U.S. Sues Michigan Blue Cross Over Pricing

U.S. Sues Michigan Blue Cross Over Pricing
By ROBERT PEAR
Copyright by Bloomberg News
Published: October 18, 2010
http://www.nytimes.com/2010/10/19/business/19insure.html?th&emc=th


WASHINGTON — The Justice Department sued Blue Cross Blue Shield of Michigan on Monday, asserting that the company, the state’s dominant health insurer, had violated antitrust laws and secured a huge competitive advantage by forcing hospitals to charge higher prices to Blue Cross’s rivals.

The civil case appears to have broad implications because many local insurance markets, like those in Michigan, are highly concentrated, and Blue Cross and Blue Shield plans often have the largest shares of those markets.

In the Michigan case, the Obama administration said that Blue Cross and Blue Shield had contracts with many hospitals that stifled competition, resulting in higher health insurance premiums for consumers and employers.

The State of Michigan was also a plaintiff in the lawsuit, filed in the Federal District Court in Detroit.

Blue Cross and Blue Shield, like most insurers, contracts with hospitals, doctors, labs and other providers for services. The lawsuit took direct aim at contract clauses stipulating that no insurance companies could obtain better rates from the providers than Blue Cross. Some of these contract provisions, known as “most favored nation” clauses, require hospitals to charge other insurers a specified percentage more than they charge Blue Cross — in some cases, 30 to 40 percent more, the lawsuit said.

Christine A. Varney, the assistant attorney general in charge of the antitrust division of the Justice Department, said these requirements were “pernicious.”

“Our lawsuit alleges that the intent and effect of Blue Cross Blue Shield of Michigan’s contracts is to raise hospital costs for competing health plans and reduce competition for the sale of health insurance,” Ms. Varney said. “As a result, consumers in Michigan are paying more for their health care services and health insurance.”

The contract terms, she said, discouraged discounts and prevented other insurers from entering the market. The lawsuit also asserts that Blue Cross, in effect, bought protection from competition — by agreeing to pay higher prices to certain hospitals to induce them to agree to the “most favored nation” clauses.

Blue Cross Blue Shield of Michigan said the lawsuit had no merit. It said the contract clauses attacked by the Justice Department were a tool to secure the lowest possible hospital costs, and the deepest possible discounts, for the more than four million people it served.

“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,” said R. Andrew Hetzel, a spokesman for the company. “These kinds of low-cost guarantees are widely used in a variety of contracts in a number of industries.”

Blue Cross Blue Shield of Michigan, a nonprofit company, is by far the largest provider of commercial health insurance in the state, with revenue of more than $10 billion in 2009. It insures more than nine times as many Michigan residents as its next largest commercial health insurance competitor, covering more than 60 percent of Michigan’s three million commercially insured residents, the government said.

The lawsuit comes in the context of a national debate over the cost of health care and health insurance. For months, the White House has denounced insurance premiums as excessive and has urged state officials to deny or reduce rate increases sought by insurers.

On Monday, the Obama administration asked the Connecticut insurance commissioner, Thomas R. Sullivan, to reconsider a recent decision approving increases as high as 47 percent for individual policies sold by Anthem, a unit of WellPoint.

For their part, insurers say the premiums reflect increases in the cost of medical care. While blaming insurers, they say, President Obama rarely puts pressure on hospitals, doctors or makers of medical equipment to hold down the prices they charge.

Herbert J. Hovenkamp, a professor at the University of Iowa and co-author of the leading treatise on American antitrust law, said it was probably all right for a buyer to tell a seller, “We want your best price.”

But, Mr. Hovenkamp said, “When a dominant firm requires that rivals pay more, that is typically a mechanism for increasing the dominant firm’s market share at the rivals’ expense.”

The Government Accountability Office, an investigative arm of Congress, has found growing concentration in insurance markets for small groups, typically those with 50 or fewer employees. Its latest survey, for 2008, said that a Blue Cross and Blue Shield company was the largest carrier in 36 of the 44 states that identified their top carriers.

In its complaint, the Justice Department said that Blue Cross required two hospitals in Saginaw, Mich., to charge most other insurers at least 39 percent more than the hospitals charged Blue Cross. Likewise, it said, in the Detroit area, the contract required three hospitals to “charge Blue Cross’s significant competitors at least 25 percent more than they charge Blue Cross.”

The business of insurance has been largely exempt from federal antitrust law since 1945. But Justice Department officials said the Michigan hospital contracts were not part of that business.

In a 1979 case involving Blue Cross of Texas, the United States Supreme Court said the antitrust exemption applied to activities at the heart of the insurance business, the “underwriting or spreading of risk” — not to an insurer’s contracts for the purchase of goods and services, which the court said were “legally indistinguishable from countless other business arrangements.”