At first glance, Coventry Health Care v. Nevils reads like a tedious commercial-law dispute, assessing the enforceability of “subrogation” clauses in insurance contracts. What a snore-fest, you might think. But when the case comes up for argument next week, the justices finally will confront a legal issue that has been moving back and forth between the state and federal courts since 2011, and there is every reason to think they will be fully engaged.
Assuming the eyes of most of my readers started to glaze over at the mention of “subrogation,” I should point out that the justices will not find this at all unfamiliar. The underlying factual dispute is a dead ringer for the one they faced last term in Montanile v. Board of Trustees: An insurance company pays for the medical care of an insured injured in an automobile accident. Later, the insured successfully sues the other driver. Having paid the insured’s medical costs, the insurance company predictably seeks the funds the insured received from the other driver, relying on a “subrogation” clause in the insurance policy. Confronting these facts in the ERISA context, the unassuming opinion in Montanile held that the insurance company could not recover because the claim was “equitable” rather than “legal” and thus beyond the remedies granted under ERISA. Now, that one did turn out to be a snoozer.
Next week’s case starts with just such a routine dispute, but presents it in a context with far-reaching implications. The injured individual here is a federal employee, insured under a policy provided under the Federal Employees Health Benefits Act, the terms of which have been specified by the Office of Personnel Management. Among other things, those policies, like the policy at issue in Montanile, include subrogation clauses authorizing the insurers to recover funds their insureds obtain from third parties, usually through successful tort litigation.
So what makes this case so interesting? As it happens, the law of Missouri, like the law in dozens of other states, does not allow the enforcement of subrogation clauses. Generally speaking, the hostility to those clauses rests on the notion that they are unfair to the injured policyholders. One concern is that insurance settlements often leave individuals undercompensated, so they will rarely be overcompensated even if they receive payments both from their insurers and from tort litigation. Another concern is that insurance companies do not apply proceeds from subrogation litigation in a way that lowers insurance premiums. The key point, though, is that under Missouri law the insurance company would not be able to recover from the insured. The question, then, is whether the Missouri anti-subrogation statute (a state enactment) can invalidate the terms of the contract prescribed by OPM (implementing a federal statute).
The case has been bitterly contested. Jodie Nevils, the injured employee, filed a class action in Missouri state court, which Coventry, the insurer, removed to federal court. In large part because of the Supreme Court’s 2006 ruling in Empire HealthChoice v. McVeigh, the district court held that it had no jurisdiction over the case and sent it back to state court. There, the trial court held for Coventry, but the Missouri Supreme Court ruled for Nevils, finding the FEHBA insufficiently specific to pre-empt Missouri’s anti-subrogation statute. When Coventry sought review in the United States Supreme Court, the court called for the views of the U.S. solicitor general. At that point, OPM issued a regulatory interpretation of the statute stating explicitly that the subrogation provisions should apply notwithstanding contrary state law.
The solicitor general weighed in with the suggestion that the Supreme Court vacate the decision of the Missouri Supreme Court and send the case back to let that court consider the new OPM regulation. The Supreme Court took the solicitor general’s advice, sending the case back to the Missouri Supreme Court in June of 2015. The Missouri court, though, stuck to its guns, holding once again that subrogation was inappropriate. This time around, the Supreme Court granted Coventry’s petition and set the case for full review.
The central jurisprudential problem here is that the FEHBA does not say anything about subrogation provisions, much less pre-empt state laws that invalidate them. Rather, it generally provides that certain contractual terms – those that “relate to the nature, provision, or extent of coverage or benefits (including payments with respect to benefits)” – “shall supersede and pre-empt any State … law.” Read literally, then, the statute suggests the novel idea that it is the contract (specifically, the insurance policy) that pre-empts state law, not the statute adopted by Congress. As mentioned above, the court has considered the jurisdictional ramifications of the provision before. The McVeigh court noted the oddity that the FEHBA on its face “declares no federal law preemptive” and seems to “rende[r] preemptive contract terms in health insurance plans.” That is indeed, as the court commented, a “prescription of [an] unusual order.” Whether the supremacy clause permits Congress to provide for pre-emption by contract is just the kind of question to get the attention of the justices.
Logically, the first question should be whether the statutory text applies to invalidate the state law at issue. Read in a vacuum, the best answer probably is that it does. The FEHBA refers, among other things, to contractual terms that “relate to the … extent of coverage or benefits (including payments …).” As Coventry emphasizes, the subrogation clause relates to the benefit payments in an important way, by making those payments conditional.
It’s not at all clear, though, that the textual point will get Coventry very far, because there are so many reasons why this case is not (in the view of either party) a likely candidate for a plain-language ruling. On Coventry’s side is the OPM regulation. Because the regulation interprets a statute the enforcement of which Congress has delegated to OPM, Coventry’s argument (echoed by the solicitor general) for deference to the agency’s interpretation under Chevron v. Natural Resources Defense Council is powerful. It is hard to argue that the statute is not at least ambiguous on the question, so if Chevron applies, that should carry the day for Coventry. On the other hand, a “friend of the court” brief filed by a redoubtable group of prominent administrative-law academics cogently counsels against the application of Chevron in this case. Among other things, the professors argue both that Chevron deference is ill-suited to questions of pre-emption (which have little to do with agency expertise) and that in this particular case, OPM’s regulatory analysis displays no interest in considering the state interests that should inform the pre-emption balance.
A nice counterpoise to Coventry’s argument for Chevron deference is Nevils’ argument for application of the long-postulated presumption against pre-emption. If the court reads the statute in light of that presumption, it would not be hard to conclude that the statute’s loose language falls short of achieving pre-emptive effect. To be sure, though, as Coventry demonstrates, the court in recent years has so routinely departed from a presumption against pre-emption that applying such a presumption in this case would represent a remarkable turning point.
This case strikes me as one that is all about the lens through which the justices decide to analyze the statute. Chevron deference would all but seal a victory for Coventry; a presumption against pre-emption would do the same for Nevils. So how will the court choose between those perspectives? I would point to two more features of the case. One is the supremacy-clause problem. I doubt the justices will have any appetite for directly authorizing “pre-emption by contract.” At the same time, I think they will have little or no inclination to try to explain exactly why and how the supremacy clause requires Congress to specify pre-emptive rules in the statutory text itself. All in all, I think the justices would prefer not to address that question, and the more seriously they take it the more likely they may be to punt the problem back to the legislature by ruling in favor of Nevils.
On the other hand, it is just about inconceivable that Congress would want Nevils to prevail here. For one thing, it makes no sense to adopt a system under which federal employees in one state get to keep tort recoveries while those in another state do not. An amicus brief from several trade groups that provide insurance under the FEHBA illustrates this point with some great hypotheticals. Imagine, for example, co-workers in a St. Louis office, one of whom lives in St. Louis itself (in Missouri) and one of whom resides across the Mississippi in East St. Louis (in Illinois). Congress could not possibly have intended their insurance coverage to differ based on where they live. For another thing, the issue involves large sums of money from the federal fisc. As the government’s brief in support of Coventry points out, subrogation recoveries last year were $126 million, even under the existing patchwork regime in which some states deny them altogether. That may be a trivial percentage of federal-government outlays, but it is hard to believe that Congress would prefer that those funds come from general revenue sources rather than from federal employees’ tort recoveries.
I hope this lengthy post gives a sense of the many balls likely to be in the air at next week’s argument. At a minimum, it should convince you that the justices will not come to the argument viewing the case as a tedious insurance-law matter.
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