Federal Court Dismisses ERISA Plan Participants’ Cross-Plan Offsetting Claims

On May 20, 2021, the U.S. District Court for the District of Minnesota (District Court) dismissed the breach of fiduciary duty claims that several plan participants filed against UnitedHealth Group regarding cross-plan offsetting. The court case, Scott v. UnitedHealth Group, Inc., is the second major case in the last few years on the issue of cross-plan offsetting. Several participants of a self-insured plan filed claims of breach of fiduciary duty against the plan’s third-party administrator (TPA) UnitedHealth Group (United). The District Court held that it was dismissing the case because the participants lacked standing to challenge United’s practice of cross-plan offsetting.

Cross-plan offsetting is a payment recovery method that insurers and TPAs use to recover overpayments from service providers.

In general, the TPA or insurer of a medical plan may withhold payments to a provider on a new claim to recoup overpayments made to that same provider for other claims paid out under that same plan. TPAs or insurers typically withhold payments to regain overpayments in cases such as coordination of benefits, subrogation or payment mistakes. Cross-plan offsetting occurs when a TPA, or insurer, with multiple employer clients, offsets payments to a particular provider for one client’s plan to recoup the overpayments made to that provider from another client’s plan or policy. The Employee Retirement Income Security Act (ERISA) governs self-insured plans that TPAs administer. The ERISA plan documents of a self-insured plan should contain language describing whether or not its TPA may engage in cross-plan offsetting.

An Eighth Circuit Court ruled against United in a case involving the use of cross-plan offsetting.

The Circuit Court in the case Peterson, D.C. v. UnitedHealth Group Inc. ruled that, as written, the plan document for an ERISA-covered plan did not permit United to practice cross-plan offsetting to recover overpayments. The Circuit Court stated that its ruling in Peterson, D.C. v. UnitedHealth Group Inc. did not require it to decide whether cross-plan offsetting was a permissible practice. According to the Circuit Court, the present case only required it to decide whether or not the language in the plan documents presented authorized United to use cross-plan offsetting to recover the overpayment from the participant’s plan. The Circuit Court decided that, as written, the plan documents did not allow cross-plan offsetting. However, the Circuit Court’s decision did indicate that the questionable legality of cross-plan offsetting necessitates using clear plan language clarifying when a plan will use cross-plan offsetting measures.

The Department of Labor (DOL) weighed in on Peterson, D.C. v. UnitedHealth Group Inc. and the practice of cross-plan offsetting.

The DOL questioned whether ERISA permitted the practice of cross-plan offsetting. The DOL submitted an amicus brief arguing that cross-plan offsetting constitutes a prohibited transaction under ERISA. An amicus brief is a legal document that a third party, with a strong interest in the case’s subject matter, files in an appellate court case. A third party uses their brief to advise the court of relevant, additional information or arguments that the court should consider in the case. The submission of the DOL’s brief is significant and persuasive because it provides some insight into Agency thinking on market practices. The brief explains that when United refused to pay for legitimate claims for one plan to offset overpayment from another plan, it denied benefits to participants and exposed them to the risk of personal financial liability and harm. Thus, according to the DOL’s brief, cross-plan offsetting violates a TPA’s fiduciary duty to act exclusively in the plan participants’ interests and to provide participants their plan benefits. DOL further alleges that cross-plan offsetting constitutes self-dealing prohibited by ERISA because the practice allowed United to recover its overpayments with payments from self-insured plans funded by plan sponsors and their employees. Thus, United failed to act in the exclusive interests of plan participants or provide the benefits required by ERISA and engaged in self-dealing transactions explicitly prohibited by ERISA.

The claimant participants in Scott v. UnitedHealth Group, Inc. argued that United’s practice of cross-plan offsetting violated the TPA’s fiduciary duty requirement under ERISA.

In Scott v. UnitedHealth Group, Inc., the participants of several different self-insured ERISA health plans filed a lawsuit against UnitedHealth Group (United), their plans’ TPA. The claimant participants asserted that United’s practice of cross-plan offsetting violated ERISA. The claimant participants made arguments similar to those brought up by the DOL in Peterson, D.C. v. UnitedHealth Group Inc. They claimed that cross-plan offsetting was a misuse of participant funds. Moreover, United’s use of cross-plan offsetting breached United’s fiduciary duty of loyalty and violated ERISA’s prohibitions against self-dealing and transactions with a party in interest. In response to the claims, United filed a motion to dismiss the case on the grounds that the participants lacked standing.

The District Court dismissed the claims on the grounds of standing because it held that the claimant participants were not denied any benefits and were not individually injured.

A person must have legal standing to bring a lawsuit. Standing is the legal concept that requires parties bringing or defending a suit to have a legal interest or injury in a matter that permits them to file or defend a claim. In the Scott v. UnitedHealth Group, Inc., the plan participants needed to demonstrate to the District Court that the cross-plan offsetting harmed them and that the District Court needed to rule as such and provide them a legal remedy. The District Court relied on the Supreme Court case, Thole v. U.S. Bank, which held that a loss to a defined benefit plan is insufficient for establishing a legal injury to the plan’s participants. In its decision to dismiss the case, the District Court found that, similar to Thole v. U.S. Bank, though the benefit plan may have suffered an injury due to the cross-plan offsetting, the plan participants themselves may not have sustained an injury. The District Court explained that participant contributions become plan assets – that do not belong to the participants – once the funds can be reasonably segregated from the employer’s general assets. Once their contributions become plan assets, the plan participants must present evidence showing that the cross-plan offsetting resulted in them being denied benefits to prove that they personally suffered a legal injury. Consequently, the District Court ruled that the participants lacked standing because their fiduciary breach claims involved evidence showing harm to the plan and not the participants because of the cross-plan offsetting by United. However, the participants suffered no injury because United did not deny any of their claims due to the cross-plan offsetting. Since the practice did not harm the claimant participants, the District Court held it was proper to dismiss the case.

Even though this case resulted in a favorable outcome for United, the question of whether cross-plan offsetting violates ERISA, according to the courts, still remains.

Scott v. UnitedHealth Group, Inc. may offer guidance for future cases related to the practice of cross-plan offsetting. Future claimants may be successful in arguing that a TPA utilizing cross-plan offsetting led directly to the participant’s injury if the provider balance-bills the participant for the amount of the reduced payment used to offset a previous overpayment. Given that the DOL’s position in Peterson, D.C. v. UnitedHealth Group Inc. was that cross-plan offsetting violates ERISA, administrators performing cross-plan offsetting may want to review the practice and proceed with caution when using it.

Employers with self-insured health plans may want to seek the advice of legal counsel regarding cross plan-offsetting. Counsel can assist employers in reassessing the practice’s use or reviewing their plan documents and summary plan descriptions to determine whether the plan’s language adequately describes if or when the health plan allows the TPA to use cross-plan offsetting.

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