Alaska Supreme Court Overturns Law Limiting Awards in Some Medical Malpractice Cases

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The Alaska Supreme Court determined late last year that a 1976 law limiting financial awards in medical liability lawsuits for Alaskans with health insurance is unconstitutional.

The statute at issue, AS 09.55.548(b), provided that when a medical malpractice claimant’s losses have already been compensated in part by a collateral source, such as a health insurer, the claimant’s damages award will be reduced by the value of the collateral source compensation, except when the collateral source is a “federal program that by law must seek subrogation.” At issue in Knolmayer, et al. v. McCollum was whether and how the statute’s federal program exception applies when the claimant’s losses are compensated by an employer’s self-funded health benefit plan governed by the federal Employee Retirement Income Security Act (ERISA).

In the underlying case, plaintiff Charina McCollum alleged that in May 2015, Thomas Knolmayer, MD, mistakenly cut the wrong duct during a surgery to remove her diseased gallbladder. As a result, McCollum was medevacked from Anchorage to Seattle, where she was given a drain to evacuate bile from her abdomen until she could have duct repair surgery. Due to problems with bile drainage in June 2015, she was again medevacked to Seattle and the drain was replaced. In August 2015 the duct was surgically repaired.

McCollum’s husband, Jason McCollum, was employed by Lowe’s Companies, Inc., and most of McCollum’s healthcare expenses were paid by a health plan administered by Lowe’s. The terms of the plan include a right to subrogation, under which the plan “may, at its discretion, … commence a proceeding or pursue a claim against any party” for the recovery of all benefits paid by the plan.

The terms of the Lowe’s Plan also give it a right to reimbursement from any damages award without deduction for attorneys’ fees and costs. The obligation exists regardless of how the judgment or settlement is classified and whether or not the judgment or settlement specifically designates the recovery — or any portion of it — as including medical, disability or other expenses. And if the covered person’s recovery is less than the benefits paid, the plan is entitled to be paid all of the recovery achieved.

Charina McCollum was awarded $250,000 in her lawsuit against Knolmayer, but the Lowe’s Plan had reimbursed her $349,049.87 for her medical care. McCollum, under AS 09.55.548(b), was on the hook for the $99,049.87 difference.

The justices noted that most private health insurers employ subrogation clauses similar to the Lowe’s Plan. In these cases, the court determined, “the plain language of AS 09.55.548(b) causes the health plan’s medical payments to be deducted from the plaintiff’s damages award twice: first by the court, applying AS 09.55.548(b), and a second time by the health plan exercising its contractual right of reimbursement. This ‘double deduction’ means that the plaintiff, instead of receiving a windfall, comes up short …

“A severely injured person unable to continue working a strenuous, high-paying job might have incurred $500,000 in medical bills, covered by his insurer, and lost $500,000 in future income. Under AS 09.55.548(b) the person may not recover the $500,000 paid by the insurer. Thus the defendant, who has caused $1 million in damages, is on the hook for half the cost of its negligence. As for the $500,000 the person could recover as compensation for lost income, the insurer may exercise its contractual right of reimbursement and take the entire amount. This person would end up far worse than someone who had no insurance at all, who would be able to recover all damages and, after paying medical debts, could keep the compensation for lost income.”

The Alaska Supreme Court ultimately concluded that an ERISA plan does not fall within the statute’s “federal program” exception. Therefore AS 09.55.548(b) requires a claimant’s damages award to be reduced by the amount of compensation received from an ERISA plan. But the justices went further.

“We also conclude that the distinction the statute draws between different types of medical malpractice claimants is not fairly and substantially related to the statute’s purpose of ensuring claimants do not receive a double recovery — an award of damages predicated on losses that were already compensated by a collateral source. Because insurance contracts commonly require the insured to repay the insurer using the proceeds of any tort recovery, claimants with health insurance are scarcely more likely to receive a double recovery than other malpractice claimants. The statute therefore violates the equal protection guarantee of the Alaska Constitution.”

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