Last October the Justice Department ("DOJ") filed an antitrust case against Blue Cross Blue Shield ("BCBS") in Michigan challenging BCBS's use of most favored nations clauses ("MFNs") in its contracts with hospitals. The DOJ has since acknowledged that it also has investigations related to MFNs pending against BCBS in North Carolina, Ohio, Kansas and Virginia. The BCBS motion to dismiss in the Michigan case was denied in August.
The MFNs used by BCBS in Michigan require hospitals to charge BCBS rates that are no higher than the rates charged any other insurer or payer. And the DOJ claims that in contracts with some 22 tertiary care hospitals, the MFN clauses actually require the hospitals to charge other insurers rates 30-40% higher than those charged BCBS. The DOJ also claims that because BCBS has a large market share, hospitals won't charge other insurers lower rates because that would force them to lower their BCBS rates. It alleges that the MFNs have not resulted in lower costs for BCBS but have increased the costs to other insurers. The result, the DOJ claims, is that other insurers have been prevented from entering into or expanding in the market, competition in the insurance market has been harmed and consumers have paid more both for insurance and hospital services.
The claims of the DOJ in the Michigan case are contrary to several older authorities dealing with MFNs. A Michigan state court in 1982 rejected an antitrust claim against MFNs and declared that they made "good business sense." A federal court in Washington state agreed in 1987 and stated that the "practices are in fact pro-competitive." The First Circuit Court of Appeals ruled in 1989 that MFNs are valid "as a matter of law." And in 1995, Chief Judge Posner of the Seventh Circuit Court of Appeals said that MFNs "are standard devices by which buyers try to bargain for low prices" and that it "is the sort of conduct that the antitrust laws seek to encourage." He acknowledged in an amended opinion, however, that MFNs may be "misused to anticompetitive ends in some cases."
It has come to be fairly clear, however, that the older authorities fail adequately to appreciate MFNs' potential for anticompetitive effects. A federal district court in 1996 ruled that MFNs "can have severe anticompetitive effects." BCBS of Ohio settled a case against it in 1999 in which the DOJ claimed that the MFNs did not produce any costs savings for BCBS but harmed other insurers and competition in the insurance and hospital markets. The DOJ makes the same claims in the pending Michigan case. A joint DOJ/Federal Trade Commission report in 2004 indicated that the agencies would decide the antitrust question by inquiring whether cost savings to the BCBS entity exceed the additional costs incurred by its insurance rivals. If the DOJ's factual claims in Michigan are well founded, application of this standard would signal antitrust problems for BCBS in that case.
Most federal antitrust activity in the past involving MFNs has occurred in a healthcare context. The enforcement agencies are, of course, free to challenge these arrangements in other industries as well.
A paper discussing these issues in detail is available here.