"Most-favored-nation clauses" don't favor physicians

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted Aug. 6, 2007.

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Often, clients will contact me during payer contract negotiations with questions about contract clauses such as this one:

"Provider represents and warrants that it has not agreed to accept from any other payer a reimbursement rate that is less than what is offered by Payer under this contract. If Provider offers a better reimbursement rate to any other Payer, the Provider must provide prior written notice of such an offer to Payer and give Payer the option to accept the reduced reimbursement rate. Thereafter, at Payer's option, Payer may accept the reduced reimbursement rate or it may terminate the contract immediately upon written notice to Provider."

A contract clause like this is called most-favored-nation pricing. In a nutshell, it means: Give me the lowest price you offer my competitors.

Most-favored-nation clauses vary in scope and methodology and in practical application. But in simplest terms, a most-favored-nation clause is an agreement in which the physician charges the payer no more than the lowest prices the physician charges any other payer. The clauses attempt to assure a payer it will receive the benefit of any price concessions that a physician extends to other payers.

Large payers that command a substantial portion of the relevant market often use most-favored-nation clauses in their provider contracts. These payers will often be able to persuade physicians to agree to these contractual provisions depending upon the relative importance of the payer to the doctor.

Physicians should not assume, however, that these clauses are non-negotiable. Having a strategy in place to address most-favored-nation clauses during contract negotiations with payers, and enlisting the assistance of an expert to implement that strategy, could have a future financial benefit.

In advising my clients, I suggest and use the following multipronged strategy to eliminate most-favored-nation clauses or revise them to be more physician-friendly.

Check the legality of the clause. As a preliminary matter, determine the legality of most-favored-nation clauses in your state. Certain states have laws that prohibit or restrict the use of the clauses in payer contracts, and other states have introduced such legislation. You should be able to obtain this information from your legal counsel or from your state's medical board, insurance commission or Legislature.

The leverage created by the suspect legality of this type of clause in a particular jurisdiction may be used to negotiate with a payer to eliminate or revise the clause.

Absent such a law, however, most-favored-nation clauses are not automatically legal or illegal. In the second half of the 1990s, the Dept. of Justice and the Federal Trade Commission instituted several enforcement actions against the use of most-favored-nation clauses in contracts between payers and physicians.

Concurrent with the federal government's enforcement actions, courts also began to view these clauses with increased skepticism. Since the late 1990s, however, there has been almost no activity by the federal agencies or the courts involving the use of the clauses in contracts between physicians and payers.

Confirm that apples are compared with apples. Generally, a most-favored-nation clause should only be triggered by financial arrangements that favor substantially similar plans (e.g., the same type of plan, same patient demographics, same patient volume, and same geographic area). Accordingly, negotiate a clause that applies like products to like products for HMOs, PPOs, point-of-service and fee-for-service plans.

Negotiate exclusions. If the clause cannot be deleted in its entirety, negotiate exclusions to its application. Exclusions may be made for government programs (e.g., Medicaid and Medicare primary care, Veterans Affairs, workers' compensation, public health assistance, and non-managed care governmental programs); uninsured patients; employees, medical staff, volunteers and their dependents; outpatient services sold to physicians; other payers that are not HMOs/health insuring corporations, PPOs, insurance companies, third-party payers or administrators; and plans that are demographically or otherwise different from the plan to which the clause applies.

Negotiate a favorable audit provision. Most-favored-nation clauses often contain a provision that permits the payer to audit the physician's financial records to confirm that a competing payer has not been offered a more favorable reimbursement rate. These audit provisions are often very payer-favorable.

For example, while audits are generally performed by independent auditors, most-favored-nation provisions often provide that the auditor will be chosen solely by the payer.

It is critical that the audit provisions provide for physician control or share of control of the choice of the auditor, a comparison of products to like products, a comparison of payment methods to like payment methods, a proper audit methodology and audit appeal rights.

Also, doctors are generally required to pay for the audit. In virtually no other contract, however, would one party be responsible for paying an auditor selected by the other party.

For the big picture

In addition to advising clients on strategies to eliminate or revise most-favored-nation clauses in their payer contracts, I also suggest that all physicians proactively resist the enforcement of these clauses in their states. This resistance has been successful in certain states and has been accomplished, in part, by physicians taking the following actions:

Support legislative action. Introduce or support state legislation to prohibit payers from using most-favored-nation clauses in contracts with physicians. (The AMA has, on a members-only section of its Web site, model legislation language that essentially calls for the elimination of such clauses.)

Seek Dept. of Justice involvement. In 2004, according to a Justice Dept. spokesperson, it had begun investigating the use of these clauses in the insurance field. No further information, however, has been forthcoming.

The agency's Health Care Task Force has also stated it will consider bringing an enforcement proceeding when a payer imposing a most-favored-nation provision on a physician constitutes a substantial share of the doctor's income and has a significant share of the industry's market.

The success of a challenge under the federal antitrust laws against a payer will depend in large part on the determination of the payer's market power in the relevant geographic and product markets, and the payer's specific conduct.

Litigate the issue. A physician subject to a most-favored-nation clause could seek a preemptive judgment in court that takes the position that the provision is unenforceable based on its illegality. Alternatively, a physician could refuse to pay any recoupment amount due as a result of an alleged most-favored-nation violation. This course of action is risky. In response to a physician's refusal to pay the requested amount, a payer could sue to enforce the provision, or it could withhold amounts owed for future payments. In addition, a payer could refuse to enter into new agreements with the physician.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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