OVERPAYMENT REFUND CLAIMS IN COMMERCIAL HEALTH CARE RELATIONSHIPSA frustrating and expensive, yet pervasive irritant in the relationship between healthcare providers and payors are overpayments made in what can be called the "ordinary course of business" due to mistakes and inadvertence. This recurring pattern can be called the "ordinary course of business" because while the overpayments are unintended and stem from a variety of causes, they happen with sufficient frequency that the phenomenon has become an entrenched part of the healthcare landscape.This primer will focus primarily on the legal issues arising in the handling of overpayments in commercial relationships. Overpayment refund issues arising out of government healthcare direct reimbursement programs are excluded since they are subject to a separate regulatory scheme.The emergence of the Overpayment TrendPayors obviously need to be concerned about identifying and recovering overpayments in order to properly manage their resources according to their intended business plans. Many factors lead to overpayments, such as complex payment formulas set out in payer-provider contracts and claims processing system inefficiencies. It is not uncommon for underpayments and overpayments to be made on the same account without any discernable pattern or methodology. As a result, payors and providers often must devote substantial resources to engage in a second round of claims processing to identify, analyze and reconcile erroneous payments. While maximizing profitability by capturing all of the revenue a company is entitled to cannot be underestimated, another important factor is the heightened awareness of the need for accurate financial reporting and revenue recognition by just about every company participating in the healthcare industry due to state insurance regulations, the Sarbanes-Oxley Act of 2002, and new federal statutes enacted under the Patient Protection and Affordable Care Act, such as medical loss ratio requirements for health insurance issuers.Charges vs. Amount PaidProviders strive to submit "clean claims," which generally means a complete and accurate UB-92/CMS-1500 form that includes the provider's "commercial"," or "full billed" charges. The payor or third-party administrator must determine whether the claim is for authorized services rendered to a member and then properly process and determine the amount to pay on the claim. Depending upon the applicable insurance contract and the provider's participation status, the correct reimbursement rate may be a negotiated contractual rate or out-of-network (OON) payment rate determined by the payor or third party administrator according to the terms of the applicable health insurance coverage. For many reasons, a provider's charges identified on the claim form are rarely the same as the amount the provider expects to be paid or which the payor intends to pay, which may be a contributing factor leading to overpayments.This process leads to overpayments for many reasons, including when payments are made: (1) for the face amount of the claim when another discounted rate should apply; (2) based on the payor's inadvertent selection of the wrong contract; (3) based on an erroneous OON rate; (4) based on incorrect claims information submitted by the provider; or (5) by paying duplicate claims.Post-Payment AnalysisAfter paying the claim, the payor and the provider typically engage in a post-payment audit process, which identifies the potential overpayments and the reasons why they were made, and subsequent requests for a refund. At this point, a provider typically will examine any potential defenses it may be able to assert before agreeing to the refund, including determining whether the provider has any offsets from other unpaid or underpaid claims. In addition, there are two basic questions both the payor and provider need to ask regarding the validity of overpayment refund requests: (1) Is the refund request timely and otherwise consistent with applicable law? and (2) Whose mistake led to the overpayment (assuming the absence of fraud, which leads to a different set of issues altogether)?Issues Of Concern For Both Payers And ProvidersIs the Refund Request Timely and Otherwise Consistent with Law?One of the first tasks to be undertaken in determining whether an overpayment refund request is valid is to assess whether it was made timely. This entails an examination of (1) contractual time limitations; (2) specific state statutes or regulations governing the amount of time a payor has after a claim is paid to request an overpayment refund, and (3) state law statutes of limitations applicable to legal theories asserted to support the refund request. If the covered services were rendered to a member pursuant to a contract between the payor and the provider or between the payor and a managed care network that includes the provider, one would expect the analysis to be relatively straightforward. In practice, however, the analysis often is frustrating due to the absence of straightforward rules governing timeliness.The dynamics of this analysis are at their most contentious when it comes to OON claims paid by self-insured group health plans (GHP) governed by the Employee Retirement Income Security Act of 1974 (ERISA). This is because neither ERISA nor its implementing regulations set forth any statute of limitations governing claims for the payment - or the refund - of ERISA benefits. As a result, the federal courts have developed their own "ERISA common law," which applies the most analogous state law statutes of limitations to claims for the payment of ERISA benefits.Payors frequently point to ERISA's supremacy clause, which provides ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." Payors argue that since Congress did not establish any statutes of limitations for recovery of overpayments related to ERISA benefits, there are no time limitations whatsoever for a self-insured GHP to request an overpayment refund.Providers look at the same situation and note that while ERISA preemption is expansive, it is not absolute. Providers generally do not dispute that ERISA preempts a host of state law claims and defenses when it comes to self-insured GHP's, such as those related to benefit eligibility and claims processing procedures. However, even ERISA's claims processing regulations do not mandate complete preemption of state law: they state that "nothing in this section shall be construed to supersede any provision of State law that regulates insurance, except to the extent that such law prevents the application of a requirement of this section."Providers argue a state law "relates" to an ERISA plan and is therefore preempted only "if it has a connection with or reference to such a plan." Though complex and frequently litigated, the determination of whether such an impermissible connection exists turns on "the objectives of the ERISA statute as a guide to the scope of the law Congress understood would survive as well as to the nature of the state law's effect on ERISA plans."There are no on-point, published opinions determining whether ERISA preempts state law statutes of limitations applicable to the recovery of healthcare claim overpayments. Nonetheless, despite the dearth of case law, guidance is available from rulings that have conceptually examined the relationship between ERISA and similar state and common law limitations periods in ruling against preemption.One United States District Court held in an unpublished opinion that ERISA does not support a claim for recovery of overpayments. In Vacca v. Trinitas Hospital, a GHP plan administrator sued to recover overpayment mistakenly made to a hospital. The plaintiff asserted a claim pursuant to Section 502(a)(3) of ERISA as well as state claims for breach of contract and unjust enrichment. The hospital moved for summary judgment on the ERISA claims on the ground that the plan administrator's claim for money damages exceeded the scope of Section 502(a)(3), which authorizes a claim for benefits or "other equitable relief." Granting the hospital's motion and ultimately dismissing the case, the Vacca court concluded that a claim for recoupment, while akin to an equitable claim for restitution, was ultimately merely a claim for money damages and recoupment claims are outside the scope of available remedies under ERISA since they are neither "benefits" nor "equitable relief". The Vacca court declined to recognize a federal common law cause of action for unjust enrichment to recover the overpayments, granting summary judgment on the ERISA claim and dismissing the state law claims for lack of federal jurisdiction. Therefore, any potential claims by the payor had to be pursued according to state law theories for which state law defenses, including time-based defenses, would apply. While payors do not wish to see a published opinion with a holding similar to Vacca, providers clearly would embrace it.Whose Mistake Led To The Overpayment?Assuming an overpayment refund request is timely, and the absence of fraud, the affirmative defense of mistake-of-fact is the main impediment to the recovery of an overpayment refund. One California court aptly explained:As a general rule, equitable concepts of unjust enrichment dictate that when a payment is made based upon a mistake of fact, the payor is entitled to restitution unless the payee has, in reliance on the payment, materially changed its position. (Rest., Restitution (1937) § 1.) Restitution will be denied, however, if the mistaken payment is made to a bona fide creditor of a third person-a creditor without fault because it made no misrepresentations to the payor and because it had no notice of the payor's mistake at the time the payment was made. (Rest., Restitution, supra, § 14, subd. (1); see Holmes v. Steele (1969) 269 Cal.App.2d 675, 678-679 [75 Cal.Rptr. 216].) Stated plainly, if it's your mistake, you get to pay for it - unless the recipient misled you or accepted the payment knowing you didn't owe it.Until healthcare processing systems are able to calculate and pay all healthcare claims correctly the first time they are processed, reconciliation and recovery of overpayments likely will be unavoidable. However, for the sake of certainty and to encourage efficiency, there needs to be some time limit on the recovery of overpayments. One court relied upon the public policy of encouraging transaction stability in healthcare transactions in reversing an overpayment refund judgment in a case brought years after the expiration of a state law time limit for contesting the payments:Of most concern here is the element of transactional stability. We believe transactional stability an important element of any benefit system. Approving restitution in these cases would set a precedent that would have unfortunate consequences for the workers' compensation system. It would introduce the possibility of continued transactional instability so negative it would impact the number of medical providers willing any longer to participate in the system by evaluating workers with industrial injuries. No one can operate a business on receipts only conditionally possessed, and medical providers are no exception. Thus we have determined the restitution orders were unfair and must be annulled.The cost of identifying and reconciling overpayments is an overhead expense that all parties to these transactions ought to strive to reduce and eliminate for the benefit of all concerned. Until there are more published opinions providing guidance as to whether ERISA does or does not pre-empt state law time-based defenses to overpayment demands, the huge gulf of uncertainty over leaves the issue open to interpretation and subject to negotiation between payors and providers. Hence, it is incumbent on both payors and providers to develop clear understandings and expectations regarding time limits and protocols for the recovery of overpayments.*Mike Winsten focuses his practice on the representation of healthcare providers primarily in connection with commercial payor and joint venture relationships and related litigation. Mike can be reached by email and by phone.2. 29 U.S.C. §§ 1001 et seq.3. Del Costello v. Teamsters, 462 U.S. 151, 158-160 (1983); Wilson v. Garcia, 471 U.S. 261, 266-267 (1985).4. 29 U.S.C. § 1144(a).5. See, e.g. Admin. Comm. of the Wal-Mart Stores, Inc. Assoc.' Health & Welfare Plan v. Mooradian, 2006 WL 2194176 (M.D. Fla., Aug. 2, 2006) (unpublished) (finding that probate code time limitations were not preempted by ERISA).6. See, 29 C.F.R. § 2560.503-1(k).7. Id.8. Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983).9. Cal. Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 325 (1997).10. See, MacDougall v. The Unified Retirement Plan of the Bank of New England Corp. and Affiliates, 878 F. Supp. 4 (D. Mass. 1995) (noting, without deciding, that, if applicable, ERISA would not necessarily preempt counterclaim defendants from asserting a defense of laches in a case between former employees and a pension plan to recoup unreimbursed benefits payments); see also, Mooradian, supra, 2006 WL 2194176 (analyzing ERISA preemption of a state probate code time limitation period in subrogation case by self-insured ERISA plan and executrix and concluding that the state law did not sufficiently relate to ERISA plans and was therefore not preempted because the state statute had minimal effect on the administration of employee benefit plans, did not regulate the payment of premiums to or benefits from a plan, and did not affect the substantive right to reimbursement but only the time period in which reimbursement must be sought).11. See, Vacca v. Trinitas Hosp., 2006 WL 3314637 (E.D.N.Y., Nov. 14, 2006) (unpublished).12. City of Hope National Medical Center v. Superior Court, 8 Cal.App.4th 633, 636-637 (1992)

Michael S. Winsten Jan. 24, 2021