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Cross-Plan Offsetting Runs Afoul with ERISA, Increased Legal Risk for Plan Sponsors

On January 15, 2019, the Eighth Circuit Court of Appeals decided that an insurance industry practice of recouping overpayment made to a provider by one benefit plan by offsetting the overpaid amount against future payments owed to the same provider by a different benefit plan “is in tension with the requirements of ERISA.”

In Peterson v. UnitedHealth Group, Inc., the Court was poised with the question of whether Employee Retirement Income Security Act of 1974 (ERISA)-covered plans administered by UnitedHealth Group permitted cross-plan offsetting.

In 2007, UnitedHealth Group implemented a procedure to offset overpayments to “out-of-network” providers through a practice known as cross-plan offsetting. Consider this example on cross-plan offsetting:

A TPA administers two separate and unrelated health plans. Patient A, who is a participant of Plan A, goes to an out-of-network provider (Dr. Peterson) and has a $500 charge for service. The TPA pays $500 to Dr. Peterson but later determines it should have charged only $350. Dr. Peterson disagrees and refuses to return the $150. Later, Patient B, who is a participant of an altogether different Plan B, goes to the same out-of-network provider and has a $700 charge for service. The TPA agrees $700 is a properly payable and pulls $700 from Plan B’s checking account. However, the TPA only transmits $550 to Dr. Peterson to pay Patient B’s claim, withholding $150 from payment thereby recouping the overpayment for Patient A.

United administers many self-insured employee welfare benefits plans and each plan granted United broad authority to interpret and implement the plan. United argued that this broad authority to administer the plan was sufficient to authorize the cross-plan offsetting. However, the Court did not agree, but rather stated that “nothing in the plan documents even comes close to authorizing cross-plan offsetting,” and if they were to agree to such an argument “would be akin to adopting a rule that anything not forbidden by the plan is permissible.”

The court did not specifically decide if cross-plan offsetting necessarily violates ERISA but did state “at the very least it approaches the line of what is permissible.” Such a practice likely violates ERISA’s exclusive benefit rule by failing to pay a benefit owed to a beneficiary under one plan in order to recover money for the benefit of another plan, and also a prohibited transfer of assets from one plan to another.

Most notably, the Department of Labor filed an amicus brief supporting the Court’s decision and affirmatively stating its position is that this practice violates ERISA’s prohibited transaction rules.

Plan sponsors will want to inquire and review plan documents and third-party service agreements with their TPAs about whether they engage in the practice of cross-plan offsetting and fully understand how overpayment recoveries are administered. If a TPA is engaging in cross-plan offsetting, a plan sponsor may also seek to add indemnification language to its agreement with the TPA.

For more information on how to ensure your organization remains compliant this year, visit OneDigital's Compliance Confidence page.