Hospitals and insurers unite against Anthem on contract provision

Doctors and hospital officials are hoping state lawmakers will ban a contracting provision that insurance companies use to get the lowest prices for medical services.

Some of the state’s insurers hope so too.

The provision, known as a most favored nation clause, requires a hospital or health care provider to give the insurance company the lowest rates it offers. If a hospital with a most favored nation clause in its contract with one insurer negotiates lower rates with another insurance company, the hospital could be required to give the first company the lower rates too.

Health care providers say the clauses are unfair and discourage innovation, since providers who are required to give one insurer their lowest prices could run into trouble if new payment arrangements with another insurer ultimately lead to lower rates.

The Connecticut Association of Health Plans, which represents insurers including Aetna, ConnectiCare, CIGNA and UnitedHealthcare, says most favored nation clauses create an uneven playing field among insurers and should be discouraged.

But Anthem Blue Cross and Blue Shield, the largest health insurance carrier in the state, says the clauses benefit consumers, particularly self-insured employers who directly pay the rates Anthem negotiates with providers and individuals whose plans require them to pay a percentage of the cost of care.

“Anthem submits that the use of most favored nation clauses by insurers who purchase health care services is good for the consumer and good for the Connecticut health benefits market,” the company said in written testimony. “It is a prudent and legitimate buying practice that is used by insurers for the benefit of their employer groups and members.”

A proposed bill, which made it through the legislature’s Insurance and Real Estate Committee, would prohibit health plans from including clauses in contracts that require providers or hospitals to disclose what rates they get from another insurer, accept payment rates lower or equal to those given to other insurance companies, or refrain from accepting lower rates from another insurer.

Several other states have taken aim at most favored nation clauses in recent years, and more than a dozen states now prohibit or restrict them. Last fall, the U.S. Department of Justice filed an antitrust lawsuit against Blue Cross and Blue Shield of Michigan over its use of most favored nation clauses, alleging that they raise hospital prices, prevent other insurers from entering the market and discourage discounts for medical care. The state of Michigan joined the suit.

In Ohio, a commission established to study the clauses in health care contracts recommended that the legislature prohibit or restrict them. The commission found there is little empirical evidence to determine whether most favored nation clauses discourage or encourage competition.

But it found that some hospital leaders said they would have given lower prices to another insurance company in the absence of a most favored nation clause, and some reported that the clauses discouraged them from entering into innovative payment arrangements with other insurers.

The commission also found that hospitals and insurers face costs associated with enforcing the clauses, including from audits and, in some cases, additional hospital staffing to ensure compliance.

In Connecticut, Bristol Hospital spent more than $113,000 and more than 376 hours responding to a most favored nation audit last year, according to President and CEO Kurt Barwis, one of the most outspoken critics of the clauses.

Barwis said the hospital had little choice but to accept the clause in its contract with a large commercial insurer. The hospital would likely go out of business without the contract, Barwis said, and would not have the contract if it did not accept the most favored nation clause.

Although Barwis would not name the insurer, the hospital and Anthem were engaged in a lengthy fight over a contract last year, which was reported to include a most favored nation provision.

Hospitals might give one insurance company or self-insured employer lower rates for bringing in a large volume of business or for having less cumbersome administrative requirements. Or a hospital might work with an insurer to develop a nontraditional payment arrangement that uses incentives, rather than simply paying by the procedure, which could ultimately lead to lower rates.

But if a hospital has a most favored nation clause with another insurer, Barwis said, that company could demand the lower rates too. Effectively, he said, the insurer with the most favored nation clause would get to pay less without providing any of the benefits that led the hospital to give the other company lower rates.

Critics also say the clauses can discourage new insurance companies from entering a market and give large insurers with the most clout an unfair advantage.

Paul Knag, an attorney with the firm Murtha Cullina who has represented health care providers negotiating contracts, said most favored nation clauses have helped Anthem maintain its position in Connecticut’s health insurance market, which is dominated by five companies.

One of the five, ConnectiCare, said in testimony that most favored nation clauses allow insurers with a large share of the market to ensure that its competitors must pay at least as much as it does for medical services. That effectively puts a floor on the price of health care, director of government relations Janice Perkins said in written testimony.

“This is clearly not in the best interests of health plan customers, particularly as we seek to make insurance more affordable,” she said.

While Anthem says the provisions allow it to get its customers the best rates, Knag questioned whether they get passed on to customers.

“They could get great prices from the hospital, they could pay the hospital very little and then still charge the consumers a lot,” he said. “I don’t necessarily think it follows that any savings they get go into the pockets of the consumers.”

But Anthem says the clauses are good for consumers and allow for long-term contracts with providers, which brings stability for consumers and providers.

In testimony, the company noted that no federal or Connecticut courts have found the clauses to be illegal or anti-competitive. Instead, the company argued, the clauses provide price protection for buyers that antitrust laws are meant to encourage.

A bill banning the clauses would be “an inappropriate use of the legislative process in the negotiations of a private contractual matter between sophisticated bargaining parties,” Anthem said.

The company cited an article by economist William J. Lynk, published in 2000, that examined the effects of most favored nation clauses used in contracts with physicians in Rhode Island and hospitals in Philadelphia. After the clauses began, Lynk found, enrollment in competing HMOs continued to grow, hospital net prices declined, and hospital profitability remained “roughly stable.” He concluded that data did not support the idea that the clauses were anti-competitive, and were “if anything more consistent with a pro-competitive assessment.”

“If there is one lesson that is warranted from this analysis, it is that across-the-board presumptions opposing MFNs are groundless,” Lynk wrote.