The U.S. District Court for the District of New Jersey (District Court) ruled against cross-plan offsetting in Lutz Surgical Partners, PLLC, et al. vs. Aetna, Inc., et al. (Lutz Surgical Partners v. Aetna). The reasoning behind the District Court judge ruling against the practice, in this case, differed in several key areas from past court rulings. This latest ruling shows that the practice of cross-plan offsetting can present several issues for plans.

Cross-plan offsetting is a payment recovery practice that several courts have ruled against as an acceptable method for recouping provider overpayments.

As a refresher from a previous article, generally, the Third-Party Administrator (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. This practice typically occurs in situations such as coordination of benefits, subrogation, or payment mistakes. In addition, 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-funded plans that TPAs administer and may prohibit cross-plan offsetting.

The ERISA plan documents of a self-funded plan should contain language describing whether the TPA may engage in cross-plan offsetting. For example, the Eighth 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 the TPA in the case to practice cross-plan offsetting to recover overpayments. Additionally, the Department of Labor (DOL) has questioned whether ERISA permits the practice of cross-plan offsetting. In an amicus brief (a legal document that a third party with a strong interest in the case’s subject matter files in an appellate court case), the DOL argued that cross-plan offsetting constitutes a prohibited transaction under ERISA. Specifically, the DOL’s brief stated that cross-plan offsetting violates a TPA’s fiduciary duty to act exclusively in the plan participants’ interests and to provide participants their plan benefits. The brief also said that the DOL views cross-plan offsetting as “self-dealing,” prohibited by ERISA because it allows a TPA to recover overpayments with payments from self-funded plans funded by plan sponsors and their employees.

The plaintiffs, Lutz Surgical Partners, claimed that their insurer, Aetna, violated ERISA by using cross-plan offsetting on one plan to recoup overpayments on another.

Lutz Surgical Partners argued that the plan documents only allowed same-plan or same member offsetting, meaning Aetna could only authorize payment offsets when the same plan seeks to recover the overpayment previously made under the same plan. The plaintiffs said that cross-plan offsetting between their two plans was a “per se” violative cross-plan offset.

The District Court in Lutz Surgical Partners v. Aetna ruled that cross-plan offsetting violated ERISA for two reasons.

Unlike previous cases relating to the validity of using cross-plan offsetting, the District Court, in this case, did not review whether the terms of the plan document permitted cross-plan offsetting. Instead, District Judge Brian R. Martinotti held that as practiced, cross-plan offsetting, in this case, violates two sections of ERISA (406(b)(2) and 404(a)), regardless of what the plan language permitted. Judge Martinotti interpreted Section 406(b)(2) to prohibit a plan fiduciary that acts as the fiduciary for two plans from transferring money from one plan to another. Section 404(a) requires a plan fiduciary to act solely in the interest of the participants and beneficiaries, and for the exclusive purpose of providing benefits to participants and their beneficiaries.

According to Judge Martinotti’s ruling, Aetna first violated the prohibited transaction provisions of ERISA.

The District Court’s ruling states that the Third Circuit held in a previous case that Section 406(b)(2) creates a per se prohibition of a transfer between two funds where the plan fiduciary is identical, but the plan participants and beneficiaries are not the same individuals. The Judge found that Aetna acted as the plan administrator for an ERISA plan. Therefore, Aetna was subject to the ERISA fiduciary duties. Consequently, when Aetna failed to pay a benefit to one Lutz Surgical Partners’ plan participant and their beneficiaries to recover overpayments for another Lutz Surgical Partners’ plan participant, it constituted a prohibited transaction. According to Judge Martinotti, unless some exemption applies, Aetna’s cross-plan offsetting violates ERISA’s prohibited transaction provisions in this case. He also ruled that Aetna’s use of a pooled account to pay for claims from both plans made the plans adverse to each other because it required Aetna to use benefit payments from one plan to pay for claims from the other. This practice also violated the prohibited transaction provisions of ERISA.

Second, Judge Martinotti ruled that Aetna violated its fiduciary duty to Lutz Surgical Partners by engaging in cross-plan offsetting.

ERISA requires a fiduciary to act solely in the interest of the plan’s participants and beneficiaries to provide them with the benefits detailed in the plan. The District Court reasoned that cross-plan offsetting requires Aetna to discharge its duty to pay claims under one plan to recover payments under another. Thus, according to the court, failing to pay claims for participants and beneficiaries violates Aetna’s fiduciary duties under ERISA. Further, the District Court said that Aetna could not circumvent its ERISA requirements even if the plan documents had allowed cross-plan offsetting. Accordingly, the District Court held that ERISA prohibits cross-plan offsetting.

This case and several others seem to indicate that cross-plan offsetting may be an impermissible payment recovery method. As a result, employers with self-funded 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 of cross-plan offsetting and reviewing their plan documents and summary plan descriptions to determine whether the plan’s language adequately describes if, or when, the TPA can use cross-plan offsetting.


EPIC offers this material for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this document and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.


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