Employers take note: The collapsing legal basis for cross-plan offsetting
The practice often also causes a ripple effect that may unfairly saddle a participant with additional costs.
Back in 2019, an Eighth Circuit Court of Appeals case offered key insight about “cross-plan off-setting.” Without directly ruling on the matter, that Appellate Court sharply questioned whether ERISA permitted cross-plan offsetting. Now, a New Jersey District Court has directly held that cross-plan offsetting represents an ERISA fiduciary violation. [Lutz Surgical Partners, PLLC v. Aetna, Inc. 2021 WL 2549343 (D. N.J., June 21, 2021).]
Although a district court sits at the lowest rung of the federal judiciary, this ERISA ruling casts insightful handwriting on the wall that employers sponsoring self-funded plans should carefully contemplate. As more fully described below, cautious employers may even consider reaching out to their TPAs to ensure that its plan operations correctly satisfy ERISA fiduciary obligations.
Related: UnitedHealth accused of bilking employer plans in latest class-action suit
Cross-plan offsetting occurs when a valid payment from one plan is artificially reduced to “offset” an errant overpayment made to the same provider from a different plan. (An out-of-network provider is usually involved.) In other words, this approach effectively cures an overpayment by reducing the next payment. Although offsetting conveniently enables a plan payer (e.g. an insurance carrier) to be made “whole,” it does so by manipulating the operations of unrelated ERISA programs. The practice often also causes a ripple effect that may unfairly saddle a participant with additional costs.
Consider the following example and the parties’ unwitting involvement in resolving an insurer overpayment.
Example: Ed Employee participates in the ABC Company Group Health Plan and uses an out of network physician (Doctor Greedy) for medical services. The ABC Company Group Health Plan is insured with ACME Insurance. ACME Insurance processes the claim and pays Doctor Greedy $1,000. Sometime later, after reviewing the claim, ACME Insurance determines it should have only paid $800. ACME Insurance asks Doctor Greedy for the $200 back. Since Doctor Greedy is out-of-network, he is not subject to a contract with ACME Insurance that requires him to repay. As a result, Doctor Greedy refuses to return the $200 overpayment.
The next week, Patty Participant, who is in the XYZ Company Group Health Plan, also goes to Doctor Greedy. Doctor Greedy is, again, out-of-network. XYZ Company Group Health Plan is self-funded but uses ACME Insurance to process claims as an Administrative Services Only (ASO) provider. When Doctor Greedy submits Patty’s claim, ACME Insurance determines Patty’s claim is also $800.
ACME Insurance now astutely observes that Doctor Greedy expects a new payment – and this is where the “offset” is hatched. Instead of correctly paying Doctor Greedy $800 from the XYZ Company Group Health Plan, ACME Insurance sees an opportunity to recoup its $200 overpayment from last week’s ABC Company Group Health Plan transaction with Doctor Greedy. Therefore, ACME Insurance only pays $600 on Patty Participant’s claim. The $200 “reduction” to Doctor Greedy serves as an “offset” for ACME Insurance’s errant ABC Company Group Health Plan overpayment that instantly makes ACME Insurance “whole.”
In ACME Insurance’s eyes, Doctor Greedy owed it a $200 “debt.” ACME Insurance “recovered” that “debt” by reducing the otherwise correct amount that XYZ Company Group Health Plan should have paid Doctor Greedy for Patty Participant’s treatment.
However, ACME Insurance doesn’t tell the employer sponsoring XYZ Company Group Health Plan that this is going on. As far as XYZ Company Group Health Plan knows, it correctly paid $800 to Doctor Greedy. Not surprisingly though, Doctor Greedy isn’t happy with his reduced payment, so he responds by billing Patty Participant the $200 he wasn’t paid in connection with Patty’s treatment. (Note that balancing billing practices largely become prohibited under federal law starting in 2022. Nonetheless, even in the absence of a balance bill issue, cross-plan offsetting raises fundamental ERISA concerns.)
Unless Patty presses the matter with ACME Insurance, her ERISA-protected right to receive XYZ Company benefits at a specific dollar level will have been unilaterally sabotaged.
Clashing with ERISA
In the 2019 Eighth Circuit case, the Court stopped short of saying that cross-plan offsetting violates ERISA. (Primarily because circumstances in that case could be resolved without the Court’s ruling on cross-plan offsetting activities.) However, the Appellate court still used its written opinion as a platform to question cross-plan offsetting. Additionally, the U.S. Department of Labor filed a brief in the case expressing its view that cross-plan offsetting constituted a fiduciary violation.
In contrast, the recent New Jersey District Court case addressed the cross-plan offsetting issue head-on. The District Court held that the practice is a prohibited transaction and a breach of fiduciary duty under ERISA. Basically, the carrier is using assets of one plan to satisfy the debts owed to another plan. Moreover, in many cases, the plan that was owed the debt was an insured plan where the carrier shouldered ultimate financial responsibility. As a result, the Court held that the insurer was engaged in prohibited self-dealing.
The New Jersey District court further held that cross-plan offsetting violates ERISA’s duty of loyalty. This duty requires a plan to be operated exclusively for the benefit of that plan’s participants (and pay reasonable administrative costs of that plan). By using one plan’s payment to reduce a debt owed to another plan with different participants, the insurer violated that ERISA duty.
Takeaways
As a federal district court case, strict application of the ruling is generally limited to the litigants. However (especially in light of comments the Labor Department expressed in the 2019 Eighth Circuit case), it strongly appears that the prevailing view going forward deems that cross-plan offsetting violates an array of fundamental ERISA principles – and for that reason this case holds greater than usual implications.
Although the New Jersey case focused on an insurance carrier, other ERISA plan payers also often use cross-plan offsetting techniques, and this may carry implications for self-funded plans. Specifically, as plan sponsors, employers hold ultimate responsibility for overseeing their plan’s service providers. Therefore, employers with self-funded plans may wish to consider proactively taking the following steps:
- Talk with the plan’s third-party administrator/administrative services only provider (TPA/ASO) and ask if they engage in cross-plan offsetting.
- If they do, determine if the plan can “opt-out” of this practice. (Some TPAs allow plans to opt-out).
- If engaged in cross-plan offsetting without offering an opt-out opportunity, consider switching TPAs at the next reasonable opportunity.
- If the plan sponsor is contemplating a service provider change, determine whether a potential new vendor uses cross-plan offsetting or permits opt-out from the practice.
Plan sponsors should recognize that “opting-out” forgoes an undeniably effective overpayment recovery tool; and that likely means that the plan is relegated to slower and pricier methods of recovering future overpayments. More importantly though, proactively squelching the practice positively underscores the plan sponsor’s fiduciary resolve and helpfully positions the plan to avoid a far costlier ERISA lawsuit down the road.
Dennis Fiszer is chief compliance officer and senior vice president for global insurance brokerage Hub International, providing compliance and consulting services regarding health plans and other employee benefits. His areas of expertise include all aspects of ACA, including employer reporting, hours tracking, transition relief, and plan valuations for affordability and minimum essential coverage analysis. His work also centers on ERISA, COBRA, FMLA, state and local leave laws, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), wellness programs, employment and labor issues, cafeteria plans, and compliance with Internal Revenue Code requirements for favorable tax treatment of benefits. As Senior Vice President, Dennis also absorbs service responsibilities for all east region HUB offices and an expanded content production role for the organization’s national practice.
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