By: Ward Kallstrom and Jonathan Braunstein

A medical plan’s board of trustees may proceed with its restitution claim against health care providers to collect expenses the plan paid for the treatment of plan members that were later determined to have been either excessive or excluded as not medically necessary, the U.S. District Court for the Northern District of California ruled on September 12, 2011. (International Longshore & Warehouse Union-Pacific Maritime Ass’n Welfare Plan Board of Trustees v. South Gate Ambulatory Surgery Center, No. 11-01215-WHA (N.D. Cal. 9/12/11).

In South Gate, ERISA plan trustees sued an outpatient surgery center, a doctor, and an anesthesiologist for appropriate equitable relief, including restitution and agreed or implied equitable liens, seeking to recover millions of dollars in prior reimbursements that the trustees claimed had been paid for services that were excluded because they were not medically necessary or had been overpaid.

Neither the Plan nor the trustees had any contractual relationship with the providers, but the trustees alleged that the providers submitted invoices directly to the plan based on contractual assignments by plan members.  The trustees did not — at least for now — specifically allege that the providers engaged in fraud.

The providers moved to dismiss, arguing that the Plan trustees failed to state claims for appropriate equitable relief under ERISA Section 502(a)(3) because the trustees had not pled fraud and erroneous payments could not be “traced” to assets currently in the providers’ position.

Rejecting and denying the providers’ motion to dismiss, Judge William Alsup held that the trustees pled sufficient facts to show the providers became subject to plan provisions for restitution of benefit overpayments when they accepted payment from the plan through contractual assignments from plan members.  The Court held that it was plausible that by submitting assigned claims, the providers agreed to the Plan’s language requiring providers to refund erroneous payments and overpayments. 

The court further found that the restitution sought by the trustees was equitable relief under ERISA.   Prior cases had held that a plan administrator could sue for restitution under ERISA if the plan had an express contractual relationship with the provider, the provider had obtained benefits through fraud, or the plan assets could be traced to specific assets in the provider’s possession.  South Gate extended the right to restitution to situations where the only contractual relationship was between the provider and plan members, even absent fraud or traceability. 

The case is important given that fraudulent health care claims for benefits from private U.S. medical plans have been estimated to total $200 to $300 billion per year.  Most of this fraud is believed to be perpetrated by health care providers.  One of the problems faced by plan administrators in ferreting out and remedying provider fraud is that before litigation discovery, plans generally are not able to plead fraud with the specificity required by Federal Rule 9(b).  Although state law pleading requirements are generally less restrictive than Rule 9(b), the federal rules may apply to plan administrators’ claims against health care providers because those claims may arise only under section 502(a)(3) of ERISA, a federal statute.  Judge Alsup’s ruling is significant because it provides plan fiduciaries with a day in court before they do the discovery that is necessary to establish fraud.  Fiduciaries can now proceed in court on allegations that the plan has overpaid benefits to health care providers — or is entitled to refunds of payments the plan has made for services that the plan administrator has now determined to have not been medically necessary or to have been otherwise excluded — even in the absence of fraud allegations.