Health Plan Administrator’s Cross-Plan Offsets Were ERISA Prohibited Transactions and Violated Fiduciary Duty of Loyalty

A federal trial court has ruled in favor of health care providers who alleged that the claims administrator for numerous group health plans breached its ERISA fiduciary duties by engaging in cross-plan offsetting. The court noted that cross-plan offsetting generally refers to the practice of underpaying benefits under some plans (collectively, Plan B) to recover overpaid benefits under other plans (collectively, Plan A). In this case, the TPA reduced certain Plan B benefit payments to the providers and offset those amounts against purported overpayments previously made to the same providers from Plan A. Highlighting the administrator’s use of a commingled pooled bank account to pay claims, the providers alleged that the failure to pay benefits in accordance with Plan B’s terms to recover money for the benefit of Plan A was a prohibited transaction and a per se violation of ERISA’s duty of loyalty. The providers also contended that the Plan B participants were harmed because they remained potentially liable for the difference between the providers’ billed charges and the benefits underpaid by Plan B.

The court held that the administrator’s use of cross-plan offsetting in the context of a pooled account for claims payments was a prohibited transaction. The court explained that, in a pooled account, overpaying claims under Plan A decreases the funds available to pay claims under Plan B, making Plan A’s interests adverse to Plan B’s. Thus, when the administrator reduced payments under Plan B to recoup funds for Plan A, it engaged in a prohibited transaction—a transaction involving Plan B on behalf of an adverse party (Plan A). The court also agreed that the administrator’s use of cross-plan offsetting violated the duty of loyalty. When making benefit payments under Plan B, ERISA requires the administrator to act for the exclusive purpose of providing benefits to Plan B participants and beneficiaries, but cross-plan offsetting serves a contrary purpose—recovering overpayments made under Plan A. The court left the determination of damages for a future hearing but emphasized that the providers need not match overpaid and underpaid claims either by participant or by plan. The court concluded by dismissing the administrator’s state-law counterclaims, which asserted that any damages awarded to providers for underpayments from Plan B should be offset by the overpayments the providers received from Plan A. According to the court, ERISA preempts these state-law claims because the court would have to refer to the terms of Plan A to determine whether and how overpayments may be recouped.

EBIA Comment: As indicated by this court’s opinion, cross-plan offsetting is a controversial practice that raises significant ERISA questions. One preliminary question challengers must surmount is who has legal standing to seek remedies for the practice. This court ruled that the providers had standing, but a different federal trial court recently held that plan participants did not (see our Checkpoint article). Meanwhile, in a previous federal appeals court case that turned on the terms of the plan and didn’t address ERISA duties, the DOL filed an amicus brief asserting that cross-plan offsetting was self-dealing and violated ERISA’s exclusive benefit rule (see our Checkpoint article). Plan sponsors and administrators may wish to review this practice with legal counsel. 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 webinar, “Administrative Services Agreements for Group Health Plans” (recorded on 6/10/2021).

Contributing Editors: EBIA Staff.