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Most-Favored-Nation Clauses and Monopsonistic Power: An Unhealthy Mix?

Published online by Cambridge University Press:  24 February 2021

Susan E. Stenger
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Abstract

Most-favored-nations clauses appear in health insurance contracts allegedly to prevent price discrimination by health care providers among competing insurers. In fact, use of these provisions often works to exclude competitors from the health insurance market. This Note examines the antitrust implications of most-favored-nations clauses as used in the health insurance industry.

Type
Notes and Comments
Information
American Journal of Law & Medicine , Volume 15 , Issue 1 , 1989 , pp. 111 - 128
Copyright
Copyright © American Society of Law, Medicine and Ethics and Boston University 1989

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References

1 R. Snyder, the Most-Favored-Nation Clause 1-11 (1948).

2 The MFN clause was first used in the eighteenth century network of U.S. Friendship, Commerce, and Navigation treaties. J. Barton & B. Fisher, International Trade and Investment: Regulating International Business 91 (1986).

3 Legal Times of Wash., Jan. 21, 1980, at 12, col. 1.

4 R. Snyder, supra note 1, at 10.

5 See generally Hufbauer, , Erb, & Starr, , The GATT Codes and the Unconditional Most-Favored-Nation Principle, 12 Law & Pol'Y Int'l Bus. 59, 59-62 (1980).Google Scholar The free trade ideal has been eroded, however, by several preferential agreements under GATT. Legal Times of Wash., supra note 3.

6 A totally free market is one in which there is no government interference—no tariffs, no quotas, no MFN clauses between countries. A trading group's use of an MFN clause creates a relatively free market because, although the governments are still interfering, they are eliminating protectionist measures such as tariffs and quotas; the resulting market is thus closer to a pure free market.

7 See, e.g., E.I. du Pont de Nemours & Co. v. Federal Trade Coram', 729 F.2d 128 (2d Cir. 1984) (vacating an FTC order prohibiting use of MFN clauses in the sales contracts of gasoline additive manufacturers); Fisher Bros. v. Phelps Dodge Indus., Inc., 614 F. Supp. 377 (E.D. Pa. 1985)(MFN clause was used in a settlement agreement with one of several defendants).

8 15 U.S.C. § 1 (1982).

Section 1 of the Sherman Antitrust Act provides:

Every 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 hereby declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

15 U.S.C. § 1 (1982). Section 2 of the Sherman Antitrust Act reads:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

15 U.S.C. § 2 (1982).

9 See Report of the Committee on Antitrust, 5 Energy L.J. 149, 149 (1984); see, e.g., Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571 (1981)(The Court refused to award damages for breach of a MFN clause in natural gas producer contract governed by federal law; the Court implied, however, that it would uphold the MFN, absent statutory restrictions).

10 Report of the Committee on Antitrust, supra note 9, at 149. Horizontal agreements are made between competitors that provide similar products or services. Typical examples of horizontal agreements include price-fixing and allocation of sales territories. In contrast, vertical agreements are made between a producer or provider and its customers, suppliers or distributors.

11 Id.

12 Admittedly, the natural gas industry is highly regulated and thus does not provide and ideal example for antitrust analysis; the Federal Energy Regulatory Commission has the power to establish and review natural gas rates. 42 U.S.C. § 7172 (1982).

13 A leading case on the rule of reason is Chicago Board of Trade v. United States, 246 U.S. 231 (1918), which states in pertinent part:

The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.

Id. at 238.

14 See infra note 8 (Section 1 of the Sherman Antitrust Act).

15 See cases cited infra p. 13-32.

16 See supra note 8 (Section 2 of the Sherman Antitrust Act); infra text accompanying notes 50, 75 (lists of antitrust violations).

17 See generally Steuer, , Exclusive Dealing After Jefferson Parish, 54 Antitrust L.J. 1229 (1985).Google Scholar

18 R. Halper & J. Miles, Antitrust Guide For Health Care Coalition, (National Health Policy Forum, George Washington University, Washington, D.C. 1983).

19 Consider the difficulty and complexity of defining the product market of health care providers.

20 15 U.S.C. § 13 (1982).

21 See, e.g., May Dep't Store v. Graphic Process, 637 F.2d 1211 (9th Cir. 1980).

22 See Black's Law Dictionary 1060 (5th ed. 1979); see generally Areeda, & Turner, , Predatory Pricing and Practices Under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975)CrossRefGoogle Scholar, reformulated in 3 P. Areeda & D. Turner, Antitrust Law ¶¶ 710-22 (1978).

23 Blue Cross of Wash. & Alaska v. Kitsap Physicians Serv., 1982-1 Trade Cas. (CCH) ¶ 64,590, at 73,211 (1981).

24 Id. at 73,212.

25 1980-2 Trade Cas. (CCH) ¶ 63,352, at 75,792 (1980).

26 Id. at 75,793.

27 Id. at 75,793-94.

28 Id. at 75,794; see supra note 13 regarding the rule of reason.

29 Michigan, 1980-2 Trade Cas. (CCH) at 75,794.

30 749 F.2d 922 (1st Cir. 1984).

31 Id. at 924.

32 Id. at 932.

33 Id. at 931.

34 Id. at 925.

35 Id.

36 Id. at 930-31.

37 Id. at 929. There was no evidence of predatory pricing in Kartell. Id. at 928.

38 For a discussion of predatory pricing, see supra notes 22-24 and accompanying text.

39 See Black's Law Dictionary 908 (5th ed. 1979).

40 United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956), cited in SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1065 (1978).

41 Kartell, 749 F.2d at 924.

42 For a discussion of how courts have treated monopsony power, see Miller, , Vertical Restraints and Powerful Health Insurers: Exclusionary Conduct Masquerading as Managed Care? 51 Law & Contkmp. Probs. (1989)Google Scholar(in press).

43 663 F. Supp. 1360 (D. Kan. 1987).

44 Id. at 1421-25, 1416-21.

45 Id. at 1416-18.

46 Id. at 1416.

47 Id. at 1376.

48 671 F. Supp. 1267 (W.D. Wash. 1987).

49 Id. at 1268-69.

50 Id. at 1269 (citing Syufy Enters, v. American Multicinemas, 783 F.2d 878 (9th Cir. 1986); Drinkwine v. Federated Publications, 780 F.2d 735 (9th Cir. 1985); William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014 (9th Cir. 1981)).

51 Id. at 1269; see also Michigan Ass'n of Psychotherapy Clinics v. Blue Cross & Blue Shield, 1982-83 Trade Cas. (CCH) ¶ 65,035, at 70,767, 70,775 (1982).

52 Kitsap, 671 F. Supp. at 1269.

53 Id. (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)).

54 Id.

55 Id.

56 Id. at 1270.

57 783 F.2d 878 (9th Cir. 1986).

58 Id. at 884.

59 The court included commercial insurers in the relevant market, lessening defendant's market share from 22% to 13%, but stated that neither figure was large enough to give rise “to a prima facie case of dangerous probability of success of monopolization.” Kitsap, 671 F. Supp. at 1270.

60 Id.

61 For a discussion of market power, see Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 692 F. Supp. 52, 69 (D. R.I. 1988).

62 Kitsap, 671 F. Supp. at 1268.

63 Id. at 1270.

64 692 F. Supp. 52 (D. R.I. 1988).

65 Blue Cross & Blue Shield merged in 1982, creating one company that provided both hospital and physician care coverage. Id. at 56-57.

66 Id. at 54, 72. The plaintiffs were awarded $2,693,437 in compensatory damages and $250,000 in punitive damages for wrongful interference with contractual relationships. Id. at 54. The court granted BCBSRI's motion for a new trial on these contractual interference claims. Id. at 74.

67 The plaintiffs alleged that BCBSRI's market share was 80%; BCBSRI claimed the figure was 57.1%. Id. at 57-58.

68 HMOs are prepaid health care programs in which subscribers pay a predetermined per capita amount and receive unlimited comprehensive physician and hospital care. For federal requirements of HMOs, see 42 U.S.C. § 300e (1982).

69 The Prudent Buyer Policy, adopted May 15, 1986, reads:

  • (1) The Plan will not pay a provider more for a service, procedure or product than that provider is accepting as payment in full from any other buyer; and

  • (2) The Plan will not offer a payment mechanism to any provider which is more favorable than an arrangement that provider has entered into with any other buyer.

Defendant's Trial Memorandum at 3 n.2, Ocean State Physician Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 692 F. Supp. 52 (D. R.I. 1988).

The two other major components were HealthMate, a selectively marketed HMO-like product that offered more benefits than did regular Blue Cross coverage, and “adverse selection” rating factors, which increased BCBSRI rates of companies offering their employees the Ocean State HMO option. Ocean State, 692 F. Supp. at 58-59.

70 Id. at 60.

71 Ocean State called this the Speciality Incentive Pools (SIPS). Id.

72 Id. at 60-61.

73 Id. at 61.

74 Id. at 64.

75 Id. at 67 (citing United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966)). These elements differ slightly from those developed by the Ninth Circuit. See supra text accompanying note 50.

76 Ocean State, 692 F. Supp. at 69, 72.

77 Kartell v. Blue Shield of Mass., 749 F.2d 922 (1st Cir. 1984). For a discussion of this case, see supra text accompanying notes 30-41.

78 Ocean State, 692 F. Supp. at 71.

79 See supra notes 19-42 and accompanying text.

80 Id.

81 Id. at 61.

82 Id. at 56.

83 Id. at 61.

84 Plaintiff's Trial Memorandum at 17 para. 70, Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 692 F. Supp. 52 (D. R.I. 1988).

85 Id. at 17 para. 71.

86 Id. at 17 para. 72.

87 Telephone interview with Rollin Bartlett, Chief, Life, Accident & Health Insurance Analyst, Rhode Island Department of Business Regulation (Apr. 27, 1988).

88 Id.

89 C. Rule, Assistant Attorney General, Antitrust Division, U.S. Dep't of Justice, Remarks at the Antitrust & Health Care Seminar of the Antitrust Section of the Connecticut Bar Ass'n & the Connecticut Health Lawyers Ass'n 24 (March 11, 1988), quoted in 54 Antitrust & Trade Reg. Rep. (BNA) No. 450 (Mar. 17, 1988).

90 Id.

91 Id. at 21.

92 Id.

93 Prepaid plans such as PPOs and HMOs often offer hospitals the benefit of participating in the utilization review process. S. Barger, D. Hillman, & H. Garland, the PPO Handbook 46-47 (1985).

94 C. Rule, supra note 89, at 22.

95 See supra text accompanying note 24.

96 C. Rule, supra note 89, at 22.

97 15 U.S.C. § 15 (1982)(allows private actions for alleged antitrust violations, and in fact encourages them by providing for treble damages), noted in Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 692 F. Supp. 52, 65 (D. R.I. 1988).