When a plan sponsor hires a third-party administrator (TPA) or insurance company to administer its self-insured health plan, it’s easy to assume overpayment recoveries are being handled. But that assumption can be costly.
One area where plan sponsors routinely fall short in their oversight responsibilities is in monitoring overpayment recovery efforts, a critical component of post-payment integrity. In a healthcare environment where errors, system issues, and coordination of benefit failures are common, relying solely on the administrator’s internal processes without independent oversight exposes plan assets and fiduciaries. Overpayments, often caused by misapplication of contracts, duplicate claims, eligibility errors or misapplied benefits, can quietly drain plan assets if not actively monitored.
Overpayments Are More Common and More Costly Than You Think
- Overpayment recoveries can represent 1-1.5% of all claims processed and paid, a significant amount when multiplied across millions of dollars in annual plan expenditures.
- Without a strong recovery process and active oversight, uncollected amounts can quietly accumulate year after year, resulting in the unnecessary depletion of plan assets.
The Problem: Out of Sight, Out of Mind
Most TPAs and insurers have internal processes to identify and recover overpayments. However, those processes are not always comprehensive, transparent, or actively monitored by the plan sponsor.
In fact, many sponsors are unaware of:
- How often overpayment recovery reviews are performed
- What types of claims are reviewed (and what are excluded)
- How recoveries are tracked, credited, and reported back to the plan
- Whether recoveries are being properly pursued or written off without sponsor input
When this oversight is missing, recoverable dollars can be lost, and fiduciaries may unknowingly fail their duties.
Do Not Overlook the Cost of Recovery
Many TPAs and insurance carriers engage third-party vendors to identify and recover overpayments. These vendors specialize in benefit coordination, duplicate detection or subrogation, and are typically compensated on a contingency-fee basis, earning a percentage of any recovered amounts.
Instead of invoicing the plan directly, vendors deduct their fees from the recovered amount. Fees typically range from 20 – 30%, meaning a large portion of the recovered money doesn’t go back to the plan.
In some cases, these recoveries stem from errors made by the TPA or insurance carrier, such as misapplied benefit rules or contract errors. However, the plan is still charged a fee to fix these issues, raising concerns on fairness and accountability.
For example, a $100,000 overpayment recovery at a 30% contingency rate would result in only $70,000 being credited back to the plan.
Given this structure, plan sponsors must actively monitor these arrangements to ensure:
- Fee percentages are reasonable and aligned with market benchmarks
- Recovery efforts are not duplicative or overlapping with other vendors
- Reports clearly distinguish gross recoveries, fees retained, and net amounts returned to the plan
- There is accountability for performance and value delivered
Without proper oversight, these fees can erode the financial benefit of recovery efforts and potentially go unnoticed by fiduciaries responsible for managing plan assets. Transparency and governance are essential to ensure the recovery process serves the plan, not just the vendors.
The Fiduciary Duty to Monitor
Under ERISA, plan fiduciaries must carefully monitor service providers and ensure plan assets are used solely to pay covered claims and reasonable administrative costs. That duty does not end once a contract is signed or a process is delegated. It includes:
- Monitoring the service provider’s performance
- Asking questions about recovery rates and methodologies
- Ensuring appropriate escalation of complex or high-dollar cases
- Reviewing documentation and reporting regularly
Failure to do so wastes plan resources and increases the risk of regulatory scrutiny, participant challenges or litigation.
What Plan Sponsors Should Be Doing
To better oversee overpayment recovery efforts, plan sponsors should:
- Understand the Scope, Vendors, and Methodology of Overpayment Recovery – Know which overpayments are targeted and how vendors are compensated.
- Ask for Transparency – Request comprehensive and regular reporting from the TPA or insurer that includes, at a minimum:
- The total amount of each overpayment identified
- The date the overpayment was identified
- The specific reason for the overpayment (e.g., coordination of benefits, duplicate payment, provider billing error)
- The date and amount of any recovery made
- Recovery status and recovery rate (e.g., fully recovered, partially recovered, pending)
- Items written off or deemed unrecoverable, along with explanations
- Fees or contingency amounts are deducted from the recovered funds
- Net amounts ultimately returned to the plan
- The method used to identify the overpayment (e.g., internal audit, third-party vendor, claims system flag)
- Error trending and related corrective actions or process changes implemented to prevent recurrence
- Ensure Recoveries Are Credited to the Plan – Verify that recovered dollars are returned to the plan, not retained by vendors.
- Audit the Recovery Process – Engage an independent reviewer to assess overpayment recovery efforts.
- Define Expectations in Contracts – Include clear performance expectations and audit rights in administrative agreements, including timelines for recovery, documentation requirements and fiduciary access to supporting data.
By taking these steps, plan sponsors can help ensure that overpayment recovery efforts are comprehensive, cost-effective and aligned with the plan and their participants’ best interests.
A Missed Opportunity or a Hidden Liability?
Sponsors can ensure that efforts are thorough, cost-effective and aligned with the best interests of the plan and its participants by treating overpayment recovery as a strategic priority. This includes monitoring vendor practices, understanding fee structures and holding service providers accountable for errors. Put simply, proactive oversight in this area is essential to fulfilling fiduciary duties and protecting plan assets.
Contact Us
For more information on this topic, please contact a member of Withum’s Self-Insured Health Plan Advisory Services Team.
