United States v. Blue Cross Blue Shield of Michigan

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.

Facts. Blue Cross Blue Shield of Michigan (Blue Cross) (Defendant) is a state nonprofit health care corporation, which is subject to federal taxation but is exempt from state and local taxation under state law.  Directly and through its subsidiaries, Blue Cross (Defendant) provides commercial and other health insurance products, including preferred provider organization (PPO) health insurance products and health maintenance organization (HMO) health insurance products.  Defendant is the largest provider in the state of commercial health insurance, covering three million residents, which is more than 60 percent of the commercially insured population and is equal to nine times as many residents as its next largest commercial health insurance competitor.  Defendant is also the largest nongovernmental purchaser of health care services, including hospital services.  Defendant purchases hospital services from all 131 general acute-care hospitals in the state.
  Defendant sought to include most favored nation clauses (MFNs) in many of its contracts with hospitals.  Blue Cross had agreements containing MFNs or similar clauses with at least 70 of the state’s 131 general acute-care hospitals.  Those 70 hospitals operate more than 40 percent of the acute-care hospital beds.  Defendant usually entered into types of MFNs, which required a hospital to provide hospital services to Defendant’s competitors either at a higher price than Defendant pays or at prices no less than Defendant pays.  The first type was known as “MFN-plus.”  Defendant’s existing MFNs included agreements with 22 hospitals that require the hospital to charge some or all other commercial insurers more than the hospital charges Defendant, usually by a specified percentage differential.  Those hospitals included major hospitals and hospital systems, and all of the major hospitals in some communities.  Defendant’s MFN-plus clauses required that some hospitals charge competitors as much as 40 percent more than they charged Blue Cross (Defendant).  Under these agreements, Defendant agreed to pay more to community hospitals, raising Defendant’s own costs and its customers’ costs, in exchange for the Equal-to MFN.  A community hospital that declined to enter into these agreements would be paid about 16 percent less by Defendant than if it accepts the MFN clause.  Defendant entered into Equal-to MFNs with some larger hospitals also.
  The United States of America and the State of Michigan (collectively, the Government) (Plaintiff) filed the instant action against Defendant alleging that the company’s use of MFN clauses in its agreements with various hospitals violated the federal and state antimonopoly laws, specifically found in s 1 of the Sherman Act and the State’s Antitrust Reform Act.  The Plaintiff alleged that each of the provider agreements between Defendant and state hospitals containing an MFN provision is a contract, combination and conspiracy within the meaning of s 1 of the Sherman Act, and that the Blue Cross agreements with hospitals acted as an unreasonable restraint in trade and commerce in violation of s 2 of the State Antitrust Reform Act.  After denial of its preliminary motions to dismiss, Defendant appealed.

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.)  Yes.  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.  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.  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.  Defendant has not sought or used MFNs to lower its own cost of obtaining hospital services.  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.  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.
  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.  Reviewing the complaint, Plaintiff asserted that Defendant entered into agreements with various hospitals that affect interstate commerce, satisfying elements one and two.  Defendant does not move to dismiss based on these two elements, but moves to dismiss under the third element—whether the MFN clauses at issue unreasonably restrain trade.
  In order to assess whether the MFN clauses unreasonably restrain trade, the parties agree that the “rule of reason” is applied.  An agreement violates the rule of reason if it may suppress or even destroy competition, rather than promote competition.  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.  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.
  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.  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.  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.  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.