Must insurance payments made in error be returned? - Cover Story

Healthcare Financial Management, May, 1995 by William C. Sturm

PATIENT ACCOUNTS MANAGEMENT

Healthcare organizations sometimes receive payments made in error from insurance companies. Such payments may occur when insurance companies do not determine that a person receiving care was not covered until after the care has been provided and the bill has been paid.

A review of pertinent cases in this area suggests that a legal precedent exists for viewing a healthcare organization as an innocent third-party creditor, thus absolving it of the responsibility to return the mistaken payment.

Many situations occur in which insurance companies pay healthcare bills in error. For example, an insurer may discover that a young adult patient was not a full-time student at the time of treatment and, therefore, was not eligible for coverage under a parent's policy. Or, an insurer may determine that a patient had left his or her employment before the date of treatment and that, therefore, coverage had lapsed. An insurer also may deem a certain treatment experimental and not covered under a patient's policy after the treatment has been provided.

In most of these and similar situations, an insurance carrier will request that the healthcare organization refund all or some of the payment made for the patient's benefit because the carrier paid on the patient's account erroneously.

In such situations, a healthcare organization's managers must decide whether they should refund the payment or refuse to do so.

Although few court cases directly address what a healthcare organization should do when a third-party payer has provided reimbursement it was not contractually bound to provide, the legal decisions that do exist have come down squarely in favor of a healthcare organization retaining the payments when certain factors are present.

Foundation of the law

In a 1974 case, Federated Mutual Insurance Co. v. Good Samaritan Hospital, the Nebraska Supreme Court addressed the issue of whether a hospital must return a mistakenly made insurance payment. The insurance company sought to recover payments that the insurance company erroneously made in excess of the insured's policy.

After the insurance company made its request for a refund, the hospital refunded the amount in excess of the patient's bill, but retained the amount that previously had been applied to the patient's account. The court held that "[a] creditor who has innocently received payment of a debt from a third party is under no duty to make restitution to the third party if it is later discovered that the third party had no responsibility to make the payment and the payment was made solely because of the third party's mistake."(a)

The insurance company argued that, under the general principles of restitution, an insurer is entitled to recover a payment made under a mistake of fact even if the mistake is due to the insurer's lack of care. The insurance company further asserted that a refund would be unjust only if the hospital had changed its position (ie, decided to treat rather than not to treat a patient) because of the mistaken payment.

The Supreme Court of Nebraska disagreed and noted a distinction between mistaken payments made to the insured and mistaken payments made to an innocent third-party creditor of the insured. To illustrate this distinction, the court referred to an ALR Annotation and a line of cases pertaining to an exception to the general rule of restitution. This exception allows third parties to retain payments received from entities that are paying for another person's benefit. This rule applies only to situations in which a third party received payment for a claim and accepted the payment in good faith and without knowledge of the mistake or fraud between the original parties. The Nebraska court found that the hospital met the criteria for this exception to the general rule because when the hospital applied the payment to the patient's account, it had already provided services to the insured in good faith and without knowledge that the patient had exceeded the coverage limits under the policy.

The court also likened the hospital to a bona fide purchaser for value. This principle, not unlike the exception to the general rule of restitution, provides that if a payee has innocently acquired title to money for something that the payee has paid value (ie, provided services), the payee is under no duty to return the money. This situation is contrary to the general rule, under which the payee would be obliged to return the money if the payee were not innocent or had not paid value for it. Thus, the court found that the hospital was not unjustly enriched because it retained only the amount due it from the insured for the services rendered.

Furthermore, the court in Federated Mutual saw no moral issue in determining who should bear the loss of the mistaken payment because the exception to the general rule of restitution simply determines which of two innocent parties should bear the loss that someone must bear. The burden was placed on the insurer because the court recognized that the insurer was the only party in a position to know the insurance policy provisions and its liability under the contract. Because patients frequently assign insurance benefits directly to hospitals, the court found that requiring hospitals to refund payments was an undue burden on hospitals.