State and federal regulators are starting to cast a disapproving eye on contracts with “most-favored nation” clauses, where big buyers of a product or service use their market clout to squeeze sellers, forcing them to raise prices on the buyer’s rivals.
The Department of Justice and the Michigan state attorney general filed a lawsuit in late October accusing Blue Cross Blue Shield of Michigan of violating antitrust laws and stifling competition by forcing hospitals to charge higher prices to Blue Cross rivals. The case, filed in the Eastern District of Michigan, specifically challenges the use of MFN clauses, which require sellers to give the buyer their lowest price. In the healthcare sector, such contracts essentially guarantee that no competing healthcare plan can obtain a better rate than the plan offering the MFN.
The case is not a broad attack on the use of MFNs entirely; indeed, they are a common tool in many industries to negotiate lower prices and are generally considered pro-competitive and lawful under antitrust laws. For example, Buyer A might ask the seller to agree that if it ever charges Buyer B a lower price, it will offer that price to Buyer A as well.
In the case against Michigan Blue Cross, however, the Justice Department alleges that the insurer is so dominant in its the market—it covers 60 percent of the state’s commercially insured and nine times as many people as the next largest competitor—that it can demand discounts that hospitals and other healthcare providers then can’t give to anyone else. The MFN clause may put healthcare providers in a position where they can’t reduce their prices if that means they would lose profit on Michigan Blue Cross, forcing them to charge higher prices to others. The action seeks to ban Michigan Blue Cross from having any MFN clause in its existing contracts and from using any others in the future.
Assistant Attorney General Christine Varney, head of the Justice Department’s Antitrust Division, says the case is a warning to all dominant buyers in a market: “If we uncover other health insurers with market power that use anticompetitive MFNs to thwart competition, we will challenge them,” she said in a statement.
Raup
“Requiring a party to a contract to treat your competitors less favorably than it treats you is likely to attract antitrust scrutiny, and increases the risk that the MFN will be found to restrain trade unreasonably.”
—Erika Brown Lee,
Senior Counsel,
Fulbright & Jaworski
“I’m sure that buyers that have a large market share are watching this case carefully,” says Mitch Raup, a partner with law firm Mayer Brown. If the Justice Department succeeds, MFNs could be banned under certain circumstances.
Regulatory agencies aren’t the only ones making threats over MFN clauses in the healthcare sector. Two weeks after the Justice Department lawsuit, the Shane Group, a self-insured employer and competitor of Blue Cross, filed a class action against Michigan Blue Cross on behalf of consumers and employers for allegations similar to the federal regulators’ case. The class seeks an injunction, reformation of contracts, and damages for antitrust violations.
Health insurers with MFN clauses could become popular targets of such class actions, Raup says, because they are prime examples of buyers with large market shares that present anticompetitive risks. Blue Cross/Blue Shield plans, in particular, often have the largest shares in many local insurance markets; the latest survey conducted by the Government Accountability Office in 2008 said that a BCBS company was the largest insurer in 36 of the 44 states that identified their top carriers.
Brown Lee
It’s not the first time the government has brought a case against a health insurer challenging the use of MFN clauses as anticompetitive. In the 1990s, the Justice Department filed suit against several health insurers that later settled and agreed to stop using MFNs. Because the suits settled, there is little case law on the matter. Erika Brown Lee, senior counsel of law firm Fulbright & Jaworski, says she is “unaware of any courts ever having held that an MFN unreasonably restrains trade in violation of any of the antitrust laws.” In fact, the Seventh Circuit in Blue Cross Blue Shield United v. Marshfield Clinic specifically approved such clauses, holding that MFNs are never anticompetitive. The Justice Department is hoping to prove that ruling in error.
VARNEY REMARKS
Assistant Attorney General Christine Varney remarks on the Michigan antitrust lawsuit:
This morning, we filed a civil antitrust lawsuit in U.S. District Court in Michigan against
Blue Cross Blue Shield of Michigan alleging that provisions in their agreements with hospitals
stifle competition, resulting in higher health insurance prices for consumers in Michigan.
We’re challenging Blue Cross Blue Shield’s use of Most Favored Nation clauses. In the
health care arena, these are generally contractual clauses between health insurance plans and
healthcare providers that guarantee that no other insurer can get a better rate than Blue Cross.
In Michigan Blue Cross has used its dominance to impose anticompetitive MFNs in
contracts with approximately half of the general acute care hospitals. The complaint alleges that
Blue Cross has a 60 percent market share in Michigan and its 2009 revenues were more than 10
billion dollars.
Our lawsuit alleges that the Blue Cross anticompetitive MFNs are used to raise hospital
prices to any competing healthcare plans and thus reduces competition for the sale of health
insurance and inflates the costs of health care services and insurance.
As a result, consumers in Michigan are paying more for their healthcare services and
health insurance. This action is significant in Michigan. However, this action is also significant
in a broader sense. These kinds of anticompetitive MFNs affect healthcare delivery and costs in
a very fundamental way.
Any time a dominant provider uses anticompetitive agreements, the market suffers. This
cannot be allowed in Michigan. And, let me be clear, we will challenge similar anticompetitive
behavior anywhere else in the United States.
American consumers deserve affordable healthcare at competitive prices. The Antitrust Division will vigorously pursue anticompetitive actions that stand in the way of achieving that goal.
Our extensive review of the evidence shows that in Michigan, Blue Cross used MFNs to
actually raise costs to its rivals. In some circumstances, Blue Cross agreed to pay higher prices
to hospitals in exchange for a promise from the hospitals to charge even higher prices to their
competitors.
When a large healthcare plan with a substantial market share, like Blue Cross, imposes an
anticompetitive MFN 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.
We are seeking to stop these anticompetitive practices as quickly as possible so that
consumers in Michigan get affordable health care.
We will continue to monitor this important industry. If we uncover other health insurers
with market power that use anticompetitive MFNs to thwart competition, we will challenge
them.
Source
DoJ Press Release on Antitrust Healthcare (Oct. 18, 2010).
Beyond Healthcare
Whether the Michigan Blue Cross case will reverberate to other industries that use MFN clauses will depend on the court’s ultimate ruling, says Bill Pakalka, a partner with law firm Fulbright. “If it says these types of MFNs are unreasonable when the beneficiary is dominant or has market power, there may not be much of a collateral effect,” he says.
Pakalka
“MFNs between buyers and sellers should continue to be acceptable, at least where the beneficiary does not have market power,” agrees Brown Lee.
On the other hand, if the court finds that all MFNs unreasonably restrain trade and if such a holding were upheld on appeal, “all businesses that use them would need to re-examine whether their value outweighs their risk,” Pakalka says. “Federal and state courts unquestionably have the power to enjoin the use of private contractual clauses that are found to restrain trade unreasonably.”
Varney
Varney’s warning coupled with the Justice Department’s past statements that enforcement of antitrust laws in the healthcare sector is a “priority,” makes additional activity in this area likely, either from regulators or private parties.
“Requiring a party to a contract to treat your competitors less favorably than it treats you is likely to attract anti-trust scrutiny and increases the risk that the MFN will be found to restrain trade unreasonably,” Brown Lee says. Parties with high market shares should proceed with an MFN only after checking with antitrust counsel to first assess whether their particular MFN poses any anticompetitive risks.
The Justice Department, meanwhile, says it’s going to continue to examine MFN clauses for unfair practices. “Let me be clear: We will challenge similar anticompetitive behavior anywhere else in the United States,” Varney said.
No comments yet