The U.S. District Court for the District of New Jersey, in Lutz Surgical Partners PLLC v. Aetna, Inc., has ruled that a group health plan administrator (“TPA”) cannot offset overpayments made to a provider by one health plan it administers by reducing the amount paid to that provider by a different health plan.
Background. Group health plans typically have both in-network and out-of-network health care providers. In administering group health plans, TPAs sometimes overpay service providers. For in-network providers, TPAs and providers usually resolve overpayment issues through the terms of their contracts. TPAs, however, do not have contracts with out-of-network providers, and this often leads to disputes about how to resolve overpayments.
Therefore, some TPAs engage in a practice known as “cross-plan offsetting”, where an overpayment by the health plan of one employer is offset by reducing the amount paid by a different health plan of a different employer that is also administered by the TPA.
Law. ERISA’s prohibited transaction rules forbid plan fiduciaries from engaging in certain transactions involving a party with interests adverse to those of the plan or its participants, unless an exemption applies. ERISA’s “Duty of Loyalty” obligates plan fiduciaries to discharge their fiduciary duties solely in the interest of plan participants and beneficiaries.
Facts. In Lutz, a group of health care providers alleged that the TPA failed to pay benefits for certain services provided to participants in various ERISA group health plans (collectively, the “Plans”). The providers alleged that the TPA engaged in the prohibited practice of cross-plan offsetting by transferring amounts owed under the Plans to entirely different plans administered by that TPA. In particular, the providers asserted that the TPA’s cross-plan offsets were intended to reimburse the other plans for overpayments the TPA had made to the providers for services furnished to participants under completely different plans.
The providers sued, claiming that the practice of cross-plan offsetting violated ERISA’s prohibited transaction rules and Duty of Loyalty, and the TPA responded by filing a counterclaim for setoff based on the alleged overpayments it made to the providers.
District Court. The court concluded that the TPA engaged in cross-plan offsetting, as evidenced by the provider’s explanation of benefits, which showed that the TPA had withheld benefit payment claims under the Plans and applied that amount toward alleged prior overpayments under the other unrelated plans. In reaching this decision, the court noted: (i) that it was not necessary that there be an actual transfer of money between the Plans and other plans; and (ii) cross-plan offsetting could occur whether or not an administrator used a pooled account. The court noted that the TPA’s use of a pooled bank account actually suggested an ERISA prohibited transaction because it made the Plans’ interests adverse to those of the other plans. As the court noted, when the TPA took funds from the Plans’ account to pay a claim made under the other plans, the funds available to pay the Plans’ own claims were reduced.
The court next reviewed whether the TPA’s cross-plan offsetting was a prohibited transaction under ERISA. The court concluded that the TPA’s offsetting practice was a transaction involving a party with interests adverse to those of the Plans’ participants, in violation of ERISA’s prohibited transaction rules. In reaching this determination, the court explained that: (i) the TPA served as a fiduciary to multiple plans, which did not have identical participants and beneficiaries; and (ii) there was no evidence that a prohibited transaction exemption applied.
Finally, the court determined that the TPA violated ERISA’s Duty of Loyalty by engaging in cross-plan offsetting. In particular, the court observed that while making payments for claims made under the Plans, the TPA recovered alleged overpayments made by the other plans. Therefore, the court reasoned that by doing so the TPA had failed to act solely in the interest of the Plan’s participants and beneficiaries.
Employer Takeaway. As a reminder, employers continue to retain their fiduciary obligations under ERISA even after engaging a service provider. Accordingly, in order to avoid co-fiduciary liability in a case like Lutz, employers must be sure to regularly review and monitor service providers’ work to ensure that it is compliant with ERISA.
In the instant case, one aspect of this would entail reviewing the service provider’s underlying administrative services agreement with the plan to ensure that it complies with ERISA’s rules. For assistance with completing such a review for your plan, please contact The Wagner Law Group’s welfare benefit practice group.