Guest Article

Retiree Plan Is Primary When Neither Plan Follows the 'Vicious Circle' Exception

(Oct. 4, 2001) The plan directly covering an individual is primary and the plan covering that individual as a dependent is secondary under the first COB standard order of benefit determination rule. However, if the individual is covered by: (1) Medicare; (2) Medicare supplemental coverage; and (3) as a dependent of an actively-employed spouse, this rule operates to create a "vicious circle" where each plan is secondary to the other. The NAIC Model COB Regulation resolves this circular priority by making the plan covering the person as a dependent (rather than the plan covering the person directly) the primary plan. However, since that rule was adopted by the NAIC in 1990, very few states have modified their COB regulations to include it. As a result, very few plans have incorporated that vicious circle exception into their COB provisions.

When self-insured ERISA plans do not include the vicious circle exception into their COB provisions, the plan covering the person directly (usually as a retiree) will be primary, a federal appeals court ruled. The case is Harris Corp. v. Humana, 253 F.3d 598 (11th Cir., June 6, 2001).

The 6th U.S. Circuit Court of Appeals made similar earlier rulings in Baptist Memorial Hosp. v. Pan American Life Ins. Co.,; and Perry v. United Food and Commercial Workers District Unions.

Background

Each case involved a Medicare beneficiary who incurred catastrophic medical expenses and was also covered by a Medicare supplemental plan and as a dependent. In the Harris Corp. case, the Harris plan initially sought reimbursement from Medicare of more than $750,000 it had paid in benefits. But as soon as Medicare advised that the Humana plan (which covered the person as a dependent) was primary to Medicare, the Harris plan immediately sought recovery from Humana, and sued for double damages under the private lawsuit provisions of the Medicare secondary payer (MSP) rules.

In the Baptist Memorial case, after both private carriers denied liability for almost $600,000 of medical services, the Hospital sued them to determine which was primary. No one looked to Medicare for payment. In the Perry case, nobody paid what the court described as "the insured's large hospital bill," and the insured's executor sued the two private plans, Medicare and the hospital. When the case was removed to federal court, Medicare and the hospital were dismissed from the action, leaving the two private plans to fight it out.

The court in the Baptist Memorial case disposed of the MSP private lawsuit provision in the following terms:

What difference does the MSP statute make as far as priority of payment obligations between Blue Cross [the retiree plan carrier] and Pan-Am [the dependent plan carrier] is concerned? None at all, in our view, on the facts presented here. In precluding Pan-Am from making its coverage secondary to the coverage provided by Medicare, Congress did not purport to preclude either Pan-Am or Blue Cross from making the Pan-Am coverage secondary to the coverage provided by Blue Cross.

Medicare had no dog in this particular fight. Medicare has never been asked to pay anything, as far as we know, and has not been made a party to the lawsuit. Congress manifested no interest whatever in who would pay first as between private insurance carriers such as Pan-Am and Blue Cross. The sole interest of Congress, as far as the statute discloses, was to provide that Medicare would not have to pay ahead of private carriers in certain situations. Where that interest is not affected -- and it does not seem to be here -- we see no reason why the pertinent contractual provisions should not be enforced in accordance with their terms. (emphasis in original).

Neither plan included the vicious circle exception to the order of benefit determination rule. Therefore, the court enforced the order of benefit determination rule that appeared in both coordinating plans, thereby making the retiree plan primary because it covered the person directly and not as a dependent. The Perry and Harris Corp. courts also followed this approach.

Implications

Given the courts' understanding regarding the applicability of the purpose of the MSP's private lawsuit provision, their decisions appear to be quite correct. ERISA plans must be enforced according to their clear and unambiguous terms. In the absence of the vicious circle exception provision in both plans' COB provisions, those COB provisions agreed that the plan directly covering the person is primary to the plan covering that person as a dependent.

Should plans that do not include the vicious circle exception modify their provisions to include it? If they are insured under policies issued in states that have not modified their COB regulations to require inclusion of that exception, can they make such a modification even if they want to?

Excerpted from the October 2001 supplement to Coordination of Benefits Handbook, ©Thompson Publishing Group, Inc., 2001. All rights reserved.

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