Hospital-Payor Contracting: Antitrust Concerns Surround Exclusive Contracts & Most-Favored Nation Clauses

Hospitals and health systems today operate in one of the most challenging environments in the history of the healthcare industry. Regulatory and reimbursement pressures continue to tax facilities, and the growth of government-sponsored healthcare programs further constrain revenues. In response, many providers have begun to more closely focus on their contracts with private payors, and in some cases, enter into unique agreements, such as exclusive and/or most-favored-nation agreements. While these types of contracts can be attractive to both hospital and payor, Angelo Russo, JD, and Richard Greenberg, JD, both partners in McGuireWoods' Chicago office, recommend dominant providers enter into such contracts with caution, as they could draw attention from antitrust regulators or plaintiffs' lawyers.

Exclusive contracts
Under an exclusive contract, a health system or other provider might agree to lower reimbursement rates than it would typically accept (but which could still be among the highest in the market) so long as the payor agrees to contract with none of the system's competitors in the same market. Most concerning, from an antitrust standpoint, is when this type of agreement occurs between a payor and a dominant or "must-have" hospital or health system in a market, says Mr. Russo. When a dominant provider contracts exclusively with a payor, proponents argue lower prices for consumers result. Opponents, however, contend these contracts allow dominant providers to squeeze out the competition. As such, dominant hospitals must be careful when entering into exclusive contracts and should ensure such contracts don't increase healthcare pricing or inhibit competition.

United Regional Health Care System in Wichita Falls, Texas, was recently on the receiving end of the regulatory scrutiny surrounding this type of contract.[1] In February 2011, the U.S. Department of Justice and the Texas Attorney General's office filed a complaint against the health system, which controlled approximately 90 percent of acute-care inpatient services and 65 percent of outpatient surgical services in the market. The government's complaint alleged United Regional systematically required most commercial health insurers to enter into contracts that prohibited them from contracting with the system's competitors. Additionally, the DOJ and AG argued United Regional's average per-day rate for inpatient hospital services offered to commercial health insurers under the exclusive contracts was around 70 percent higher than the rate charged by its closest competitor for the same services.

According to a DOJ statement about the complaint:

"Since United Regional is a must-have hospital for any insurer that wants to sell health insurance in the Wichita Falls area, and because the penalty for contracting with United Regional's rivals was so significant, almost all insurers offering health insurance in Wichita Falls entered into exclusionary contracts with United Regional. As a result, competing hospitals and facilities could not obtain contracts with most insurers and were less able to compete, helping United Regional maintain its monopoly in the relevant markets and raising healthcare costs to the detriment of consumers."

Simultaneously with filing complaint, the DOJ and AG proposed a final judgment and settlement, agreed to by United Regional. While the final judgment in this case only applies to United Regional, it sets forth four specific rules for the system that should be noted by other providers, says Mr. Greenberg.

  • The health system may not condition pricing offered to an insurer on whether or not the insurer contracted with other hospitals;
  • The health system may not refuse to contract with an insurer or terminate a contract because the insurer has contracts with competitors;
  • The health system may not prevent insurers from encouraging the use of other medical providers; and
  • The health system may not provide "market-share" discounts, or discounts beyond the scope of the system's services. That is, discounts may not be conditioned on an insurer's purchases at the health system meeting a specified percentage of that insurer's total purchases.

"If hospital has market power or a dominant share of the market, it needs to be conscious of agreements with payors," says Mr. Russo. "Not every exclusive contract will run afoul [or antitrust regulations], but systems must be cautious of contracts that prohibit competitors' growth or entrance into a market."

Mr. Greenberg adds, "An exclusive contract with one small insurer is unlikely to be a problem, but agreements with several insurers could be looked at in the aggregate."

As such, hospitals should analyze their market share for services as well as the potential market foreclosure that would result from exclusive contracts. Antitrust regulations do not provide a specific threshold of what constitutes an anti-competitive agreement, says Mr. Russo. "In some cases, antitrust complaints have been made against organizations with contracts that foreclose 35-40 percent of the market.  Other times it's a little more or a little less," he says.

Most-favored nation clauses
Most-favored nation clauses are another type of hospital-payor agreement that may draw regulatory scrutiny. Under a most-favored nation clause, hospitals and health systems agree to offer their most favorable rates to the insurer, and if the hospital later offers a lower rate to another insurer, it must then offer that rate to the most-favored insurer. Proponents of these clauses say they allow insurers to be confident that their rate is no greater than their competitors; however, opponents argue these clauses essentially provide purchasing protection from other competitors, says Mr. Russo. "Using these clauses can chill a hospital's willingness to provide lower rates or discounts," he says.

The clauses also stifle new health plans from entering the market. "New payors on the scene often enter a market by offering a lower price," explains Mr. Greenberg. Hospitals are more willing to offer better rates to higher-volume payors than to lower-volume ones.

Payors are generally more at risk for antitrust action related to most-favored nation clauses. However, a most-favored-nation clause can facilitate coordination among health care providers in certain instances where the insurer imposing the clause is provider-controlled.  For example, where a provider-controlled insurer has access to the rates of competing providers, it might create a price floor for providers by using a most-favored-nation clause as an enforcement mechanism to monitor and curtail possible price cutting by other providers, explains Mr. Russo. Additionally, hospitals are at risk if a private plaintiff brings charges of conspiracy between the hospital and a health plan, says Mr. Greenberg.

In October 2010, the DOJ and the Michigan Attorney General's office filed suit against Blue Cross Blue Shield of Michigan [2], alleging the insurer violated antitrust regulations by entering into most-favored-nation agreements with several hospitals and health systems in the state. According to the complaint, the agreements required hospitals to charge  "significant competitors" of Blue Cross rates at least 25 percent more than Blue Cross paid. BCBS requested the case be dismissed, but in June a federal judge dismissed BCBS's request, allowing the case to proceed. A number of class-action suits were also filed by private plaintiffs against BCBS and a number of Michigan hospitals that entered into the agreements.

Given the increasing scrutiny from the DOJ and state attorneys general around payor-provider contracting, health systems and other providers should carefully examine all payor contracts for potential antitrust action and be cautious of any agreement that could be accused of reducing competition or protecting prices.


[1] United States v. United Regional Health Care System, No. 7:11-cv-00030 (N.D. Tex. Feb. 25, 2011)
[2] United States v. Blue Cross Blue Shield of Michigan, No. 2:10-cv-14155 (E.D. Mich. 2010)

More Articles on Antitrust Issues:

FTC's Stance Toward Hospital Mergers Grows More Aggressive
BCBS of Michigan Asks Judge to Dismiss Unfair Contracting Suit
FTC Announces Changes to Premerger Filing Requirements

Copyright © 2024 Becker's Healthcare. All Rights Reserved. Privacy Policy. Cookie Policy. Linking and Reprinting Policy.


Featured Whitepapers

Featured Webinars