von Briesen Health Law Blog

Department Alleges Agreements with Hospitals Stifle Competition, Resulting in Higher Health Insurance Prices for Michigan Consumers

WASHINGTON – The Department of Justice filed a civil antitrust lawsuit today against Blue Cross Blue Shield of Michigan (BCBSM) alleging that provisions of its agreements with hospitals raise hospital prices, prevent other insurers from entering the marketplace and discourage discounts. The department said that these agreements likely resulted in Michigan consumers paying higher prices for their healthcare services and health insurance.

The state of Michigan joined the department in its lawsuit, which was filed in U.S. District Court in the Eastern District of Michigan.

The challenged provisions are known as most favored nation (MFN) clauses. In the healthcare context, MFN provisions generally refer to contractual clauses between health insurance plans (buyers) and healthcare providers (sellers) that essentially guarantee that no other plan can obtain a better rate than the plan wielding the MFN. Some of the MFNs in this case guarantee the plan an even better rate than given to any other plan or purchaser.

The department alleges in its complaint that BCBSM’s MFN clauses in its contracts with hospitals have caused hospitals to increase their prices to BCBSM’s competitors and insulated BCBSM from competition. According to the complaint, BCBSM has used MFNs or similar clauses in its contracts with at least 70 of Michigan’s 131 general acute care hospitals, including many major hospitals in the state.

“The department’s lawsuit alleges that the intent and effect of Blue Cross Blue Shield of Michigan’s MFNs is to raise hospital costs for competing health plans and reduce competition for the sale of health insurance. As a result, consumers in Michigan are paying more for their healthcare services and health insurance,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “American consumers deserve affordable healthcare at competitive prices, and the Antitrust Division will vigorously pursue anticompetitive actions that stand in the way of achieving that goal.”

The department said that the MFNs require a hospital either to charge BCBSM no more than it charges BCBSM’s competitors, or to charge the competitors a specified percentage more than it charges BCBSM, in some cases between 30 and 40 percent. The complaint alleges that BCBSM’s use of MFN provisions has reduced competition in the sale of health insurance in Michigan by raising hospital costs to BCBSM’s competitors, which discourages other health insurers from entering into or expanding within markets throughout Michigan. The complaint further alleges that BCBSM agreed to raise the prices that it pays certain hospitals to obtain the MFNs, thus buying protection from competition by increasing its own costs.

BCBSM is a Michigan nonprofit healthcare corporation headquartered in Southfield, Mich. It is the largest provider of commercial health insurance in Michigan, with revenues of more than $10 billion in 2009. BCBSM insures more than nine times as many Michigan residents as its next largest commercial health insurance competitor, covering more than 60 percent of Michigan’s three million commercially insured residents.

The court will determine a pretrial schedule for the case once BCBSM files its response to the government’s lawsuit.

Michigan – Judge George Caram Steeh of the Eastern District of Michigan rejected the challenges to the law put forth by the Thomas More Law Center, a nonprofit public interest law firm in Ann Arbor and three individuals who objected to being compelled to either buy health insurance coverage that they do not want or pay a  penalty.   They challenge that the Constitution does not grant Congress to regulate inactivity (the decision not to buy insurance).  Rather, they argue, the Commerce Clause grants Congress the power to regulate interstate commerce which requires activity.  Judge Steeh, on October 7, 2010, ruled that by forgoing insurance, the plaintiffs’ decision not to purchase insurance could shift the cost of their health care onto other market participants.  Judge Steeh determined that “because the ‘penalty’ is incidental to these purposes, plaintiffs’ challenge to the constitutionality of the penalty as an improperly apportioned direct tax is without merit.”

The plaintiffs are expected to appeal Judge Steeh’s decision.

Florida – U.S. District Court Judge for the Northern District of Florida Roger Vinson issued a 63-page opinion on October 14, 2010, allowing a constitutional challenge to the Federal Health Reform law to proceed. The Florida challenge involves twenty states (Florida, South Carolina, Nebraska, Texas, Utah, Louisiana, Alabama, Michigan, Colorado, Pennsylvania, Washington, Idaho, South Dakota, Indiana, North Dakota, Mississippi, Arizona, Nevada, Georgia, and Alaska) and the National Federation of Independent Business and focuses on the individual mandate and Medicaid expansion.  Judge Vinson’s decision discusses at length whether the individual mandate is a tax or penalty.   If it is not, then the authority that Congress has to impose the mandate comes from the Commerce Clause.  Judge Vinson determined that the mandate is not a tax and thus, must find support in the Commerce Clause.  He further stated that the mandate for individuals to purchase insurance is without precedent, but may ultimately be upheld.  “Of course, to say that something is ‘novel’ and ‘unprecedented’ does not necessarily mean that it is ‘unconstitutional’ and ‘improper.’ There may be a first time for anything. But, at this stage of the case the plaintiffs have most definitely stated a plausible claim with respect to this cause of action,” Vinson ruled.

Judge Vinson dismissed challenges to the employer mandate and the state-based insurance exchanges finding that no constitutional issues existed with these provisions of the law.

A hearing is scheduled for December 16, 2010.

Virginia – On October 18, 2010, Virginia and the Justice Department will conduct a hearing in Richmond on Virginia’s challenge to the health reform law.  Virginia’s challenge, similar to Florida’s, is whether the federal health care law exceeds the powers granted to Congress.

If the federal circuit courts are not in agreement on the constitutionality of the federal health reform law,  we may not have resolution on these until the Supreme Court rules.