Some Basics about Most Favored Nation Contracts in Health Care Markets

• Author: William J. Lynk
• Published date: 01 June 2000
• Date: 01 June 2000
• DOI: http://doi.org/10.1177/0003603X0004500208
• Subject Matter: Economic

The Antitrust Bulletin/Summer

2000

Some basics about

most

favored

nation contracts in health care

markets

BY WILLIAM J. LYNK*

I.

Introduction

491

A most favored nation (MFN) provision is a condition in a con-

tract between abuyer and a seller, specifying that the buyer gets

the benefit

of

the lowest price that the seller charges to other buy-

ers. So if Smith, a seller, and Jones, a buyer, enter into a contract

with an MFN provision under which Jones initially gets a price of

$10, and Smith later sells the same product to another buyer at a

price of $9, then Jones also gets the same lower $9 price. Or, to

rearrange the emphasis, Smith had better not offer the $9 price to

the other buyer unless he is prepared to cut his price to Jones as

well.

MFN provisions affect prices, and so it is not surprising that

their use has attracted the attention

of

the federal antitrust agen-

cies. Their earliest litigated assault on this practice was 20 years

*

Senior

Vice

President

and

Senior

Economist,

Lexecon

Inc.,

Chicago, Illinois.

©2000 by Federal Legal Publications. Inc.

492

The antitrust bulletin

ago, when in 1979 the Federal Trade Commission brought the

Ethyl case against the sellers

of

gasoline additives.' The Commis-

sion found MFNs to be anticompetitive and enjoined their further

use, but it was reversed soundly by the Second Circuit Court of

Appeals." Since then, virtually all MFN cases brought by the fed-

eral agencies have involved contracts in the health care industry,

generally between providers of medical services (e.g., physicians,

dentists, hospitals) and purchasers

of

those services (e.g., health

insurers, including health maintenance organizations [HMOs]).3 In

addition to the federal antitrust agencies' challenges to health care

MFN contracts, the practice has been attacked frequently by pri-

vate health care antitrust litigants, in which typically ahealth care

purchaser with an MFN provision is sued by either aprovider or a

competing purchaser (usually amanaged care payor such as an

In re Ethyl Corp., 101 FTC 425 (1983). A prior Justice Depart-

ment investigation of MFNs in the electrical equipment industry ended in

settlement with a consent decree; U.S. v. General Electric Co., 1977-2

Trade Cas. (CCH)

~

61,660 (E.D. Pa. 1977) (consent decree).

E.I. du

Pont

de Nemours &Co. v. FTC, 729 F.2d 128 (2d Cir.

1984).

"With the exception

of

Ethyl, the major antitrust challenges to

MFN

clauses

have

been in

the

context

of

the health

care

industry."

Arnold

Celnicker,

A

Competitive

Analysis

of

Most

Favored

Nations

Clauses in Contracts Between Health Care Providers

and

Insurers, 69

N.C. L.

REV.

864, 868 (1991). See, e.g., United States v. Oregon Dental

Service,

1995-2

Trade

Cas. (CCH)

~

71,062

(D. Or. 1995)

(consent

decree); United States v. Delta Dental Plan of Arizona, 1995-1 Trade

Cas. (CCH)

~71,048

(D. Ariz. 1995) (consent decree); United States v.

Vision Service Plan, 1996-1 Trade Cas. (CCH)

~

71,404 (D.D.C. 1996)

(consent

decree); RxCare

of

Tennessee, Dkt. C-3664 (FTC June 10,

1996) (consent order); and United States v. Delta Dental Plan of Rhode

Island,

943

F.

Supp.

172

(D.R.I.

1996), 1997-2

Trade

Cas.

(CCH)

~71,860

(D.R.I. 1997) (consent decree). See also United States v. Medi-

cal Mutual of Ohio, N.D. Ohio No. 1:98-CV-2172 (September 23, 1998),

a

proposed

consent

decree

eliminating

the use

of

MFNs by Medical

Mutual,

the largest

commercial health care insurer in the

Cleveland

metropolitan area and until recently a Blue Cross plan, described in 75

Antitrust &Trade Reg. Rep. 374 (BNA) (October 1, 1998), and Erik F.

Dyhrkopp &Andrew H. Kim, Antitrust Enforcers Step Up Scrutiny

of

MFN

Clauses,

NATIONAL

L. J., July

5,1999,

at B7.

MFN

contracts 493

HMO).4 When the providers sue, they typically complain that the

prices that they must accept from the defendant purchaser are too

low; when the competing purchasers sue, they typically complain

that the prices that they must pay to providers are too high.

The recent antipathy

of

the federal antitrust agencies toward

the practice of MFN provisions in health care contracts is unmis-

takable. As the Department

of

Justice recently explained in urging

the Pennsylvania insurance commission to disallow the use

of

an

MFN provision:

[W]here sellers (hospitals) and buyers (health plans) negotiate price

and a large buyer asks sellers for a guarantee of the best rate given to

any

other

purchaser.

anticompetitive

results

can

occur.

...

[T]he

cost to a hospital

of

granting aprice concession

...

increases dramat-

ically because this same price must be given to the larger buyer

....

This reduces the incentive

of

ahospital to grant price concessions to

[managed care plans] and thus helps the hospital negotiate ahigher

price with [managed care plans}.'

The timing

of

this emerging enforcement posture in the 1990s

is puzzling for at least three reasons. One is that this contractual

feature is not a recent development; MFNs have been around for a

long time. Second. the economic theory on MFNs is remarkably

ambiguous in terms

of

its economic welfare implications; even

analyses that fall generally into the anti-MFN camp usually note

For example, Blue Cross &Blue Shield v. Michigan Association

of Psychotherapy Clinics, 1980-2 Trade Cas. (CCH)

~

63,351 (E.D. Mich.

1980); Kitsap Physicians Service v. Washington Dental Service, 671 F.

Supp. 1267 (W.D. Wash. 1987); Reazin v.

Blue

Cross &

Blue

Shield, 663

F. Supp. 1360 (D. Kan.

1987).899

F.2d

951 (10th

Cir.);

Ocean

State

Physicians Health Plan v.

Blue

Cross

&

Blue

Shield,

692

F. Supp. 52

(D.R.I.

1988),883

F.2d 1101 (1st Cir. 1989); National Benefits Adminis-

trators v.

Blue

Cross &Blue Shield. 1989-2 Trade Cas. (CCH)

~68,831

(M.D. Ala.

1989),907

F.2d

1143 (11th Cir. 1990);

Willamette

Dental

Group.

P.e.

v. Oregon Dental Service, 882 P.2d 637 (Or. App. 1994);

and Blue Cross &Blue Shield v.

Marshfield

Clinic. 65 F.3d 1406 (7th

Cir. 1995).

Letter

from

Anne

K.

Bingaman.

Assistant

Attorney

General,

Antitrust Division, to Hon. Cynthia M. Maleski, Pennsylvania Insurance

Commissioner (Sept. 7, 1993). concerning an MFN provision adopted by

Blue Cross

of

Western Pennsylvania in its contracts with hospitals.