DOJ v. Blue Cross Blue Shield of Michigan

Josh Wright —  22 October 2010

This should be an interesting case to watch.  As I’ve discussed, if one excludes policy speeches and restricts focus to enforcement action and activity, it has been thus far difficult to distinguish the Obama Antitrust Division from the Bush II Antitrust Division when it comes to single firm or allegedly exclusionary conduct.  But the DOJ’s recent announcement of case against Blue Cross Blue Shield of Michigan looks like the DOJ’s first major “exclusionary” conduct case — despite the fact that it is brought under Section of the Sherman Act rather than Section 2 (there is also a state antitrust law claim).

The case is about BCBS Michigan’s Most Favored Nation clauses in contracts with their customers, i.e. hospitals.  The Complaint alleges that BCBS enters into two types of these MFN clauses.  The first type, “MFN-Plus,” with 22 hospitals “require the hospital to charge some or all other commercial insurers more than the hospital charges Blue Cross, typically by a specified percentage differential.”  The second type of MFN clauses merely require the hospital to give BCBS prices that are equal to the lowest offered to rivals.   According to the Complaint, “Blue Cross currently has agreements containing MFNs or similar clauses with at least 70 of Michigan’s 131 general acute care hospitals. These 70 hospitals operate more than 40% of Michigan’s acute care hospital beds.”  The allegation is that BCBS has used MFN clauses to raise its own costs, but disproportionately raise the costs of its rival hospitals.

The case will is interesting because while there is a robust theoretical empirical literature on the possible competitive harms arising from of MFN’s, economists have also identified pro-competitive justifications for the contracts.  Indeed, one observes MFNs in all sorts of product markets which cannot plausibly be said to involve firms with market power.  BCBS describes the MFN clauses, in their own press release, as follows:

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 possible cost when the visit the hospital.

And what about the DOJ suit?  BCBS comments further:

This lawsuit is without merit, and we will vigorously defend our ability to negotiate the deepest discounts possible for our members and customers with Michigan hospitals.

In cases like this, the burden lies with the DOJ to provide convincing evidence that this particular use of MFNs was anticompetitive, did not lower costs or further efficiency, and injured consumers rather than merely harming BCBS rivals.  The complaint, of course, alleges all of this.   But if BCBS’ litigation position is anything like what appears in the press release, the DOJ will be put to its proof on this front.  While the Section 2 and Section 1 doctrine differs here and there on these issues, it is safe to say that the DOJ faces a heavy burden of proof on competitive effects.  This is especially true for MFN clauses, business activity for which there are at least simple and plausible pro-competitive explanations (whether or not they apply here).

Given the health care reform debate — and the not so hard to find link to current debates about the appropriate role of the federal government in health care — I suspect the case will get a great deal of attention.

2 responses to DOJ v. Blue Cross Blue Shield of Michigan

  1. 

    Could you point me and your readers to some of the empirical literature on this topic? Thanks.

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  1. Carl Shapiro on BCBS and the New Merger Guidelines « Truth on the Market - November 18, 2010

    […] TOTM readers.  The first is a discussion of the DOJ’s case against Blue Cross Blue Shield, which as discussed here, turns on an economic analysis of the use of most-favored nations clauses in contractual […]