The Antitrust Division of the US Department of Justice has challenged the use of “most favored nation” clauses by an alleged dominant health insurer, contending that contracts guaranteeing a buyer the lowest price may exclude competition.
Most favored nation (MFN) contracts require a seller to give a buyer the seller’s lowest price. They are a common tool for negotiating lower prices and, as such, are generally considered procompetitive and lawful under the antitrust laws.
But when a powerful buyer uses MFN contracts with most or all of the sellers in a given market, the result, at least theoretically, can be less price competition and higher prices. And when that buyer asks these sellers to agree that they will charge competing buyers more, the resulting “MFN Plus” contracts may exclude the buyer’s competitors and reduce competition. In that extreme case, regulators have argued that MFNs violate state and federal antitrust laws.
The Antitrust Division and the Michigan Attorney General are employing this theory in their lawsuit challenging the use of MFN and MFN Plus agreements by Blue Cross Blue Shield of Michigan (Blue Cross). The key allegations of the complaint are that:
- Blue Cross is the largest seller of commercial health insurance in Michigan (with 60-80 percent of commercially insured lives in some parts of the state), and is the largest non-governmental purchaser of hospital services in Michigan.
- Blue Cross has MFN agreements with at least 70 of Michigan’s 131 general acute care hospitals, which operate more than 40 percent of Michigan’s acute care hospital beds.
- Blue Cross has MFN Plus agreements with 22 hospitals and 45 percent of Michigan’s tertiary care hospital beds. They require some hospitals to charge Blue Cross’ competitors 40 percent more than they charge Blue Cross.
- Blue Cross pays hospitals higher prices in exchange for MFNs. Therefore, MFNs result in higher prices to both Blue Cross and its competitors.
- By forcing hospitals to charge Blue Cross’ competitors higher prices, MFNs have prevented entry or expansion by those competitors, which helps Blue Cross to maintain its market power.
- By increasing hospital prices and reducing health insurance competition, MFNs led to higher health insurance prices and injured consumers.
- Blue Cross’ MFNs have no procompetitive benefits that would outweigh these anticompetitive effects. According to the complaint, “[t]he MFNs have not led, and likely will not lead, to lower hospital prices for Blue Cross or other insurers. On no occasion has a Blue Cross MFN resulted in Blue Cross’ paying less for hospital services.”.
The complaint also charges that Blue Cross’ MFNs are unreasonable restraints of trade.
MFNs are commonly used in many industries and they are usually legal, because they often result in lower prices by requiring sellers to expand their discounting. The question is, when do MFNs cross the line? The DOJ’s lawsuit suggests that MFNs are anticompetitive and illegal when buyers are so large and the demanded discount is so steep that the MFNs effectively prevent sellers from lowering their prices or selling to non-dominant buyers.
Even under the DOJ’s theory, most MFNs will be legal because most buyers are not large enough to be able to exercise excessive control in the marketplace. For very large players, however, the DOJ’s lawsuit serves to remind buyers with high market shares of the antitrust risks of MFNs.