United States: Court Rejects Motion To Dismiss In DOJ - Blue Cross Blue Shield Litigation Over Most Favored Nation Clauses

First published in Antitrust News & Notes, October 2011

The U.S. District Court for the Eastern District of Michigan denied a motion to dismiss a complaint filed by the Antitrust Division of the Department of Justice (DOJ) and State of Michigan against a health insurance provider for including most favored nation (MFN) clauses in contracts with Michigan hospitals. In doing so, the court held that the complaint set forth a plausible claim that the contracts containing MFN clauses violate Section 1 of the Sherman Act and Section 2 of the Michigan Antitrust Reform Act by inhibiting competing insurance providers from obtaining competitive pricing for health care services.¹

The complaint, filed in October 2010, states that Blue Cross Blue Shield of Michigan (Blue Cross) included MFN clauses in its contracts to purchase health care services from more than half of the acute-care hospitals across Michigan. The MFN clauses require the contracting hospital to provide health care services to Blue Cross' competitors at prices that are higher or no less than the price Blue Cross pays for the same services.²

The DOJ and State of Michigan allege that the MFN clauses harm competition in the market for the sale of commercial health insurance in Michigan by raising the costs for hospital services that competing insurance providers must pay. While a hospital may comply with the MFN clause by lowering the prices charged to Blue Cross, the complaint contends that this option imposes a significant penalty on the hospital because Blue Cross insures more than 60 percent of the state's commercially insured population. Instead, hospitals will opt to raise competing insurance providers' prices. This increase in costs that competing insurance providers must face diminishes their ability to effectively compete with Blue Cross and discourages new competitors from entering the market.³ Further, in exchange for the hospital agreeing to include the MFN clause in its contract, Blue Cross often agrees to pay more for the hospital's services than it would otherwise pay.⁴ This trade-off, according to the complaint, increases health care costs for both Blue Cross and its competitors, and puts upward pressure on prices that the insurers charge for health insurance. To remedy this effect, the complaint seeks an injunction to prevent Blue Cross from including MFN clauses in current and future contracts with hospitals in the state.

In its motion to dismiss filed in December 2010, Blue Cross challenged the DOJ's allegations and argued that the complaint failed to plausibly allege that the MFN clauses created adverse anticompetitive effects within the relevant product and geographic markets. The court disagreed, finding that the DOJ's description of the anticompetitive effects of the MFNs, including examples of how MFN clauses at various hospitals throughout Michigan will negatively impact competition, adequately set forth a plausible claim for relief under the Sherman Act and Michigan's antitrust statute.⁵ The court also noted that a market-by-market analysis is not required at the pleading stage and held that the complaint's description of the product and geographic markets was adequate to withstand a motion to dismiss.

The court rejected Blue Cross' argument that Michigan's regulation of the insurance industry means that Blue Cross is entitled to immunity under the state action doctrine, and that, as the state's insurer of last resort, Blue Cross is a quasi-public entity. This defense, if accepted by the court, would have meant that the federal government could not enforce the Sherman Act against Blue Cross due to the state's heavy participation in Blue Cross' business. In order to be protected from the application of the Sherman Act under the state action doctrine, the court stated that the MFN clauses must be clearly articulated and affirmatively expressed as state policy and actively supervised by the state itself.⁶ The court found no merit to Blue Cross' claims that its business is conducted sufficiently close to the state to be exempt from the governance of the Sherman Act. The state does not support the use of MFNs to stifle competition, nor possess the statutory right to review MFN clauses in contracts between hospitals and health insurers, according to the court's analysis.⁷ The court also determined that Blue Cross is a private — not quasi-public — entity because Blue Cross controls its own business decisions and has represented itself as a private entity in prior litigation.

For similar reasons, the court rejected Blue Cross's argument that it is exempt from liability because the Michigan Antitrust Reform Act does not apply to conduct that is specifically authorized under the laws of the state and conduct that is the subject of a legislatively mandated pervasive regulatory scheme. The court found that Blue Cross is not covered by these exemptions and, even if it was, would still be subject to the Act because the use of MFNs in particular is not protected by state or federal law.

In addition to this case, a class action suit has been filed against Blue Cross Blue Shield of Michigan alleging antitrust violations similar to those argued in the present matter⁸ and the United States has issued civil subpoenas to Blue Cross in six additional states.

Footnotes

1 United States of America and State of Michigan v. Blue Cross Blue Shield of Michigan, No. 10-14155, 2011 WL 3566486 (E.D.Mich. Aug. 12, 2011) (Order Denying Motion to Dismiss).

2 Id. at *1.

3 Id. at *3-4.

4 Id. at 3.

5 Id. at *12-13.

6 Id. at *8.

7 Id. at *9-10.

8 The case is Veneberg v. Blue Cross Blue Shield of Mich., No. 2:10-cv-14360, in the Eastern District of Michigan.

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