A recent decision from the U.S. Eighth Circuit Court of Appeals in Peterson v. UnitedHealth Group, Inc., et al., No. 17-1744 (8th Cir. 2019), and the lower court decision it affirms, place the practice of cross-plan offsetting squarely in the cross hairs of ERISA.
Cross-plan offsetting is the recovery of alleged overpayments to a specific provider for services rendered to participants/dependents of a health plan by withholding payments due to the same provider for services rendered to patients in a different health plan. This practice is to be contrasted with same-plan offsetting where the offset is applied to a payment due to the provider arising from services provided to a participant/dependent of the same health plan.[1] Cross-plan offsetting can occur with respect to both fully insured and self-funded health plans, sometimes by the same insurer. While the practice of cross-plan offsetting was previously upheld on state law contractual grounds, the recent decisions in the Peterson cases challenge the practice under ERISA fiduciary duty standards.
In 2010, the Fifth Circuit Court of Appeals affirmed a district court decision upholding cross-plan offsetting in Quality Infusion Care, Inc. v. Health Care Serv. Corp., 628 F. 3d 725 (5th Cir. 2010). There, the Court addressed the question of whether Blue Cross and Blue Shield of Texas had the right to set off overpayments to Quality Infusion Care, Inc. by underpaying subsequent patient claims, without regard to whether the subsequent claim was from the same patient or under the same insurance plan. The Fifth Circuit upheld the practice because Blue Cross had the right to apply the offsets under each of the three contracts involved in the offsetting. Whether cross-plan offsetting ran afoul of the ERISA fiduciary duties, or constituted a prohibited transaction under ERISA, was not addressed in the Quality Infusion case.
ERISA borrows heavily from traditional trust law in formulating its statutory fiduciary duties. It adopts the “prudent man” standard so familiar to estate and trust lawyers. 29 U.S.C. § 1104 provides in pertinent part:
(a) Prudent Man Standard of Care
(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.
ERISA further establishes certain transactions as “prohibited transactions.” That definition is found at 29 U.S.C. § 1106:
(a) Except as provided in section 1108 of this title:
(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect—
(A) sale or exchange, or leasing, of any property between the plan and a party in interest;
(B) lending of money or other extension of credit between the plan and a party in interest;
(C) furnishing of goods, services, or facilities between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan; or
(E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 1107(a) of this title.
(2) No fiduciary who has authority or discretion to control or manage the assets of a plan shall permit the plan to hold any employer security or employer real property if he knows or should know that holding such security or real property violates section 1107(a) of this title.
(b) A fiduciary with respect to a plan shall not—
(1) deal with the assets of the plan in his own interest or for his own account,
(2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or
(3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.
Cross-plan offsetting potentially implicates both §§ 1104 and 1106. In part, § 1104 requires that “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries … for the exclusive purpose of … providing benefits to participants and their beneficiaries.” (Emphasis added.) And § 1106 says “[a] fiduciary with respect to a plan shall not … deal with the assets of the plan in his own interest ….” (Emphasis added.)
In Peterson v. UnitedHealth Grp., Inc., 242 F. Supp. 3d 834 (N.D. Minn. 2017), the District Court for the Northern District of Minnesota found UnitedHealth’s cross-plan offsetting to be unlawful. UnitedHealth Group Inc. is a U.S. based health care company based in Minnetonka, Minnesota. As of 2018, it is ranked fifth on the Fortune 500 rankings of the largest U.S. corporations ranked by revenues. It administers both fully insured and self-funded plans. The plaintiffs in the case were both out-of-network providers.[2]
The District Court held that a plan “must be read in light of trust law and the fiduciary duties imposed by ERISA.” Id. at 842. It commented that “[t]hese fiduciary duties are among ‘the highest known to the law. . . . . ERISA requires plan fiduciaries to discharge their duties ‘solely in the interest of the participants and beneficiaries’ and for the ‘exclusive purpose’ of providing benefits and defraying reasonable administrative expenses. ERISA also prohibits a plan fiduciary from dealing with the assets of the plan in the fiduciary’s own interest and from acting in any capacity on behalf of a party whose interests are adverse to those of the plan or plan participants.” Id.
The District Court went on to state its view of cross-plan offsets in no uncertain terms:
In light of this case law and the strict fiduciary duties imposed by ERISA, cross-plan offsetting is, to put it mildly, a troubling use of plan assets—one that is plainly in tension with “the substantive or procedural requirements of the ERISA statute . . . .” Finley, 957 F.2d at 621. In stark terms, cross-plan offsetting involves using assets from one plan to satisfy debt allegedly owed to a separate plan—a practice that raises obvious concerns under §§ 1104 and 1106. These concerns are particularly acute in this case, in which every offset that United orchestrated did not just benefit a different, unrelated plan, but benefited United itself.
Id. at 844.
The District Court’s decision was affirmed by the Eighth Circuit Court of Appeals in an opinion filed on January 15, 2019. The Secretary of Labor filed a brief in support of the Plaintiffs-Appellees as amicus curiae. In its brief, the Secretary of Labor argued that two of its Advisory Opinions[3] support the conclusion that UnitedHealth’s cross-plan offsetting is prohibited by ERISA. The Secretary also argued that the Quality Infusion decision should not be relied upon because the Fifth Circuit in that case did not decide nor did it consider the application of ERISA, but rather had decided the case on the narrow basis of what was permitted under state contract law.
In its opinion, the Eighth Circuit noted that UnitedHealth had instituted its cross-plan offsetting procedure in 2007 and that the offsetting had been challenged by class actions filed in 2014 and 2015, being consolidated into the case before it. It explained that “ERISA authorizes civil actions to recover benefits due under a plan to be brought by plan participants and beneficiaries. [Citation omitted.] Healthcare providers are generally not authorized under ERISA to sue on their own behalf, even if they are entitled to direct payment from the plan administrator by virtue of the plan’s obligation to the patient and beneficiary, because the provider is not itself a plan participant or beneficiary.” No. 17-1744, p. 7. However, the Court concluded that Dr. Peterson had the authority to pursue his claims pursuant to assignments from patients treated by him.[4]
Two points were key to the Eighth Circuit’s analysis. “First, nothing in the plan documents even comes close to authorizing cross-plan offsetting, the practice of not paying a benefit due under one plan in order to recover an amount believed to be owed to another plan because of that other plan’s overpayment. We agree with the district court’s summation that ‘not one of th[e] plans explicitly authorizes cross-plan offsetting.’” No. 17-1744, p. 9. “Second, the practice of cross-plan offsetting is in some tension with the requirements of ERISA. While we need not decide here whether cross-plan offsetting necessarily violates ERISA, at the very least it approaches the line of what is permissible. If such a practice was authorized by the plan documents, we would expect much clearer language to that effect.” No. 17-1744, p. 10.
The Eighth Circuit made several pertinent observations about ERISA and the fiduciary duties imposed by ERISA. “ERISA provides that plan assets are to be held in trust and that plan administrators are fiduciaries of the plan assets.” 29 U.S.C. § 1002(21)(A) (stating that with limited exception, ‘a person is a fiduciary with respect to a plan to the extent … he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.’). Id. “Specifically, with limited exception, a fiduciary must act in accordance with the plan documents, diversify investments, act prudently, and ‘discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . providing benefits to participants and their beneficiaries; and . . . defraying reasonable expenses of administering the plan.’ 29 U.S.C. § 1104(a)(1) (emphasis added).” No. 17-1744, p. 11. Moreover, “While administrators like United may happen to be fiduciaries of multiple plans, nevertheless ‘each plan is a separate entity’ and a fiduciary’s duties run separately to each plan.” Id. “Cross-plan offsetting is in tension with this fiduciary duty because it arguably amounts to failing to pay a benefit owed to a beneficiary under one plan in order to recover money for the benefit of another plan. While this benefits the latter plan, it may not benefit the former. It also may constitute a transfer of money from one plan to another in violation of ERISA’s ‘exclusive purpose’ requirement.” Id.
The Peterson decision was rendered by the Eighth Circuit Court of Appeals which has jurisdiction over the Eastern District of Arkansas, the Western District of Arkansas, the Northern District of Iowa, the Southern District of Iowa, the District of Minnesota, Eastern District of Missouri, the Western District of Missouri, the District of Nebraska, the District of North Dakota, and the District of South Dakota and is controlling only in those jurisdictions. Peterson did not outlaw cross-plan offsetting as a matter of law under ERISA. But, “[r]egardless of whether cross-plan offsetting necessarily violates ERISA, it is questionable at the very least.” No. 17-1744, p. 11-12.