Nearly half of U.S. residents are enrolled in employer-sponsored health insurance. The  majority of covered workers are in health plans that are self-insured, meaning the employer—rather than an insurance company—bears the financial risk of paying claims. Because employers typically do not have the capacity and resources to administer a health insurance plan themselves, they usually contract with an array of third parties who help build provider networks and negotiate reimbursement rates, design benefit packages, and adjudicate claims, among other responsibilities. Many of these third-party administrators (TPAs) are the same big-name insurance companies that directly insure coverage for millions of Americans.

Hiring an insurer-TPA makes some sense: insurers already have the infrastructure and provider networks in place to run a health plan. But their interests may not align with those of their employer clients. This blog highlights several examples of questionable insurer-TPA practices that court cases have uncovered in recent years. Many of these practices may violate ERISA’s fiduciary duties, including requirements that health plan fiduciaries like TPAs act “solely in the interest of the participants and beneficiaries of the plan” when administering a health plan and dispensing its assets. Problematic TPA practices may also—directly or indirectly—contribute to excessive health care spending by health insurance plans and, ultimately, the members and sponsors footing the bills.

Hidden Overpayments

TPAs have long kept employers in the dark about the prices employer health plans pay for care. In the Consolidated Appropriations Act of 2021 (CAA), Congress banned “gag” clauses in payer-provider contracts, which restrict plans’ ability to access their own de-identified claims data. But experts have reported compliance problems (aspects of which the Department of Labor (DOL) addressed in recent FAQs).

A recent lawsuit details an example of the antics one insurer-TPA has allegedly employed to avoid disclosing claims data to union health funds. The lawsuit alleges that Elevance Inc., formerly known as Anthem, may be trying to keep this information hidden because “it is not uniformly applying its negotiated discount to the claims it processes . . . instead, [Elevance] is either unlawfully retaining the improperly discounted amounts for itself, or it is imprudently overpaying providers.” For example, the lawsuit states that Elevance guaranteed a 50 percent discount on network provider rates, but available data reflected only a 30 percent discount. The union health funds allege that they had to take measures such as diverting money from an annuity fund or switching to high deductible health plans to pay for their increased health care costs. Elevance denies overpaying claims, citing limitations of publicly available hospital pricing data—the source plaintiffs relied on to calculate the alleged overpayments because they couldn’t access their own claims data. Elevance argues, for instance, that the hospital-released data may reflect out-of-date negotiated rates or base rates that may go up or down depending on the procedure’s complexity.

Other plans have also accused insurer-TPAs of overpaying claims. A union health and welfare fund alleged Blue Cross Blue Shield of Massachusetts (BCBSMA) payed “inflated claims up-front” and collected inappropriate recovery fees from the fund when it later corrected its own errors. Additionally, an ongoing lawsuit against UnitedHealth charges that the insurer-TPA frequently overpaid claims, including paying for non-covered services or incorrect CPT codes. Finally, public records suggest Horizon Blue Cross Blue Shield of New Jersey, like Elevance, paid millions of dollars more than providers billed when administering New Jersey’s state employee health plan.

Buried Fees

Inflated reimbursement rates aren’t the only charges hidden from employer health plans. Several lawsuits allege TPAs are hiding administrative fees from their clients. Although provisions of the CAA should shed more light on compensation going to plan service providers, compliance is far from perfect, especially among TPAs and pharmacy benefit managers who argue the law does not apply to them, despite congressional leaders’ contrary views.

One example is Aetna’s alleged use of “dummy codes.” According to an ongoing lawsuit, Aetna subcontracted with Optum to access certain provider services at a lower price than Aetna could directly negotiate, but misled its clients about the cost of these new rates. Aetna publicly proclaimed that “[s]elf-funded plans will not be charged any fees for this program.” But while these fees were not included in clients’ administrative fee schedules, the court found that Aetna secretly demanded that Optum “bury” its fees into provider claims by tacking on a dummy CPT code and sending Aetna a claim that included both the health care provider’s fee and Optum’s administrative fee. For example, Optum would bill Aetna $70.89 for a claim, of which $34 was its negotiated reimbursement rate and $36.89 was its administrative fee.

Aetna maintains that total charges were less than care would cost had it not contracted with Optum, because of Optum’s better rates. But plan members could be paying more out-of-pocket for each visit than they would if the fee were processed as part of the administrative fee schedule, paid by the plan, rather than hidden in members’ claims. What’s more, it’s possible Aetna could have negotiated a lower fee from Optum if the fee wasn’t hidden. Court records show Optum employees’ concern about the legality of Aetna’s dummy code plan; that Optum nonetheless agreed to it indicates Aetna had leverage in the negotiation process that could have been put to better use demanding lower fees.

Cross-plan Offsetting

Cross-plan offsetting is a process some insurer-TPAs use to recoup alleged overpayments to health care providers. Although paying claims accurately is important, in practice, cross-plan offsetting overwhelmingly benefits the insurer-TPA at the expense of providers, patients, and health plans.

Below is an illustrative example:

John is a member of Plan A, administered by TPA, and receives care from his Doctor. For John’s care, the TPA initially pays Doctor $200, but later determines (for whatever reason) that it should have paid only $100. Rather than pursue the Doctor or John to repay the difference, the TPA waits until Doctor submits another claim – for example, $200 for care for Maria, who is a member of Plan B. TPA, using Plan B’s funds, then pays $100 to Doctor and $100 to Plan A.

From the TPA’s perspective, at the end of this series of transactions, it has paid what it considers to be a fair amount to Doctor ($300) across the two transactions and both Plan A and B have contributed the amounts owed under their plan terms ($100 and $200, respectively). But Doctor, having submitted bills for $400, still thinks he is owed an outstanding $100. If he is out-of-network, he could potentially balance bill Maria for that $100, even though her Plan has already paid $200 for her care.

Further, an insurer-TPA can use this process to its own financial benefit. When cross-plan offsetting, it is in an insurer-TPA’s interest to hunt for overpayments made by its fully insured products (for which it is on the hook for any overpayments) and reimburse itself for those overpayments with offsets from self-insured plans, funded by employers and unions. For example, in 2017 a federal court described internal documents from UnitedHealth “gush[ing] about how cross-plan offsetting will allow United to take money for itself out of the pockets of the sponsors of self-insured plans.” The court also found that, of the claims it reviewed, “every plan that made overpayments [was] fully insured,” while “the majority of plans from which overpayments were recovered [were] self-insured.” Notably, only 22 percent of United’s plans were fully insured at the time.

Despite concerns from multiple courts and the Department of Labor that this practice creates a significant conflict of interest that may violate ERISA’s fiduciary obligations, UnitedHealth appears undaunted—in 2019, the insurer-TPA captured $1.354 billion through cross-plan offsetting and, in 2021, a spokesperson affirmed its commitment to overpayment recovery.

Better Monitoring Ahead

Employers would be well-advised to look more closely at their health plan contracts to ensure they are not unwitting participants to practices that may violate ERISA’s fiduciary duties and potentially increase their members’ financial exposure. Thanks to the CAA, plan sponsors have a right to information about what they are paying for care and how their service providers are being compensated and, indeed, an obligation to get it.