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DOJ Disfavors MFNs

Doyle, Barlow & Mazard PLLC

On October 18, 2010, the U.S. Department of Justice (“DOJ”) and the Michigan Attorney General challenged Blue Cross Blue Shield (“BCBS”) of Michigan in a civil antitrust action. The complaint alleges that “most-favored nation” (“MFN”) clauses in BCBS contracts with Michigan hospitals raises health-care costs for Michigan residents and employers and excludes other insurers from the Michigan health-care market. United States v. Blue Cross Blue Shield of Michigan, No. 2:10-cv-14155-DPH-MKM (Mich. E. Dist. Oct. 18, 2010).

MFN clauses come in two flavors: equal-to MFN and MFN-plus. An equal-to MFN clause in a contract between a health insurer and health-care provider requires that the provider – such as a hospital – charge the insurer no more than the lowest price the provider charges other insurers. An MFN-plus clause requires that the provider charge other insurers a certain percentage more than what it charges the MFN-insurer.

MFN clauses are common tools for negotiating lower prices, and as such, antitrust laws generally consider them to be pro-competitive and lawful. Under certain conditions, however, MFN clauses can suppress competition within a market. For instance, when a dominant insurer signs equal-to MFN contracts with most or all of the hospitals in a given market, it lessens price competition. When such an insurer signs MFN-plus contracts with these hospitals, it can exclude non-MFN insurers from the market and eliminate meaningful consumer choice. In such cases, MFN clauses violate antitrust laws, and that is what the DOJ and the Michigan Attorney General argued in their complaint against BCBS.

The Complaint

The complaint, which was filed in the United States District Court for the Eastern District of Michigan, seeks an injunction prohibiting BCBS from using or enforcing all variations of MFN clauses and does not seek any monetary damages. BCBS is the largest seller of commercial health insurance in Michigan (with 60-80 percent of the commercial market in some parts of the state) and is the largest non-governmental purchaser of hospital services in Michigan. The plaintiffs allege that BCBS has intensified the pressure it puts on Michigan hospitals to accept equal-to MFN clauses in their contracts with BCBS. BCBS threatens hospitals that reject MFN clauses with up to 16 percent lower payments. Additionally, the complaint states that at least 23 large hospitals have signed contracts with BCBS that include MFN-plus clauses.

The complaint claims that MFN-plus agreements between BCBS and large hospitals have prevented BCBS competitors from either entering into the Michigan health-care market or expanding their share of it, thereby reinforcing the market power of BCBS. The State of Michigan purchases group health insurance through BCBS for its employees, retirees and dependents, and claims that it, as a self-insurer, has suffered direct injury in the form of increased hospital costs. Not surprisingly, BCBS counters that MFNs have pro-competitive effects: “[t]his lawsuit is without merit, and we will vigorously defend our ability to negotiate the deepest discounts possible for our members and customers with Michigan hospitals.”

Legal Analysis

The DOJ has successfully resolved a number of MFN cases, including Medical Mutual of Ohio (formerly Blue Cross & Blue Shield of Ohio), Delta Dental of Rhode Island, and Vision Service Plan. In all of these cases, the parties settled; however, the Delta Dental of Rhode Island settlement contained a consent decree after the District Court both denied the defendant's motion to dismiss and issued a very significant opinion on the application of the antitrust laws to MFN clauses. In denying Delta's motion to dismiss the case, the Court rejected Delta's argument that most MFN clauses are per se legal and agreed with the DOJ that MFNs under certain conditions may have substantial anticompetitive effects and are properly evaluated under the rule of reason. U.S. v. Delta Dental of Rhode Island, 943 F. Supp. 172 (D.R.I. 1996).

Because MFN clauses are evaluated under the rule of reason, the analysis for each contract will be fact specific. The main question for the Court is whether the MFN clauses are posing anticompetitive harm or having net pro-competitive benefits. The Court will certainly look into several factors in answering this question, including: BCBS's high market share in Michigan, the existence of alternative and competitive sources, the impact of the MFNs on price, and the purpose of the provision based on its textual interpretation and as demonstrated by its effects.

Overall, this case is similar to many other cases that have been filed against insurance companies to prevent them from enforcing anticompetitive MFN contract provisions with hospitals. In almost all of these cases, DOJ has settled with the defendant, in return for abandoning the practice in that particular suit. BCBS' MFN clauses with hospitals in Michigan occurred several years after the company had settled another MFN case with the DOJ in Ohio.

The DOJ usually does not seek monetary damages in MFN cases. Basically, companies can harvest the benefits of MFN clauses for as long as they have not been sued. Most of these insurance companies abandon the practice as soon as they are sued (this is not the scenario with BCBS Michigan). Sometimes, private law firms file class action lawsuits on behalf of employers or other customers that seek monetary damages from the insurance companies. Furthermore, hospitals and health-care providers that sign MFNs are potential defendants in antitrust suits. This potential exposure depends on the hospitals' willingness to forgo such a provision, the insurance company's market share, the negotiability of the MFN clause, and the price differential between the favored insurer and its rivals.

Although an MFN clause does not necessarily constitute an anticompetitive practice, in instances such as this case, it can have anticompetitive effects. It is a violation of antitrust laws when an insurance company dominates the market and leverages its bargaining power to demand discounts from providers at the expense of its rivals or to demand that health-care providers keep the prices high for all insurers.

Parva Fattahi
(202) 589-1834

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