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Justice Department Sues Michigan Blues on Antitrust Grounds

By John Reichard, CQ HealthBeat Editor

October 18, 2010 -- The Obama administration upped the ante on Monday in its battle against rising health insurance premiums, filing a lawsuit against Blue Cross Blue Shield of Michigan.

The lawsuit charges the insurer with blocking other insurers from entering the market through its contracts with 70 of the state's 131 general acute-care hospitals. The contracts are forcing residents of the state to pay more for insurance, the suit charges.

The Justice Department suit targets contract provisions negotiated by the Michigan Blues requiring hospitals to charge it prices no higher than the facilities charge other insurers. In some instances, the hospitals are required to charge higher prices to insurers competing with the Blues. The provisions are called "most favored nation" clauses, or MFNs for short.

The clauses have caused hospitals to increase prices to insurers competing with the Michigan Blues, Justice Department officials said. By raising hospital costs to its rivals, the Blues' use of the MFNs "discourages other health insurers from entering into or expanding within markets throughout Michigan," according to a Justice Department statement. The suit also charges that the Michigan Blues obtained the MFNs by agreeing to raise the prices it pays certain hospitals, thus buying protection from competition by increasing its own costs.

"Any time a dominant provider uses anticompetitive agreements, the market suffers," Christine Varney, assistant attorney general, said in prepared remarks. "And let me be clear, we will challenge similar anticompetitive behavior anywhere else in the United States," Varney told reporters in a news briefing.

The Michigan insurer issued a statement saying the suit is "without merit." But Senate Judiciary Committee Chairman Patrick J. Leahy, D-Vt. suggested it would have wide impact.

"I applaud the Department of Justice for employing our nation's antitrust laws to break up the stranglehold that massive insurance companies have on our health care industry," Leahy said in a statement. "Given that much of the health insurance is shielded from the antitrust laws by an antiquated exemption, it is perhaps not surprising that insurers also are engaging in anticompetitive conduct that falls outside the exemption," he added. Leahy is pushing for Senate passage of legislation (S 1681) already approved by the House that would broaden federal powers to crack down on insurers on antitrust grounds.

Blue Cross MFNs "include agreements with 22 hospitals that require the hospital to charge some or all other commercial insurers more than the hospital charges Blue Cross," in some cases up to 40 percent more, the complaint says. More than 40 of the other agreements are with small community hospitals, requiring them to charge the Blues rates as least as low as those asked of other insurers, the complaint notes, adding that those facilities are typically the only hospitals in their communities.

According to the suit, "Blue Cross is far and away the largest provider of health insurance in Michigan, with more than 60 percent of commercially insured lives." Its policies cover more than three million Michigan residents, "more than nine times as many Michigan residents as its next largest commercial health insurance competitor," the suit adds.

"This lawsuit is without merit, and we will vigorously defend our ability to negotiate the deepest possible discounts for our members and customers with Michigan hospitals," said Andrew Hetzel, communications vice president for the Michigan Blues. "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 lost cost requirements."

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