Michigan Blues defends use of "most-favored-nation" clauses

A state's attorney general and U.S. Justice Dept. lawsuit alleges that the plan drove up prices by pushing hospitals to charge other insurers more.

By Emily Berry — Posted Nov. 1, 2010

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Blue Cross Blue Shield of Michigan is defending its use of "most-favored-nation" contract clauses against a lawsuit brought by the U.S. Dept. of Justice and the state's attorney general and filed on Oct. 18. The two offices allege that the company's use of the contract provisions violated antitrust laws.

Most-favored-nation clauses prohibit a hospital or doctor from giving any other insurer a deeper discount than the contracting health plan.

An investigation revealed that, in some cases, the Blues demanded the deepest discount and not always by merely demanding the lowest price, according to a statement by the office of Michigan Attorney General Mike Cox. He said the plan offered to pay hospitals more, as long as other insurers were forced to pay more than the Blues for care as a result.

"The investigation also revealed that Blue Cross secured [most-favored-nation] clauses with at least 23 larger hospitals by offering to increase the amount Blue Cross paid hospitals, as long as all other insurers paid more, putting other insurers at a competitive disadvantage while raising prices for everyone," the attorney general's statement said.

At least 70 hospitals were subject to the unfair contract provisions, and the hospitals cooperated in the investigation, according to the Dept. of Justice's statement.

The insurer released a statement saying it was only trying to keep prices low.

"Negotiated hospital discounts are a tool that Blue Cross uses to protect the affordability of health insurance for millions of Michiganders," Andrew Hetzel, the Blues' vice president for corporate communications, said in the statement. "At a time when insurance premiums are increasing because of medical costs, it hurts consumers to remove tools that insurers use to negotiate the lowest possible cost for medical care in the hospital."

The Michigan lawsuit dealt only with Blue Cross Blue Shield's contracting with hospitals. The Michigan State Medical Society had no comment on the lawsuit.

But some physician organizations have fought with insurers over most-favored-nation clauses, which also have been applied to doctors.

Christine Varney, assistant attorney general in charge of the Dept. of Justice's Antitrust Division, suggested that the Michigan lawsuit will not be an isolated action.

"These kinds of anti-competitive [most-favored-nation clauses] affect health care delivery and costs in a very fundamental way," she said as part of prepared remarks at a news conference announcing the lawsuit. "Any time a dominant provider uses anti-competitive agreements, the market suffers. This cannot be allowed in Michigan. And, let me be clear, we will challenge similar anti-competitive behavior anywhere else in the United States."

But James Burns, a Washington, D.C.-based partner at Williams Mullen who focuses on antitrust law, said it's unlikely that a large number of other insurers will be sued in a ripple effect from the Michigan case.

That's because regulators in this case are contending that Blue Cross Blue Shield of Michigan has a dominant market position. Regulators said that dominance made its use of the contracting clauses an abuse of power rather than a competitive tool. The Michigan Blues held 63% of the combined state's market for PPO and HMO health insurance, according to the American Medical Association's most recent analysis of insurance market share.

The Dept. of Justice already also had its market research for this case in hand, because staff had studied the Michigan market before its challenge of the Blues' proposed acquisition of Lansing, Mich.-based Sparrow Health System earlier this year, Burns said. The Blues and Sparrow opted to drop their proposed deal after Cox's office and the Justice Dept. made it clear they would seek to block it.

The deal would have given the Blues' HMO Blue Care Network 99% of the HMO market in Lansing.

Burns said that in markets where competition is healthier, most-favored-nation clauses are seen as a good thing, in health care and in other industries, because they keep prices down for customers.

Indeed, Varney's comments were worded to emphasize that the department is interested in looking at the behavior of health plans that are dominant in their markets.

"When a large health care plan with a substantial market share, like Blue Cross, imposes an anti-competitive [most-favored-nation contract] in the marketplace, it harms competition and consumers. It prevents others from entering the marketplace and discourages discounting. The end result -- fewer options and higher prices," she said.

Though some court cases have settled in regulators' favor, no judge has ruled that most-favored-nation clauses are anti-competitive or illegal, Burns said.

He said previous cases that challenged them have ended with settlements, so a court decision that establishes legal precedent could affect how often health plans use most-favored-nation clauses, and how likely regulators are to go after insurers that do.

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