact that Medicare is involved in the payment of charges is indicated on the face of those documents. If a "Medicare" stamp or notation appears on the face of the hospital bills, but the insurer fails to reimburse Medicare, such evidence will undoubtedly be used to prove that the insurer "should have known" of Medicare's interest.

4. Medicare's Burden in Limited Cases

Despite the seemingly over-reaching effect of Medicare's lien, it has been held to be constitutional and preempts state law. Colonial Penn Insurance Co. v. Heckler, 721 F.2d 431 (3d Cir. 1983); St. Agnes Hospital v. Jaeckel, 616 F.Supp. 426, 428 (1st Cir. 1986) (even though Wisconsin law allows a plaintiff who is not made whole from a personal injury settlement or judgment to withhold the reimbursement of liens, Medicare must be paid the entire personal injury judgment, minus reasonable attorneys' fees and costs, leaving nothing for the plaintiff). Nevertheless, although the federal regulations do not require Medicare to actually file its lien, they do provide that, where Medicare is given notice of the claim which specifically describes the situation and circumstances surrounding the claim, Medicare must initiate its claim or recovery proceeding within one year of the date of notice if the particular insurer's policy contains a claim filing requirement. 42 C.F.R. § 411.24(f)(2).

5. Attorneys' Fees Recoverable From Medicare Lien

Although Medicare's lien is superior to any other interest, including attorneys' fees, federal law specifies that Medicare is to follow what is known as the "equitable fund doctrine" which requires it to reduce its recovery to allow for the costs of recovering the settlement or judgment. 42 C.F.R. § 411.37; Insurance Co. of North America v. Norton, 716 F.2d 1112, 1115-1116 (7th Cir. 1983). This means that an attorney may recover his or her fees and costs, reducing Medicare's recovery by that amount. The only limitation on such fees and costs is that they must not exceed the prevailing standards in the area. See CCH Medicare and Medicaid Guide, ¶ 4142 at 1378. And, as with any lien, Medicare may decide to waive all or part of its recovery.

D. MEDICAID LIENS

Medicaid is medical assistance that is offered to all persons who receive financial assistance from the state of Texas (Aid to Families with Dependent Children, Welfare, and Related Services under Chapter 31 of the Texas Health and Human Resources Code), as well as to other persons if providing medical assistance to those others is required by federal law as a condition for obtaining matching funds for support of the state medical assistance program. TEX. HUM. RES. CODE ANN. § 32.024 (Vernon's 1990) (hereinafter cited only to the applicable section of the Code). A recipient of benefits under Chapter 31 of the Texas Human Resources Code, or the recipient of supplemental security income from the United States government, is automatically eligible for state medical assistance § 32.025; see also Medicaid eligibility, Children and Pregnant Women requirements, 40 TAC § 4.1002 et seq.; 40 TAC § 15.5101, et seq.

1. An Assignment of Recovery

The Texas statute regulating Medicaid subrogation, § 32.033, establishes that by filing for, or receiving, medical assistance through the State, the injured person assign his or her right to recovery from (1) their own personal insurance, (2) other sources, or, (3) another person whose negligence or wrongdoing caused the applicant or recipient's injuries. The State statute, then, like the Medicare lien, applies to PIP payments and uninsured/underinsured motorist benefits that, under other subrogation schemes, could not ordinarily be attached as satisfaction of the subrogated interest.

Insurers are required to identify each of their insureds whose names appear on a Medicaid data tape (a reference tape containing the certified names of all Medicaid recipients sent out to insurers no more than once a year) in an effort to determine whether or not the insurance company has paid, or should have paid, health benefits for a person for whom Medicaid has footed the bill. TEX. HUM. RES. CODE ANN. § 32.042 (Vernon's Supp. 1994). Such a procedure aids the state in recovering monies it has expended on medical assistance for those citizens that qualify for aid. As further control over the recoupment of its public assistance funds, Texas has written into its Insurance Code a provision that specifically requires accident and group insurance companies to pay the Texas Department of Human Services the actual costs of the medical expenses it has paid for the benefit of their insured, (the injured person), if the insured is entitled to payment for those medical expenses under his or her policy of insurance. TEX. INS. CODE ANN. § 21.49-10 (Vernon's 1981). These sections may explain insurance companies' growing insistence on mailing separate checks: one to the Claimant as settlement and fees on the cause of action, and another to the state in settlement of its subrogation interest.

As with any assignment, the State may sue those persons who have received all or part of what should have been theirs and may further sue for their attorneys' fees in bringing the suit.

2. Criminal Liability: Class C. Misdemeanor

An applicant for, or recipient of, medical assistance under the Code must inform the Texas Department of Human Services of any tort claim, potential cause of action, or any private accident or sickness insurance coverage that is or may become available within 60 days of the date the person learns of the actual or potential insurance coverage, tort claim, or potential cause of action. § 32.033(b); see also Notice Requirements, 40 TAC 28 § 101, 121, 131.

If the applicant or recipient knowingly and intentionally fails to disclose such information, he or she commits a Class C misdemeanor, punishable by a fine not to exceed $500.00 TEX. PENAL CODE ANN. § 12.23 (Vernon's Supp. 1994).

3. Attorneys' Fees on Medicaid Recoveries

The statute does not provide for the recovery of attorney's fees; however, National Heritage Insurance Company in Austin [NHIC], with whom the State has contracted to seek payment of its third party recovery, will provide for the recovery of attorneys fees as a matter of policy. NHIC will agree to pay attorneys' fees, not based on the standard contingency fee arrangement between attorneys and clients, but as follows:

• If suit is not filed, they will allow 10% of those Medicaid benefits paid as attorneys' fees, up to a maximum of $5,000.00;

• If suit is filed, but the case is not tried, they will allow 20% of those Medicaid benefits actually paid as attorneys' fees, up to a maximum of $20,000.00; and

• If suit is filed and the case is tried, they will allow 30% of those Medicaid benefits actually paid as attorneys' fees, up to a maximum of $20,000.00.

(This information pertaining to NHIC and their attorneys' fee policy is based on information from Jan Greenberg, Supervising attorney of the Office of General Counsel for the Texas Department of Health).

Other insurance companies, such as automobile insurers or health care providers, probably have a subrogated interest in the recovery in circumstances that are not covered by statute. Subrogation may arise by contract in the same way that an insurer's right to subrogation may be altered by contract. See, e.g., Foster v. Langston, 170 S.W.2d 250, 251 (Tex. Civ. App. - San Antonio 1943, no writ).

Once you become aware that an insurance policy has paid for some of the claimant's benefits, you should investigate the possibility that the policy may contain a subrogation clause. The following guidelines generally apply to other forms of subrogation that are not regulated by statute, that usually arise by contract (the terms of the insurance policy), but could be enforced in equity as well.

A. GENERAL GUIDELINES

To the extent that the insurance company's remedy is controlled by the rights and obligations possessed by the injured person, the general rule is that a release between the insured and the offending party prior to the loss destroys an insurance company's right by way of subrogation. Interstate Fire Insurance v. First Tape, Inc., 817 S.W.2d 142, 145 (Tex. App. - Houston [1st Dist.] 1991, writ denied). However, if the insured settles with or releases the third party before being paid by the insured, the insured should be relieved from liability to the extent of the payment made by the third party to the insured. Propeck v. Farmers' Mutual Insurance Association of Grayson County, 65 S.W.2d 390 (Tex. Civ. App. - Dallas 1933, no writ).

Probably the most important aspect of subrogation outside of a statute is that it is not available to an insurer when the injured person's loss exceeds the amounts recovered from the insurer and the person who caused the loss. Propeck, 65 S.W.2d 390 (Tex. Civ. App. - Dallas 1933, no writ). The injured party is entitled to subrogation. Only after the injured party is fully compensated for his or her loss (including the costs and expenses of collecting for that loss) can the subrogated insurance company recover any excess monies collected from the wrongdoer in satisfaction of its interest. Ortiz v. Great Southern Fire & Casualty Insurance Co., 597 S.W.2d 342, 344 (Tex. 1980). The right to subrogation, therefore, does not exist until the insured's loss has been fully paid.

The Wisconsin case cited below may be used as persuasive authority for the proposition that monies expended upon a minor who is not a named insured under the insurance policy may not be subject to subrogation. Wahl v. Northern Telecom, Inc., 726 F.Supp. 235 (E.D. Wis. 1980).

1. Automobile Insurance

A standard automobile insurance policy includes a clause specifically allowing the insurance company to recover all that it has paid (except for uninsured/underinsured motorist benefits and personal injury protection (PIP) payments). An insurer's right to subrogation derives from right of the insured, and is limited to those rights; there can be no subrogation where the insured has no cause of action against the defendant because subrogees stand in the shoes of the one whose rights they claim. However, an automobile policy's subrogation agreement gives the insurance company the right to sue for and recover the amount that the insured might have recovered from a person who negligently causes injury. Maryland Casualty v. Jones, 358 S.W.2d 677 (Tex. Civ. App. - 1962, no writ).

2. Health and Accident Insurers

Health care providers, such as Blue Cross/Blue Shield, often place subrogation clauses in their contracts of insurance as well. Such clauses will usually state that the insurer shall be subrogated to all rights of recovery which any insured person may acquire against any negligent person for those injuries for which benefits are provided. Like the standard auto policies, these health and accident policies will also usually contain a clause deeming the insured to have assigned his or her rights of recovery to the insurer and to have agreed to do whatever is necessary to secure the subrogated recovery. See, e.g., Group Hospital Service, Inc. v. State Farm Insurance Co., 517 S.W.2d 897 (Tex. Civ. App. - Eastland 1974, no writ)(such a provision in a group medical and hospital insurance policy is valid and enforceable and not against policy).

B. ATTORNEYS' FEES FOR SUBROGATION OUTSIDE OF A STATUTE

An insurer must pay its share of costs and expenses incurred in obtaining the recovery from the third party - including attorneys' fees. Ortiz, 597 S.W.2d 342, 344 (Tex. 1980); State Farm Mutual Automobile Insurance Co. v. Elkins, 451 S.W.2d 528, 531-532 (Tex. Civ. App. - Tyler 1970, no writ)(the subrogated insurance carrier must pay a pro rata portion of the recovering attorney's attorneys' contingent fee and expenses for obtaining the injured party's recovery from the tortfeasor).

It seems that Texas law applies to subrogation claims made under even employee welfare plan health insurance policies. Most employer-sponsored group health insurance policies include a contractual subrogation clause and are usually in a form which has been approved by the Texas Department of Insurance. Remember that ERISA's "savings clause" returns the power to enforce state laws that regulate insurance to the states (thus avoiding preemption). 29 USC § 1144(b)(2)(A).

Despite the seemingly rigid control some of the preceding subrogation schemes endorse, a claimant or plaintiff's attorney will always attempt to negotiate a lesser lien with the subrogated provider - whether it be the government (both federal and state), a hospital or a private insurer. In certain situations, even the government, either through the HCFA or the Texas State Commissioner of Health, will allow a full or partial waiver of its subrogation interests. Hospitals and insurers are often willing to accept less than the full amount of their lien in an effort to close the matter.