By Sarah O. Rollman, JD, MSA

Bryant L. Welch, J.D., Ph.D., & Associates, Potomac, Maryland.

This article is shared by permission of the HFMA, in whose publication it appeared in December, 1998.


When insurance carriers and employee benefit plan administrators discover a payment made in error for medical services or supplies, they ask the healthcare provider to return the payment – sometimes months or even years after the payment was issued. Read this single article and gain an understanding these legal premises. When you put these tips into practice, you’ll reclaim hundreds of thousands of dollars and prevent inappropriate charge backs, refunds, offsets, and other related reimbursement challenges.

By the time the provider receives such a refund request, it may no longer be possible to submit claims to secondary or tertiary sources of payment to make up the loss incurred by returning the payment; it may be too late for the provider to seek another source of payment, such as medical assistance; the provider may be unable to locate the patient to collect payment; or, if the patient is found, the statute of limitations for collecting the payment may have expired. Because of such difficulties, the provider naturally may wonder whether the insurer is legally entitled to the refund.

Establishing the legitimacy of a refund request requires determining whether the payment made by the insurer truly was erroneous. Legally, a payment is erroneous under only four circumstances: when the payment was made for an uninsured patient; when the payment was made for services or supplies not covered under the benefit plan; when the payment was greater than the amount owed; or when the insurer was not the payer obligated to make the payment. If the payment was not made under any of these circumstances, the payment was not erroneous, and a refund is not owed.

When an insurance payment indeed has been made in error, it should be established whether a contract exists between the insurer and the healthcare provider that addresses the issue of insurance overpayments. If so, then the terms of the contract govern the legal rights and obligations of the parties. If no contract exists, or if the contract does not address the issue of insurance overpayments, then the law relating to restitution applies to the situation.

Restitution is an equitable concept – that is, it is an idea generally accepted as fair or valid rather than resting for legitimacy on a legal principle. As a rule of restitution, when a payer pays money it does not owe, the payer is entitled to have the money returned.(a) This rule is based on an assumption that the payee is receiving a windfall at the same time the payer is sustaining a loss, which is unfair.

This assumption, however, does not hold true for an overpayment to a healthcare provider. Because the payment is for medical services and supplies and because the provider is entitled to be paid for the services and supplies, payment by an insurer is not a windfall to the provider. Rather, the payment makes the provider whole. Moreover, although the insurer sustains a loss by having made a payment it does not owe, the provider will sustain a loss by returning the money, that is, by making restitution. Whatever is done, one of the parties will be harmed. Equity, therefore, dictates that the party that created the situation occasioning the loss be the party that sustains the loss.(b) Consequently, exceptions to the general rule of restitution have been created.

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Three of these exceptions have been applied by the courts in claims by insurers for refunds of overpayments for healthcare services: the innocent third-party creditor exception,(c-g) the material change in position exception,(h-j) and the assumption of the risk exception.(k,l) The rationale for applying these exceptions is that the insurer created the loss by making the overpayment and so should sustain the loss.(m) In every court case in which a healthcare provider has been able to demonstrate that it met all of the elements of any of the three exceptions, the court has allowed the provider to keep the overpayment.

The Innocent Third-Party Creditor Exception

The innocent third-party creditor exception has three elements: the party seeking to avoid restitution (the provider) cannot be unjustly enriched because of the mistaken payment, cannot have induced the mistaken payment, and cannot have had notice of the mistaken payment.(n) These conditions mean that the healthcare provider was an innocent third party in that it rendered medical services or supplies for which it was not paid in full, submitted an accurate claim, and did not know at the time payment was accepted that the insurer was not obligated to pay.

Unjust enrichment. When a provider has received more than full payment for services rendered a patient (typically because of multiple payers for a single claim or because the insurer pays more than is required in the managed care or preferred provider contract), the provider is unjustly enriched and, therefore, would not meet any of the exceptions to the general rule of restitution. A provider is entitled to full satisfaction of the bill, and anything over and above that amount constitutes a windfall that must be returned. In the event that the “windfall amount” is not returned, the insurer can offset that amount from future claims submitted by the provider on behalf of that patient.

Full satisfaction of a claim does not necessarily mean that a provider is entitled to 100 percent of its charges. If a provider and an insurer have a contract that provides for a lesser rate of payment, receipt of the contract amount is full satisfaction. The difference between the full charges and the contract amount would constitute an unjust enrichment.

Inducement of the mistaken payment. The second element of the innocent third-party creditor test, that the provider cannot have induced the mistake that led to the overpayment, says simply that the provider should submit an accurate claim. Submitting an inaccurate claim essentially is making a misrepresentation. A misrepresentation, whether intentional or negligent, constitutes fault, whereby the appropriate party to bear the loss is the party that caused the loss.(o) (The provider may submit an incomplete claim, however. If the insurer issues payment based on an incomplete claim, then the third exception to the general rule of restitution, assumption of the risk, would apply to the refund request. See “The Assumption of the Risk Exception.”) Examples of a provider’s inducing a mistaken claim are submitting claims for services that were not provided or for services rendered by a noncovered provider (unless the provider is unaware that its services are not covered), and submitting claims that contain false or inaccurate information.

In evaluating whether the innocent third-party creditor exception applies, the conduct constituting inducement of the mistake is regarded as the conduct solely of the healthcare provider; the conduct of the insured party or of anyone acting on behalf of the insured party is irrelevant. In National Ben. Administrators,(p) the insured patient’s father intentionally misrepresented the patient’s birth year, thereby making it appear that the patient was a dependent covered under his father’s policy. That misrepresentation induced the insurer to make payment. Fortunately, when the misrepresentation was disclosed, the healthcare provider did not have to refund the payment because the provider had had no part in inducing the mistaken payment.

Notice of the mistaken payment. Finally, the provider cannot have known (had notice) before receiving payment that the insurer was not obligated to pay the mistaken or inaccurate claim. For example, if the provider submits a claim and before receiving payment learns that the patient’s coverage has been terminated, or that the services or supplies provided are not covered by the insurer, then the provider is no longer an innocent third-party creditor and cannot keep the payment made by that insurer. Other legal and equitable principles may exist, however, such as a claim based upon a misrepresentation of benefits, that would allow the provider to successfully defend a refund request.

The innocent third-party creditor exception can apply even when the insurer is a Federal entity, such as Medicare, Medicaid, or CHAMPUS. As long as the provider did not know (eg, through statutes, regulations, codes, or bulletins) that the services provided were not covered, and as long as the provider was not on notice (based on standard practice in the community) that the services provided were not covered, then the provider generally is entitled to keep any overpayment.(q)

Two cases illustrate the application of this exception. In one case, when a provider’s classification and rate of payment was changed by Medicaid but Medicaid had not yet given the provider notice of these changes, the provider was permitted to keep overpayments received.(r) In the other case, however, the provider’s eligibility had been terminated and the provider was on notice of the termination at the time payments made in error were received; the provider was told to refund the payments.(s)

The Material Change in Position Test

The second exception to the general rule of refunding overpayments is the material change in position exception, which occurs when a provider, having received an erroneous payment from an insurer, accepts that payment without realizing the insurer’s error and so does not pursue other possible means of payment.(t)

When the insurer discovers its error and asks for the mistaken payment to be returned, the provider is placed in a position of not being paid for providing services if it returns the payment. The courts recognize that by requiring providers to refund overpayments, providers may be left uncompensated for their services. An insurer, however, can request a refund long past the deadline that a provider has for billing a patient, billing a secondary or tertiary carrier, or securing alternate sources of coverage.(u-w)

The Assumption of the Risk Exception

The third court-tested exception to the general rule requiring a provider to refund overpayments made in error is the assumption of the risk exception. This exception arises when an insurer issues payment without full information about a claim, such as that the claim form is missing necessary information or that the medical necessity of a claim has not been evaluated. Because the insurer knows (or should know) that it cannot fully evaluate its liability without the missing information, the insurer assumes the risk of failing to evaluate its liability when it issues payment based on the incomplete information.


The best way for healthcare providers and insurers to manage billing and payment errors and any subsequent insurance refund requests is to anticipate them and provide for them contractually, either by restitution, whereby the provider returns the overpayment to the insurer, or by offsetting, whereby the insurer offsets the amount of an overpayment against money due the provider on another claim. Such contractual provisions should include a reasonable time limit for requesting restitution or making an offset so that the provider can seek alternate sources of coverage and, if none exist, collect from the patient.


a. Restatement of Restitution [section]18 (1937).

b. Federated Mutual Ins. Co. v. Good Samaritan Hosp., 214 N.W.2d 493,495-496 (Neb. 1974).

c. Federated Mutual Ins. Co. v. Good Samaritan Hosp.

d. Lincoln Nat. Life Ins. v. Brown Schools, 757 S.W. 2d 411 (Tex.App.-Houston[14th Dist.] 1988).

e. National Ben. Administrators v. MMHRC, 748 F. Supp. 459 (S.D.Miss. 1990).

f. City of Hope Nat. Medical Center v. Superior Court, 8 Cal.App.4th 663; 10 Cal. Rptr. 2d 465[July 1992].

g. St. Mary’s Med. Ctr. v. United Farm Bur., 624 N.E.2d 939 (Ind.App.1Dist. 1993).

h. Restatement, Restitution [section]69(1).

i. Lincoln Nat. Life Ins. v. Brown Schools.

j. Central States, Southeast and Southwest Areas Health and Welfare Fund v. Pathology Laboratories of Arkansas PA., CA 7, No. 95-2171, 12/1/95.

k. Restatement, Restitution [section]11.

l. Hunt v. Hospital Service Plan of New Jersey, 157 A. 2d 575 (N.J. Super. 1960).

m. Federated Mutual Ins. Co. v. Good Samaritan Hosp.

n. Restatement, Restitution [section]14(1).

o. Blue Cross Blue Shield of Alabama v. Weitz, 913 E2d 1544 (11th Cir. 1990).

p. National Ben. Administrators v. MMHRC.

q. Dept. of Med, Assistance v. Presbyterian Home, 200 Ga.App. 885, 409 S.E.2d 881 (1991).

r. Dept. of Med. Assistance v. Presbyterian Home.

s. Dept. of Public Health v. Perry, 123 Ga.App. 816, 182 S.E.2d 493 (1971).

t. Restatement, Restitution 69(1).

u. Central States, Southeast and Southwest Areas Health and Welfare Fund v. Pathology Laboratories of Arkansas P.A

v. Federated Mutual Ins. Co. v. Good Samaritan Hosp.

w. Lincoln Nat. Life Ins. v. Brown Schools.


Sarah O. Rollman, JD, MSA, is an attorney at Bryant L. Welch, J.D., Ph.D., & Associates, Potomac, Maryland.

COPYRIGHT 1998 Healthcare Financial Management Association
Included by Permission from Patricia Nuccio, Manager HFMA Professional Development

Dec 1998

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