Court Rejects Third-Party Administrator's Cross-Plan Offsetting Practice

The Eighth Circuit Court of Appeals, in Peterson v. UnitedHealth Group Inc., has upheld a district court's decision that a third-party administrator ("TPA") cannot engage in cross-plan offsetting to recover overpayments.

Background. Group health plans typically have both in-network and out-of-network 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 relating to the health plan of one employer is offset by modifying the amount paid by a different health plan of a different employer.

Facts. The plaintiffs in Peterson were healthcare providers for patients who were enrolled in health plans administered by the defendant TPA. The plaintiffs filed a lawsuit against the defendant TPA, claiming that its cross-plan offsetting practice violated ERISA. Specifically, the TPA had allegedly overpaid the plaintiffs for services provided to certain patients, and offset these alleged overpayments by reducing payments that the plaintiffs would provide to other patients who were members of different health plans administered by the defendant TPA.

In reviewing the matter, the district court determined that the relevant plans did not allow cross-plan offsetting. In particular, the district court found that the provisions of the plan documents addressing offsetting only allowed the practice for payments made from the same plan and that the TPA's interpretation of the plan documents to permit cross-plan offsetting was unreasonable. Accordingly, the district court ruled in favor of the plaintiffs and held that the defendant TPA had breached its fiduciary duty (as a TPA for ERISA-governed self-insured health plans) by not obtaining the plan sponsors' consent before engaging in cross-plan offsetting. The defendant in turn appealed the decision to the Eighth Circuit.

Eighth Circuit. In reviewing the matter, the Eighth Circuit observed that the controlling plan documents for the plans at issue authorized the defendant to interpret and implement the plans and that the more deferential "abuse of discretion" standard of review applied. Nevertheless, the court determined that nothing in the plan documents "even comes close" to authorizing cross-plan offsetting, noting that the defendant's assertion that it was authorized to engage in the practice had "virtually no basis in the text of the documents."

Ultimately, the Eighth Circuit upheld the district court's determination and held that the TPA's interpretation of the plan documents as authorizing cross-plan offsetting was unreasonable.