Feds turn spotlight on Anthem over "most-favored-nation" clause

Observers say use of the controversial contracting strategy has increased with health plans' market power.

By Robert Kazel — Posted June 7, 2004

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Anthem is facing a federal inquiry into a contracting tactic it -- and other big plans -- use to guarantee that doctors and hospitals always give it the biggest discounts.

That tactic is commonly referred to as a "most-favored-nation" clause. Doctors who sign a contract containing such a clause agree to a certain fee schedule. If discounts to other plans ever rise above these levels for any procedure, the payer with most-favored-nation status can adjust its payment schedule to regain a price advantage, said Mark Rust, a Chicago health care attorney. The repricing goes on constantly, and doctors are seldom aware of it, he said.

The inquiry by the Justice Dept. is not expected to interfere with completion of the Anthem-WellPoint Health Networks merger, which, with 26 million members, would become the nation's largest private health plan.

But the Justice Dept.'s apparent heightened interest in most-favored-nation clauses could portend more aggressive reviews of such provisions throughout managed care, because other large payers with a dominant presence in local markets also have written such provisions into at least some of their contracts with physicians and hospitals, legal experts say.

The Justice Dept. last fall asked Indianapolis-based Anthem to provide it with documents relating to the clauses, said Deborah New, Anthem spokeswoman. Anthem complied. Gina Talamona, spokeswoman for the Justice Dept., acknowledged that the department had begun a "current, active, ongoing investigation" into most-favored-nation clauses in the insurance field, though she would not identify any specific company.

The Indiana State Medical Assn. recently was contacted by the Justice Dept. inquiring about most-favored-nation clauses in Anthem contracts, according to Richard R. King, the society's executive director. "There's no question in my mind that it's an unfair trade practice," King said. "We support the concept of trying to prohibit it." Anthem controls about one-third of the commercial health insurance market in Indiana and has the largest share of the market in almost all of the nine states where it operates.

Also, some suburban Indianapolis hospitals have provided copies of their Anthem contracts at Justice's request, said Bill Oakes, director of business development for Johnson Memorial Hospital in Franklin, Ind.

Anthem has a history of putting a most-favored-nation provision into its contracts and being "fairly aggressive in the enforcement of it," said Lisa Ge Shang Han, a health care attorney in Columbus, Ohio. In April 2003, the AMA and six state medical societies wrote to Anthem criticizing the inclusion of such a clause in its contracts with Kentucky doctors.

Kentucky law prohibits such clauses if the insurer has a significant market share. Idaho and New Hampshire -- another Anthem state -- also restrict their use. In 1998, the AMA adopted policy opposing the inclusion of most-favored-nation clauses.

Anthem's New said the most-favored-nation clauses are present in only some of Anthem's hospital contracts and a small proportion of physician contracts. The insurer uses the clauses in half the states where it does business, she said.

"It is a way to manage our health care costs to keep our premiums affordable to our members," she said.

Many doctors won't speak out about most-favored-nation clauses because of secrecy provisions in their contracts, as well as antitrust laws forbidding discussions about fees.

"Most of the time, people just sit around wringing their hands and say, 'What can we do?' " said David Wilson, MD, a pulmonary intensive care specialist and president of Multi-County Physicians, a 350-physician IPA based in Columbus, Ind.

But it's common for payers to know about other insurers' pricing because data are shared in the benefits coordination process, said Bob Martin, executive director of Northwest Ohio Specialists Cooperative in Toledo, a 150-physician practice.

Most-favored-nation clauses have been present in health care contracts since the 1980s. But as managed care plans became more powerful and spread to more markets in the 1990s, use of the clauses became more commonplace. A recently released AMA study found that in 90% of the nation's large metropolitan areas, a sole insurer has attained an HMO/PPO market share of at least 30%.

"The only time you see a most-favored-nation clause is when physicians don't have bargaining power," said AMA President Donald J. Palmisano, MD.

But two federal court cases in the 1990s established the precedent that the clauses can be anticompetitive under certain market conditions.

In a Justice Dept. lawsuit against Delta Dental of Rhode Island in 1996, a federal court ruled that such cases deserve a "highly fact-specific inquiry" to see if the clauses, on balance, obstruct competition among payers. The case was settled by a consent decree, with Delta agreeing not to enforce the provisions.

In a case two years later, most-favored-nation clauses in doctors' contracts with Medical Mutual of Ohio, formerly Blue Cross Blue Shield of Ohio, were deemed to be anticompetitive and likewise were nullified by a Justice Dept. consent decree.

Throughout the 1990s, legal experts say, Justice has continued to be skeptical of most-favored-nation clauses and advised courts that they must use the "rule of reason" to consider whether a specific use of the clauses serves only to accentuate the dominance of payers already enjoying the benefits of massive size. At this point, it's not clear whether the Justice Dept. has extended that skepticism to Anthem.

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What it's all about

What is a "most-favored-nation" clause? It's a contract provision requiring doctors and hospitals to give a sole managed care company, generally the leading plan in the market, the biggest discounts.

Is it legal? Idaho, Kentucky and New Hampshire have banned or restricted the practice. At the federal level, antitrust officials and courts evaluate clause legality case by case.

Is it anticompetitive? It can be, the Justice Dept. says. A rival payer with no most-favored-nation advantage can find itself excluded from markets, unable to price products effectively and thwarted from offering innovative care delivery to patients.

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