Brief Fact Summary. The United States of America and the State of Michigan (collectively, the Government) (Plaintiff) sued Blue Cross Blue Shield of Michigan (Defendant) claiming that the company violated federal and state antimonopoly laws by establishing most favored nation clauses in its agreements with various hospitals.
Synopsis of Rule of Law. A factual showing that an insurance company’s use of most favored nation clauses in agreements increased overall health care costs overcomes a motion to dismiss.
Issue. Does a factual showing that an insurance company’s use of most favored nation clauses in agreements increased overall health care costs overcome a motion to dismiss?
Held. (Hood, J.)Â Yes.Â A factual showing that an insurance company’s use of most favored nation clauses in agreements increased overall health care costs overcomes a motion to dismiss.Â Defendant’s MFN-plus clauses guarantee that Defendant’s competitors cannot obtain hospital services at prices comparable to the prices Defendant pays, which limits other health insurers’ ability to compete with Defendant.Â In the instances where it employed the Equal-to MFNs, Defendant has purchased protection from competition by causing hospitals to raise the minimum prices they can charge to Defendant’s competitors but has also increased its own costs in doing so.Â Defendant has not sought or used MFNs to lower its own cost of obtaining hospital services.Â Plaintiff has argued that by denying Defendant’s competitors access to competitive hospital contracts, the MFNs have deterred or prevented competitive entry and expansion in health insurance markets in the state.Â The result was increased prices for health insurance sold by Defendant and its competitors, in addition to higher prices for hospital services paid by insureds and self-insured employers.
Â Three elements must be present in order to establish a violation of s 1 of the Sherman Act: (1) an agreement (2) affecting interstate commerce (3) that unreasonably restrains trade.Â Reviewing the complaint, Plaintiff asserted that Defendant entered into agreements with various hospitals that affect interstate commerce, satisfying elements one and two.Â Defendant does not move to dismiss based on these two elements, but moves to dismiss under the third elementâ€”whether the MFN clauses at issue unreasonably restrain trade.
Â In order to assess whether the MFN clauses unreasonably restrain trade, the parties agree that the “rule of reason” is applied.Â An agreement violates the rule of reason if it may suppress or even destroy competition, rather than promote competition.Â To state a claim under the rule-of-reason test, a plaintiff must claim that the purportedly unlawful contract, combination or conspiracy produced adverse anticompetitive effects within relevant product and geographic markets.Â In order to survive a motion to dismiss the rule-of-reason test, the complaint must plausibly allege that the MFNs produced adverse anticompetitive effects within relevant product and geographic markets.
Â Based on the allegations in the complaint, it is plausible that the MFNs entered into by Defendant with various hospitals in the state establish anticompetitive effects as to other health insurers and the cost of health services in those areas.Â Defendant’s motion to dismiss is denied, and the final ruling is affirmed.
Discussion. While the excerpt from the case redacts many of the details from the case, it is clear that as creative as Defendant’s MFN clauses were, they brought scrutiny from the federal and state authorities.Â While the initial impact on Defendant was to increase its costs for providing coverage, what is learned from the redacted excerpt was that the net effect was to establish anticompetitive pricing by forcing or favoring hospitals to accept their terms and making it difficult for competitors to gain market share.Â Plaintiff’s initial complaint satisfied the minimal standard of establishing enough facts to alleged federal and state antimonopoly violations, therefore overcoming the motion to dismiss.