During the past twenty years, most-favored-nation (MFN) clauses have proliferated in contracts between third-party payers and health care providers throughout the country. These clauses, in their various forms, require the provider of health care services to guarantee to the third-party payer that the provider will charge to that payer the provider’s very lowest prices for any services rendered.² While at first blush, such price guarantees would appear to be procompetitive and to encourage lower prices for healthcare services, the truth, in many instances, is far different.³

Commentators have recognized the pernicious effect that MFN clauses may have on competition, and have linked the emergence of MFNs to efforts by traditional fee-for-service insurers to thwart the rise of health maintenance organizations (HMOs) and other alternative health care delivery systems.⁴ The Federal Trade Commission, too, has challenged MFN clauses, in a non-health care context, alleging they have an unfair impact on price competition.⁵ The Antitrust Division of the Department of Justice, in 1988, also recognized the anticompetitive potential of MFN clauses – albeit in limited circumstances.⁶

The Antitrust Division’s recent initiation of two actions challenging MFN clauses in health care contracts, however, suggests that MFNs are now viewed far more skeptically⁷ and may indicate that the Division will take a far more aggressive enforcement position in the future.⁸

Editor’s Note: Please see the Antitrust section in this issue for an article on a settlement between Portland-based Oregon Dental Service and the Justice Department over MFN clauses. [Not available on this Web site.]

Justice Targets MFN Clauses
In 1988, the Antitrust Division of the Department of Justice recognized that MFN clauses, “[a]s a theoretical matter, … might be anticompetitive.”⁹ The Antitrust Division, however, also declared that in most instances MFN clauses should be viewed as “a legal attempt to adapt to competition”¹⁰ because they “ordinarily reflect good hard bargaining on the part of buyers of medical services – bargaining that yields lower health care costs . . . “¹¹ The Division opined that an MFN clause might be procompetitive because it could “help an insurer contain provider costs by linking the fees it pays to the fees paid by other payers who are better able to ascertain the reservation prices of providers,”¹² or might “facilitate bargaining by eliminating the risk that the provider will be able to hold up the third-party payer for more than [the provider] was willing to accept from the third-party payer’s competitors.”¹³

Nonetheless, at the time, the Division recognized MFN clauses to be vertically-imposed restraints of trade¹⁴ with significant horizontal price effects, subject to analysis under the rule of reason. Such restraints are condemned, if, on balance, they are anticompetitive.¹⁵ The Antitrust Division suggested, as an example of the anticompetitive potential of MFN clauses, the situation where an HMO is contemplating entry into a new market. The Division hypothesized that, as an incentive to providers, the HMO might provide certain volume guarantees or utilize physician time in such a way as to decrease time dedicated to patients during office visits. By so doing, the Division stated, the HMO in reality was seeking to purchase “a different service” than the physician was providing to his or her other payers.¹⁶ The Antitrust Division concluded that, to a physician signing an agreement with a dominant insurer containing an MFN clause, “the cost of offering a discount would be greatly in excess of the reduced fees paid by the new patient.”¹⁷ As a result, “the physician may be discouraged from offering a discount that would merely fill a few openings in his or her appointment book.”¹⁸

The Division then identified two prerequisites to a finding that an MFN clause had an anticompetitive impact on a market under a rule of reason analysis:

First, the third-party payer must be so significant a factor in the market that a very high percentage of all providers feel they must contract with it. And, second, that payer must account for such a large portion of its providers’ total billings that there is not sufficient provider capacity available to support entry into the market by other third-party payers.¹⁹

As a guideline, the Division then indicated that “when the third-party payer [seeking the MFN clause) supplies at least 35 percent of the business of providers in the market — a function of the number of providers contracting with the payer and the importance of the payer to each provider — further analysis is warranted.”²⁰ The Division then would examine such factors as whether the clause was implemented for anticompetitive reasons and whether a competing payer could contract with a sufficient number of providers to establish a viable competitive plan.

DOJ Analysis’ Eschews Bright-Line Rules
For a time, the Antitrust Division investigated, but filed no actions challenging MFN clauses.²¹ Within the past year, however, it has filed two such actions. The first, United States and State of Arizona v. Delta Dental Plan of Arizona, Inc., Civil No. 94-1793 (D. Ariz.), was brought Pursuant to Section 1 of the Sherman Antitrust Act against Delta Dental Plan of Arizona, Inc, a member of a nationwide network of dental insurers.²² Delta Dental contracted with businesses, government agencies, and other organizations to provide pre-paid dental-care services to the employees of those organizations. Delta Dental’s contracts with participating dentists always contained some version of an MFN clause.

Delta Dental was alleged to be the dominant dental care provider in Arizona, with approximately 85 percent of all dentists licensed to practice in Arizona providing services for Delta Dental. The complaint also alleged that most dentists in Arizona received a significant portion of their income from serving Delta Dental patients.²³ According to the complaint, the cost to participating dentists of accepting lower fees from Delta Dental was too great to permit them to discount the fees charged to other payers. The complaint further alleged that it would be too costly to participating dentists to terminate their participation in Delta Dental’s plan to avoid the MFN clause and to continue to offer discount services. The Antitrust Division claimed that hundreds of dentists were forced, by virtue of Delta Dental’s enforcement of its MFN dame, to resign from discount dental plans attempting to compete with Delta Dental. There was, however, no reference in either the complaint or the competitive impact statement that Delta Dental controlled thirty-five percent of the business of providers in the relevant market.

Subsequently, the Division again challenged, pursuant to Section 1 of the Sherman Antitrust Act, an MFN clause imposed by Vision Service Plan, a national vision care insurer. United States v. Vision Service Plan, Civil Action 94CV02693 (D.D.C. 1994). Vision Service Plan was alleged to be the largest vision care insurance plan in the country, with operations in forty-two states and annual revenues exceeding $500 million. Approximately 17,000 optometrists and ophthalmologists contracted to become “panel doctors” with Vision Service, and, according to the complaint, each “Panel Doctor Agreement” contained some version of an MFN clause.

The complaint further alleged that “in all or parts of many states in which [Vision Service] does business, it has contracted with a relatively high percentage of optometrists in private practice.”²⁴ The complaint further alleged that “payments from [Vision Service] have constituted a significant portion of -most panel doctors’ revenue from the provision of vision services to, patients having some form of vision care insurance coverage.”²⁵ The Division concluded that Vision Services enforcement of the MFN clause resulted in:

1. the discontinuation of discounts by its panel doctors to competing pay ;
2. the refusal of the panel doctors to join competing plans; and
3. the departicipation of panel doctors in competing plans.

Again, as in Delta Dental, the complaint did not allege and the Competitive Impact Statement did not state that Vision Service supplied thirty-five percent of the business of optometrists or ophthalmologists in the relevant market.

Conclusion
Delta Dental and Vision Care appear to signify a change in the approach by the Antitrust Division towards MFN clauses. A thirty-five percent share by a payer of the total provider market no longer appears to be a prerequisite to investigation or challenge. In our opinion, this rejection of a market-share screen will permit the Division to assess more accurately the true impact of MFN clauses in the relevant provider market, because the competitive impact of an MFN clause is often related to the perception by providers of the dominance of a particular payer in the relevant market, rather than to the payees actual size.²⁶ When providers believe that it would be uneconomic to terminate their relationships with such payers, departicipation, refusals to deal, and the absence of discounting may, and indeed do, occur in markets where the market share of the payer is significantly lower than thirty-five percent. While factors such as market penetration and market share, of course, will remain important considerations, the single most important factor, in our view, is whether providers believe they can terminate their relationship with the dominant payer to avoid its MFN clause.

The Antitrust Division and state attorneys general have now developed a coherent and viable analytic approach to the enforcement of MFN clauses. As a result, enforcement action by the Antitrust Division and state, attorneys general is increasingly likely. It remains to be seen whether courts adopt the new methodology. If they do, the future of MFN clauses is bleak.

ENDNOTES

1. Robert M. Langer is a partner at the firm of Wiggin & Dana, in the Hartford, Conn., office. Mr. Langer is head of the firm’s Antitrust/Trade Regulation Practice Group. Prior to joining Wiggin & Dana, Mr. Langer was the Assistant Attorney General is charge of Antitrust and Consumer Protection for Connecticut, and served as Chairperson of the National Association of Attorneys General Multistate Antitrust Task Force from 1990 to 1992. Thomas J. Witt is an associate in Wiggin & Dana’s Litigation Department and a member of the firm’s Antitrust/Trade Regulation Practice Group. 
2. Most-favored-nation clauses may take many forms. Typically, they require the provider to charge to the payer the provider’s “usual fee” with the “usual fee” defined to be “the lowest fee charged or offered and received as payment in full.” Similarly, a most-favored-nation clause may require that a provider not “charge fees to an insurer higher than the fees the provider accepts from any other non-governmental group, group plan, or panel.” 
3. MFNs, because they typically are demanded by payers able by virtue of their perceived dominance in the market to impose them upon unwilling providers, perversely often constitute a powerful disincentive to any discounting Whatsoever. For example, the prospect of extending a discount offered to one, or a small group of patients, to the much larger percentage of a provider’s patients covered by the dominant payer multiplies the effect of the discount, thereby potentially rendering the provider unable or unwilling to grant the discount at all. The MFN clause in such a case has resulted in higher health-care costs and fewer options for consumers of health-care services than would otherwise prevail. 
4. See Arnold Celnicker, A Competitive Analysis of Most Favored Nations Clauses In Contracts Between Health Care Providers and insurers, 69 N.C. Law Rev. 863 (1991); John Miles, Health Care & Antitrust Law §15.04[2] (1992). 
5. In re Ethyl Corp., 101 F.T.C. 425 (1983), rev’d sub nom., E.I. Du Pont de Nemours & Co. v. Federal Trade Commission, 729 F.2d 128 (2d Cir. 1984). 
6. See Remarks of Charles F. Rule, Assistant Attorney General, Antitrust Division of the United States Department of Justice, at the “Antitrust and Health Care” Seminar in North Haven, Connecticut on March 11, 1988 (hereinafter “Rule Remarks’). 
7. United States and State of Arizona v. Delta Dental Plan Of Arizona, Inc., Civil No. 94-1793 (D. Ariz.)(3 HLR 1261, 9/15/94); United States v. Vision Service Plan, Civil No. 94-2693 (D.D.C.) (3 HLR 1822, 12/22/94). 
8. Courts, to date, have generally viewed most-favored-nation clauses as procompetitive, representing the exercise of “good business sense” by payers. See, e.g., Ocean State Physicians Health Plan, Inc. v. Blue Cross and Blue Shield of Rhode Island, 883 F.2d 1101 (Ist Cir. 1989), cert. denied, 110 S. Ct. 1473 (1990); Blue Cross and Blue Shield of Michigan v. Michigan Ass’n of Psychotherapy Clinics, 1980-2 Trade Cas. (CCH) §63,351 (E.D. Mich. 1980); Michigan Ass’n of Psychotherapy Clinics v. Blue Cross and Blue Shield of Michigan, 118 Mich. App. 505, 325 N.W.2d 471 (1982); Kitsap Physician Service v. Washington Dental Service, 671 F. Supp. 1267 (W.D. Wash. 1987); but see Reazin v. Blue Cross and Blue Shield of Kansas, 663 F. Supp. 1360 (D. Kan. 1987). 
9. Rule Remarks at 21. 
10. Id. 
11. Id. 
12. Id. 
13. Id. 
14. ” MFN clauses may, in certain instances, be considered horizontal imposed restraints on trade. In United States and State of Arizona v. Delta Dental Plan of Arizona, Inc., Civil No. 94-1793 (D. Ariz.), for example, the Antitrust Division alleged a horizontal restraint if trade since dentists comprised a majority of Delta Dental’s board of directors. 
15. Id. 
16. The Division doubted that a payer seeking to enforce an MFN clause .”would acknowledge these differences.” 
17. Id. 
18. Id. 
19. Id. at 22-23. 
20. Id. at 23-24. 
21. See Letter from Steven Kramer, Attorney, Antitrust Division, to Cynthia M. Maleski, Pennsylvania Insurance Commissioner (May 5, 1994). 
22. The State of Arizona acted with the Antitrust Division of the Department of Justice in bringing the action, alleging that Delta Dental’s enforcement of its MFN clause violated the Arizona Uniform Antitrust Act, A.R.S. §44-1402. 
23. Neither the complaint nor any documents filed with the settlement agreement indicate the specific percentage of Arizona dentists’ revenues accounted for by Delta Dental. 
24. Complaint at 18. 
25. Id. 
26. Theoretically, even a payer with no more than a five percent share of the relevant market could have a significant adverse impact upon price competition through enforcement of an MFN clause. This would occur when the payer with the five percent share is the perceived dominant actor. In such an instance, the providers must deal with that payer, and thus that payer’s price becomes the floor for the remainder of the market.

Co-authored with Thomas J. Witt

BNA Health Law Reporter, V. 4, Reprinted with Permission