Common Fund Doctrine

Common Fund Doctrine

Common Fund DoctrineA health insurer, medical payments insurer, worker’s compensation carrier, or medical provider that pays medical bills (or renders services) on behalf of an injured party has a right to subrogation which means they have a right to repayment if the injured party obtains a settlement for their injuries.  The common fund doctrine requires health insurers, medical payment insurers, worker’s compensation carriers, and hospitals and other medical providers (but not public hospitals) to offset the amount of money an injured party has to pay in procurement costs (i.e. attorney’s fees, costs, etc.) to obtain a settlement.  See Martinez v. St. Joseph Healthcare Sys., 1994-NMSC-030, 117 N.M. 357, 871 P.2d 1363 (applying the common fund to private hospitals); Amica Mut. Ins. Co. v. Maloney, 1995-NMSC-059, 120 N.M. 523, 903 P.2d 834 (applying the common fund to insurers); Gutierrez v. City of Albuquerque, 1998-NMSC-027, 125 N.M. 643, 964 P.2d 807 (amount a worker’s compensation insurer is entitled).  The purpose of the common fund doctrine is to require the insurer or hospital/medical provider to pay their fair share of attorney’s fees and costs incurred in recovering payments made on behalf of the insured/injured party. The idea behind this rule is that the insurer would not receive any money if the injured party had not gone through the trouble to file a lawsuit or make a claim against the negligent party.  To get their money back, the insurer would typically have to have hire a lawyer and incur the expense of litigation. 

The common fund doctrine can dramatically increase the “in pocket” money after a settlement or judgment in your favor.  The best way to explain this concept is through an illustration: Settling Sally settles her car accident case for $25,000.  Her attorney advanced $1,250 in costs to recover the $25,000.  Settling Sally agreed to pay her attorney a one-third (33 1/3) percent contingency fee plus gross receipts tax (a/k/a sales tax).  The total attorney’s fees would be $8,333.33 and the gross receipts tax would be $656.25 (7.875 % (subject to change) of the attorney’s fees).  Mary Medical Insurer paid Settling Sally’s medical providers $4,000 for Settling Sally’s medical treatment that resulted from the car accident.  In this case, Mary Medical Insurer must reduce the amount owed by 41% because that is the pro-rate share of fees, GRT, and costs ($8,333.33+$656.25+$1,250/$25,000 = 41%).   So, the amount owed by Settling Sally to Mary Medical Insurer is $2,360 ($4,000-($4,000*0.41) which is much less than the original $4,000 requested by Mary Medical Insurer.

Medicare is statutorily required to reduce amounts it recovers in a similar fashion (although there are exceptions if the claim is not disputed).  42 C.F.R. 411.37.  If the settlement or judgment exceeds the amount paid out by Medicare in conditional payments, then Medicare agrees to reduce the amount owed by the injured party in the following manner:

(1) Determine the ratio of the procurement costs to the total judgment or settlement payment.

(2) Apply the ratio to the Medicare payment. The product is the Medicare share of procurement costs.

(3) Subtract the Medicare share of procurement costs from the Medicare payments. The remainder is the Medicare recovery amount.

Id.  Medicare will reduce the amount owed by the full amount of attorney’s fees and costs if the conditional payments by Medicare exceed the amount of the settlement or judgment. If, for example, the policy limits for the negligent driver in a car accident are $25,000 and Medicare paid out $30,000 in conditional payments, Medicare will reduce the amount owed by the full costs and attorney’s fees.  In our experience, a larger reduction can be obtained depending on the case.  This is similar to the equitable apportionment doctrine applied in New Mexico.     

In the worker’s compensation context, the analysis is a bit different.  The employer “is entitled to only that part of the tort recovery [settlement] which represents monies paid that duplicate compensation it has paid or is liable to pay.”  Gutierrez v. City of Albuquerque, 1998-NMSC-027, 125 N.M. 643, 964 P.2d 807.  Initially, therefore, the injured party (or more likely their attorney) must determine what amount the employer is entitled to from the settlement.  The New Mexico Supreme Court provided this example to determine how to determine what an employer is owed:

Worker proved just over $367,609 in total tort damages needed to make her whole. The judge divided that sum into the following elements:

Reasonable medical expenses: $24,969 (about 7% of the total tort damages)

Lost wages: $220,604 (about 60% of the total tort damages)

Pain and suffering: $122,000 (about 33% of the total tort damages)

Worker reached a reasonable compromise settlement of $140,000. Apportioning this settlement in the same manner results in Worker receiving the following elements and amounts:

Reasonable medical expenses: $9,800 (7% of the $ 140,000 settlement)

Lost wages: $84,000 (60% of the $ 140,000 settlement)

Pain and suffering: $46,200 (33% of the $140,000 settlement)

The next step is to compare the settlement breakdown to the elements of the compensation benefits Worker received. Here, Employer paid $24,969 in medical benefits, which was the total amount of Worker’s reasonable medical expenses. Because Employer paid 100% of these expenses, 100% of any amount that Worker received in tort for those expenses would duplicate benefits Employer paid. Therefore, Employer is entitled to 100% of the amount worker received in tort settlement for medicals, or $ 9,800.

Employer did not pay the entire amount of Worker’s lost wages. Employer paid about $27,000 in disability benefits, which amounts to roughly 12% of the total wages required to make Worker whole ($ 27,000/$ 220,604 = .12). Employer is entitled to 12% of the part of Worker’s settlement covering lost wages (.12 x $ 84,000), or $10,080.

Employer paid nothing to Worker for pain and suffering. Therefore, Employer is entitled to 0% of Worker’s tort settlement for this element. The amount of her settlement intended to compensate for pain and suffering ($46,200) is beyond the reach of Employer. 

Employer, then, is entitled to $ 19,880 in reimbursement, less its proportionate share of fees and costs. Note that Employer would not be entitled to draw on Worker’s pain and suffering recovery or the remainder of her lost wage recovery to receive full reimbursement for its outstanding medical outlays. 

Id. (citations omitted).  The analysis can be tricky, but ultimately there must be a determination of how much the employer paid to the worker compared to the damage elements received in the settlement.  Then once that is determined, a reduction for the attorney’s fees and costs can be reduced under the common fund doctrine. 

Unfortunately, the common fund doctrine if the health insurer is governed by ERISA and the health insurance company’s plan documents do not permit a reduction in payment under the common fund doctrine. See US Airways, Inc. v. McCutchen, 569 U.S. 88 (2013).  This result is incredibly unfair to the injured party. It often results in the injured party receiving no money for their injuries and the entire settlement goes to the health insurance company. If the insurer did not include the proper language in the plan documents, then the US Airways case typically will not apply and the common fund doctrine will apply.  Some insurers will also agree to a reduction on a case-by-case basis. 

This common fund doctrine does not apply to letters of protection. The reason is a matter of timing and contract.  Health insurers are contractually obligated to pay medical bills incurred by the insured regardless of whether a third-party may have caused those injuries.[1] A medical provider agreeing to provide medical services under a letter of protection, however, was not required to provide treatment to the injured party until they agreed to the letter of protection.  Consequently, a medical provider does not have to reduce the amount they are owed if they entered into a letter of protection with an attorney. 

The common fund doctrine does not apply to a public hospital if the injured party was treated at the public hospital without health insurance.  See Eaton, Martinez & Hart, P.C. v. Univ. of N.M. Hosp., 1997-NMSC-015, 123 N.M. 76, 934 P.2d 270.  The distinction between a public hospital and private hospital is that the New Mexico Legislature has not authorized a reduction under the common fund doctrine for a public hospital.  But in a private hospital setting, common law and the courts interpret the application of subrogation and the common fund doctrine; not the Legislature. In our experience, however, many public hospitals will agree to provide a reduction if it will assist in resolving the case.   

The Davis Kelin Law Firm has a firm understanding of the common fund doctrine. If you have been injured and want to receive the full amount of damages you are entitled to, we can help.  We know that insurance companies will try to short change you, but we know how to handle this hurdle. Contact us today at (505) 242-7200. Let us fight for your personal injury needs and stand up for you in this difficult time.

Common Fund Doctrine

Davis Kelin Law Firm

Author Davis Kelin Law Firm

More posts by Davis Kelin Law Firm

Leave a Reply