How MFN clauses used in the health care industry unreasonably restrain trade under the Sherman Act.

• Author: Wright, Beth Ann
• Position: Most favored nations

INTRODUCTION I. THE SHERMAN ACT II. THE BALANCING TEST UNDER THE RULE OF REASON A. Quadrant I: Pro-competitive Purposes 1. Guard Against Discriminatory Pricing 2. Tool to Secure Volume Discounts B. Quadrant III: Pro-competitive Effects 1. Lower Prices Overall 2. Guarantee the Same Best Price C. Quadrant II: Anticompetitive Purposes 1. Creating an Artificial Price Floor 2. Price Certainty D. Quadrant IV: Anticompetitive Effects 1. Horizontal Price-fixing 2. Unreasonably Restrains Vertical Trade 3. Elimination of Price Discrimination 4. Preempts a Genuine Market Floor Price 5. Deters New Market Entrants 6. Eliminates or Cripples Existing Smaller Competitors 7. Prevents Development of Lower-cost Plans 8. Deprives the Market of Innovative and Alternative Service Delivery Models 9. Deprives Consumers of Differentiated Products III. DEFEATING THE PRESUMPTIONS OF PRO-COMPETITIVENES IV. U.S. CONSENT DECREES V. INDICIA OF A MERITORIOUS CLAIM AGAINST AN INSURER EMPLOYING AN MFN CLAUSE UNDER SECTION 1 OF THE SHERMAN ACT A. Claims Brought Under Sherman Act Section 1 B. MFN Clause-automatic Reduction in Price, and Monetary Penalty in Addition to Lowering Price C. Sufficient Market Power D. Intra-market Use of the MFN Clause E. Anticompetitive Injury in Fact Which is Causally Related to the MFN Clause F. Party Posture VI. CONCLUSION INTRODUCTION

A most favored nations (MFN) clause is a contractual agreement between a buyer and a seller stating that the price paid by the buyer will be at least as low as the price paid by other buyers who purchase the same commodities from the seller. (2) In health care, the contract is typically between the health insurer who acts as the purchaser of health care services on behalf of its subscribers and the medical provider who acts as the seller of health care services. (3) MFN clauses have also been dubbed prudent buyer clauses, (4) price nondiscrimination clauses, (5) usual fee-provisions, (6) and most favored rate requirements. (7)

Only a health insurer with sufficient market power can negotiate the incorporation of an MFN clause in consideration for the exchange of a relatively large volume of business in the relevant market. (8) Typically, only one health insurer per market will secure provider contracts incorporating the MFN clause. As an insurer with sufficient market power, Blue Cross and Blue Shield plans started using MFN clauses in contracts with providers as a way to maintain market strength in the face of the emerging alternative health care delivery models like HMOs and PPOs. (9) The U.S. Government, corporations offering employer-based health insurance, and American citizens as consumers, all have reason for serious concern regarding the anticompetitive nature of MFN clauses. These clauses 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.

The purpose of this paper is four-fold. First, to design a four-quadrant matrix to evaluate the pro-competitive and anticompetitive purposes and effects of MFN clauses under the "rule of reason" standard of review where a violation of Section 1 of the Sherman Act is alleged. Second, to defeat the jurisprudential presumption that MFN clauses are pro-competitive in the health care industry and recommend that the presumption be abolished in health care cases. Third, to examine the U. S. Department of Justice's paradigmatic shift over the last decade toward prosecuting large insurers who employ MFN clauses resulting in U.S. Consent Decrees for Sherman Act Section 1 violations. Fourth, to outline the indicia of a meritorious claim against an insurer who employs an MFN clause in an agreement with medical providers.

1. THE SHERMAN ACT

   Most complaints alleging antitrust violations involving MFN clauses are brought under Sections 1 and 2 of the Sherman Act. Section 1 claims are either examined under the per se rule or the rule of reason. The court decides which rule to use on a case-by-case basis, applying the facts of the case to guiding precedent. First, the court examines the language of the Sherman Act and how courts have interpreted and applied it. Second, a Sherman Act Section 1 violation where the court applies the rule of reason is more meritorious because the MFN clause can produce anticompetitive effects which unreasonably restrain trade through a contract, combination, or conspiracy. Third, the court's reasoning in Ocean State, where the plaintiff failed on the merits to establish an unlawful monopoly under Section 2 of the Act highlights an important distinction between Section 1 versus Section 2 claims.

   First, regarding Section 1 violations, the Sherman Act states that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." (10) Because any agreement concerning trade can restrain competition, the Supreme Court has interpreted Section 1 to "render unlawful only those restraints that unreasonably restrict competition." (11)

   Whether an agreement unreasonably restrains trade is traditionally analyzed under either the per se rule or the rule of reason standard of review. If a "practice facially appears to be one that would always or almost always tend to restrict competition and decrease output" rather than "one designed to 'increase economic efficiency and render markets more, rather than less, competitive,'" it is deemed "per se illegal." (12) The per se rule disregards the defendant's market power, illicit purpose, and the anticompetitive effects of the agreement. (13) Application of the per se rule as the standard of review is generally limited to claims involving horizontal price-fixing or market allocation agreements among competitors. (14) Generally, all other Section 1 claims are reviewed under the rule of reason.

   The Delta Dental court articulated a rationale for applying the rule of reason to a Section 1 claim as opposed to the per se rule. In Delta Dental, the thrust of the government's complaint centered on the anticompetitive effect on price to the market as a whole, realized through market foreclosure of reduced fee plans by new market entrants, the inability of existing plans to offer lower fee alternatives, and the maintenance or increase in consumer prices. (15) The court reasoned that applying the per se rule to these allegations would "contradict the Sherman Act's animating concern of protecting consumers from high prices." (16) Rather, the court only conducts a balancing test, where it weighs the anticompetitive effects of the agreements against their legitimate business justifications (i.e. pro-competitive purposes and effects) under the rule of reason. (17)

   Under the rule of reason, this balancing test determines whether the plaintiff has met his burden of proof that the "anticompetitive effects of the agreements outweigh their legitimate business justifications." (18) The inquiry focuses on whether the restraint on competition impacts the market as a whole. (19) As such, an agreement is not an unreasonable restraint on trade merely because it injures a competitor. (20) Rather, the agreement becomes an unreasonable restraint only when it "causes detriment to the competitive process" on the market as a whole. (21) Therefore, only unreasonable restraints on trade which affect the market generally are prohibited under the rule of reason.

   While a court will hear a Sherman Act Section 1 claim alleging anticompetitive purposes and/or anticompetitive effects, prevailing appears more likely when the evidence shows sufficient anticompetitive effects. The primary reason prevailing on the merits improves where anticompetitive effects are shown lies in the balancing test employed by the courts under the rule of reason. The pro-competitive purposes and effects are weighed against the anticompetitive purposes and effects. If the anticompetitive effects, therefore, are not yet recognized in the market, then only the anticompetitive purpose weighs in the balance. It follows that the plaintiff who can prove actual anticompetitive effects caused by the competitor's MFN clause possesses a greater likelihood of succeeding on the merits, as opposed to a plaintiff alleging mere anticompetitive purposes. Put differently, actual negative anticompetitive effects must be felt by the market as a whole for the plaintiff to tip the balance and overcome the presumption of pro-competitive conduct. (22)

   Second, regarding Section 2 violations, the First Circuit in Ocean State stated that the monopolization claim under the Sherman Act Section 2 requires: "(1) the possession of monopoly power in the relevant market, and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." (23) While an MFN clause may eliminate competition to the degree that the dominant insurer has effectively created a monopsony, the Section 2 inquiry fails to examine the most salient features of the MFN clause's effect on competition. The operation of the MFN clause on market competition better fits with Section 1 analysis where the MFN clause may operate to unreasonably restrain trade with anticompetitive effects on the market as a whole through a contract, combination, or conspiracy. Moreover, the Antitrust Division of the U.S. Government has entered five separate U.S. Consent Decrees subsequent to filing a complaint alleging Sherman Act Section 1 violations as opposed to Section 2 violations. (24)

   Third, although Ocean State primarily involves a Sherman Act Section 2 challenge, the court's reasoning is instructive on several points because the Ocean State clause is identical to Delta Dental's MFN clause. (25) The Ocean State court observed that Section 2 prohibits...