On November 9, 2016, the Supreme Court of the State of Montana published its opinion on WEST, as Guardian Ad Litem for Peter Lee v. United Services Automobile Association (USAA) and USAA Casualty Insurance Company, concluding that USAA did have a reasonable basis to condition its settlement payment on waiver of the TRICARE lien from the United States. The court makes it clear that the “only way” for USAA to satisfy its statutory obligation to reimburse TRICARE is to pay the United States, not to pay Lee. If USAA had not honored the lien, the United States could have gone after USAA to enforce its right to reimbursement. Accordingly, the court holds that USAA’s “grounds for conditioning payment were reasonable under existing law.” The court therefore reverses the District Court’s grant of summary judgment in favor of West and orders it to enter summary judgment in favor of USAA.
In December 2012, Lee and three other passengers were injured in a single vehicle accident. Lee sustained catastrophic injuries. The driver, Julian Perez, held a USAA insurance policy. All of the passengers were military servicemen covered by TRICARE, a government insurance program for military members and their families. TRICARE paid medical benefits for the passengers and therefore had a statutory right to recover the benefits it paid. TRICARE’s liens for the passengers’ combined medical expenses totaled over $215,000; more than $204,000 of the total were for Lee’s expenses alone.
USAA insured Perez under an automobile liability policy with coverage limits of $50,000 per person and $100,000 per accident. After conducting a liability investigation, USAA determined that Perez was 100% at fault for the accident.
On August 21, 2013, Lee’s counsel made a settlement demand on USAA for Perez’s $100,000 policy limits. The letter stated that the offer would be withdrawn and that the claimants would seek to recover all of their damages from USAA if USAA did not agree to pay the policy limits in twenty days. One week later, USAA’s claims examiner contacted Lee’s counsel and offered to pay the full policy limits, provided that the TRICARE liens were addressed. Lee’s counsel immediately responded with a letter stating that his clients would indemnify and hold USAA harmless from any responsibility for the TRICARE liens.
On September 9, 2013, USAA responded, stating that the offer to indemnify was not sufficient to protect Perez or USAA from the TRICARE liens. USAA confirmed in writing its offer to pay the policy limits, provided either that TRICARE be included as a payee on the settlement check or that Lee’s counsel first secure lien releases from TRICARE. Lee’s counsel followed with a letter two days later, stating that his clients would indemnify both USAA and Perez from any responsibility for the TRICARE liens. The letter gave USAA a deadline of September 21.
USAA did not respond by the deadline. In the meantime, both USAA and Lee’s counsel attempted to determine the status of TRICARE’s liens. In early November 2013, USAA received letters from the Air Force providing notice of its claims and requesting payment of the liens pursuant to 42 U.S.C. § 2651. TRICARE finally agreed to waive its liens at the end of January 2014, and USAA issued a check for the policy limits of $100,000 six weeks later.
In the interim, Lee filed suit against Perez in October 2013, and he continued his suit after receiving the policy limits payment from USAA. In January 2015, Perez agreed to a consent judgment in the amount of $1,464,000, and assigned his claims against USAA to Lee. As a result, on behalf of Lee, West filed a separate suit that same month alleging bad faith against USAA. The District Court granted West summary judgment, concluding that USAA did not have a reasonable basis in law for conditioning payment of the settlement check. The court held therefore that USAA was liable to Lee for the consent judgment. USAA appeals that decision here.
District Court’s Decision
An insurer does not act in bad faith, and therefore is not liable, “for failing to settle within policy limits when it had a reasonable basis in law or fact for contesting coverage.” In determining whether an insurer has a reasonable basis in law for contesting coverage, “it is first necessary to survey the legal landscape as it existed during the relevant time period.” Therefore, the “determinative question here is whether the law in effect at the time, caselaw or statutory, provided sufficient guidance to signal to a reasonable insurer that its grounds for denying the claim were not meritorious.”
Soon after filing the complaint in this action, West moved for summary judgment. She argued that USAA acted in bad faith by failing to promptly settle the claim. USAA responded, arguing that it had “a reasonable basis in law to condition payment of the settlement upon resolution of the TRICARE liens. USAA contended that federal law, specifically 42 U.S.C. § 2651 and Conway v. Benefis Health Systems, Inc., 2013 MT 73, 369 Mont. 309, 297 P.3d 1200, established TRICARE as a secondary payer and obligated USAA either to include TRICARE as a co-payee on the settlement draft or to secure a waiver of the liens before making payment to West.”
The District Court ruled that USAA lacked a reasonable basis in law to delay payment of policy limits because of the TRICARE liens. The court rejected USAA’s reliance on Conway, finding the case not directly on point. The court similarly rejected USAA’s comparison of TRICARE to Medicare because it concluded that Medicare and TRICARE statutes and regulations are distinct. Specifically, the court noted that “unlike the automatic first payer liability imposed on Medicare, there is no corresponding provision under TRICARE.” Finally, the court rejected USAA’s reliance on 42 U.S.C. § 2651, which governs the United States’ right to recover incurred medical costs from liable third parties and their insurers.
The District Court determined that the federal statute would apply only if the United States had commenced litigation or intervened to enforce its liens; in that case, “USAA would have a compelling argument it properly included TRICARE on the settlement check.” The court also determined that although TRICARE sent USAA notice of its claim and requested payment of the liens, “there is no obligation in the TRICARE regulations requiring USAA to protect the government lien.” Most pertinently, the District Court specified, “there is no requirement that USAA name TRICARE on Lee’s settlement check.” As such, the court concluded that “USAA’s unilateral decision to include TRICARE as a payee on the settlement check is without support in statute, regulation, or common law.”
Further, the District Court noted that Lee expressly agreed to indemnify USAA, but that “USAA made the unilateral decision to condition its legal obligation to settle Lee’s claims on including TRICARE as a settlement check payee.” Such a condition, the District Court concluded, “went against Montana’s public policy regarding settlement of insurance claims.” The court emphasized, “when an insurer unilaterally adds a payee to a claimant’s settlement check, the insurer substantially delays settlement, imposes onerous obligations not required by law, and creates unreasonable burdens on a claimant to receive funds the insurer is legally obligated to pay.” Such a result, the court concluded, “is hardly what the Montana legislature intended when it obligated insurers to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”
The District Court therefore held that “USAA’s decision to condition payment on naming TRICARE as a payee of the settlement funds is unreasonable under applicable law.” As a result, the District Court ordered USAA to pay the entire consent judgment.
Supreme Court’s Decision
First, the District Court correctly recognized that “a TRICARE lien arises under the Medical Care Recovery Act, 42 U.S.C. § 2651(a).” The Air Force’s November 2013 letter to USAA referenced this section in asserting the United States’ “independent right to recover costs.” But the Supreme Court indicates “the District Court incorrectly interpreted the statute. The statute broadly provides that, whenever the United States furnishes benefits to a beneficiary who is injured under circumstances creating a tort liability upon some third person to pay damages therefor, the United States shall have a right to recover (independent of the rights of the injured or diseased person) from said third person, or that person’s insurer, the reasonable value of the care and treatment so furnished, to be furnished, paid for, or to be paid for and shall, as to this right be subrogated to any right or claim that the injured beneficiary has against such third person.” 42 U.S.C. § 2651(a).
By bestowing upon the United States a right to recover from Perez or USAA, 42 U.S.C. § 2651(a) obligated Perez or USAA to honor the TRICARE liens.
The same statute allows the United States to enforce its right to recover by “intervening” in or “instituting and prosecuting legal proceedings against the third person who is liable for the injury or the insurance carrier responsible for the payment or reimbursement of medical expenses.” 42 U.S.C. § 2651(d). Contrary to the District Court’s conclusion, “USAA’s obligation to honor the liens under § 2651(a) did not depend upon the United States already having pursued judicial enforcement under § 2651(d).”
Second, the Supreme Court disagrees with the District Court that Conway offers no guidance here. In Conway, the court indicated that “federal regulations mandate that TRICARE functions as a secondary payer.” 32 C.F.R. § 199.8(a). TRICARE’s status as a secondary payer means that “where the medical treatment at issue is necessitated as a result of the negligence of an insured third party, any payment originally made by TRICARE must be reimbursed.” 32 C.F.R. § 199.8(a), (b)(3). TRICARE benefits therefore are not “available to a TRICARE beneficiary where there is third party insurance available to pay the expenses of medical treatment.” Conway supports USAA’s contention that it had an obligation to reimburse TRICARE given TRICARE’s status as a secondary payer.
Third, 10 U.S.C. § 1095 provides that “the United States shall have the right to collect from a third-party payer reasonable charges for health care services incurred by the United States on behalf of a person who is a covered beneficiary.” 10 U.S.C. § 1095(a)(1); accord 42 U.S.C. § 2651(a). Section 1095 defines a “third-party payer” as “an entity that provides an insurance, medical service, or health plan by contract or agreement, including an automobile liability insurance or no fault insurance carrier.” 10 U.S.C. § 1095(h)(1). USAA is clearly a “third-party payer” pursuant to both 10 U.S.C. § 1095b(c) and 10 U.S.C. § 1095(h)(1). These statutes make clear that the United States had “the right to collect from USAA reasonable charges for health care services incurred by the United States on behalf of Lee.” 10 U.S.C. § 1095(a)(1); accord 10 U.S.C. § 1095b(b); 42 U.S.C. § 2651(a).
More, the federal TRICARE regulations provide: “The only way for a third-party payer to satisfy its obligation under 10 U.S.C. §1095b is to pay the United States or authorized representative of the United States. Payment by a third-party payer to the beneficiary does not satisfy 10 U.S.C. §1095b.” 32 C.F.R. § 199.12(d)(3). The United States’ right to recover costs incurred on behalf of a TRICARE beneficiary “includes the authority under 10 U.S.C. §1095(e)(1) for the United States to institute and prosecute legal proceedings against a third-party payer to enforce a right of the United States under 10 U.S.C. §1095b and this section.” 32 C.F.R. § 199.12(g)(1). The United States may also “compromise, settle or waive a claim” of its right to reimbursement. 32 C.F.R. § 199.12(g)(2); 10 U.S.C. § 1095(e)(2).
These statutes and regulations, “in effect at the time of USAA’s negotiations with Lee’s counsel, obligated USAA to reimburse TRICARE for the costs TRICARE incurred on behalf of Lee.” So, USAA issuing a settlement check to Lee would “not satisfy its statutory obligation.” 32 C.F.R. § 199.12(d)(3). Rather, “the only way USAA could meet its obligation to reimburse TRICARE was to pay the United States or authorized representative of the United States.” 32 C.F.R. § 199.12(d)(3). If USAA did not satisfy its statutory obligation, “the United States could institute and prosecute legal proceedings against USAA to enforce its right to reimbursement.” 32 C.F.R. § 199.12(g)(1); 10 U.S.C. § 1095(e)(1); 42 U.S.C. § 2651(d). Based on the plain language of the governing statutes and regulations, the Supreme Court concludes that “the District Court incorrectly determined that there is no obligation in the TRICARE regulations requiring USAA to protect the government lien.”
The Supreme Court’s Analysis
The court’s role here is to assess objectively whether it was reasonable for USAA to condition payment “in light of that legal landscape.” West’s argument is that because Lee made an offer to indemnify USAA and Perez, the law did not obligate USAA to address the TRICARE liens before settling Lee’s third-party claim.
Contrary to West’s argument however, the Supreme Court finds that “neither Lee’s offer to indemnify nor his obligation pursuant to 32 C.F.R. 199.12(h)(3) to cooperate with the United States in any reimbursement action by the United States against USAA affects USAA’s statutory obligation to reimburse TRICARE, nor do they impact the United States’ right to recover medical payments from USAA. Any agreement between Lee’s counsel and USAA would not bind the government or exempt USAA from federal law.”
The Supreme Court reiterates that the District Court was correct that “there is no requirement that USAA name TRICARE on Lee’s settlement check.” As the District Court pointed out, if USAA had tendered the settlement check with TRICARE as a payee, the check would not have been negotiable until an authorized government agent endorsed it, and Lee could have been denied the insurance proceeds he was entitled to receive. As the District Court also observed, Lee’s attorney could not have deposited “the check in his IOLTA account until fully endorsed, making it impossible to comply with the Montana Rules of Professional Conduct.”
However, as the District Court’s order recognized, USAA did not just condition payment of Lee’s settlement on including TRICARE as a payee on the check—it also gave Lee’s counsel the option of “obtaining waiver of any lien or negotiating the liens.” USAA also followed up with the government to determine the status of the liens. Federal law expressly provides that the United States may “compromise, settle or waive a claim” of its right to reimbursement. 32 C.F.R. § 199.12(g)(2); 10 U.S.C. § 1095(e)(2). “The District Court therefore erred in not considering USAA’s request for lien waiver before concluding that USAA did not have a reasonable basis in law to condition payment of the settlement.”
The Supreme Court concludes that “USAA did have a reasonable basis in law to condition its settlement payment on waiver of the TRICARE lien from the United States.” The court goes as far as to indicate that “the only way for USAA to satisfy its statutory obligation to TRICARE—the secondary payer—was to pay the United States, not to pay Lee.” 32 C.F.R. § 199.12(d)(3). If USAA “had not honored the lien, the United States presumably still could have gone after USAA to enforce its right to reimbursement.” 32 C.F.R. § 199.12(g)(1); 10 U.S.C. § 1095(e)(1); 42 U.S.C. § 2651(d). Therefore, the court concludes that “the law provides sufficient guidance to signal to a reasonable insurer that its grounds were meritorious. This is especially so given the absence of case law on point.” Accordingly, the court here holds that USAA’s “grounds for conditioning payment were reasonable under existing law.” The court therefore reverses the District Court’s grant of summary judgment in favor of West and orders it to enter summary judgment in favor of USAA.
Although this is a TRICARE situation, and not a Medicare Secondary Payer case, it provides important lessons for MSP non-group health plans such as auto, no-fault, liability, and workers compensation entities and insurers. 42 U.S.C. § 2651(a) is very similar to 42 U.S.C. § 1395y(b) in that both statutes provide the United States authority to collect conditional payments it makes in situations where a third party is responsible for medical expenses. 32 C.F.R. § 199 is very similar to 42 C.F.R. § 411 in that both regulatory provisions spell out the federal government’s authority to collect conditional payments it makes in situations where a third party is responsible for medical expenses. Therefore, when the Montana Supreme Court concludes that the only way for the insurer (USAA) to satisfy its statutory obligation to the federal government (TRICARE) is to pay the United States directly, not to pay Lee or his counsel through a settlement agreement, it is concluding what we have been counseling clients for years.
As a primary payer, if an auto, no-fault, liability, or work comp entity or insurer does not make certain that the federal government’s lien is honored, the United States has the right to seek reimbursement, and can therefore go after the primary payer or responsible entity to enforce its right to reimbursement. As the Supreme Court of Montana reminds litigants here, the only absolute, sure way to do this is to reimburse the federal government directly. Therefore, having an experienced partner that will create a consistent process, and will become responsible for timely responding, negotiating, communicating, and resolving such conditional payments is the only way to assure compliance. Flagship Services Group is the only national Medicare and Medicaid services provider with a focus on conditional payments resolution for the property and casualty insurance industry. Whether a self insured, an insurer, re-insurer, or third party administrator, for conditional payment services and pricing specific to auto, no-fault, liability, and work comp entities and insurers, please contact us at 888.444.4125, email us at firstname.lastname@example.org, or visit us on line at www.flgshipservicesgroup.com.
About Rafael Gonzalez
Rafael Gonzalez, Esq. is President of Flagship Services Group, the only national Medicare Secondary Payer services provider focusing on and offering comprehensive mandatory reporting, conditional payments, and set aside allocation compliance services to the property and casualty insurance industry. He has been a part of the insurance, medical, and disability industries since 1983. He has served as a thought leader on all aspects of liability, workers compensation, social security, Medicare, and Medicaid compliance since 1990. He speaks and writes on mandatory insurer reporting, conditional payment resolution, set aside allocations, CMS approval, and MSA and SNT professional administration, as well as the interplay and effect of these processes and systems and the Affordable Care Act throughout the country. Rafael blogs on these topics at Medicare Compliance for P&C Insurers at http://www.flagshipservicesgroup.com/blog. He can be reached at email@example.com or 813.967.7598