Benefits and Compensation

Indemnity Plan’s Recovery Provision Does Not Bind Providers, So Lawsuit to Force Pay-back Is Dismissed

ERISA can be the key to upholding benefit decisions based on plan language before money is paid, but it may be far less helpful once overpaid money goes out the door, particularly when the plan is indemnity-based with no provider contracts.

This situation became evident in Int’l Longshore & Warehouse Union v. Sharp Surgery Center, 2012 WL 1656921 (C.D. Calif., May 8, 2012), where a self-insured indemnity plan had no contract with a surgical practice, and plan provisions about recovering overpayments failed to spell out any duty for providers to return overpayments.

The plan attempted to enforce plan language to recover overpayments, but because that language did not create any obligations for providers (which had no contract with the plan), the provider successfully argued it had not violated the plan.

The court rejected plan arguments that accepting payment directly from the plan bound the provider to plan terms.

The Facts

The International Longshore and Warehouse Union Health Plan provided surgical, medical and hospital benefits on an indemnity basis to participants and beneficiaries. The plan provided that: (1) if the fund overpaid a medical provider, the plan could pursue recovery of the overpayments; and (2) the plan only would cover medical care that is medically necessary; and (3) the plan pays no more than usual, customary and reasonable rates.

Sharp Surgery Center did not contract with the plan, but it did bill the plan directly through assignments of benefits it had from plan members.

After some time paying Sharp directly, the Longshore plan alleged that: Sharp had millions of dollars of alleged fraudulent overbilling of medically unnecessary and unauthorized procedures; it billed for services not performed based on established treatment protocols; and plan members reported that they were billed for services to which they did not agree.

Asserting that the plan had been cheated out of millions of dollars in plan assets by Sharp, the plan and its trustees sued under ERISA: (1) to recover outstanding overpayments; and (2) for declaratory relief. The surgery practice moved to dismiss the suit for lack of standing to state an ERISA claim.

Note: Sharp had sued the Longshore plan administrator under state law for breach of contract to compel the plan to pay amounts it said were due it for services performed, but the court remanded that case because the claims were not stated under ERISA. Less than one month later, the plan filed this overpayment case.

No Standing Under ERISA

The ASC argued that ERISA didn’t authorize the kind of relief the plan was seeking, because: (1) such a recovery would be legal, and not equitable relief; and (2) it wouldn’t relieve a breach to the plan because no breach of plan is identified.

Note: ERISA allows only equitable relief. Equitable relief includes specific performance, trusts and liens, restitutions, injunctions and declaratory relief. Examples of relief allowed in ERISA cases are orders to: (1) follow timeframes, procedures and coverage limitations as described in the plan document; (2) pay benefits due under the plan; (3) restore benefits the plan paid to beneficiaries who were covered by another insurer, among others. Punitive or compensatory (legal) remedies — including payments for lost time and pain and suffering — are often disqualified under ERISA.

The U.S. District Court for the Central District of California said the second provider argument was enough to dismiss the case, so it would not need to determine whether the proposed relief was equitable or legal.

Failed Plan Arguments

The plaintiffs contended that their claims were being brought in order to enforce the terms of a plan provision that said:

If a third party provider of Benefits hereunder, through error, misrepresentation, or fraud, receives payment of Welfare Fund assets in an amount greater than the amount authorized under the Plan, the Trustees, in their sole, absolute, and unreviewable discretion, may collect the amount of any such overpayment(s)….

The court agreed with the ASC that the plan did not impose any duties on the providers, and so they could not have violated plan terms. The ASC argued:

[W]hile the Plan states that it will not pay bills that charge more than the reasonable value of services, it imposes no duties on the providers who submit the bills.

The provision clearly authorized the plan to pursue its duty to recover overpayments, but it didn’t create an obligation for providers to return funds the plan said were overpaid, the court agreed. Thus, Plaintiffs could not “enforce” plan terms as they are not bound by the plan’s provisions.

Here, there could be no provider violation, because the plan’s overpayment recovery provision created no duty for a provider, the court said.

Finally, the plan argued that by accepting benefit payments direct from the plan, by virtue of assignments from plan beneficiaries, Sharp agreed to be bound by plan terms. However, the court said this requirement was “far from the truth.”

[Sharp] addressed this argument in [its] reply, stating that [it was allowed to] submit benefit claims to the Plan — not by assignment — but based on a separate agreement distinct from the plan. … that [the plan] and [Sharp] entered into in 2009.

Therefore, the court dismissed the case with prejudice, because it said any effort to amend the complaint would be futile.

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