Insurance Industry ERISA Violations and Rising Health Care Costs in New Jersey


The New Jersey Neurosurgical Society
New Jersey Doctor Patient Alliance

Download this position paper as a PDF

Executive Summary

The State Health Benefits Plan (SHBP) can save hundreds of millions of dollars a year by eliminating hidden fees and commissions paid to insurance companies in their role as Third Party Administrators (TPAs).  These savings can be achieved without the devastating public health consequences caused by underpaying doctors and hospitals, pursuant to A-1952/S-1285, while protecting patients from economic hardships and surprise balance billing.

Hidden fees and commissions exist outside standard DOL 5500 reporting of TPA Administrative Compensation. Consequently, even sophisticated self-funded plan sponsors and auditors can be unaware of their existence.

In other States, self-funding private companies and unions have successfully sued their TPAs for ERISA violations and self-dealing, and for hiding Administrative Compensation fees within Claims Paid categories. Federal courts have ordered multi-million dollar judgements against these TPAs. Here in New Jersey, Horizon was recently penalized for similar activities as an administrator for the Medicaid program.

An aggressive and focused audit needs to be performed of SHBP, with regard to its ASO contracts with Aetna and Horizon. Using forensic techniques successfully utilized elsewhere, along with novel strategies outlined below, the State Health Benefits Plan can achieve substantial savings.

The Issue

To date, the Out-of-Network debate has focused on how OON billing drives up health care costs in New Jersey. For emergency settings, The State Health benefits Plan (SHBP) estimates that elimination of OON billing could help realize savings of up to $40 million annually (1). Similar restrictions in elective settings, estimated by the Treasury, could amount to an additional $81 million (2).

Position papers have demonstrated that artificially low price caps on doctors and hospitals will hurt New Jersey citizens in their ability to access quality medical care and emergency services close to home (3). It has also been shown that these price caps do nothing to halt healthcare price inflation (4).

Nowhere in the debate has there been recognition of the critical but poorly understood source of runaway health care expenses in the State. Insurance companies, in their incessant PR campaign against OON providers, have managed to deflect attention from themselves. However, a growing body of ERISA litigation from around the country can help shed light on the insurance industry’s role in health care inflation here in New Jersey.

Insurance Industry Profit Models in the Age of Self-Funding

The majority (68.3% in New Jersey) of commercially-insured individuals are now covered by some form of self-funded plan, typically sponsored by large corporations, local municipalities, trade unions, or the SHBP. When a patient covered by a self-funded plan incurs a medical expense, it is the plan sponsor who pays the claim, not the insurance company. The insurance company does, however, provide expertise as a Third Party Administrator (TPA), via an Administrative Services Only (ASO) contract with the sponsor. Roughly 50% of Horizon’s book of business is via ASO contracts (5). For Aetna, that figure is 75% (6).

In return for its administrative expertise, the TPA charges a fee, set forth in the ASO, typically itemized as a monthly charge per plan beneficiary. It is these cumulative administrative fees that must be submitted by the plan sponsors every year in a Federal Annual Return/Report of Employee Benefit Plan Form 5500 for filing with the US Department of Treasury, Internal revenue Service, and the Department of Labor, Pension and Welfare Benefits Administration.

It has been repeatedly demonstrated, however, that TPAs charge other, hidden fees that siphon funds from the plan sponsors’ health benefit trusts. The most common of these are:

  1. Cost Containment Commissions/Network Access Fees.
  2. Retention Reallocations.
  3. Cross Plan Offsets/Overpayment Refund Demands (Takebacks).
  4. Fee Forgiveness Protocols
  5. Fake PPO Discounts.

Usually, these profit strategies overlap. For illustration, the first three will be briefly explained.

Cost Containment Commissions/Network Access Fees

When an insurance carrier contracts with a self-funding sponsor via an ASO contract, it provides the self-funding sponsor a network of providers with whom it has negotiated discounted fees. Without this network, the sponsor would be liable to pay full retail medical fees.

However, Horizon, Aetna, Cigna, and Oxford, in their role as TPAs, all charge commissions for these network savings. After the TPA has paid a medical claim on behalf of its self-funding sponsor, it draws funds from the sponsor’s medical benefit trust account for an equal amount (reimbursing itself). The TPA then also draws its commission – which is equal to a percentage of the difference between the paid claim and the provider’s actual charge. Every medical transaction is subject to this commission. In-network or out-of-network. The plan sponsor, meanwhile, is usually unaware that this commission has been taken from its account, because the commission has been added to the original medical claim.

How large are these commissions? They vary by TPA and ASO contract. In general, insurance carriers, acting as TPA’s, charge from 20% to 50% as cost containment commissions for medical transactions. The example below is an ASO contract between Cigna and the School Board of Seminole County, FL. This ASO is remarkable in that the commission of 29% is clearly stated. Other ASO contracts have less clear language, with commissions embedded for difficult detection. In any event, the commissions, which are in fact Administrative Compensation, are categorized instead as Claims Paid in Form 5500 reporting.

ASO between CIGNA and School Board of Seminole County, FL (Commission = 29%) (7).


In November of 2013, the City of Richmond (COR), and the Richmond Public Schools (RPS) published an audit of their self-funded health benefits plan, administered by Cigna (8).

Here is the key finding:

In summary, $1.1 million, representing 3.7% of the COR/RPS health care budget, did not go towards paying subscribers’ medical bills or towards legitimate administrative fees. Instead, 3.7% of the budget was diverted to Cigna commissions, without COR/RPS review, approval, or understanding of the fees.

In comparison, the State of New Jersey paid $3.27 billion in 2016 for health care benefits through its SHBP/SEHBP programs (9). Extrapolating the findings of COR/RPS, SHBP/SEHBP may be paying $121 million per year in cost-containment commissions to Aetna and Horizon as TPAs.

Retention Reallocation

When a self-funding patient incurs a medical expense, the medical provider submits a bill to the TPA via an EDI 837 form (Appendix A).  This EDI 837 represents a raw, unprocessed charge, not inclusive of network discounts (for in-network providers), negotiated settlements (for out-of-network providers), or CPT modifiers that could limit reimbursement for the charge by 50-80%.  The provider rarely expects full payment for the submitted EDI 837.

Upon receiving the EDI 837 invoice from the provider, the TPA forwards the claim to the sponsor via an EDI 810 invoice.  The sponsor in turn sends payment to the TPA via an EDI 820 remittance.  Finally, the TPA then reimburses the provider via an ERA 835 remittance, a data subset of which is included in the Explanation of Benefits (EOB).

In a landmark suit (10) brought by HiLex Corporation against its TPA Blue Cross Blue Shield of Michigan (BCBSM), it was demonstrated that, for any particular medical claim, there can be a large discrepancy between the invoice paid by the sponsor to the TPA, and the reimbursement sent by the TPA to the provider for that claim.  In the HiLex case, HBCBS submitted the provider’s raw charge to the sponsor and got paid for it by the sponsor.  However, only after receiving money from the sponsor did HBCBS proceed to properly adjudicate the claim, making reductions for network discounts, negotiated settlements, and modifier adjustments.  The final, reduced amount was then forwarded to the provider.  According to the court’s decision:

The difference between the amount billed to [HiLex] and the amount paid to the [provider] was retained by BCBSM.  This system was termed “Retention Reallocation.”

In the certifications provided by BCBSM to help prepare DOL 5500s, the Disputed Fees were included on the line for “Claims Paid.”  The “Administration” section that should have included all administrative fees listed only those fees disclosed by BCBSM. 

…representatives from BCBSM told various insurance brokers that customers got 100% of the hospital discounts and that “Blue Cross does not hold anything back.”  BCBSM made similar assurances to Hi-Lex, stating in an annual renewal document, “Your BCBSM Administrative Fee is all-inclusive.”  BCBSM also gave a misleading response to a Request for Proposal (RFP) issued by Hi-Lex by denying that it charged “Access Fees.”

BCBSM breached its fiduciary duty by committing fraud and then acting to conceal that fraud.

The court awarded Hi-Lex $5,111,431 in damages and prejudgment interest in the amount of $914,241.

More recently, in July of 2017, a Federal judge ruled that Blue Cross Blue Shield had to pay the Saginaw Chippewa Indian Tribe $8.4 million for charging “hidden fees” in violation of ERISA.” (11)

It is undisputed that the company included hidden administrative fees in its charges to the Tribe.  Between 2004 and 2012, the Tribe paid approximately $13 million in hidden administrative fees. 

In a similar suit bought by United Teamsters against its TPA MagnaCare (12), court documents state:

[MagnCare] - simply misappropriated the difference between what Plaintiffs paid MagnaCare and what MagnaCare negotiated to pay the providers.

Both the Plaintiffs and the providers were thus unaware that the Plaintiffs were paying MagnaCare substantially more than the healthcare providers were receiving.

The amounts retained by MagnaCare were so grossly excessive as to shock the conscience and constituted a violation of MagnaCare's fiduciary duty to Plaintiffs.

Cross Plan Offsets/Overpayment Refund Demands (Takebacks)

 From the standpoint of provider billing, the most common reason for payment denial is Overpayment Refund Demand, also known as a Takeback.  In this scheme, an insurance carrier refuses to pay a provider’s charge for a patient encounter, claiming that the denied money is being used to refund the carrier for an alleged overpayment on a different charge for a different patient.

This practice crosses the Fraud threshold in the following two scenarios:

  1. The insurance carrier, acting as TPA, “overpays” a claim on self-insured patient Y, but performs a Takeback on its fully-funded patient X.  The Takeback is never refunded to patient Y’s sponsor.  Rather, the insurance carrier keeps the Takeback.  In effect, the sponsor’s ERISA-protected plan assets have been siphoned into the insurance carriers profit statement.
  2. The insurance carrier performs a Takeback on self-funded patient Y, for alleged overpayment on fully-funded patient X.  In this scenario, the insurance carrier, acting as TPA, has already received an EDI 820 remittance from the sponsor for patient Y.  However, via Retention Reallocation, the TPA keeps that remittance without payment to the provider.

In this instance, patient Y is left with a large financial surprise bill.

In Peterson v United Health Group (13), the presiding judge made these comments regarding Cross-Plan Offsetting:

In other words, the money that reimburses United for its alleged overpayment comes out of the plan sponsors’ pockets. Several internal United documents emphasize this point and gush about how cross‐plan offsetting will allow United to take money for itself out of the pockets the sponsors of self-funded plans.

In light of this case law and the strict fiduciary duties imposed by ERISA, cross plan offsetting is, to put it mildly, a troubling use of plan assets—one that is plainly in tension with “the substantive or procedural requirements of the ERISA statute…“

Cross‐plan offsetting creates a substantial and ongoing conflict of interest for claims administrators who, like United, simultaneously administer both self‐insured and fully insured plans.

Novel Strategies for New Jersey

Every year, health care providers complain of decreasing reimbursements and income.  At the same time, health care consumers complain of rising premiums and costs.  The obvious question that needs asking is:  Where is all the money going?

The cases cited above help answer this question – health care dollars are skimmed by the insurance industry.  However, these all involve private companies and unions suing TPAs and administrators, with only local ramifications.  To date, there has not been a large, organized, State-wide effort to hold insurance carriers accountable for ERISA violations and TPA embezzlement.  New Jersey can take the lead in this initiative through collaboration between providers and the SHBP.

Appendix A outlines the HIPAA-mandated flow of medical claims processing.  The extreme complexity of this system is further confounded by its lack of transparency.  As a result, TPAs can hide embezzlement schemes inside electronic data streams that few providers or sponsors understand (Appendix B). 

An information firewall exists at the TPA.  For any particular claim, providers can know their charges (837) and payments (835/EOB), but do not have access to how much the TPA was paid by the plan sponsor for that claim (820).  Conversely, plan sponsors can know how much they paid for a claim (820), but do not know how much of that money was reimbursed to the provider (835/EOB).

The creation of information silos within TPA organizational structure further aids his process – teams that handle 820 remittances from sponsors are segregated from teams that process ERA 835 payments to providers.

Through collaboration between providers and the SHBP, the TPA information firewall can be broken.

According to HIPAA mandates, all EDI forms pertaining to a medical encounter must contain the patient’s name, the date of service, and a claim number.  Using this information, a claim can be tracked from 1.  Initial claim submission from provider to TPA (837), 2.  Invoice from TPA to sponsor (810), 3.  Remittance from sponsor to TPA (820), and, finally, 4.  Remittance from TPA to provider (835/EOB).

The New Jersey State Health Benefits Plan provides medical coverage to 880,000 beneficiaries. Of these, a substantial number have received care from members of the New Jersey Neurosurgical Society, and the New Jersey Doctor Patient Alliance.

NJNS and NJ DPA have identified over 70 claims for SHBP beneficiaries where the provider received zero payment and the ERA 835 or EOB stated the reason.  Ten of these claims are listed in Appendix C.

For each of these claims, we have independent confirmation that the SHBP did in fact issue payment to the respective TPA, even though the TPA denied that payment to the provider.  This confirmation was obtained via serendipitous exploitation of the TPA information silo system (the TPA 820 team had no knowledge that the 835 team had denied payment).

We propose the following:  For each of these claims (traceable via patient name, date of service, and claim number), the provider’s ERA 835/EOB be compared directly with the SHBP 820 remittance.  Providers will furnish ERA 835/EOBs.  SHBP will furnish EDI 820s.  An independent auditor can perform the forensics.  Our contention is that the SHBP will discover the following:

  1. TPAs routinely keep all or part of 820 remittances paid by SHBP for medical services.  These payments are not forwarded to the treating provider.
  2. The SHBP beneficiary is consequently left with a surprise medical bill, even though SHBP has already paid the claim.

Once the pattern of TPA self-dealing has been clearly established by the above audit, NJNS and DPA suggest legal action in the manner of cases presented above.  However, even short of legal action, significant savings can be immediately realized simply from knowledge that the above practices occur.  On a daily basis, beneficiaries of self-funded plans receive payment denials for medical services.  These denials occur even though the sponsor has already paid the claim on the beneficiary’s behalf.  Meanwhile, because the provider has not received reimbursement, the beneficiary is left with a surprise financial liability.

We believe that transparency can help eliminate TPA profits at the expense of our citizens’ health care dollars.  We suggest that any Out-of-Network transparency legislation include language mandating open access to all 820 remittances.

According to AVYM Healthcare Consultants, “all self-insured health plans nationwide should look to recover at least $30 to $45 billion in Plan Asset refunds,” by auditing and then eliminating hidden fees (13).


1.   Dudley Burge, SHBP Commission, in AFI testimony.


3.   NJNS position paper – A-1952/S-1285












Appendix A:  HIPPA-mandated data flow for medical claims.


Upon delivering medical services, a provider submits an 837 invoice to the TPA.  The TPA then forwards the claim to the plan sponsor (eg, SHBP), along with all other medical claims for that day, via 810 invoices.  The sponsor sends payment back to the TPA as an 820 remittance.  Finally, after claim adjudication, the TPA reimburses the provider via an 835 remittance.

Typically, a plan sponsor assumes that its payments “pass through” the TPA and get forwarded to the provider in full.  The legal cases referenced in this paper show that this is not the case – the amount retained by the TPA can be “so grossly excessive as to shock the conscience.” (12)  This practice leaves patients with unexpected balance bills.

Because of the information firewall that prevents direct communication between providers and sponsors, TPAs can keep their retentions secret.

Appendix B:  EDI raw data file.


Appendix C:  Zero payment claims, SHBP

SHBP processed and paid Horizon for these claims, but Horizon failed to pay provider.

Collaboration between providers and the SHBP can break the TPA information firewall, and demonstrate conclusively how SHBP plan assets have been misappropriated, driving up health care costs and leaving patients with balance bills. 

SHBP to provide EDI 820 remittances for these claims.


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