ERISA Preemption Challenged: How a Pharmacy Lien Survived a Self-Funded Plan's Subrogation Claim

James Wong — Founder & Pharmacist, LienScripts | January 22, 2026 | 8 min read

When a self-funded ERISA plan tried to assert a sweeping subrogation claim over a PI settlement — including medications the plan never covered — a careful reading of plan language and two Supreme Court decisions kept the pharmacy lien intact. This fictionalized case study explains the argument that worked.

Note: This is a fictionalized case study based on composite facts. Names and identifying details are not real.

This post is for informational purposes only and does not constitute legal advice.

Background: A Rear-End Collision and a Complicated Benefits Picture

Maria Delgado, a 41-year-old logistics coordinator in the Inland Empire, was rear-ended on the 60 freeway while stopped in traffic. She sustained a cervical disc herniation at C5-C6 and soft tissue injuries to her lumbar spine. Her treatment plan included chiropractic care, two rounds of epidural steroid injections at a pain management clinic, and a substantial ongoing prescription regimen — muscle relaxants, nerve pain agents, and topical anti-inflammatory compounds.

Maria's health insurance was a self-funded health plan administered by a large third-party administrator (TPA) through her employer, a regional freight company. Her attorneys recognized early that this was an ERISA-governed plan and enrolled her in a pharmacy lien arrangement for her prescription medications at intake. Her employer's health plan paid for her imaging and the injection procedures. The pharmacy lien covered her prescriptions from the first fill forward.

The at-fault driver was insured with a $100,000 policy limit. After more than a year of active treatment, the case settled at policy limits.

The ERISA Plan's Subrogation Demand

Approximately three weeks before the settlement finalized, the TPA administering the self-funded plan sent a subrogation letter to Maria's attorneys. The demand letter asserted a broad recovery interest based on the following language from the Summary Plan Description:

"The Plan shall have the right to reimbursement from any recovery, settlement, or judgment the Covered Person receives from any third party for any expenses the Plan paid or incurred on the Covered Person's behalf arising from the same injury or illness, including but not limited to medical services, pharmacy benefits, and all other covered expenses."

The TPA's demand itemized the imaging costs and injection procedures the plan had paid — and then added a line for "pharmacy and related medication costs" citing an estimated figure. The attorneys immediately flagged the pharmacy line as problematic: the plan had not paid for any of Maria's prescriptions. Every medication she received was dispensed under the LienScripts pharmacy lien and had never been billed to the employer's health plan at all.

[!KEY] When an ERISA plan's subrogation demand includes line items for costs the plan never actually paid, challenging the factual basis of those line items — not just the legal theory — is the first and most important step. Plans assert broad contractual language, but enforcement requires that the plan actually expended funds on the claimed items.

Dissecting the Plan Language: What "Paid or Incurred" Actually Means

The attorneys focused their challenge on two distinct but related grounds.

First: The factual predicate. The plan's subrogation clause covers amounts the plan "paid or incurred." The plan had not paid for any of Maria's pharmacy costs. It had not incurred any obligation to her pharmacy — the pharmacy lien was a separate arrangement between Maria, her attorney's firm, and the lien provider. The TPA was using a broad interpretation of "incurred" to sweep in costs it had never touched.

The attorneys requested a complete accounting from the TPA: itemized EOBs, remittance data, and any pharmacy claims the plan had processed for Maria's injury-related medications. The TPA's response confirmed what the attorneys already knew — no pharmacy claims existed. The plan had paid for imaging and injections only.

Second: The equitable limitation under McCutchen. Even for the costs the plan genuinely paid, the attorneys advanced an argument under US Airways, Inc. v. McCutchen, 569 U.S. 88 (2013). In McCutchen, the Supreme Court held that while an ERISA plan's express terms generally govern its subrogation right, federal common law equitable principles — including the common fund doctrine — may modify those rights where the plan's terms are silent. The plan's SPD contained no express clause overriding the common fund doctrine.

The attorneys argued that the TPA's recovery from the settlement was made possible entirely by the attorneys' contingency work. Without the lawsuit and the settlement, the plan would have recovered nothing. The plan should therefore contribute proportionately to the attorneys' fee — effectively reducing the plan's net recovery by the contingency percentage.

[!SOURCE] US Airways, Inc. v. McCutchen, 569 U.S. 88 (2013): The Supreme Court held that ERISA plan terms control subrogation recovery, but federal common law equitable principles apply where the plan is silent — including the common fund doctrine requiring the plan to contribute to attorney fees that produced the fund from which it recovers.

The Montanile Argument: Dissipated Funds and Equitable Tracing

The attorneys also preserved an argument under Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. 136 (2016). In Montanile, the Supreme Court held that an ERISA plan's equitable lien by agreement — the standard mechanism for ERISA subrogation enforcement — attaches only to specifically identified, traceable funds or property in the defendant's possession. If the beneficiary dissipates the settlement funds by spending them on non-traceable items (general expenses, food, consumables), the equitable lien is extinguished and the plan is left with only a legal claim — which is unavailable under ERISA § 502(a)(3).

In this case, the attorneys structured the settlement disbursement to ensure that the pharmacy lien was satisfied from Maria's net recovery before any remaining funds were transferred to her. The pharmacy lien payment went directly from the attorneys' trust account to LienScripts. Once that payment was made and the remaining settlement funds transferred to Maria for personal use — rent, food, living expenses — the self-funded plan's equitable lien on those disbursed funds was extinguished under Montanile.

The attorneys put the TPA on notice of this timeline before disbursing, giving the TPA a final opportunity to resolve the subrogation claim for the confirmed amount. The TPA, faced with the prospect of losing its equitable lien on dissipated funds, settled promptly for the amount attributable to the imaging and injections only, with a full release of any pharmacy-related claims.

[!SOURCE] Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. 136 (2016): An ERISA plan's equitable lien by agreement attaches only to specifically traceable funds in the beneficiary's possession. Once settlement proceeds are dissipated into general assets, the equitable lien is extinguished and the plan cannot enforce its subrogation claim against the beneficiary's general estate.

The Outcome: Pharmacy Lien Paid in Full; ERISA Plan Limited to Its Actual Costs

The final resolution of the subrogation dispute:

• The ERISA plan recovered only the amounts it had actually paid — imaging and injection costs — reduced further by a pro-rata common fund contribution to attorney fees under McCutchen.
• The plan's demand for pharmacy costs was entirely withdrawn after the attorneys confirmed no pharmacy claims existed in the TPA's system.
• The LienScripts pharmacy lien was paid from the net settlement proceeds prior to disbursement to Maria.
• Maria received her remaining net recovery free of any further ERISA subrogation claim.

[!KEY] The pharmacy lien's structural independence from the health plan was the decisive factor: because the lien-dispensed medications had never been billed to or paid by the ERISA plan, the plan had no colorable subrogation interest in those costs regardless of how broadly its SPD was written. Broad plan language cannot manufacture a subrogation claim where no payment was made.

Key Lessons for PI Attorneys

1. ERISA plan language is broad, but enforcement requires actual payment. Self-funded plans routinely assert sweeping demands that include costs they never paid. Always request itemized EOBs and confirm what the plan actually expended before negotiating any figure.

2. Pharmacy liens taken off the insurance system eliminate ERISA subrogation exposure on medications. If medications were never billed to the plan, the plan has no subrogation interest — regardless of ERISA preemption.

3. McCutchen's common fund principle reduces the plan's net recovery. Where the plan's SPD is silent on attorney fees, the common fund doctrine requires the plan to contribute proportionately to the contingency fee that produced the fund.

4. Montanile creates disbursement leverage. Once settlement proceeds are disbursed to non-traceable general expenses, the plan's equitable lien is extinguished. Timing disbursements strategically — with proper notice to the plan — can accelerate resolution.

5. Engage the TPA early, in writing, and with documentation. TPAs administering self-funded plans have authority to negotiate. A well-documented demand letter citing McCutchen and Montanile and including actual EOB data often resolves ERISA subrogation disputes without litigation.

Related Resources

• What Is ERISA Preemption in Personal Injury?
• ERISA Self-Funded Plans and Pharmacy Liens: What PI Attorneys Must Know
• Health Insurance Subrogation vs. Pharmacy Liens: California PI Attorney Guide