On October 18, Assistant Attorney General Christine Varney, who heads the Department of Justice Antitrust Division, announced the filing of an antitrust action against Blue Cross Blue Shield of Michigan (“BCBSM”). The suit, which was filed in the Eastern District of Michigan and was joined by the Michigan Attorney General’s office, accuses BCBSM of forcing Michigan hospitals to agree to contractual provisions that restrain competition and increase healthcare costs for Michigan consumers. Specifically, the action challenges BCBSM’s use of “most favored nation” (“MFN”) clauses that required the hospitals to provide BCBSM with its best prices and, according to the DOJ complaint, in some cases also required the hospitals to charge BCBSM’s competitors significantly higher prices. The action seeks to enjoin BCBSM from enforcing the provisions in its existing agreements and from using any such provisions in the future.

“MFN” clauses generally guarantee a buyer of goods or services that it is getting terms that are at least as favorable as those provided to any other buyer. Typically, such provisions result in reduced costs for the buyer, which can be passed on to its customers in the form of lower rates or prices. As such, in most cases “MFN” clauses do not raise antitrust concerns. The DOJ complaint, however, alleges that BCBSM has not utilized its MFN clauses simply to reduce its own costs, but to “raise hospital prices to any competing healthcare plans.” As AAG Varney explained in announcing the filing of the action: “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.” AAG Varney continued: “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.” Michigan Attorney General Michael Cox echoed AAG Varney’s views, and added that “These greedy deals are hardly what the Legislature had in mind when it created Blue Cross.”

BCBSM’s response to the suit was swift and unequivocal. A Blue Cross spokesman stated that “This lawsuit is without merit, and we will vigorously defend our ability to negotiate the deepest possible discounts for our members and customers of Michigan hospitals.”

While it has been many years since the DOJ has brought an action against a health insurer challenging the use of MFN clauses in provider contracts, the action is not unprecedented. Several such cases were brought by the DOJ Antitrust Division during 1990s, although none of those cases resulted in a judicial determination that the use of the clauses can be unlawful. Instead, the cases were all settled by consent judgments, pursuant to which the defendant insurer simply agreed to discontinue its use of the clauses in their hospital contracts. See, e.g., U.S. v. Medical Mutual of Ohio, 1999-1 Trade Cas. (CCH) ¶72,465 (N.D. Ohio 1999). At the same time, some courts have expressly rejected antitrust challenges to MFN clauses. See, e.g., Ocean State Physicians Health Plan v. Blue Cross & Blue Shield, 883 F.2d 1101 (1st Cir. 1989) (the use of a most favored nation clause is a “bona fide policy to ensure that Blue Cross would not pay more than any competitor paid for the same services.”) Accordingly, MFN clauses continue to be in widespread use to this day in the healthcare industry, except in those states that have enacted laws that limit their use. See, e.g., Idaho Code §41-3443.

Finally, AAG Varney concluded her remarks by announcing that she intends to “challenge similar anticompetitive behavior anywhere else in the United States.” Thus, when coupled with AAG Varney’s statements last Fall that the enforcement of the antitrust laws in the healthcare insurance industry is a Division “priority,” it would not be surprising to see additional activity in this area, either from regulators or private parties, in the coming months. Stay tuned.