The U.S. Supreme Court yesterday strengthened the ability of employer health insurance plans to recoup payments for medical expenses paid for an injured plan participant who later sues to recover damages from a third party.

The case is US Airways v. McCutchen, U.S. Supreme Court, No. 11-1285.

This decision helps resolve a conflict among the federal courts of appeal over whether principles of fairness, or “equity,” can trump a health plan’s terms under the Employee Retirement Income Security Act (ERISA). The decision also will allow companies to draft their contracts to ensure full reimbursement and to avoid having to pay legal fees.

FACTS.  James McCutchen was injured in a car accident. The US Airways benefit plan paid $66,866 for McCutchen’s medical expenses. The ERISA plan had a provision requiring beneficiaries to reimburse for claims “out of any monies recovered from a third party.”  McCutchen hired an attorney and received $110,000 in settlement and underinsured motorist coverage funds. After McCutchen paid his lawyer a 40 percent contingency fee, he was left with a net recovery of $66,000. US Airways sued McCutchen to recover the funds by seeking “appropriate equitable relief under ERISA section 502(a)(3).

McCutchen argued he should not reimburse the US Airways plan because: (1) he had not been made whole by the settlements. The amount he recovered from the other driver and his own auto insurance policy was only a fraction of his $1 million total damages; (2) If the company was entitled to reimbursement, it should also be required to cover its share of the attorneys’ fees. Since McCutchen had paid his attorney 40 percent of the $110,000 he recovered, US Airways should have to reduce the $66,866 it was demanding from McCutchen by 40 percent.

HELD–REVERSING THIRD CIRCUIT: In a 5-4 ruling, the Supreme Court  concluded that as long as a contract gives the health plan administrator the right to full reimbursement from the recovered funds, judges cannot use principles of fairness to rewrite the contract terms to reduce that reimbursement.

Justice Elena Kagan writing for a five-member majority of the Supreme Court rejected McCutchen’s argument that fairness principles should trump the terms of a contract. The fact that McCutchen would not recover his medical expenses did not justify rewriting the contract to reduce US Airway’s reimbursement, the high court found.

However, the majority also found that the health plan contract did not specify how to divide the responsibility for attorneys’ fees in ERISA reimbursement cases. Because the contract was silent on that point, the court agreed to apply fairness considerations and force US Airways to share McCutchen’s legal costs.