Earlier this year, the North Carolina General Assembly overwhelmingly passed House Bill 247, banning the use of a controversial health insurance contract provision that’s informally referred to as the “Most Favored Nation” clause (MFN).
The new law will allow healthcare providers and insurance companies to freely negotiate reimbursement rates.
The MFN clause in business contracts takes its name from the international practice of establishing reciprocal economic relationships. The provision guarantees that a country receives trade advantages equal to the “most favored nation” by the country granting such treatment. As part of a business contract, the MFN (sometimes also referred to as a ‘most favored customer’ clause or ‘most favored licensee’ clause) requires a seller to provide a buyer the lowest price offered to any rival purchaser. Ostensibly, this is meant to guarantee the lowest prices or rates to any buyer.
“ It is my belief that we need to return North Carolina’s health insurance market to a competitive state, and certainly in the last 15 years we have gone from having over thirty insurance companies offering health insurance; and we’re now down to seven.”
—Representative Justin Burr
Advocates of MFN provisions in the insurance world argue that the measures can, in theory, be pro-competitive by encouraging competition and lowering prices for consumers. The Antitrust Division of the U.S. Department of Justice said that in most instances MFN clauses should be viewed as “a legal attempt to adapt to competition” because:
- They “ordinarily reflect good hard bargaining on the part of buyers of medical services — bargaining that yields lower healthcare costs.”
- They “help an insurer contain provider costs by linking the fees it pays to the fees paid by other payers who are better able to ascertain the reservation prices of providers,”
- They might “facilitate bargaining by eliminating the risk that the provider will be able to hold up the third-party payer for more than the provider was willing to accept from the third-party payer’s competitors.”
The risk is in creating a financial incentive for the seller to not offer low prices, resulting in higher overall prices in the market. MFN clauses can also be used by a company that dominates its market to hamper the ability of rivals to enter the market and compete fairly.
In October 2010, the U.S. Department of Justice filed a lawsuit against Blue Cross Blue Shield of Michigan over the practice. The DoJ claimed that BCBS sought to stifle competition by denying hospitals the ability to offer other insurance companies better discounts. The suit was subsequently dropped in March of this year after the state of Michigan took legislative steps to ban the use of MFN clauses in contracts, thus outlawing “sweetheart deal” contracts between insurers and hospitals that shift costs onto competing insurers. North Carolina joins twenty other states that have taken action banning the use of MFN clauses in health insurance contracts.
Blue Cross Blue Shield is the dominant health insurance company in many of those states, including both Michigan and North Carolina. The Blue Cross Blue Shield Association is a “non-profit” federation of 38 health insurance organizations and companies, providing some form of health insurance coverage in every state. BCBS also administers Medicare in many states and provides coverage to state and federal government employees. Blue Cross Blue Shield reported more than $5.5 billion in net income for 2010.
Opponents of using the MFN clause in contracts argue that they are anticompetitive and can lead to collusion to create an artificially high price floor in a local market for goods and services, or price fixing, that serves to protect market dominance by creating conditions where it is impossible for smaller providers to compete on price. MFN clauses can have the effect of unnecessarily raising consumer costs, reducing choice among providers, constraining access to care and preventing the development of alternative health care delivery models.1
A number of courts have now concluded that guaranteeing the lowest price does not necessarily lead to lower prices — not only in healthcare, but in other industries such as entertainment, auto repair, cable television, publishing, and financial services.
During the floor debate in the North Carolina House on March 28, the bill’s primary sponsor, Representative Justin Burr, said, “It is my belief that we need to return North Carolina’s health insurance market to a competitive state, and certainly in the last 15 years we have gone from having over thirty insurance companies offering health insurance; and we’re now down to seven.”
“This (new law) will give an opportunity for others to be able to compete against our dominant insurance company here in this state — and certainly allow for competition again. And I can tell you that insurance executives in other states in the past have testified that the MFN clause is not used to keep down that particular insurance company’s costs but really to help drive up the cost of their competitors, and that should not be the reason to use this clause.”
1. Journal of Law & Health: “How MFN Clauses Used in the Health Care Industry Unreasonably Restrain Trade under the Sherman Act“