The United States Court of Appeals for the Seventh Circuit recently affirmed a Wisconsin district court’s grant of summary judgment in favor of two Wisconsin hospitals, ruling the hospitals were not obligated to repay $1.7 million to a health plan in connection with services provided to a non-covered patient, even where the payments were made in error.

Plaintiffs Kolbe & Kolbe Health and Welfare Benefit Plan, an employee benefit plan, and Kolbe & Kolbe Millwork Co., Inc., the employer (together, the “plan”), filed a lawsuit against Medical College of Wisconsin, Inc. and Children’s Hospital of Wisconsin (together, the “hospital”), seeking the repayment of medical expenses mistakenly paid by the plan. The medical care at issue involved services provided to the daughter of a Kolbe company employee, who, in August 2007, requested coverage for his child as a dependent under the plan. The plan covered the expenses of the child’s medical care at the hospital until June 2008, when it determined that the child was not covered. The plan then demanded the hospital refund the amounts it had paid pursuant to the terms of a provider agreement it entered into with an intermediary. The hospital refused, asserting it had no obligation to make a refund under the agreement. The plan then filed its action, claiming ERISA violations and breach of contract.

The district court initially dismissed the plan’s lawsuit and awarded attorneys’ fees in favor of the hospital. Following the Seventh Circuit’s partial reversal of the lower court’s decision, the district court granted summary judgment in the hospital’s favor on the breach of contract claim. The plan appealed, and the hospital cross-appealed, claiming the district court should have sanctioned the plan under Rule 11.

The issue before the Seventh Circuit boiled down to whether the provider agreement implicitly required a refund where a health plan made payments to a hospital in error—i.e., initially believing the patient was covered. (The court pointed out that this was not an instance of impermissible overcharging—in which the hospital would be required to return amounts paid by the plan—noting there was no dispute that the services at issue had actually been rendered adequately.) The court refused to recognize a requirement to refund where the contract was silent on the issue, despite the fact that the hospital may have made refunds to the plan under similar circumstances in the past. The court reasoned that such a step would encourage moral hazard and undercut the purpose of the underlying provider agreement: “interpolating an obligation to make a refund when the seller [the hospital] is faultless and the buyer [the plan] is asking to be compensated for his own mistakes would make the contract fail by reducing the buyer’s incentive to exercise proper care in determining the eligibility of presumed plan beneficiaries.” As such, the court concluded, among other things, that the hospital was not obligated to refund the amounts paid by the plan.

The case is Kolbe & Kolbe Health and Welfare Benefit Plan v. Medical College of Wisconsin, Inc., Nos. 12-3837 & 12-3929 (7th Cir.). Click here to read the Seventh Circuit’s opinion.