"Use Legal Precedent to Fight Payer Take-Backs"


"Use Legal Precedent to Fight Payer Take-Backs"

An Indiana case illustrates how you can win.

by Gil Weber, MBA
Consulting Editor

Adapted with permission from Ophthalmology Management
© Copyright, 2002. All rights reserved.
March 2002

As of November 2001, all but two states had some sort of prompt payment law or regulation for claims settlement on the books. And many physicians are starting to benefit from generally stricter enforcement that "encourages" third-party payers to settle their obligations in a more timely manner.

But even if you're being paid on time, it doesn't necessarily mean you can bank the money and put it out of your mind. In a discouraging number of instances, third-party payers across the nation are taking back -- or trying to take back -- payments that they claim have been made in error.

In this article, I'll provide you with some suggestions to make it harder, or hopefully, impossible, for payers to successfully take back or withhold payments, or offset alleged overpayments against current and future reimbursements. If you're interested in obtaining even more information on how to fight payer attempts at take-backs, please see my previous article ("Getting a Grip on Payer Take-Backs," Ophthalmology Management, July 2000).

Unreasonable demands for restitution have created enormous trouble for numerous practices. Here, I want to give you a powerful way to protect your interests -- using case law and legal precedent to fight back when you receive that "Dear Doctor" letter demanding repayment, or stating that your next check will be reduced. I'll describe a very interesting case from the Indiana Court of Appeals (St. Mary's Medical Center, Inc. vs. United Farm Bureau Family Life Insurance Company, 624 N.E. 2d 939) and then show you how an Indiana practice successfully used this case to block a health plan from taking back the practice's hard-earned money.

With this information, you'll better understand specific legal concepts that might work in your favor. You'll also appreciate the mindset you must establish to resist these unreasonable take-back demands. And while every specific in this Indiana case may not apply to your state -- courts in other jurisdictions aren't bound to follow Indiana decisions -- it's still a good place from which you and your practice attorney can start building an effective defense and counterattack strategy.

Summarizing the Case

Don't worry, this summary won't involve a lot of mysterious legalese. But it's important that you understand the basics of the case and some underlying legal principles regarding financial restitution before we get into the real-life lessons of how you can fight back. And even though this case involved a hospital, you've probably experienced a similar scenario in your own practice.

In January 1991, Mrs. Mumford was admitted to St. Mary's Medical Center as an outpatient. She listed Farm Bureau as her insurance company and assigned her benefits to St. Mary's. The hospital provided services.

In February, St. Mary's billed Farm Bureau $3,836.47, of which Farm Bureau paid $3,685.87. Subsequently, Farm Bureau discovered that Mrs. Mumford's insurance coverage had lapsed on December 1, 1990 -- many weeks before St. Mary's provided the services. The insurance company notified St. Mary's of the problem and requested repayment in March and again in May 1991. St. Mary's refused both times.

In February 1992, Farm Bureau sought restitution in the Indiana courts, alleging that there had been a mistake of fact regarding Mumford's eligibility. The trial court found in the insurance company's favor. Subsequently, St. Mary's appealed, and in December 1993 the Court of Appeals reversed the original decision, ruling that St. Mary's was entitled to keep the payment.

St. Mary's Argument

St. Mary's appealed the trial court decision by arguing that it was an "innocent third-party creditor" and, therefore, an exception should be applied to the general rules of restitution, which I'll discuss below. Further, St. Mary's argued that:

  • The mistake was solely Farm Bureau's,
  • St. Mary's made no misrepresentations that led to Farm Bureau's mistake,
  • St. Mary's acted in good faith and without prior knowledge of Farm Bureau's mistake.

In other words, St. Mary's was essentially saying, as we all have said at one time or another: "We played by the insurance company's rules and did nothing improper that would have induced payment we weren't entitled to receive. It shouldn't be our job to go chasing after the patient when Farm Bureau's own information was flawed."

St. Mary's argued that it hadn't been unjustly enriched and, therefore, an "innocent third-party creditor" exception to the general rules of restitution should be applied. That would then relieve St. Mary's of any obligation to repay Farm Bureau.

Farm Bureau's Argument

Farm Bureau argued three points:

  • The money was paid by mistake,
  • But for that mistake there would have been no payment,
  • It was under no legal obligation to pay the money to St. Mary's Medical Center.

Farm Bureau also argued that St. Mary's had been unjustly enriched because St. Mary's had collected payment from Farm Bureau for services Farm Bureau had no obligation to cover, and for which St. Mary's should, therefore, have had to collect from Mrs. Mumford.

In other words, Farm Bureau was singing that tired, old song: "It wasn't our fault. The eligibility database had an error and the patient wasn't eligible. It was an unfortunate mistake, but the provider should bill the patient." Does that sound familiar? And good luck collecting from the patient.

Next, let me give you a brief explanation of some general principles regarding payment and restitution. Then, I'll complete the case summarization and we can get to the real-life lessons and teach you how to fight back.

Payment and Restitution

To appreciate St. Mary's successful argument before the Court of Appeals, you need to understand some basic principles of law that this court relied on regarding payment and restitution:

If one party to a transaction pays another, and if there's a mistake of fact in that transaction, then the payer is entitled to restitution from the payee. For example, if I have a contract to fix your wall for $100, and if you mistakenly pay me $130, you're entitled to get back $30.

A prerequisite of restitution is that the payee must have been unjustly enriched. A person is enriched if he has received a benefit. A person is unjustly enriched if retaining that benefit would be unfair under the circumstances. For example, if I never fix your wall but you pay me $100 thinking I have, in fact, completed the work, then I have been unjustly enriched and you're entitled to restitution. Note that the courts have often found that an insurance company may be entitled to restitution even if the payment was made solely due to the insurance company's error. And that's where "exceptions" come in.

There are some exceptions to the general rule that a payer who has made a mistake is entitled to restitution. When the payee's position is so changed that it would be inequitable to require restitution. Thus, it might be deemed an unreasonable hardship on the payee to recover and repay the money if it's already been spent. But note, the payee must not know the payment was in error. If the payee, aware of the error, nevertheless spends the money, there is no "unreasonable hardship" precluding the payer from recovering the mistaken payment.

Another exception is when the payee is an "innocent third-party creditor" who had no notice of the payer's mistake and made no misrepresentation to induce payment. The "innocent third-party creditor" exception was at the heart of St. Mary's case.

This exception to restitution is based on the presumption that if the payee hasn't been unjustly enriched then it's not obligated to make restitution to the payer. St. Mary's argued that it had provided good value in exchange for payment -- it had cared for Mrs. Mumford. Therefore it was entitled to keep the money.

Further, St. Mary's argued that it was Mrs. Mumford, not St. Mary's, who had been unjustly enriched (since she wasn't eligible for the services she received). Therefore, Farm Bureau should look to Mrs. Mumford for its restitution of the erroneous payment.

The Court of Appeals Speaks

The Court of Appeals agreed with St. Mary's. It stated that Farm Bureau had satisfied an obligation that actually was Mrs. Mumford's, and the Court limited Farm Bureau's remedy to restitution from Mrs. Mumford.

And the Court made these two points to which you should pay particular attention:

  • There's a difference between an incorrect insurance payment made directly to the insured and an incorrect payment made to an innocent third-party creditor of the insured.
  • Further (and citing other cases for precedent), ". . .where the insured is overpaid, paid mistakenly or benefits from a mistaken payment for services by the insurer, unjust enrichment results. In such cases, the insured has derived a benefit because it has received more than that to which it was entitled, either in actual payment or from the benefit of having a debt discharged erroneously. That is not the case with an innocent third-party creditor."

The Court of Appeals clearly told Farm Bureau to look elsewhere than St. Mary's for its restitution. But that wasn't all. The Court also recognized that this whole issue of health plans coming back at providers and making retroactive demands for repayment at any time put an unreasonable contingency liability burden on providers. Here's where it really got good!

The Court stated: "We agree with St. Mary's that requiring an innocent provider to refund an insurer's payment made by mistake would place an undue burden of contingent liability upon the provider, 'lasting until all such claims were barred by the statues of limitation.' The assignment of policy benefits to medical providers is a widespread and accepted practice in the health insurance industry, and the prospect of universal refund liability under these circumstances would create uncertainty in accounting for such payments. Further, the adoption of this exception places no additional burden upon the insurance companies. It merely requires that an insurer verify coverage before paying a claim, which is what an insurer must do in every case. If a mistake is made, as occurred here, then an insurer can maintain an action for restitution against the insured who was unjustly enriched by payment for medical services."

For years the insurance companies have been telling us it's not their fault, it's not their problem -- that the physician should bill the patient. Physicians were saddled with all of the risk created by the errors of others. Here the Court said "I don't think so."

The Indiana Court of Appeals told insurance companies that, under certain circumstances, you go chase the patient when you make the mistake. It's no longer de facto the provider's hassle. Wow!

A Practice Fights Back

My good friend, Michael Lockard, serves as the practice administrator at Talley Medical-Surgical Eye Care Associates in Evansville, Ind.

Michael "gets it." He understands that a practice must fight aggressively to protect its interests and to collect or hold onto hard-earned income. Michael uses the law and a pit-bull mentality to hold onto the practice's money. He won't let go.

Following is a letter Michael used recently to refute one health plan's demand for restitution. The letter cites the Farm Bureau case, and states that there will be no refund. It's now more than a year since he sent the letter, and the plan has never again mentioned restitution for this payment. Do you like the sound of that?

Ask your attorney to review this letter and determine if you can use it as a model to create your own document. But remember, the Farm Bureau decision was in the Indiana Court of Appeals, and any letter you use to refute a restitution demand must cite law or legal decisions applicable to your state.

September 25, 2000

Overpayment Unit
XYZ Health Plans

To Whom It May Concern:

We must politely decline your request for refund for services provided to (patient's name) on April 12, 1999.

We decline to pay this based upon the Indiana Appellate Case law cited in St. Mary's v United Farm Bureau (624 NE 2d 939). Talley Eye Care is an innocent third-party creditor and, thus, XYZ Health Plans is not entitled to restitution because (1) the payment was made to Talley Eye Care solely due to XYZ Health Plans' mistake, (2) Talley Eye Care made no misrepresentations to induce the payment, and (3) Talley Eye Care acted in good faith without prior knowledge of XYZ Health Plans' mistake.

Furthermore, Talley Eye Care contacted XYZ Health Plan for an authorization for surgery, and prior authorization was received prior to surgery being performed. We feel compelled to note that the patient never made any mention of Medicare coverage at the time of service, and that his insurance cards and all information from XYZ Health Plan noted that they were primary and the sole insurance. Therefore, based upon the length of time and the facts of this case, we will not be refunding the amount requested.

Your prompt attention and assistance in this matter will be greatly appreciated. If you have any questions or need further information, please do not hesitate to contact me at your earliest convenience.


Michael Lockard
Talley Medical-Surgical Eye Care Associates

You Can Win

Michael learned he could fight "city hall" and win. So can you. The key is to be educated, aware, and armed with the right ammunition.

When you get a "Dear Doctor" letter, don't automatically accept that your money is lost. Payers should be ready and able to substantiate any demand for restitution. You may find they aren't able to do that.

Payers count on the fact that most physicians don't know how to fight back effectively and don't even understand their legal rights. That realization gives payers a huge advantage and sometimes allows them to bluff physicians into returning monies that needn't be returned.

In the end, and depending on circumstances, the payer may be entitled to restitution. But there's no reason to cave in without a fight, especially when you've followed all the proper administrative procedures and provided care in good faith -- and when you have the law on your side.

You worked hard for that money. You should work just as hard to keep it.

Laches and Estoppel

Two other legal theories that you, as a third-party creditor, may have occasion to use -- laches and estoppel -- weren't argued in the Farm Bureau appeal. But you may hear the terms (called equitable doctrines) in the context of other cases. They apply in one way or another to one's rights and responsibilities when performing on a contract.

When one of these theories is applied, it's done to promote fairness in cases where justice wouldn't result by application of strict legal theory. Ask your attorney how, or if, either might apply in your specific case when an insurance company makes what you feel are unreasonable restitution demands.


Laches is a term that can come up in cases where a claim for restitution is made long after what seems, in fairness, a reasonable amount of time. For example, practice administrator Michael Lockard told me about a recent attempt by a New Jersey payer to recover on a 12-year-old claim.

Black's Law Dictionary defines laches as "The equitable doctrine by which a court denies relief to a claimant who has unreasonably delayed or been negligent in asserting the claim, when that delay or negligence has prejudiced the party against whom relief is sought."

Laches involves the following elements:

  • waiting an unreasonable length of time to assert a claim,
  • neglecting to assert a right or claim,
  • causing detriment to another party.

A Latin maxim perfectly sums up this equitable doctrine: Vigilantibus et non dormientibus jura subveniunt (The laws relieve the vigilant and not those who sleep on their rights). In other words, a health plan doesn't have forever to make a claim for restitution. Laches says it would be unfair to allow certain old restitution claims to go forward given a significant passage of time since a defendant likely would have great difficulty gathering evidence and witnesses to build a defense.

And while the New Jersey case might be an extraordinary example of brazen conduct, I've seen many instances of plans taking back, or trying to take back, monies paid several years before. You'll want to be prepared for the time when you might be on the receiving end of one of these audacious efforts.


Estoppel is a doctrine that prevents Party A from taking a position contrary to an earlier position, and where Party A knew or should have known that Party B would rely on that original position and reasonably did rely on it to Party B's detriment.

Estoppel involves the following elements:

  • one party's statement or act intended to induce reliance by a second party,
  • the second party's ignorance of the true facts,
  • the second party's reasonable reliance on the statement or act of the first party,
  • the second party's detriment as a result of its reliance.

For example, let's say you jump through all the right hoops and obtain the health plan's authorization to do a covered surgery. In issuing that authorization, the plan has told you that it will pay for the covered service. Then, relying on that representation, you provide the service. Thereafter, the plan should be "estopped" from denying coverage and payment.

Some Caveats

Now, none of this should come as any surprise, but if you provide care and submit a claim without first confirming coverage, then estoppel doesn't apply. In such an instance you didn't rely on any payer representation that it would pay for services to a specific patient. And any "generic" promise to pay for covered services to the health plan's membership may not be sufficient.

Further, if you know that a service isn't covered but you try to get it paid anyway (and somehow the claim is paid), then you have no defense against a claim for restitution. The payer paid in error and should be able to get its money back, subject to any applicable statute of limitations.

Gil Weber is an author, lecturer and practice management consultant to the managed care and ophthalmic industries. He has served as Managed Care Director for the American Academy of Ophthalmology.

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