The Blue Cross of Michigan Suit – Yes, It Affects You

Yesterday the NYTimes reported the Justice Department is suing Blue Cross Blue Shield of Michigan for allegedly violating antitrust laws. BCBSMI is accused of requiring hospitals to give BCBSMI ‘most favored nation’ pricing, thereby increasing the prices paid by other health plans and stifling competition.

 According to the Times, the Blues contracts had “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 Varney, the head of the antitrust division in the Justice Department, said “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…”

 The lawsuit also claims that Blue Cross agreed to pay higher prices to certain hospitals to get them to agree to the “most favored nation” clauses.

 There are three issues here that deserve your attention.

 First, there is no ‘free market’ in health insurance. Most markets are dominated by a single, or at most two, health plans. This is clearly an effort by the Feds to make a statement, to force big health plans and their co-operating health systems and hospital groups to back off and ‘let’ smaller insurers into the market. No one, least of all big insurance companies, likes to be sued by the Federal government, and this very public case has undoubtedly started many health plan legal departments scrambling to prepare briefs for their CEOs detailing their potential liability for the same ‘offenses’.

 As a corollary, smaller health plans cannot compete with the big boys because they don’t have the medical dollars required for bargaining purposes. Why would St Tony’s Hospital give a big discount to Mom and Pop’s Health Plan? The answer is simple – they wouldn’t, because they don’t have to – Mom and Pop don’t have any patient dollars that they would (potentially) move to another hospital, so there’s no reason for St Tony to do a deal.

 (This basic fact is lost on those politicians and pundits who think that selling health insurance across state lines is a panacea. Health plans’ costs are primarily, and overwhelmingly, determined by the medical costs in the areas they operate – and legalizing cross-border sales of insurance will do nothing to reduce premiums or improve access)

 The suit is apparently an effort by the Feds to address this reality, and may well be part of a larger strategy to improve competition ahead of implementing health reform.

 Second, many health plans and insurers have most favored nation clauses in their contracts – workers comp payers too. This suit may – and most certainly should – encourage those payers to reconsider the purpose of and risk in those clauses.

 I hasten to add that the accusations against BCBSMI go beyond simple MFN clauses; according to the Times, “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.”

 Finally, this highlights the symbiotic payer – provider relationship that is the fabric of our current health system – dominant health plans and dominant health systems working very closely together. If we as a society decide this isn’t the health system we want, than we’re going to have to get very litigious for a very long time. It has taken a century for the system to evolve to this point, and will take decades for any material change. In some instances this works very, very well – think Geisinger, Mayo, Marshfield.

 In others, it may well ‘stifle competition’ But lets get serious – how effectively could a newcomer, or even a second tier health plan, really compete without the huge dollars necessary for investments in IT; care management; provider contracting, analysis, and relations; marketing and brand development; and distribution?

 It couldn’t, and it can’t.

 Like it or not, competing in health insurance, as in many industries, puts a premium on size and scale.

 What does this mean for you?

 We can already see this, as smaller health plans are being snapped up by bigger competitors, their management all-too-clearly reading the writing on the wall that survival in the post-reform world will require size, and scale, and money far beyond the grasp of most smaller health plans.

 Note – A subsidiary of BCBSMI is a consulting client of HSA. While I have no knowledge that in any way pertains to this action, I do know that as an organization BCBSMI is quite sensitive to and cautious about any actions that might be construed to harm competition or interfere in provider practice.

 Posted by on October 19, 2010 6:26 AM | Permalink

Editor’s Note: This article was written by Joe Paduda.