Eighth Circuit Rejects Cross-Plan Offsetting

A recent Eighth Circuit decision regarding “cross-plan offsetting” serves as an important reminder of how ERISA’s fiduciary duties impact both employers and fiduciaries who handle claims.

The case involved the common practice of cross-plan offsetting, which occurs when a claims administrator resolves an overpayment to a provider by refusing to pay that provider for a future claim (or reducing the amount paid for that future claim)—even if the latter claim was made by a participant in an unrelated plan. Cross-plan offsetting allows claims administrators to quickly recover overpaid benefits without the time and expense associated with one-off recovery actions against providers. Defendant UnitedHealth Group (UnitedHealth) initially applied this practice among its in-network providers, but then expanded cross-plan offsetting to non-network providers beginning in 2007. This practice was challenged by two out-of-network doctors in the case at issue, Peterson v. UnitedHealth Group, Inc.

In Peterson, the named plaintiffs received reduced payments from UnitedHealth due to cross-plan offsetting. After addressing the right of the physicians to stand in the shoes of certain plan participants whose claims were unpaid, the court turned to the core question of whether cross-plan offsetting was permitted by the benefit plans’ governing plan documents.

Not surprisingly, the plan documents granted UnitedHealth broad claims administrative authority, but did not specifically address cross-plan offsetting. The Eighth Circuit rejected the argument that this broad delegation of fiduciary authority empowered UnitedHealth to administer claims in any manner not specifically prohibited by the plan. Rather, the court held that such an overbroad interpretation of the plan documents’ delegation of authority would undermine the participants’ ability to rely upon plan documents. That is, participants would have no way of knowing that their claims would potentially go unpaid simply because the claims administrator overpaid benefits for an entirely separate plan.

The portion of the opinion with the broadest potential impact was largely in dicta. There, the court suggested that cross-plan offsetting might violate ERISA’s “exclusive benefit” rule. In short, when a claims administrator acts as a fiduciary for one plan, it must use that plan’s assets for the exclusive purpose of paying benefits to that plan’s participants. While cross-plan offsetting allows claims administrators to efficiently resolve its overpayments, it potentially does so at the expense of other participants in other plans, who could potentially be exposed to “balance billing,” which requires a participant to pay any remaining unpaid balance.

While the scope of the court’s opinion in Peterson will be shaped by future litigation, the decision highlights practices that at least one court has found potentially problematic in the plan administrator context. Furthermore, given the breadth of ERISA’s fiduciary duties, including the ongoing duty to monitor, it is important for employers, plan committees and others to take note of this decision and its possible ramifications. For instance, we advise self-funded employers and claims administrators to carefully review their administrative service agreements to determine whether (and, if so, how) cross-plan offsetting is addressed in light of the issues raised above.