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The high cost of fine print

Antitrust case against a major Blue Cross plan may redefine terms of contract negotiations


By Melanie Evans and Gregg Blesch
Posted: October 25, 2010 - 12:01 am ET
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The U.S. Justice Department moved for the first time in more than a decade to stop an insurer from striking deals that guarantee the best hospital rates around, and authorities warn more action could follow.

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The lawsuit may signal further scrutiny of health insurers' market clout and conduct at a time when the sector faces mounting political pressure and public anger over rising premiums, as well as tighter regulation of its business practices under the healthcare reform law enacted in March.

“This cannot be allowed in Michigan, and let me be clear, we will challenge similar anti-competitive behavior anywhere else in the United States,” Christine Varney, assistant attorney general in charge of the Justice Department's antitrust division, told reporters after the department announced it had taken Michigan's largest insurer to court over antitrust allegations. “Any time a dominant provider uses anti-competitive agreements, the market suffers,” Varney said.

Michigan Attorney General Mike Cox joined the Justice Department in a complaint filed last week that alleged Blue Cross and Blue Shield of Michigan raised prices for rivals and stifled competition with hospital contracts that left competing insurers unable to secure rates that were better than or, in some cases, even close to the rates extended to Michigan Blues plans.

‘Makes no sense'

Blue Cross and Blue Shield of Michigan spokesman Andrew Hetzel said the insurer denies the allegations. The insurer's contracts are designed to deliver its members the lowest costs, not to manipulate hospital pricing or reduce competition, he said. “It makes absolutely no sense to negotiate a higher price if we can achieve a lower price,” he said.

Hetzel countered that the Justice Department apparently doesn't understand the state's competitive insurance market. “I don't think they have a clue about what's going on here in Michigan.”

The government says what's going on in Michigan is illegal. Specifically at issue in the lawsuit are contract terms known as “most-favored-nation clauses,” which guarantee a business does not pay more than competitors.

Healthcare antitrust lawyers said—and Varney acknowledged—that such clauses are widely used and aren't illegal on their face.

“They're not per se anti-competitive, but depending on who is using them and how they are used, they have the potential to have anti-competitive effects,” said David Marx Jr., a partner at McDermott Will & Emery who oversees the firm's antitrust and competition group in Chicago. But Marx and other antitrust experts suggested insurers with such arrangements should swiftly and carefully review those agreements in light of the Justice Department's interest.

“This signals they're still in the enforcement business as it relates to healthcare insurance,” Marx said.

Jeff Miles, a healthcare lawyer who heads the antitrust and competition group at Ober Kaler, said insurers lulled by the lack of activity in recent years should consider the complaint notice that most-favored-nation clauses are “very, very much” on authorities' radar.

Varney said as much in May. Speaking before attorneys, she said authorities recently launched a review of health insurance competition and singled out as a target for scrutiny most-favored-nation clauses and exclusive contracts between insurers and providers, a text of her prepared remarks shows.

“You should expect the Justice Department to carefully scrutinize and continue to challenge exclusionary practices by dominant firms—whether for-profit or nonprofit—that substantially increase the cost of entry or expansion,” she said, particularly most-favored-nation clauses.

Clause banned elsewhere

At least 14 other states prohibit or restrict such clauses in healthcare contracts, an Ohio legislative commission said in March in a report that recommended the state follow suit. In June, the Ohio Legislature extended a two-year moratorium on most-favored- nation clauses until June 2011. One state not mentioned in the Ohio report, Pennsylvania, also prohibits the clauses, said a spokesman for one of the state's largest insurers.

The Michigan insurer wielded its clout to impose the anitcompetitive agreements in hospital contracts, Varney claimed last week. The lawsuit alleges that the aggressive tactics raised prices or shut out competitors from some markets. Hosptials that account for 40% of the state's acute-care capacity agreed to the deals, according to the complaint.

For major hospitals and health systems, the company sought clauses that required competitors pay more than the Michigan Blues by at least a specified percentage. James Burns, an antitrust attorney with Williams Mullen, said the allegations, if true, are a particularly aggressive use of most-favored-nation clauses. “That really is the most intriguing allegation,” Burns said.

In Saginaw, the Michigan Blues contracts required a two-campus hospital to charge other insurers 39% more, the complaint said. One Michigan Blues rival abandoned plans to enter the Upper Peninsula market after a major hospital revised proposed rates to meet the terms of its Blues contract—which stipulated competitors must be charged at least 23% more, the Justice Department alleged.

More than 40 small community hospitals signed contracts that allowed the Michigan Blues to cut payments by roughly 16% if competing insurers were granted rates better than that of Blue Cross and Blue Shield, according to the complaint. Hospitals that entered into this second type of clause were required to charge all insurers at least the rate paid by the state's Blues, which, in turn, raised its own payments to hospitals—and increased its own costs, the complaint said. “In these instances, Blue Cross has purchased protection from competition,” the complaint said.

Some hospitals allegedly were rewarded with better rates from Blue Cross under the contracts. Nine hospitals owned by Ascension Health, including its struggling Detroit health system, St. John Providence, received $2.5 million more per year in payment in exchange for agreeing to charge rival insurers at least 10% more than Blue Cross was charged, according to the complaint.

Trudy Hamilton, a spokeswoman for St. Louis-based Ascension, the nation's largest Catholic health system, said officials do not comment on pending litigation.

The American Hospital Association has long urged antitrust officials to more aggressively police consolidation and the conduct among insurers for anti-competitive moves that put providers at a disadvantage. Melinda Hatton, AHA senior vice president and general counsel, said she is “cautiously optimistic” that the Michigan action means that insurers are facing closer scrutiny.

America's Health Insurance Plans, the Washington trade group that includes roughly 1,300 members, declined to comment.

Prior interest

The lawsuit comes as the Justice Department and the Federal Trade Commission, which share responsibility for policing healthcare competition, are considering creating new leeway for otherwise competing physicians and hospitals to form accountable care organizations. Policymakers are touting the benefits of closer ties among hospitals and doctors, but integration raises antitrust flags of price-fixing and accumulation of market power (Oct. 11, p. 12).

The news isn't all good for hospitals and physicians. The FTC is closely scrutinizaing hospital mergers and acquisitions.

And Michigan hospitals that agreed to the terms—whether or not they believe their hands were forced by the Blues' market power—also could face lawsuits from patients, employers or the Michigan Blues' rival insurers, said Ober Kaler's Miles. Under antitrust law, hospitals with such contracts would be considered conspirators, regardless of whether they were named by the Justice Department as defendants.

Miles said such civil lawsuits would be unusual and did not follow similar prior Justice Department complaints over the most-favored-nation clauses. Five prior cases were settled, he said, the most recent being the 1999 settlement between authorities and Medical Mutual of Ohio. The settlement ended the insurer's use of most-favored-nation in seven Ohio counties.

The government's interest in the practice in Michigan may have started in Lansing. In March, the Justice Department and the Michigan attorney general threatened a lawsuit and effectively blocked the company's proposed acquisition of Physicians Health Plan of Mid-Michigan from Sparrow Hospital in Lansing (March 15, p. 18).

In the new lawsuit, the government alleges the Blues recent contract with Sparrow Hospital will prevent new insurers from entering the market and likely raise rates for Lansing's competing health plans.

The 2009 Michigan Blues contract required Sparrow Hospital to charge other insurers at least 12% more, with a deadline of Jan. 1, 2011, for any existing contracts, according to the complaint. The contract also raised Sparrow Hospital's payments from Blue Cross by $5 million per year above standard contracts for comparable hospitals, the complaint alleges.

Sparrow Health System spokeswoman Rose Tantraphol, in a written statement, said the Sparrow Blues contract was similar to that of most large Michigan hospitals. The Blues is Michigan's largest health insurer and, typically, volume helps to determine rates, she said. She stressed Sparrow was not a party in the lawsuit and could not comment on its details.

One of those competing plans is owned by McLaren Health Care Corp., which also owns Ingham Regional Medical Center in Lansing. McLaren spokesman Kevin Tompkins said the health system does not know how the alleged conduct may or may not affect its operations and won't know until the case continues. None of McLaren's seven hospitals was named in the complaint, he said. “For right now, its somebody else's fight.”

Rick Murdock, executive director of the Michigan Association of Health Plans, a trade group that does not include the Blues among its 17 health-plan members, said the group's members look forward to learning more as the lawsuit continues. Murdock said in a written statement that insurers typically negotiate hospital discounts, and most-favored-nation clauses come on top of those reductions and serve to interfere with competition.

Employers, meanwhile, are left to wonder what to make of the dispute. Did Blue Cross and Blue Shield simply negotiate hard to get the lowest rates and lower costs for its customers, or did the company drive up costs and limit the array of health plans?

In Holt, Mich., just south of Lansing, Orchid Orthopedic Solutions officials have already begun negotiations with Blue Cross and Blue Shield, which administers the company's self-insured health benefits.

Jorge Ramos, chief financial officer of the medical device designer and manufacturer, said news of the Justice Department complaint spread like a “bit of wild fire.” Nonetheless, “I treat allegations as just that,” he said. Orchid Orthopedic employs 130 people around Lansing, he said, and employs 900 people overall, primarily in Michigan, but also has operations in California, Connecticut and Tennessee.

Ramos said the large employer expects to see healthcare costs climb 9% to 11% for the coming year on top of recent years' sharp increases. He said Blue Cross and Blue Shield has been the employer's best choice, and sometimes its only choice, in markets such as central Michigan where options are limited. “It would be disappointing if this is why they're the only option,” he said.

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