Court Dismisses Participants’ Challenge to Cross-Plan Offsetting

Participants in several self-insured ERISA health plans sued the plans’ TPA (an insurer providing administrative services), seeking to bring a class action claiming that the TPA’s practice of cross-plan offsetting violates ERISA. Cross-plan offsetting is a way to recover overpayments to health care providers. If a TPA is unable to recover the overpayment directly from the provider or offset the overpayment against another payment due to the provider under the same plan, it might offset an overpayment made from one plan by reducing a subsequent payment to the provider from a different plan. The TPA asked the court to dismiss the case because the participants lacked standing—that is, they did not have a sufficient stake in the dispute.

To have standing, the participants needed to demonstrate that they were harmed by the TPA’s actions and that a favorable court ruling would remedy the harm. The participants claimed that cross-plan offsetting constituted a misuse of participant funds, and that by engaging in the practice, the TPA breached its fiduciary duty of loyalty and violated ERISA’s prohibitions against self-dealing and transactions with a party in interest. The court explained that participant contributions become plan assets (and no longer belong to the participants) as soon as they can reasonably be segregated from the employer’s general assets. Likening health plans to defined benefit pension plans because a participant’s entitlement to benefits is not affected by gains or losses within the plan, the court was guided by a Supreme Court case holding that a loss to a defined benefit plan did not establish injury to the plan participants. Noting that the participants did not say they had been denied benefits as a result of cross-plan offsetting, the court determined that the participants lacked standing because the fiduciary breach claims involved injury to the plan—not to the participants themselves. And the participants’ other claim—that cross-plan offsetting is effectively a denial of benefits for which the TPA did not follow ERISA’s claims procedures—was similarly doomed because none of the participants’ own claims had been denied. Finding no harm to the participants, the court dismissed their claims.

EBIA Comment: In a case involving the same TPA, the Eighth Circuit held that cross-plan offsetting was not permitted by the terms of the plans involved but declined to decide whether the practice necessarily violates ERISA (see our Checkpoint article). Thus, the larger question of whether cross-plan offsetting violates ERISA remains. While this case was not successful, it may prove instructive to litigants in future lawsuits—for example, participants who were balance-billed by providers whose payments were reduced to offset a previous overpayment may be able to prove direct harm from the practice. Given that awareness of cross-plan offsetting seems to be on the rise and the DOL has taken the position that it violates ERISA, administrators performing cross-plan offsets may wish to proceed with caution. For more information, see EBIA’s ERISA Compliance manual at Sections XVI (“ERISA’s Trust and Exclusive Benefit Requirements”) and XXXVI.G (“Who Can File ERISA Benefits Litigation?”). See also EBIA’s Self-Insured Health Plans manual at Sections XXI.C (“ERISA’s Exclusive Benefit Rule”) and XXIII.B (“Contracting With Service Providers”). You may also be interested in our upcoming webinar, “Administrative Services Agreements for Group Health Plans” (live on 6/10/2021).

Contributing Editors: EBIA Staff.