Following the enactment of Ohio House Bill 125, the Healthcare Simplification Act, health care providers were hopeful that use of "most favored payer" clauses would cease. While this is true for most health care provider services agreements entered into, renewed or materially amended after the effective date of the Act, June 25, 2008, different rules apply to hospital services agreements. Hospitals should be aware of these rules as negotiations with payers occur.

For newly negotiated hospital services agreements entered into after June 25, House Bill 125 imposes a moratorium on the use of "most favored payer" clauses. A "most favored payer" clause always guarantees a payer the lowest payment rate of all of a hospital's payers. If a hospital agrees to a lower rate with another payer, the hospital is required to reduce payment rates for the payer with the agreement that includes the "most favored payer" clause. The banning of these clauses is significant because hospitals would no longer be forced to provide health care services at prices lower than originally negotiated in contracts. In addition, hospitals would have more leverage to negotiate innovative contracts with other payers without fearing such clauses will be triggered.

For hospital services agreements that are renewed or materially amended after June 25, the rules are less clear. House Bill 125's moratorium against inclusion of "most favored payer" clauses does not apply to the continued use of the clause even if, during the moratorium, a hospital services agreement is materially amended with respect to any provision of agreement other than the "most favored payer" clause. So, while a payer may be prohibited from insisting that a hospital services agreement be amended to include a new "most favored payer clause," if a hospital services agreement in effect prior to June 25 includes this clause, use of the clause may continue even if the agreement is materially amended. Whether an existing "most favored payer clause" may be amended, even to benefit a hospital, is an issue of contention. At least one major payer says no, even though the express language of House Bill 125 says otherwise.

House Bill 125 also permanently bans use of "most favored payer" clauses, effective June 25, 2011, in health care services contracts with physicians and certain other providers, but this ban does not apply to agreements with hospitals. During the legislative process, representatives of the Ohio Hospital Association vehemently argued to give hospitals the same protections. Members of the Ohio General Assembly listened to these concerns, but were uncomfortable with a permanent ban. A study committee was established to make recommendations on whether the permanent ban should take effect and whether it should be extended to all hospital contracts. With the ability to ask for a one-year extension, the study committee must present findings and recommendations to the Ohio General Assembly and the Governor at the beginning of 2010. Members of the study committee will be appointed by legislative leadership, with the Superintendent of the Ohio Department of Insurance serving as chair. This appointment process has just begun.

The legislative debate surrounding use of "most favored payer" clauses will continue into the next legislative session. For further information about how you may participate in these deliberations or for information regarding implementation of Ohio House Bill 125, please contact your principal Squire Sanders lawyer or one of the individuals listed in this Alert.