Ethical Concerns: Medical Liens and Rights of Subrogation

In last month's issue, we discussed the development of federal and New York State statutory and case law regarding third-party liens against the proceeds of medical judgments. Medicare, Medicaid and Workers' Compensation programs, among others, all want reimbursement of monies they have expended on those whose medical treatments they have covered. Straightforward as this concept might at first seem, problems for the injured party's attorney can quickly develop when he or she begins trying to work out the details, amongst the interested parties, of who gets what.

Lien or Subrogation?

Many purported “medical liens” are actually “statutory rights of subrogation,” where the medical provider has the right to pursue its assignment directly against the tortfeasor. Ethical issues arise when an attorney represents an injured claimant and also agrees to pursue the “subrogation claim” of the medical provider.

Recent developments have changed the way that lien law is applied in New York State, given Arkansas Dept. of Health and Human Services v. Ahlborn, 126 S.Ct. 1752 (2006), and Faso v. Doerr, 12 NY3d 80 (2009). Medicare, Medicaid and Workers' Compensation carriers claim they are entitled to full recovery of their expenses under the lien statutes. The reality is that recent decisions in Ahlborn and Fasso, combined with New York's shift to comparative negligence and itemized verdicts since the 1970s, confirm that at best, they have a right of apportionment for their “subrogation” claims.

Whether the right is a lien or subrogation affects the relationships between the co-claimants and the attorney, as well as his or her fees. If these constitute subrogation rights then the attorney is clearly representing two claimants, negotiating an aggregate settlement and taking a fee from each. A conflict arises because the attorney must reduce/assign part of the client's recovery to the insurance carrier for medical expenses. Ethically, an attorney is barred from representing more than one party where there may be a lump sum award that has to be divided/allocated.

Attorneys who pursue the personal injury claim and medical expense recovery in one action are committing an ethical violation as well as possible malpractice. Although the statute still refers to liens, attorneys practicing in this area would be best advised to treat such claims as subrogation.

The System

We all know the status quo when a personal injury claim is pending after public funds have been expended for the client: Medicare claims a “superior” right to recover its medical costs (past and future) upon a personal injury recovery. Medicaid providers consider that they have a lien on the proceeds of a personal injury recovery though they reluctantly concede that the trend seems to be toward Ahlborn proceedings for apportionment. Workers' Compensation insurers take the position that their “lien” claims are “inviolate.” They specifically assert that the carrier's lien is enforceable against the entire amount of the recovery after subtraction of attorneys' fees.

In the realm of “liens versus subrogation rights,” there often is an aggregate offer, which invariably must be divided in a manner that satisfies both claimants. The attorney receives contingent compensation from both his client (the plaintiff) and the medical provider. This amounts to fees from two claims out of the same accident, allocated from a single pool of funds. There are some schools of thought that would very strongly suggest that this arrangement constitutes a conflict of interest and is an ethical violation.

A rift seems to be developing in the private health care field over insurers' right to recover money they expended on medical costs associated with tort claims. The New York Court of Appeals just confirmed in Fasso, that there may be an independent claim asserted by the health care provider either joined with the personal injury action or independent of it as against the tortfeasor. The Fasso court recognized that “[t]he injured party's goal is to maximize recovery without regard to whether its insurer recoups any monies it expended for the plaintiff's medical bills” and the insurer cares only about its own recovery regardless of whether the insured's compensation is adequate, or even nil. The court further held that the “made whole” rule is applicable in New York. It observed that the health insurer assumes a risk of loss when it issues a policy, whereas the injured party does not willingly assume a risk of injury. As such, only after the insured had fully recovered may the insurer recover on its claim. The insured has the “priority of interests,” which takes precedence over the subrogation rights of the insurer.

(This right of recovery for the private health care provider will be eliminated if the New York Senate Bill S.6068, which was recently passed, is signed into law. That bill modifies CPLR 4545 and precludes recovery by private health insurers. The bill does not, however, limit or restrict the recovery rights of Medicaid, Medicare, Workers' Compensation nor Additional Personal Injury Protection (APIP). As such, the same concerns, exposures and ethical issues that exist in the private health care recovery field will continue to exist and trouble New York attorneys and claimants regardless of whether the above bill becomes law.)

Getting the Proportions Right

Medical providers claiming statutory “liens” routinely demand that plaintiff's counsel negotiate on their behalf as well as on behalf of the personal injury client. These takings from plaintiff's personal injury recoveries are justified as a “balancing of interests” and “cost containment measures” as between the government, workers, insurers, employers and, inferentially, the plaintiff's own attorneys. The language relative to these demands and expectations is often threatening.

The plaintiff's attorney needs to be aware that she faces the risks of liability associated with lien resolution. When an attorney undertakes a personal injury lawsuit, she impliedly represents that she has the legal knowledge, skill, and preparation necessary to represent the client's interests competently in that area of the law. If an attorney overpays the lien, or pays an invalid lien, he may be liable for legal malpractice; if the attorney fails to discover or pay an outstanding Medicare lien, he can be held personally liable for twice the amount of the original lien, plus interest. (See 42 U.S.C. '1395y(b)(2)(A)(ii-iii)). New York County Lawyers' Association Ethics Committee Ethics Opinion 739.

The standard wisdom in the legal community has been to pay these “lienors,” save what can be retained for the client and, as a consolation, the attorney is paid his full fee on the total recovery. At least his fee is not reduced.

However, lawyers are ethically required, “Within the Bounds of the Law” (New York Disciplinary Rule (DR) 7-102) to represent a “Client Zealously” (DR 7-101). Those Disciplinary Rules require that, while an entity may have a “claim” for a part of the injured party's recovery, attorneys are ethically required to examine the predicates of that claim closely and may not dissipate their clients' funds absent the claim being proven bona fide.

The Disciplinary Rules further require that an attorney “shall decline simultaneous representation if it is likely to involve the lawyer in representing different interests.” DR 5-105(a). “A lawyer who represents two or more clients shall not make or participate in the making of an aggregate settlement of or against the clients.” DR 5-106; cf. new Rules of Professional Conduct, Rule 1.8:(g). Finally, “a lawyer shall not accept compensation for legal services from other than the client.” DR 5-107. The ultimate issue is whether an attorney may include in his prayer for relief compensation for both bodily injury, pain and suffering and medical expenses that were paid not by the client but
by an insurer. To find the answer, one must examine each of the
“lien” statutes.

Conclusion

In all these lien/subrogation statutes, the enabling legislation authorizes the medical provider to initiate its own independent action for recovery of expenses pursuant to the principles of subrogation. However, there is no incentive for any of these subrogees to pursue their own claims. The general practice is for the injured party's attorney, clearly representing two claimants, to voluntarily negotiate an aggregate settlement, allocate the money between those competing parties and take a fee from each. The medical provider does no work and takes no risks. However, if it and the plaintiff's attorney work together, it recovers from the gross award and more money is available for attorneys' fees.

The only one who comes up short in this scenario is the injured party. His personal injury recovery is reduced by the amount his attorney agrees to pay the medical provider on the subrogation claim. This is an obvious conflict of interest. As this practice has been going on for many years, a recent observation by a plaintiff's attorney may be accurate: “Clients are not sophisticated enough to understand those issues.”

The simple conclusion is that there is both an inherent and obvious conflict of interest for an attorney to represent two claimants for independent claims arising out of the same incident, obtain a single lump sum settlement and then allocate the respective amounts while taking a fee from both clients. Attorneys would be well advised to seriously consider and analyze these issues, taking into account their own states' laws and ethics codes.

J. Michael Hayes is an attorney in Buffalo, NY, practicing plaintiff's personal injury law. This article first appeared in the New York Law Journal, a sister publication of this newsletter.

In last month's issue, we discussed the development of federal and New York State statutory and case law regarding third-party liens against the proceeds of medical judgments. Medicare, Medicaid and Workers' Compensation programs, among others, all want reimbursement of monies they have expended on those whose medical treatments they have covered. Straightforward as this concept might at first seem, problems for the injured party's attorney can quickly develop when he or she begins trying to work out the details, amongst the interested parties, of who gets what.

Lien or Subrogation?

Many purported “medical liens” are actually “statutory rights of subrogation,” where the medical provider has the right to pursue its assignment directly against the tortfeasor. Ethical issues arise when an attorney represents an injured claimant and also agrees to pursue the “subrogation claim” of the medical provider.

Recent developments have changed the way that lien law is applied in New York State, given Arkansas Dept. of Health and Human Services v. Ahlborn , 126 S.Ct. 1752 (2006), and Faso v. Doerr , 12 NY3d 80 (2009). Medicare, Medicaid and Workers' Compensation carriers claim they are entitled to full recovery of their expenses under the lien statutes. The reality is that recent decisions in Ahlborn and Fasso, combined with New York's shift to comparative negligence and itemized verdicts since the 1970s, confirm that at best, they have a right of apportionment for their “subrogation” claims.

Whether the right is a lien or subrogation affects the relationships between the co-claimants and the attorney, as well as his or her fees. If these constitute subrogation rights then the attorney is clearly representing two claimants, negotiating an aggregate settlement and taking a fee from each. A conflict arises because the attorney must reduce/assign part of the client's recovery to the insurance carrier for medical expenses. Ethically, an attorney is barred from representing more than one party where there may be a lump sum award that has to be divided/allocated.

Attorneys who pursue the personal injury claim and medical expense recovery in one action are committing an ethical violation as well as possible malpractice. Although the statute still refers to liens, attorneys practicing in this area would be best advised to treat such claims as subrogation.

The System

We all know the status quo when a personal injury claim is pending after public funds have been expended for the client: Medicare claims a “superior” right to recover its medical costs (past and future) upon a personal injury recovery. Medicaid providers consider that they have a lien on the proceeds of a personal injury recovery though they reluctantly concede that the trend seems to be toward Ahlborn proceedings for apportionment. Workers' Compensation insurers take the position that their “lien” claims are “inviolate.” They specifically assert that the carrier's lien is enforceable against the entire amount of the recovery after subtraction of attorneys' fees.

In the realm of “liens versus subrogation rights,” there often is an aggregate offer, which invariably must be divided in a manner that satisfies both claimants. The attorney receives contingent compensation from both his client (the plaintiff) and the medical provider. This amounts to fees from two claims out of the same accident, allocated from a single pool of funds. There are some schools of thought that would very strongly suggest that this arrangement constitutes a conflict of interest and is an ethical violation.

A rift seems to be developing in the private health care field over insurers' right to recover money they expended on medical costs associated with tort claims. The New York Court of Appeals just confirmed in Fasso, that there may be an independent claim asserted by the health care provider either joined with the personal injury action or independent of it as against the tortfeasor. The Fasso court recognized that “[t]he injured party's goal is to maximize recovery without regard to whether its insurer recoups any monies it expended for the plaintiff's medical bills” and the insurer cares only about its own recovery regardless of whether the insured's compensation is adequate, or even nil. The court further held that the “made whole” rule is applicable in New York. It observed that the health insurer assumes a risk of loss when it issues a policy, whereas the injured party does not willingly assume a risk of injury. As such, only after the insured had fully recovered may the insurer recover on its claim. The insured has the “priority of interests,” which takes precedence over the subrogation rights of the insurer.

(This right of recovery for the private health care provider will be eliminated if the New York Senate Bill S.6068, which was recently passed, is signed into law. That bill modifies CPLR 4545 and precludes recovery by private health insurers. The bill does not, however, limit or restrict the recovery rights of Medicaid, Medicare, Workers' Compensation nor Additional Personal Injury Protection (APIP). As such, the same concerns, exposures and ethical issues that exist in the private health care recovery field will continue to exist and trouble New York attorneys and claimants regardless of whether the above bill becomes law.)

Getting the Proportions Right

Medical providers claiming statutory “liens” routinely demand that plaintiff's counsel negotiate on their behalf as well as on behalf of the personal injury client. These takings from plaintiff's personal injury recoveries are justified as a “balancing of interests” and “cost containment measures” as between the government, workers, insurers, employers and, inferentially, the plaintiff's own attorneys. The language relative to these demands and expectations is often threatening.

The plaintiff's attorney needs to be aware that she faces the risks of liability associated with lien resolution. When an attorney undertakes a personal injury lawsuit, she impliedly represents that she has the legal knowledge, skill, and preparation necessary to represent the client's interests competently in that area of the law. If an attorney overpays the lien, or pays an invalid lien, he may be liable for legal malpractice; if the attorney fails to discover or pay an outstanding Medicare lien, he can be held personally liable for twice the amount of the original lien, plus interest. (See 42 U.S.C. '1395y(b)(2)(A)(ii-iii)). New York County Lawyers' Association Ethics Committee Ethics Opinion 739.

The standard wisdom in the legal community has been to pay these “lienors,” save what can be retained for the client and, as a consolation, the attorney is paid his full fee on the total recovery. At least his fee is not reduced.

However, lawyers are ethically required, “Within the Bounds of the Law” (New York Disciplinary Rule (DR) 7-102) to represent a “Client Zealously” (DR 7-101). Those Disciplinary Rules require that, while an entity may have a “claim” for a part of the injured party's recovery, attorneys are ethically required to examine the predicates of that claim closely and may not dissipate their clients' funds absent the claim being proven bona fide.

The Disciplinary Rules further require that an attorney “shall decline simultaneous representation if it is likely to involve the lawyer in representing different interests.” DR 5-105(a). “A lawyer who represents two or more clients shall not make or participate in the making of an aggregate settlement of or against the clients.” DR 5-106; cf. new Rules of Professional Conduct, Rule 1.8:(g). Finally, “a lawyer shall not accept compensation for legal services from other than the client.” DR 5-107. The ultimate issue is whether an attorney may include in his prayer for relief compensation for both bodily injury, pain and suffering and medical expenses that were paid not by the client but
by an insurer. To find the answer, one must examine each of the
“lien” statutes.

Conclusion

In all these lien/subrogation statutes, the enabling legislation authorizes the medical provider to initiate its own independent action for recovery of expenses pursuant to the principles of subrogation. However, there is no incentive for any of these subrogees to pursue their own claims. The general practice is for the injured party's attorney, clearly representing two claimants, to voluntarily negotiate an aggregate settlement, allocate the money between those competing parties and take a fee from each. The medical provider does no work and takes no risks. However, if it and the plaintiff's attorney work together, it recovers from the gross award and more money is available for attorneys' fees.

The only one who comes up short in this scenario is the injured party. His personal injury recovery is reduced by the amount his attorney agrees to pay the medical provider on the subrogation claim. This is an obvious conflict of interest. As this practice has been going on for many years, a recent observation by a plaintiff's attorney may be accurate: “Clients are not sophisticated enough to understand those issues.”

The simple conclusion is that there is both an inherent and obvious conflict of interest for an attorney to represent two claimants for independent claims arising out of the same incident, obtain a single lump sum settlement and then allocate the respective amounts while taking a fee from both clients. Attorneys would be well advised to seriously consider and analyze these issues, taking into account their own states' laws and ethics codes.

J. Michael Hayes is an attorney in Buffalo, NY, practicing plaintiff's personal injury law. This article first appeared in the New York Law Journal, a sister publication of this newsletter.