As far as I can tell, the key to the Justice Dept.’s antitrust lawsuit against Blue Cross Blue Shield of Michigan isn’t that “most favored nation” clauses in hospital contracts guarantee a health plan receives competitive prices for medical services; rather it’s the allegation that the clauses provide BCBS-MI with a competitive edge by driving up the cost of doing business for competing plans.
Attorney Art Lerner of Crowell & Moring (Washington) tells me that MFN clauses aren’t inherently illegal. They can be legitimate hedges in long-term contracts to ensure a health plan pays no more than the “market price” for provider services.
Concerns may arise, however, when a health plan’s market share is so big it can effectively set the “market price.” For example, a hospital would think twice before offering a small health plan a discount to win its business when any gains would be outweighed by having to provide the same low rate to a market-dominant MFN plan.
The Justice Dept. argues that BCBS-MI goes even further, in some cases stipulating that competing health plans must pay up to 40% higher rates. BCBS-MI has even agreed to increase the rates it pays a hospital in order to win MFN status, the Justice Dept. says, “thus buying protection from competition by increasing its own costs.”
Strong words — even for a guy like me who has a brother named Rocco. But more important, Lerner argues, is whether BCBS-MI is using its size in combination with MFN clauses to lock out the competition. According to the Justice Dept., BCBS-MI has a 60% statewide market share (although that share may vary considerably by city and county) and at least 70 of the Michigan’s 131 hospitals have MFN clauses in their contracts with BCBS-MI.
BCBS-MI defends MFN clauses in general, noting that it’s bad business “to reimburse a provider at a higher rate than we can otherwise negotiate.” BCBS-MI adds that “low cost guarantees are widely used in a variety of contracts in a number of industries.”
The Justice Dept. says it will challenge misuse of MFN provisions by health plans nationwide – a potential problem for other BCBS plans like WellPoint, which tend to use MFN clauses the most, says Charles Boorady of Credit-Suisse. Boorady adds, however, that WellPoint’s contracts don’t appear to “require competitors to be priced higher,” only that WellPoint gets the same discounts as competitors.
The lawsuit also has potential antitrust implications for hospitals, says David Marx of McDermott, Will & Emory. “Healthcare providers should exercise caution in agreeing to explicit price differentials between an insurer and its competitors, especially if that insurer has a dominant market share,” he says.