What Can We Learn From Deborah Shank?
Shank, a former overnight shelf-stocker for Wal-Mart in southeastern Missouri, was driving her minivan when she was broadsided by a semi and suffered permanent brain damage. Unable to walk without help, she lost the ability to care for herself or interact meaningfully with her family. Now 52, she lives in a nursing home.
Wal-Mart started out as one of the good guys in this story, paying almost $470,000 of her initial medical bills. But three years after Shank’s husband sued and settled with the semi driver’s employer, the retail giant changed hats. It demanded every penny back, plus interest and legal fees — more, in fact, than the $417,477 the settlement had placed in a special-needs Medicaid trust fund for Shank’s future healthcare expenses.
Several things strike me about this story.
First, the WSJ incorrectly described Wal-Mart’s cause of action against Ms. Shank as a subrogation claim. The WSJ stated:
In insurance circles, the recovery practice is called “subrogation.” Employers and insurers say it’s necessary to ensure that medical expenses aren’t paid twice. By recovering those costs from someone who’s been compensated elsewhere, they argue, they’re saving money for everyone on the plan.
But this isn’t classic subrogation. Subrogation is generally thought of as an insurer’s right to step into the shoes of the party whom an insurer compensates and sue any party whom the insured could have sued. Wal-Mart isn’t standing in the shoes of Ms. Shank and suing the trucker, which it almost certainly has the right to do. Wal-Mart is suing under a contractual provision which gives it a right to sue its insured for indemnification and eschewing its subrogatory rights.
Second, although Wal-Mart claims it needs this contractual right to prevent its insureds (the Deborah Shanks of the world) from double recovering, Wal-Mart is using this right to take easy money. That is, there is no evidence that Ms. Shank recovered twice. Ms. Shank likely had claims for pain and suffering, lost wages, loss of consoritum, etc. The settlement agreement could have stipulated that none of the money was going to pay her medical bills and Wal-Mart still would have had the right to sue her for indemnification. And Wal-Mart would have done so, because it is much easier to collect based on the clear contract language than in a subrogation lawsuit against the trucker. Think of it this way, presumably Ms. Shank settled for pennies on the dollar in her tort lawsuit, but Wal-Mart got nearly a full recovery from Ms. Shank. Why? Because Wal-Mart didn’t have to establish the trucker’s negligence or defeat the trucker’s tort defenses as it would have if it had brought the subrogation claim.
Third, I wonder why Wal-Mart and other private insurers are doing this now, when the provisions apparently have been in the insurance contracts for years. One could speculate that private insurers feel emboldened to sue their insureds because Congress blessed this same practice for Medicare in 2003. As part of the same law that created the new Medicare prescription drug plan, Congress granted Medicare the right to recover its from beneficiaries who settle tort lawsuits.
Fourth, these indemnification lawsuits are justified as necessary to reduce the costs of medical insurance. But they might have an enormous impact on the civil and tort system. Injured parties have less incentive to bring and settle tort claims where they are forced to indemnify an insurer, because their expected recovery is much lower. This undermines the access function of the courts and the deterrence and corrective justice function of tort, not to mention undermines the social policy for health insurance. I wrote about these same issues (although in the Medicare context) in a forthcoming paper. Check it out.