Over the past few years, federal courts have responded in different ways to cross plan offsetting and the question of whether it constitutes a breach of fiduciary duty under ERISA. In general, cross plan offsetting occurs when (a) one health plan ("Plan A") overpays a provider for services, (b) the provider declines to reimburse the overpayment and (c) an insurer or third-party administrator recoups the overpayment by paying that provider less when a different participant from a different plan ("Plan B") receives services from the same provider. The provider is paid less for the subsequent service to offset the previously overpaid amount, and each plan's account is debited/credited accordingly. This Client article examines recent court cases involving cross plan offsetting to highlight the potential issues employers should consider.
Eighth Circuit Considers Cross Plan Offsetting
In 2019, the United States Court of Appeals for the Eighth Circuit addressed cross plan offsetting in Peterson v. UnitedHealth Group. Out of network providers challenged UnitedHealthcare's cross plan offsetting practices, claiming the plan documents did not authorize UHC to engage in them. The Eighth Circuit agreed with those providers. While it did not decide whether cross plan offsetting violates ERISA, the court noted that the practice was "in some tension with the requirements of ERISA," particularly a fiduciary's duty to act for the exclusive purpose of providing benefits to participants and their beneficiaries.
Importantly, the U.S. Department of Labor (the "DOL") submitted a brief to the Eighth Circuit arguing that cross plan offsetting is a breach of the duty of loyalty and a prohibited transaction under ERISA. The DOL explained that the practice exposed participants in Plan B to a risk of balance billing by out of network providers. In addition, the DOL argued cross plan offsetting is a prohibited transaction because it involves transferring assets from Plan B to benefit Plan A's loss from a past overpayment. The DOL implied that some of its concerns may be limited to cross plan offsetting involving out of network providers; in network providers typically have contracts with a plan that prevent balance billing.
Another Court Determines Participants Cannot Sue for Cross Plan Offsetting
In May 2021, a federal district court in Minnesota dismissed plaintiffs' complaint alleging that a third-party administrator misused participant funds when it engaged in cross plan offsetting. The plan participants argued cross plan offsetting violated the third party administrator's ERISA duty of loyalty, prohibition on self dealing, and transacting with a party in interest. The court dismissed the lawsuit, reasoning that the participants did not directly experience a loss or denial of benefits, but rather the plan experienced a loss when its funds were used to offset other plans' overpayments. Because the participants were not injured by cross plan offsetting, the court determined they could not sue and did not opine on the breach of fiduciary duty issue.
Another Court Determines Cross Plan Offsetting Is a Breach of Fiduciary Duty
Most recently, in June 2021, a New Jersey federal district court held, in an unpublished opinion, that a third party administrator's cross plan offsetting practice constitutes a breach of fiduciary duty of loyalty and a prohibited transaction. An out of network provider claimed that an insurer/third party administrator's cross plan offsetting violated ERISA's duty of loyalty and prohibited transaction rules. The provider also asserted that the plan documents for the plans from which the payments were withheld did not authorize cross plan offsetting (only same plan offsetting). The court agreed, applying rationale that largely echoed the DOL's brief in Peterson.
Action Items for Plan Sponsors
In light of courts' varying responses to cross plan offsetting, plan sponsors should determine whether their insurers or third party administrators are engaging in the practice. Additionally, plan sponsors should:
- Review plan documents and summary plan descriptions to verify the plan authorizes cross plan offsetting;
- Review administrative service agreements with third party administrators to determine whether it is possible to opt out of cross plan offsetting or limit the practice to in network providers;
- Confirm that plan notices explain the impact cross plan offsetting has on benefits (e.g., the practice does not result in a denial of benefits); and
- Monitor the scope and disposition of future cross plan offsetting litigation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.