Beyond the Rates: Overpayment Collections - Offsets Against Future Claim Payment
Part 2 of Beyond the Rates: The Contract Terms That Shape Reimbursement
Your Health System Receives Claim Payments Every Week, But Not This Week. What Happened to Your Money?
Consider a health system that receives an average of $2 million per week in claim payments from a payer. The payer identifies an alleged $6 million overpayment and begins offsetting claims, withholding payment on unrelated, otherwise payable claims. If the contract permits full offsets, three weeks of claims payments could be withheld to satisfy the alleged overpayment even if the health system disputes its validity.
In this hypothetical, the health system ultimately prevails, but resolution requires multiple appeals and takes six months. During that period, the health system must manage the cash shortfall and devote resources to recovering the funds.
What if the health system does not prevail through the payer’s appeals process? In this instance, the payer retains the funds, and the health system must pursue recovery through the contract’s dispute resolution process. The dispute may involve legal fees and take months or years to resolve.
Contract Language Matters
It can support the predictability and magnitude of payment or undermine it materially. Even with clearly defined reimbursement methodology and specific rates, revenue may remain uncertain. Reimbursement is only as durable as the other provisions supporting it.
This multipart series focuses on commercial payer contracts and identifies key terms with the potential to undermine revenue. Part 1 focused on when payments become final and how long payers and providers have to correct errors. This second installment examines the terms governing the collection of alleged overpayments and illustrates potential pitfalls, especially when collections occur through payment offsets.
The central questions are when and how offsets are permitted and who controls the money when an overpayment is disputed.
No Contract Language Does Not Mean No Problem
Assuming that both parties have the same rights, or that only what is written in the contract matters, may lead to an incorrect conclusion and affect financial performance.
During negotiations, it is not enough to raise an objection specific to the words on the page. You also need to identify what is missing and understand the implications. If your contract doesn’t cover it, the payer’s standard policies may apply and favor the payer.
Payer contracts typically obligate a health system to comply with payer policies and procedures (P&Ps). When incorporated into the contract, these obligations may extend to current P&Ps and future changes. If the contract does not specify rules governing overpayment collections and offsets, the payer’s P&Ps may apply.
Even with a well-drafted overpayment and offset provision, that contract language might not matter. Consider a health system that is legally bound to comply with both the contract and payer P&Ps. What happens when their requirements conflict? To ensure a health system benefits from the contract terms, it must be clear that the negotiated language governs. The contract should specify that its provisions control in the event of a conflict with payer P&Ps.
Before an Overpayment Is Collected, Do Both Parties Need to Agree?
Some may assume that collections can proceed only if both parties agree on the presence and amount of the overpayment. While this language can be negotiated, it is not typically what is initially proposed and may be very difficult to secure during contract renegotiation. Unless specific statutory protections exist and apply, agreement is only required if the contract says so.
If your contract includes the original, unnegotiated language proposed by the payer or defaults to being governed by payer policies, the likelihood of unfavorable provisions and practices increases. Depending on applicable law, your health system may face one or more of the following issues:
Overpayment Determinations / Notice
The payer alone determines the presence and amount of an overpayment.
The payer may not be required to notify the health system or explain the reason for the alleged overpayment.
Collections
The payer has no time limit on collecting an overpayment.
The payer may have the right to immediately collect.
The payer may have the right to retain otherwise payable funds on unrelated claims.
The payer may not be obligated to pay the health system anything at all until an overpayment has been fully satisfied, regardless of the magnitude.
The health system may not have a right to remit payment to the payer rather than be subject to automatic offsets.
Disputes
Even if the health system disputes an overpayment, the payer may have the right to proceed with collections and offsets.
To resolve the dispute, the health system may have to submit a reconsideration request or appeal, pursue dispute resolution, or assert a breach of contract. These actions take time and resources and may not resolve the payment dispute.
If the issues are persistent or especially acute, the health system may choose to terminate the contract.
Does an Obligation to Comply with State Law Always Provide Protection?
Some external protections exist, but they vary significantly by state, and contract language may affect their applicability. For example, Florida provides direct restrictions on offsets, but protections are limited.[1] New York establishes overpayment notice requirements and a recovery deadline but does not prohibit or limit collection through claim offsets.[2]
Other Factors Affecting Statutory Protection
Part 1 examined differences by state, funding type, provider type, overpayment versus underpayment protections, and whether contracts may supersede statutory requirements. The following factors further affect whether and how protections apply.
Factor | Potential Differences |
|---|---|
Notice of Overpayment | Is notice required? Some but not all states obligate the payer to notify the provider of an overpayment. The required level of detail and notice timeframe vary. |
Method of Notice | How must the notice be delivered and to whom? Some states may specify that electronic notice is sufficient, while others may consider electronic notice insufficient and require some form of written notice. The required delivery method may impact whether or not the notice is received and routed correctly or receipt can be proven. |
Agreement Prior to Offsets | Under what circumstances are offsets permitted? Some states do not prohibit or limit payer offsets. Others may require provider agreement or a failure to respond to notice prior to allowing an offset. In some instances, the need for “agreement” may be satisfied via standard contract language or a payer’s published policies that are incorporated by reference into the agreement. |
Statutory restrictions affect the collections and offsets for some, but not necessarily all, claims. State law does not provide comprehensive protection. For example, as discussed in Part 1 of this series, these protections do not typically apply to self-funded Employee Retirement Income Security Act (ERISA) plans.
Given the gaps and limitations, defaulting to statutory protections is not enough. Health systems need explicit contractual protections for business outside the statutes’ purview including components not mentioned in state law.
A Tale of Two States
Florida (Fla. Stat. § 627.6131, § 641.3155) | |
|---|---|
Protections:
| If a health system’s contract permits offsets, that language may satisfy the written-consent requirement without separate agreement on each claim. Some payers operationalize contract language as written agreement to offset and apply it universally. |
Limitations and Exceptions:
| |
New York (N.Y. Ins. Law § 3224-b(b)) | |
|---|---|
Protections:
| The right to dispute an overpayment does not necessarily protect cash flow. If collections continue during the dispute, the health system may have to recover money already withheld rather than prevent its collection. |
Limitations and Exceptions:
| |
Contract Review: Where the Details Matter
A minor difference in wording can dramatically affect meaning and financial impact. Clear provisions specify the steps in the process and each party’s rights and obligations; vague or incomplete language may leave important protections uncertain.
When Offsets Are Permitted or Prohibited: Does the contract language allow offsets in all circumstances or only certain, specified instances? Although uncommon, the contract language may completely prohibit the payer from initiating offsets.
Is Notice Required: Even when notice is required prior to initiating an offset, it may be limited to certain circumstances and be entirely at the payer’s discretion. For example, notice may only be required when the overpayment is “sizable,” but the financial threshold may not be defined.
Notice Period: Has the required number of days’ notice been specified? If not, offsets may be permitted immediately upon provision of notice.
Method of Notice: What method of delivery fulfills the notice obligation? For example, requiring notice via certified mail, return receipt requested, would increase reliability and provability of delivery. If the contract permits electronic notice through email, a payer’s portal, or its newsletter, is the information likely to get to the right person? If no delivery method is specified, the manner of delivery would be entirely at the payer’s discretion.
Recipient of Notice: Must written notice be provided to a specific department, individual(s) with a particular title, or a named person? Without a clearly defined recipient who will continue to be relevant over time, notice may be misrouted or lost.
Information in the Notice: Is the notice required to include identifying data elements such as patient name, date of service, and claim number along with a meaningful reason code? Without defined obligations, some payers may provide insufficient information or inconsistent detail across different lines of business or products, making it more difficult to research the validity of the overpayment.
What Happens During a Dispute: Does the contract prohibit the payer from proceeding with offsets if the health system disputes the validity of the overpayment? If not, the payer may have the right to proceed with offsets even when the overpayment has been disputed.
Watch for Incomplete Language: What are the possible outcomes under the proposed contract language? Are all accounted for? Who makes the final decision, and who controls the funds?
Negotiation Priorities
Even when a health system is unable to successfully negotiate a complete prohibition against offsets, other protections may help address financial risk. Negotiations can focus on:
Requiring advance notice and adequate supporting information
Allowing time to investigate
Requiring mutual agreement on the overpayment
Permitting direct repayment
Prohibiting collection while a dispute is pending
Limiting the amount or proportion of funds withheld
Prohibiting commercial overpayments from being offset against Medicare Advantage or Medicaid claims (separate lines of business with different rules)
Prohibiting cross-entity offsets (where an overpayment to one health system entity is recovered by withholding payments owed to another entity or tax ID number)
Requiring interest on funds withheld in error
Establishing a deadline for returning funds when the provider prevails
The objective is to make collections predictable and manageable rather than leave their timing and financial impact entirely within the payer’s control.
Develop Insights and Take Action
Financial predictability requires more than negotiated rates. It requires clear rules for communicating and resolving alleged overpayments and determining who controls the money along the way.
BDC Advisors helps health systems evaluate existing contract language, identify risks, and translate findings into negotiation strategies. We lead managed care contract negotiations, work alongside internal teams, or advise behind the scenes, from initial assessment through agreement completion.
To assess whether your contract language affects reimbursement and develop a strategy to address the risks, contact Carrie Knowles-Atkinson, Principal, at carrie.knowles-atkinson@bdcadvisors.com.
Coming in Part 3: Proprietary Payer Reimbursement Methodology
Sources
[1] Florida Legislature. Florida Statutes §627.6131, § 641.3155
[2] New York. N.Y. Insurance Law § 3224-b(b)
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