DOJ Files Antitrust Suit Against BCBS Michigan

The Department of Justice filed a civil antitrust lawsuit Monday against Blue Cross Blue Shield of Michigan, alleging that the insurer's most favored nation pacts with hospitals across the state raise prices, stifle competition from other insurers, and discourage discounts.

As a result of these MFN pacts, Michigan consumers pay higher prices for healthcare services and health insurance, said Christine Varney, assistant attorney general in charge of DOJ's Antitrust Division.

"Any time a dominant provider uses anticompetitive agreements, the market suffers. This cannot be allowed in Michigan. And, let me be clear, we will challenge similar anticompetitive behavior anywhere else in the United States," Varney said.

Andrew Hetzel, BCBSM vice president for corporate communications, said the suit is "without merit" and that the insurer would "vigorously defend our ability to negotiate the deepest possible discounts for our members and customers with Michigan hospitals."

"Negotiated hospital discounts are a tool that Blue Cross uses to protect the affordability of health insurance for millions of Michiganders. Through this lawsuit, the federal government seeks to deny millions of Michigan residents the lowest cost possible when they visit the hospital," Hetzel said.

DOJ's complaint focuses on the MFN clauses that guarantee that other health plans cannot get a better rate. DOJ alleges that BCBSM's MFN clauses with hospitals have caused hospitals to increase their prices to BCBSM's competitors and insulated BCBSM from competition. BCBSM has used MFNs or similar clauses in its contracts with at least 70 of Michigan's 131 general acute care hospitals, including major hospitals, the DOJ complaint alleges.

DOJ said the MFNs require a hospital either to charge BCBSM no more than it charges the insurer's competitors, or to charge the competitors a specified percentage more than it charges BCBSM, in some cases between 30% and 40%. The complaint further alleges that BCBSM's use of MFN has reduced competition in the sale of health insurance in Michigan by raising hospital costs to BCBSM's competitors, which discourages other insurers from entering or expanding in Michigan.

BCBSM agreed to raise the prices it pays some hospitals to get the MFNs, thus buying protection from competitors by increasing its own costs, the complaint alleges.

"When a large healthcare plan with a substantial market share, like Blue Cross, imposes an anticompetitive MFN in the marketplace, it harms competition and consumers. It prevents others from entering the marketplace and discourages discounting. The end result: fewer options and higher prices," Varney said.

Nonprofit BCBSM is the largest commercial health insurer in Michigan, with revenues exceeding $10 billion in 2009. BCBSM insures more than nine times as many Michigan residents as its next largest commercial health insurance competitor, covering more than 60% of Michigan's 3 million commercially insured residents.

Hetzel said the hospital discounts BCBSM negotiates "are a vital part of our statutory mission to provide Michigan residents with statewide access to healthcare at a reasonable cost."

"It does not make good business sense for Blue Cross Blue Shield of Michigan to reimburse a provider at a higher rate than we can otherwise negotiate," Hetzel said. "These kinds of low cost guarantees are widely used in a variety of contracts in a number of industries. In fact, the federal government routinely requires its own vendors to abide by these same low cost requirements."

The state of Michigan joined DOJ in its lawsuit, which was filed in U.S. District Court in Detroit.