Feb. 13, 2014 – The U.S. Court of Appeals for the Seventh Circuit, in an opinion by Judge Richard Posner, has ruled that an employer’s health plan is not entitled to a $1.7 million refund from the Wisconsin hospitals that treated an employee’s child.
Kolbe & Kolbe Millwork Company, based in Wausau, maintains a health plan to insure its employees. In 2007, an employee invoked his health insurance to cover medical costs for a newly born daughter who had a serious medical condition.
The health plan sought additional information from the employee, without success. The plan wanted to know more about the child’s status as the employee’s dependent.
The child received treatment for almost a year before the health plan determined that the employee’s child was not covered by the health plan.
By that time, the health plan had already paid the Medical College of Wisconsin and the Children’s Hospital of Wisconsin about $1.7 million for treatment expenses. The plan demanded that the hospital refund the money, but the hospital refused.
The health plan sued the hospitals under the federal Employee Retirement Income Security Act (ERISA), which governs private sector pensions and group health plans. The health plan also alleged the hospitals breached a “provider agreement.”
The district court in Wisconsin ultimately dismissed the suit and granted attorney fees to the hospitals as a sanction for filing a frivolous claim. The Seventh Circuit Appeals Court reversed. It upheld dismissal of the ERISA claims, but let the contract claim proceed.
On the contract claim, the district court on remand granted summary judgment to the hospitals, but refused to impose Rule 11 sanctions against the health plan.
Although the Seventh Circuit Appeals Court had ruled that ERISA did not preempt the contract claims, on remand the hospital insisted that ERISA preempted the plan’s contract claims and asked the district court to impose sanctions against the health plan for maintaining the lawsuit. The district court declined. Both sides appealed.
In Kolbe & Kolbe Health and Welfare Benefit Plan v. Medical College of Wisconsin Inc., No. 12-3837 (Feb. 5, 2013), a three-judge panel for the Seventh Circuit Court of Appeals affirmed. It said the contract claim fails and sanctions are not warranted.
The panel rejected the health plan’s claim that the hospital could recoup from Medicaid, noting that Medicaid is a secondary insurer. It also ruled there was no basis under Wisconsin contract law to allow a refund, noting that the health plan made the mistake.
“It’s one thing for a seller to refund money or take other reparative measures because of a mistake it’s made, and another to do so because the buyer has made a mistake,” wrote Judge Posner, noting that the hospital provided the adequate treatment.
The court also refused to imply terms, on the basis of the contract principle of custom, within the provider agreement that would demand a refund in this situation.
“Refunds by hospitals to health plans are indeed common,” wrote Judge Posner, noting that refunds occur if a plan overpaid or a hospital is trying to create good will.
“But to infer a contractual obligation to refund a purchase price when the seller is faultless and the buyer does not return the purchase is to infer absurdity,” he wrote.
Posner offered a hypothetical involving a man who purchases a Rolex watch but a thief steals it while the man “holds it in front of his eyes, the better to revel in its opulence.”
“Does Rolex have a legal duty to refund the purchase price? No – and still no even if it had made comparable refunds in similar circumstances to Bill Gates, Warren Buffet, Carlos Slim, and Christy Walton,” Judge Posner explained.
Discharging the contract claim, Posner turned a spotlight on the hospitals for invoking the ERISA preemption issue on remand, after the appeals court resolved that point. It rejected, with force, the hospitals’ cross-appeal for sanctions against the health plan.
“[W]e said in our first decision that preemption would not be an issue on remand,” Posner wrote. “The hospital defied us. It is the hospital that is lucky to escape being sanctioned.”