BCBSM deals with hospitals face lawsuit

October 24, 2010
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The Department of Justice anti-trust lawsuit filed against Blue Cross Blue Shield of Michigan last week has the potential to level the health insurance market in the state just in time for the launch of insurance exchanges in 2014, an analyst said last week.

“It has some real major implications going forward that go beyond just Blue Cross Blue Shield of Michigan and, in fact, beyond Michigan in general,” said Rick Byrne, Michigan market analyst for Nashville-based business information firm HealthLeaders InterStudy.

“The whole goal of federal reform and creating the exchanges is to get health plans competing, not on risk selection anymore and not on backroom deals like this one,” Byrne said. “They want them to compete on, first of all, price … and also they want them to compete on quality, service and benefits.”

The lawsuit, filed by the DOJ and Michigan Attorney General Mike Cox, contends that BCBSM’s contracts with at least 70 of the state’s 131 acute care hospitals included “most favored nation” clauses that violated state and federal antitrust laws.

BCBSM agreed to pay higher hospital rates in exchange for guarantees that all other insurers would pay at least as much or more, sometimes setting terms for how much more, according to the suit.

That caused hospital rates to rise, and Michigan companies and consumers have paid inflated insurance premiums as a result, the suit argues.

BCBSM Vice President for Corporate Communications Andy Hetzel denied the allegations, saying the MFN clauses are one tool the state’s largest insurer uses to keep costs down for its nearly 4 million members. BCBSM’s market share is 60 percent, according to the lawsuit.

Byrne said the allegations cast a shadow on the idea that health care is a free market today and highlight the federal government’s commitment to health care reform.

“They (the federal government) want to lay down a marker that says that, going forward, we’re going to level the playing field some more,” he said.

“In the bigger picture of things, for the health plan exchanges to work the way they should, it doesn’t do anybody any good if they log on to the online exchange and they see one health plan at $100 a month and four, five, six others at $300 and $400 a month, and that one that’s $100 a month gets there because they have most favored nation contracts with hospitals and are demanding that hospitals charge X percent more to their competitors.”

Developments in 2010 already have altered competition in Michigan, Byrne said.

Insurance Commissioner Ken Ross reported in May that in the small group market in 2009, seven carriers comprised 81.4 percent of the market, based on member-months. But three of them — Aetna Inc., Humana and Principal Financial Group — have left the Michigan health insurance market this year.

Those three companies together claimed 12.2 percent in market share. BCBSM and its HMO, Blue Care Network, had a combined market share of 52.6 percent last year, according to Ross’ report.

Also this year, the DOJ blocked Sparrow Hospital’s attempt to sell its health plan, Physicians Health Plan of Mid-Michigan, to BCBSM.

“For these exchanges to succeed, first of all, all the health plans have to make it to 2014,” Byrne said. “And at the rate things were going in Michigan, that wasn’t going to happen.”

“Most favored nation” clauses are “very common” in business deals, said James M. Burns, a Washington, D.C., lawyer who heads the antitrust group of law firm Williams Mullens of Virginia. “Most favored nation clauses are contained in agreements between buyers of goods and suppliers of goods in every industry around the country.

“So that usually results in a reduction in costs and a benefit for consumers. It’s only really in very limited circumstances that antitrust regulators have contended that most favored nation clauses can have anti-competitive effect,” said Burns, who has represented Blue Cross Blue Shield affiliates outside of Michigan.

MFN cases against insurers since 1994 have failed to result in clear direction from courts, he said, but did result in insurers agreeing to not enforce the provisions.

“There have not been any court rulings finding them unlawful,” Burns added.

The last MFN antitrust case occurred in Ohio in 1999, when the DOJ and the state sued Medical Mutual of Ohio, which previously was Blue Cross Blue Shield of Ohio.

Fifteen states have banned the use of MFN clauses in health care contracts.

The Ohio legislature in 2008 banned them in contracts between insurers and physicians, enacted a two-year moratorium for hospital contracts and appointed committee to study the issue. While the committee’s April report was inconclusive on whether MFN clauses are anti-competitive, it recommended the legislature ban them for hospitals.

Legislators in both Ohio and Indiana have considered banning hospital MFN causes, although no action has occurred, Byrne said.

“You may see in the next session of the Michigan legislature some legislation move to try to do away with most favored nation contracting,” he said.

Byrne said the nature and scope of the BCBSM hospital deals as described in the lawsuit surprised him.

“It was my understanding that the hospital would negotiate with various competing health plans what the market would bear, and then the dominant payer would automatically get a deeper discount,” he said. “For it to be reversed and have the dominant health plan negotiating its own contract and then dictating the terms of the contracts with the others, that’s very different.”

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