By: HUB’s EB Compliance Team 

In February 2019, we told you about an Eighth Circuit federal Court of Appeals case. Without directly ruling on the matter, that Appellate Court sharply questioned whether ERISA permitted “cross-plan offsetting.” Now, a District Court in New Jersey has said cross-plan offsetting is an ERISA fiduciary violation. (New Jersey is in the Third Circuit.)

Although a district court is at the lowest rung of the federal judiciary, we believe employers sponsoring self-funded plans should still take careful note and reach out to their TPAs to ensure that its plan operations correctly satisfy fiduciary obligations. 

What is Cross-Plan Offsetting? 

Cross-plan offsetting occurs when a valid payment from one plan is artificially reduced to “offset” an errant overpayment made to the same provider (usually, an out-of-network provider) from a different plan. 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 plans. 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: Eduardo Employee participates in the ABC Health Plan and goes to Dr. Cashe who is out-of-network. The ABC Health Plan is insured with Big Carrier. Big Carrier processes the claim and pays Dr. Cashe $1,000. After reviewing the claim, Big Carrier later determines it should have only paid $800. Big Carrier asks Dr. Cashe for the $200 back. Since Dr. Cashe is out-of-network, he doesn’t have a contract with the Big Carrier that requires him to repay. As a result, Dr. Cashe refuses. 

The next week, Polly Participant, who is in the XYZ Health Plan, also goes to Dr. Cashe. Dr. Cashe is, again, out-of-network. XYZ Health Plan is self-funded, but uses Big Carrier to process claims as an administrative services only (ASO) provider. When Dr. Cashe submits Polly’s claim, Big Carrier determines Polly’s claim is also $800. 

This is where the offset comes in. Instead of correctly paying $800 to Dr. Cashe from the XYZ Health Plan, Big Carrier sees an opportunity to recoup its $200 overpayment from the prior week’s ABC Health Plan transaction with Dr. Cashe. Therefore, Big Carrier only pays $600 on Polly’s claim. The $200 “reduction” to Dr. Cashe serves as an offset for Big Carrier’s errant ABC Health Plan overpayment. (Due to internal accounting, the $200 may be “credited” to ABC Health Plan, but in many cases, no actual money changes hands between the plans.) 

In Big Carrier’s eyes, Dr. Cashe owed it a $200 debt. Big Carrier satisfied that debt by reducing the otherwise correct amount that XYZ Health Plan should have paid Dr. Cashe for Polly’s treatment. However, Big Carrier doesn’t tell the employer sponsoring XYZ Health Plan that this is going on. As far as XYZ Health Plan or its employer knows, it paid $800 to Dr. Cashe. However, Dr. Cashe doesn’t like this, so he bills Polly Participant the $200 he wasn’t paid in connection with Polly’s treatment (and probably some other amounts as well – he is out-of-network, after all). 

Note that balancing billing practices largely become prohibited under federal law starting in 2022. (Review the new Surprise Billing restrictions described in our other article here.) However, even in the absence of a balance bill issue, cross-plan offsetting raises ERISA concerns.

At Cross Purposes with ERISA 

In the 2019 Eighth Circuit case, the Court stopped short of saying that cross-plan offsetting violates ERISA. The Court did not have to reach that issue. However, it questioned the practice. Additionally, the U.S. Department of Labor filed a brief in the case expressing its view that cross-plan offsetting is a fiduciary violation. 

In contrast, the 2021 New Jersey District Court case directly addressed the ERISA fiduciary issue. The New Jersey 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 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 

This is just one case, which may or may not gain further traction. For now, the decision generally applies only to the parties involved in the litigation. However, especially in light of the comments the DOL expressed in the 2019 Eighth Circuit case, we expect that the consensus view going forward will be that cross-plan offsetting violates ERISA fiduciary principles. 

Although the New Jersey case focused on the carrier, employers are ultimately responsible for overseeing their plan’s service providers. Therefore, as before, employers with self-funded plans should consider taking the following steps: 

  1. Talk with your third-party administrator/administrative services only provider (TPA). Ask if they engage in cross-plan offsetting. 
  2. If they do, ask if you can opt out. Some TPAs allow plans to opt out of this practice. 
  3. If they engage in cross-plan offsetting, and you can’t opt out, consider switching TPAs at your next reasonable opportunity.
  4. If you’re switching TPAs (or thinking about it), ask any new vendors you may be considering if they engage in cross-plan offsetting and if you can opt out.

Plan sponsors should recognize that “opting out” eliminates an overpayment recovery tool. As a result, your plan may have a tougher time recovering future overpayments. More importantly though, proactively squelching the practice should avoid a costly ERISA lawsuit down the road.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory. 

NOTICE OF DISCLAIMER 

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.