The Antitrust Division of the Department of Justice (the "DOJ") and the State of Michigan filed an antitrust lawsuit against Blue Cross Blue Shield of Michigan ("BCBS") on October 18th, alleging that most favored nation clauses (“MFNs”) in BCBS's contracts with hospitals unreasonably restrain trade in violation of Section 1 of the Sherman Act and Section 2 of the Michigan Antitrust Reform Act. Civil action no. 2:10-cv-14155-DPH-MKM (E.D. Mich.). (http://www.fulbright.com/e_Templates/CRD/Publications/20101019USAvBlueCross.pdf) Obviously of interest to hospitals, insurers, and others in the managed care industry, the suit also has serious implications for any business that uses MFN clauses.

MFN clauses are fairly common in American business, typically providing that one party to a contract will deal with the other on terms that are no less favorable than the terms on which the first party is dealing with others. MFNs can benefit buyers or sellers. For example, a buyer might negotiate a provision reciting that if the seller should sell to any other customer at a lower price than it is charging the first buyer, the seller will reduce the first buyer's price to the same level. Or a seller may enter a contract that provides that if the buyer pays someone else a higher price for the same goods or services, the buyer will pay the first seller the same price for all additional purchases.

The federal and state antitrust enforcement agencies have on a few prior occasions challenged MFNs as unreasonably restraining trade.[1] Other than an occasional consent decree,[2] the courts have generally found that MFNs that simply provide that someone's contract partner will deal with it on terms that are no less favorable than those that it grants others do not unreasonably restrain trade. The Seventh Circuit has specifically endorsed such clauses:

"Most favored nations" clauses are standard devices by which buyers try to bargain for low prices, by getting the seller to agree to treat them as favorably as any of their other customers. [Defendant] did this to minimize the cost . . . to it, and that is the sort of conduct that the antitrust laws seek to encourage. It is not price-fixing.

Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995). The original opinion in Marshfield Clinic held that MFNs are never anticompetitive, but on a motion for rehearing supported by the DOJ and the FTC, the court instead wrote, "Perhaps, as the Department of Justice believes, these clauses are misused to anticompetitive ends in some cases; but there is no evidence of that in this case." Id. at 1415. See also Ocean State Physicians Health Plan v. Blue Cross & Blue Shield, 883 F.2d 1101, 1110 (1st Cir. 1989)(so long as the price is not predatory, "insisting on a supplier's lowest price . . . as a matter of law is not exclusionary").

The complaint filed in Michigan alleges that BCBS is the dominant provider of commercial health insurance in Michigan, covering 3 million residents who comprise 60% of the state's commercially insured lives and nine times as many people as its next largest competitor. BCBS allegedly purchases hospital services for its insureds from each of the state's 131 general acute care hospitals, 70 of which account for 40% of Michigan's acute care hospital beds and have MFNs in their contracts with BCBS.

Plaintiffs allege that BCBS has two types of MFNs in its managed care contracts in Michigan: (1) ordinary "Equal-to MFNs," in which the hospitals agree to charge other insurers at least as much as they charge BCBS, and (2) "MFN-plus" clauses, in which hospitals agree to charge other insurers more than they charge BCBS, sometimes 40% more, and agree not to increase whatever discounts the hospital was already granting to other insurers. The suit alleges the following adverse effects on competition:

The MFNs have harmed competition by (1) reducing the ability of other health insurers to compete with Blue Cross, or actually excluding Blue Cross' competitors in certain markets, and (2) raising prices paid by Blue Cross' competitors and by self-insured employers. By reducing competition in this manner, the MFNs are likely raising prices for health insurance in Michigan.

The suit seeks only injunctive relief, and the facts may be somewhat unique, but the perhaps Draconian relief sought by the DOJ would ban all MFNs, regardless of their character or effect. The DOJ and Michigan are asking the court to enjoin BCBS from having "any MFNs in any agreement . . . or any other . . . arrangement having the same purpose or effect as an MFN, with any hospital in Michigan." Christine Varney, the Assistant Attorney General for the Antitrust Division, commented that if “we uncover other health insurers with market power that use anticompetitive MFNs to thwart competition, we will challenge them.” (http://www.justice.gov/atr/public/press_releases/2010/263229.htm) That comment suggests that the attack on MFNs may be limited, at least for now, to businesses that the DOJ believes have market power, but if the courts ultimately find that BCBS’s MFNs are anticompetitive, that could call into question the ongoing validity of MFNs in other fields of commerce.

This article was prepared by Erika Brown Lee (ebrownlee@fulbright.com or 202 662 0398), Daniel L. Wellington (dwellington@fulbright.com or 202 662 4574) and William R. Pakalka (wpakalka@fulbright.com or 713 651 5208) from Fulbright's Antitrust and Competition Practice Group and Fulbright's Health Care Practice Group.

---
[1] See ABA Section of Antitrust Law, Antitrust Law Developments 147-48 & 257 (6th Ed. 2007)(compiling cases).
[2] E.g., United States v. Delta Dental Plan, 1995-1 Trade Cas. (CCH) ¶ 71,048 (D. Ariz. 1995)(enjoining enforcement of an MFN used by a managed care plan that had 85% of the dentists in the state in its provider network).