Fraud Alleged After Carrier Included Case Management Fees in Subrogation Lien: Viewpoint

In addition to paying for medical expenses, death benefits, funeral costs and/or indemnity benefits for lost wages resulting from a compensable injury, workers’ compensation insurance carriers also expend considerable dollars for case management costs, medical bill audit fees, rehabilitation benefits, nurse case worker fees, and the like. They pay significant attorney’s fees on permanency awards and incur other expenses in conjunction with the handling and adjusting of workers’ compensation claims. Which of these benefits are recoverable in workers’ compensation subrogation remains a point of considerable confusion and contention, and an article which discusses the nuances of this issue can be viewed HERE.

A much more confusing and cutting-edge issue is whether and to what extent a workers’ compensation carrier can recover fees paid to a contracted provider of catastrophic and complex case management in a workers’ compensation claim. An example of such a vendor is Paradigm Management Services, LLC. Paradigm specializes in providing comprehensive medical case management services for catastrophic and complex injuries such as traumatic brain injuries, spinal cord injuries, amputations, burns, and complex pain conditions.

Paradigm has a service called “Paradigm Outcomes” in which they enter into a contract with the workers’ compensation carrier called an “Outcome Plan Contract.” On a particular workers’ compensation claim—usually higher-severity catastrophic injuries—Paradigm agrees to undertake medical management responsibilities including the payment of all medical costs related to the injuries sustained by the employee which are deemed appropriate, necessary, and compensable in accordance with applicable jurisdictional laws of the state under whose Workers Compensation Act the benefits are to be paid. The agreement contains identification of all the relevant claim information, a description of the injury, applicable diagnostic categories, clinical problems and risks, clinical impressions, a medical history, etc. The contract guarantees that Paradigm will assume the payment of all medical expenses. It formulates a contract price for each plan and the hope is that it will spend less than the amount the workers’ compensation carrier pays it under the contract, resulting in a profit to Paradigm. This arrangement is also known as “Outcomes-Based Contracting.”

The workers’ compensation carrier pays a set amount under the contract, and then the contracted claims management company must pay all medical expenses. If it pays more than the contract price, it loses money on the deal. If it pays less, it makes a profit. Outcome-based networks claim results reportedly include 40% faster resolution of claims, 60 percent reduction in medical costs, 70 percent reduction in indemnity costs, and 50 to 70 percent reduction in lost work days. However, if a third-party tortfeasor is responsible for the injuries and a lawsuit is filed either by the employee or the employer/carrier (for subrogation), an overriding question which remains unanswered in virtually all jurisdictions is whether the subrogated workers’ compensation carrier is entitled to recover the contract price it paid for the contract, the actual amount of medical paid by the contracted vendor, or neither. Attorneys for injured employees argue that the carrier is entitled to recover only the amount of medical expenses paid, rather than the full contract price paid by the workers’ compensation carrier (which includes the vendor’s “profit”). Some argue they are entitled to neither.

With an outcomes-based contract, the workers’ compensation carrier is assured that its exposure will not exceed the contract price, even if the actual expenses for an injured employee’s medical and rehabilitation needs exceed the contract price. Entering into such contracts means workers’ compensation is gambling that the contract price is equal to or less than the amount of medical expenses that will be incurred. Paradigm sets its contract price after assessing what medical and rehabilitation services will likely be needed and adds in a profit margin. Paradigm’s assessment, which typically takes place within two to three weeks of the injury, requires an estimation of what types of treatment will be necessary, how long treatment will take, and the possibility of complications. If the patient’s medical and rehabilitation services end up costing more than the contract price, Paradigm absorbs the extra cost.

In the Illinois federal court decision of Ocampo v. Paper Converting Mach. Co., 2005 WL 2007144 (N.D. Ill. 2005), the workers’ compensation carrier had a past lien of $469,129.12, which included a $431,548 payment made to a contracted case management company named Paradigm Health Corp. Paradigm contracted to manage medical costs, coordinate medical care, and pay medical providers. Paradigm acted as a third-party administrator, assigning a nurse manager to coordinate care. Out of the $431,548.00 contract price, Paradigm paid $241.091.10 for Ocampo’s medical bills. The remaining $190,459.90 was Paradigm’s profit on the contract. Relying on the Illinois Supreme Court case of Cole v. Byrd, 656 N.E.2d 1068 (Ill. 1995), the court in Ocampo ruled that Paradigm’s fee or “profit” on the contract was not compensation provided to the employee under the Act and was not recoverable as part of the lien. Because Paradigm did not provide any medical or rehabilitative care and only provided case management services by managing and supervising medical treatment provided by others, its fee or “profit” could not be recovered. Only the amount of money Paradigm paid to Ocampo’s treating providers constitutes workers’ compensation benefits. As a result, the court excluded Paradigm’s $190,459.90 profit and the past lien was determined to be only $241.091.10, the exact amount Paradigm paid for Ocampo’s medical bills.

Paradigm’s fee, or profit, on the contract with One Beacon was not compensation provided to Ocampo under the Illinois Workers’ Compensation Act, and thus was not part of the carrier’s workers’ compensation lien. Like the consulting nurse in Cole, Paradigm did not administer any medical or rehabilitative care. Rather, Paradigm essentially provided case management services, managing, and supervising medical treatment provided by others. By engaging Paradigm, One Beacon was able to guarantee its costs. The carrier offered no persuasive argument to distinguish its case from Cole. The court, therefore, concluded that out of the $431,548.00 contract price One Beacon paid to Paradigm, only the amount of money Paradigm paid to Ocampo’s treating providers constitutes workers’ compensation. As a result, in calculating Handi-Foil’s past workers’ compensation liability, the court excludes Paradigm’s $190,459.90 profit. Handi-Foil’s past workers’ compensation liability thus amounts to $241.091.10, the amount Paradigm paid for Ocampo’s medical bills.

Although each state will have to decide this issue for itself, it appears that the carrier might not be able to subrogate for the entire contract payment price, but it should be able to claim subrogation for the actual medical expense payments made by the vendor. It remains for future decisions as to whether the carrier can claim the Paradigm payments in subrogation against the tortfeasor under an equitable or contractual claim.

For reasons which should be obvious, large, catastrophic workers’ compensation claims which involve outcomes-based contracts must be handled by qualified subrogation counsel familiar with the nuances of each state. Such vendors must be reminded (and possibly even required in the contract) to cooperate with subrogation counsel in order to document and prove up the workers’ compensation subrogation lien. Otherwise, they would have no interest in spending additional unrequired time on a claim where the subrogation recovery was going to the workers’ compensation carrier, not them.

Subrogated workers’ compensation carriers should communicate with vendors such as Paradigm and verify how much Paradigm has paid in medical expenses, as opposed to claiming the full lump sum contract amount paid to Paradigm to assume the obligation to pay benefits. It might be argued that the contract price is recoverable in states which define contracted services such as nurse case management fees as “compensation” recoverable under that state’s workers’ compensation laws. However, a workers’ compensation carrier must never misrepresent the nature of any payments it is looking to recover. Trial lawyers are waking up to the inadvertent practice of including in their lien nurse case management fees, bill review audit fees, Paradigm payments, and other payments which could arguably not be recoverable. In some cases, carriers are being sued by trial lawyers alleging that such inflation of workers’ compensation liens is fraudulent and constitutes bad faith.

In the Texas Court of Appeals case of In re Old Republic Risk Management, 2019 WL 2462486 (Tex. Civ. App.-Tyler 2019), the employee (Jimmy Williams) was seriously injured in a fire and explosion in Corrigan, Texas. Old Republic provided workers’ compensation insurance coverage to Georgia-Pacific and paid benefits to the RPIs. The RPIs also filed a personal injury lawsuit against certain third parties. Old Republic sent written notice claiming a lien against the third-party claims based on medical and wage benefits paid by Old Republic. In response to questions about certain payments to Paradigm, Old Republic’s subrogation counsel attorney apparently made a vague suggestion that the difference was due to increased costs associated with the third-party administrator. The employee’s estate then sued Old Republic for fraudulent lien, insurance code violations, and fraud, claiming that Old Republic fraudulently inflated its lien by representing that contract payments initially made to Paradigm Management were “medical payments” purportedly made for the benefit of Jimmy Williams despite knowing that such payments were not medical payments but contractual payments for case management. Texas Fraudulent Lien Statute, Tex. Civ. Prac. & Rem. Code Ann. §§ 12.001-.007.

The Texas Court of Appeals stated that because the Texas Act specifically provides that the net amount recovered by the claimant in a third-party action shall be used to reimburse the carrier for benefits, which includes only medical, income, death, or burial benefits, paid for the compensable injury, a carrier violates the Act’s provisions if it seeks subrogation for amounts that do not qualify as benefits. However, the court then announced that the Texas Department of Workers’ Compensation is tasked with regulating and administering the business of workers’ compensation and monitoring insurance carriers, attorneys, and other representatives for compliance with the Act, and should be the decision maker with regard to whether benefits have been inflated and administrative costs have been wrongfully included in a subrogation claim. It held that courts should allow administrative agencies to initially decide issues when the agency is typically staffed with experts trained in handling complex problems within the agency’s purview. They held that the claims for fraudulent lien, insurance code violations, fraud, independent fraudulent acts by lawyer/law firm, and conspiracy to assert fraudulent lien arise out of Old Republic’s allegedly improper investigation, handling, or settling of a claim for worker’s compensation benefits. It then ordered a resolution by the Department of Workers’ Compensation as to whether Old Republic is entitled to seek administrative costs as part of its subrogation claim and whether the amount of benefits paid has been wrongfully inflated.

The In re Old Republic Risk Management case not only should serve as a shot over the bow to carriers and subrogation counsel that care should be taken in representing the payments which are included in a workers’ compensation lien, but subrogation counsel should be employed to assist in navigating the minefields that employees’ counsel continue to throw in our path. Be open and honest about the nature of all payments and, while you shouldn’t give up on the potential recovery of payments which are recoverable, you should have a legal argument for the recovery of same.

For questions on workers’ compensation subrogation in all 50 states, please contact Gary Wickert at gwickert@mwl-law.com.