by Jeffrey Brennan and Carrie Amezcua
On Tuesday, the North Carolina legislature has enacted into law, pending the governor’s signature, a prohibition on the use of most favored nations (MFN) clauses in contracts between commercial health insurers and providers.
The two-page bill, titled “Freedom to Negotiate Health Care Rates,” lists "prohibited contract provisions related to reimbursement rates." The bill prevents a commercial health insurer from prohibiting a health care provider with which it contracts from entering into a contract with another insurer at equal or lower rates. In addition, insurers are not permitted to require a provider to accept a lower rate from the contracting insurer, or to require a renegotiation of rates, in the event that the provider agrees to provide equal or lower rates to another commercial health insurer. Next, the bill prohibits an insurer from terminating a provider that agrees to provide services at lower rates to another insurer. An insurer is also prevented from requiring that a provider charge another commercial health insurer a higher rate. Finally, insurers can no longer require that providers disclose the provider’s contractual rate with another health insurer.
MFN clauses have been attracting attention in recent years, particularly in the health care field. North Carolina’s bill follows closely on the heels of Michigan’s ban on MFN clauses passed in March 2013. That action led the Department of Justice (DOJ) to file a motion asking the court to dismiss an antitrust suit against Blue Cross Blue Shield of Michigan (BCBSM), in which the DOJ alleged the MFN clauses in BCBSM’s contracts with hospitals stifled competition, raised health care costs and harmed consumers. Ohio has a similar ban on MFN clauses.
Last year, the DOJ and the Federal Trade Commission (FTC) held a public workshop specifically to discuss the competitive effects of MFN clauses. The workshop featured panels discussing economic theories concerning MFN clauses and why they are used, and the legal treatment of and industry experiences with MFN clauses, among other topics.
MFN clauses are evaluated under the antitrust law rule of reason, because, depending on the applicable facts and circumstances, such provisions have been found to have procompetitive or anticompetitive effects. A recognized procompetitive feature of MFN clauses is lower transaction costs, which provides price stability over time and ensures that a buyer is not treated any worse than its rivals. The DOJ argued in the BCBSM case, on the other hand, that the MFN clauses there reduced incentives to lower prices, facilitated coordination and prevented entry.
Health care clients using or considering the use of MFN clauses should consult antitrust counsel to assess their legal risks in light of these developments.
