Long-Awaited "Cross-Plan Offsetting" Case Increases Risk for Employers, Insurers
On January 15, 2019 the Eighth Circuit Court of Appeals issued a long-awaited decision relating to a relatively obscure -- but important -- concept called "cross-plan offsetting." The case, Peterson v. UnitedHealth Group, Inc., increases the risk for employers with self-funded health plans if an employer allows its third party administrator (TPA) to engage in cross-plan offsetting. We discuss the details of this practice and case below.
What Is Cross-Plan Offsetting?
Health plans generally have both in-network providers and out-of-network providers. When TPAs administer health plans they sometimes overpay a provider (or believe that they have overpaid the provider -- the provider may disagree). For in-network providers, the TPA and provider generally resolve the issue pursuant to their contract. For out-of-network providers, the TPA and provider do not have any contract in place. This often leads to a dispute about whether there really was an overpayment and, if so, how to resolve it.
About fifteen years ago, TPAs began devising a method to recover more of these disputed payments. Under one method, an alleged overpayment relating to one health plan from one employer is "offset" by modifying the amount which is paid by a different health plan of a different employer. A detailed example of how this "cross-plan offsetting" process works is provided at the end of this alert.
Legal Risks Raised by Cross-Plan Offsetting.
Cross-plan offsetting had not been widely known in the past. There were a few cases which challenged the practice, but the cases did not receive much attention and were of relatively low risk.
That changed in 2017 when UnitedHealth Group, Inc. (UHC) was successfully sued over the practice and the U.S. Department of Labor (DOL) weighed in with an amicus brief. The DOL strongly criticized the practice and the judge in the case agreed, holding that UHC's practice violated the plan documents and, for good measure, likely violated ERISA. UHC appealed to the Eighth Circuit.
Eighth Circuit Decision.
In a brief decision, the Eighth Circuit quickly ruled against UHC and held in favor of the provider. The court noted that nothing in the plan documents allowed UHC to conduct cross-plan offsetting. With no plan document to authorize the practice, UHC's back-up argument was that it had discretionary authority to interpret the plan. And it used that authority to, in essence, create the cross-plan offsetting authority under the otherwise silent plan.
The court rejected UHC's back-up argument. Then, the court strongly hinted that the practice violated ERISA's fiduciary duty rules, including the requirement that plan assets of one plan be used for the "exclusive purpose" of benefiting individuals covered by that plan. The court did allow some "wiggle room" when it noted the court was not holding that cross-plan offsetting "necessarily violates ERISA". This left open the possibility of designing some type of cross-plan offsetting which complies with ERISA. Although the court did not suggest exactly how that could be accomplished, it perhaps could be accomplished through specific authority in the plan document and careful disclosures to plan participants. In other words, if an employer went "all in" on cross-plan offsetting, it might (perhaps) work. But the court did not offer a clear path for an employer in this situation. So, going down that "path" will result in some risk to employers.
How Do We Know if Our TPA Engages in Cross-Plan Offsetting?
Many self-funded employers may not know if their TPA engages in cross-plan offsetting. A TPA may not clearly disclose the practice. In our experience, an employer must ask the TPA in order to obtain a definitive answer.
Must an Employer Engage in Cross-Plan Offsetting?
Some TPAs allow employers to opt out of cross-plan offsetting. But others do not allow it, or do not have the systems in place to provide an option. An employer should discuss with its TPA whether it has the ability to opt out of cross-plan offsetting if the employer is concerned about the practice. And, given the DOL amicus brief and the new Eighth Circuit decision, we think most employers will be at least somewhat concerned about the practice.
Can We Be Sued Over Cross-Plan Offsetting?
Lawsuits relating to cross-plan offsetting remain relatively rare probably because the dollars involved tend to be very small and only out-of-network payments are impacted. And those payments are not nearly as large as in-network payments. In addition, it is difficult for plaintiffs to prove damages. The larger risk might be the DOL taking the position (consistent with their 2017 amicus brief) that at least some forms of cross-plan offsetting generally are a breach of ERISA's fiduciary duty rules. The DOL could then, perhaps, take the position that the plan fiduciaries (e.g., a benefits committee) are personally liable for any damages which occur. Even if the damages are relatively small, plan fiduciaries who are personally liable for the damages may be alarmed. (It is possible that the plan sponsor would step in and try to assist the fiduciaries for any financial exposure they have.) In a worst-case scenario, criminal penalties could even perhaps be raised by a federal investigator. We consider the threat of criminal penalties very unlikely at this stage, but there is at least some risk of such a possibility.
Next Steps.
Plan sponsors who are uncertain if their TPA engages in cross-plan offsetting should ask about it. If the TPA does engage in cross-plan offsetting, the employer must decide if it is "in" or "out" -- should it allow the TPA to keep cross-plan offsetting or stop the practice? If the employer maintains the practice, the employer should consider what plan language it can add to support the practice. And employers should consider whether a TPA will provide some type of contractual indemnification relating to the practice.
TPAs (or insurers with TPA operations) should revisit their practices in light of the new court decision. The decision strongly suggests that they will want clear plan (and administrative services agreement) language supporting cross-plan offsetting if they continue the practice. That may require modifications to many client plan documents and service agreements.
Detailed Example (Caution -- Rather Long!).
At the risk of providing too much detail, we offer the following as an example of how cross-plan offsetting can work. Note: The dollar amounts in this example are low for simplicity. In the actual court cases they were often thousands of dollars (in Peterson, one claimed overpayment for one participant was $19,460). Generally, we think the dollar amounts will tend to be low, but certainly could be thousands (or tens of thousands) of dollars.
Suppose John is a participant in the Alpha Company Health Plan. It is fully-insured through a TPA. John goes to an out-of-network doctor, Dr. Jones. The bill is $300. The bill is submitted and the TPA pays it. Then, a week or two later, the TPA determines that it overpaid the bill. The TPA believes it should have been $200. The TPA makes a request for Dr. Jones to refund the $100. If the doctor refunds the $100, there is no "same-plan" offsetting or "cross-plan" offsetting. The issue is just over.
Sometimes the provider will disagree with the TPA. Dr. Jones will claim that the $100 really is properly payable. Neither the provider nor the TPA have any interest in litigation to resolve the $100 dispute. So it could just sit there, essentially, as a "bad debt" for the TPA and its employer client. Eventually, in the past, the TPA might have written it off. They may also have done "same-plan" offsetting.
Some TPAs (but not all) decided to adopt a different strategy. They waited for another participant in a different plan to go to the same out-of-network doctor (here, Dr. Jones). Let's suppose a different employer -- Beta Company -- uses the TPA also. Patient Don is covered by the Beta Company Health Plan. Don also goes to see Dr. Jones, who is out-of-network. Don's bill is $500. Everyone agrees that the $500 is properly payable (it is "usual, customary and reasonable" and is covered by the plan). The TPA pulls $500 from the Beta Company checking account (or other funding source used to pay claims). The TPA sends $400 (not $500) to Dr. Jones to pay for Don's $500 claim. The TPA sends a note along with the $400 to tell Dr. Jones that he has been paid in full: $400 in cash and $100 forgiveness of his "contested debt" to the TPA.
If Dr. Jones accepts the $400 + $100 then the issue is over. The TPA takes the $100 it pulled from Beta Company and credits it somewhere (either to its fully-insured business or to a self-funded employer -- the exact process is not always clear and it can vary from TPA to TPA).
However, Dr. Jones may not accept the "forgiveness" of the $100 contested debt. (It is contested, after all -- Dr. Jones does not believe he owes it.) Dr. Jones could fight the TPA over the $100. For example, he might litigate over the $100. That might be difficult. So Dr. Jones may decide to balance bill Don the $100. Dr. Jones would claim that he can do that because all his out-of- network patients would typically agree that they can be balance billed for amounts not paid in full by the patient's health plan (here, the Beta Company Health Plan). And Dr. Jones, from his perspective, has not been paid the full $500 -- he's only been paid $400. In some situations Don may dispute the $100, fight it and get it somehow eliminated. In other situations Don may just pay the $100 to resolve the matter. Don also may take it to Beta Company to see if Beta Company can assist. Beta Company would probably be surprised that Don's $500 bill has not been paid in full. From Beta Company's perspective it was. The TPA told them to send $500; Beta Company sent $500; the TPA received $500; but the TPA only forwarded $400 in cash (without telling Don or Beta Company what was going on -- or, perhaps worse, stating that the full $500 had been paid, when only $400 had really been paid). So Beta Company may be able to intervene and assist Don. But at the end of the day Don may actually owe the $100, as neither he nor the Beta Company Health Plan can prove that Dr. Jones was paid the $500.
The net result is that the TPA has essentially managed to turn a dispute between itself and Dr. Jones into a dispute between Dr. Jones and a participant in an unrelated health plan. This "cross-plan" offsetting is what both the lower court and the appeals court in Peterson found was not supported by any plan language (in about 40 plans that were reviewed). It's what the DOL claims is often a violation of ERISA's fiduciary duties (because it is mingling disputes among two different plans, among other problems).
