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Buyer Beware: Health Plans Need to Exercise Caution in Retaining Third-Party Administrators and Medical Claim Reviewers

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A federal court in Nebraska recently rejected a health plan’s fiduciary breach claims under the Employee Retirement Income Security Act of 1974 (ERISA) against third-party service providers, holding that the service providers were not ERISA fiduciaries and did not breach fiduciary duties under ERISA. 

The case is Central Valley Ag Cooperative v. Leonard, No. 8:17CV379, 2019 WL 4141061 (D. Neb. Aug. 30, 2019). The plaintiffs, Central Valley AG Cooperative Healthcare Plan (the Plan) and its plan sponsor and fiduciary (Central Valley), filed suit against the Plan’s third party administrator and medical claim reviewers, asserting claims for breach of fiduciary duty under ERISA Sections 502(a) and 406, 29 U.S.C. §§ 1132(a)(2), 1106(b). Plaintiffs accused the defendants of orchestrating a scheme to cut reimbursement rates for medical claims so low that Plan participants were exposed to unprecedented balance bills from their medical providers and medical providers sued the Plan for breaching a provider network contract dictating higher reimbursement levels.

In their complaint, plaintiffs alleged that defendants were fiduciaries of the Plan and breached their fiduciary duties under ERISA Section 502 by designing and administering the Plan in a manner that caused a loss to the Plan. Plaintiffs further alleged that defendants breached their fiduciary duties under ERISA Section 406 by engaging in prohibited transactions (self-dealing) by creating a reimbursement scheme that financially benefited defendants.

Specifically, plaintiffs claimed that the Plan’s third-party administrator (TPA), although not named as a fiduciary in the Plan, became a fiduciary in its design of the Plan and because of how it administered claims and retained medical claim reviewers to reprice claims to cut reimbursement rates. Plaintiffs similarly alleged that one of the medical claim reviewers, also not a named fiduciary, became a fiduciary through its repricing of claims to reduce reimbursement. The court found that none of these circumstances triggered a fiduciary duty under ERISA. The TPA’s design of the Plan was what is known in ERISA parlance as a “settlor” function—a function related to plan formation, design, and termination—which does not implicate fiduciary duties, and in any case Central Valley approved the plan design. As to the TPA’s administration of claims and engagement of medical claim reviewers, and the medical claim reviewers’ processing of claims to cut reimbursement, the evidence established that Central Valley (which was the Plan’s named fiduciary) exercised ultimate discretion over and approved these activities.

Alternatively, plaintiffs argued that defendants were liable as “de facto fiduciaries” under ERISA by acting contrary to the Plan. Specifically, plaintiffs alleged that defendants became de facto fiduciaries by, among other things, convincing Central Valley to adopt a cost-cutting reimbursement methodology and misrepresenting the impact the methodology would have on balance-billing of Plan participants as well as the willingness of medical providers to accept lower reimbursement rates. Under this methodology, the TPA would send claims from Plan participants to the medical claims reviewers, who would determine if the charges were reasonable and issue a “recommended allowable payment” amount to the TPA, which was then sent on to Central Valley. Central Valley could then accept the payment recommendation or alternatively, pay the network contract rate. The medical claims reviewers would then be paid based on a percentage of any savings to the Plan. Central Valley alleged that it adopted this reimbursement methodology after the TPA and medical claims reviewers misrepresented to Central Valley that this methodology would result in less balance billing and that providers would accept lower rates (despite their network contracts), ultimately saving the Plan money. Rather than saving money, the reimbursement methodology landed Central Valley and the Plan in hot water—providers, upset they were not being paid appropriately, began to balance bill patients and filed a lawsuit alleging that Central Valley was obligated to pay the contracted network rates.

The court found no evidence to support the alleged misrepresentations, observing that any representations were opinions and not actionable statements of fact. The court similarly rejected plaintiffs’ argument that the TPA and medical claim reviewers had engaged in prohibited transactions, noting that the relationship between the TPA and medical claim reviewers was disclosed in the underlying agreement.

This dispute serves as an important warning to health plans that unscrupulous TPAs and medical claim reviewers or “repricers” seek to lure plans with unrealistic cost-cutting promises. These promises often cause more harm than good—by exposing patients to unexpected balance-bills for their medical treatment and by upsetting relationships with contracted network providers.

At the end of the day, health plans that fail to carefully oversee the activities of third-party repricers could face not only unhappy patients dealing with unforeseen medical bills but also increased litigation by providers unwilling to accept unreasonably low payment for medical services, most especially those that breach network contracts. As this decision demonstrates, health plans will have an uphill battle trying to deflect responsibility by pursuing claims against these entities under ERISA.

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