Arizona Court of Appeals Division One Holds That 5 U.S.C. § 8902(m)(1) of the Federal Employee Health Benefits Act Does Not Preempt Arizona Law Barring Subrogation in Personal Injury Cases.

Plaintiff Kobold, a federal employee, was entitled to healthcare benefits under an insurance plan governed by the Federal Employee Health Benefts Act (“FEHBA”), which was carried by Defendant Aetna (the “Plan”).  In 2006, Kobold was in a motorcycle accident and Aetna paid his medical bills.  Under the Plan’s subrogation clause, Aetna had a right to subrogation and reimbursement in the event Kobold obtained a recovery from responsible third parties.  When Kobold settled with the third parties responsible for his accident, Aetna asserted a lien on the settlement proceeds.  The third parties deposited the disputed portion of the settlement with the superior court and filed an interpleader action against Kobold and Aetna.  Kobold and Aetna then cross-moved for summary judgment.  The superior court granted Kobold summary judgment, and Aetna timely appealed.

The Arizona Appeals Court affirmed.  Arizona law generally forbids subrogation in personal injury cases.  Under FEHBA’s preemption clause, however, certain FEHBA contract terms that “relate to the nature, provision, or extent of coverage or benefits (including payments with respect to benefits) shall supersede and preempt any State or local law . . . which relates to health insurance or plans.”  5 U.S.C. § 8902(m)(1).  After explaining that preemption is disfavored and that statutes will be construed to avoid preemption, the Court held that § 8902 did not cover the Plan’s subrogation clause, and thus did not give that clause preemptive effect.  The Court held that the subrogation clause did not “relate to” “coverage” because it had no effect on the scope of risk Aetna accepted, and did not “relate to” “benefits” because it had no impact on the carrier’s payments on behalf of the insured.  Simply put, the clause created a contingent right to repayment in favor of Aetna but had no immediate relationship to the scope of Kobold’s coverage or receipt of benefits under the Plan.  Because the subrogation clause was not covered by FEHBA’s preemption clause, Arizona law applied.

The Court rejected Aetna’s argument that it should defer to the interpretation provided by the Office of Personnel Management (“OPM”), explaining that OPM’s interpretation was not the result of a formal rulemaking or adjudication process and that FEHBA did not even delegate to OPM the authority to make determinations having the force of law.

Judge Swann authored the opinion; Judges Orozco and Cattani concurred.