Amid the allegations lodged last month by the U.S. Department of Justice against Apple and a bevy of e-book publishers, three little letters popped up in the antitrust suit: MFN, short for “Most Favored Nation.” According to the complaint, the MFN provision between Apple and the publishers was “unusual”—“instead of an MFN designed to protect Apple’s ability to compete, this MFN was designed to protect Apple from having to compete on price at all.”

A common type of arrangement used throughout commerce, MFNs are often viewed as having pro-competitive effects, but not always. The thing about MFNs is that they cut both ways—as a pro-competitive tool that passes discounts along to consumers, and also as an anti-competitive mechanism that creates barriers to entry for competitors and raises prices.

“You’re really talking about something that sits on a knife’s edge,” says Richard Wolfram, an independent attorney based in New York City who specializes in antitrust.

A typical MFN that a buyer negotiates with a seller goes like this: If you decide to give a better price to another buyer, you agree to give me that price, too. Down the line, consumers can reap the benefit of such a discount.

MFNs can have other pro-competitive effects, too. “For example, they help people in the market know what prices are, and they cut down on the necessity to price shop,” says Jeff Miles, chair of the antitrust and competition group at Ober Kale in Washington, D.C. and a former attorney in the Justice Department’s antitrust division. “In the case of a long-term contract, they also can assure a long-term price if prices are fluctuating.”

But antitrust problems tend to arise when the buyer of a given service “has a substantial degree of market power or a large market share,” Miles explains.

And while the anti-competitive facet of MFNs is clearly raised in the Apple lawsuit, a Justice Department suit filed against Blue Cross Blue Shield of Michigan better illustrates how MFNs can be particularly thorny in the context of the health care sector.

“I think it’s fair to say [antitrust enforcers] would be interested in MFNs in any context,” says Miles. “But the problems they’ve seen have arisen in the health care context. And one of the reasons is a number of Blue Cross plans around the country have very large market shares.”

Indeed, the Justice Department alleges that Blue Cross covers 60 percent of the commercially insured population in Michigan and that, in entering into agreements with area hospitals, it has used two types of MFN clauses to ill effect for competitors and consumers. They’re described in the complaint—and highlighted in a detailed article Wolfram has written on the case for the blog Antitrust Connect—thus:

The Equal-To MFNs guarantee that hospitals will charge Blue Cross prices that are equal to the lowest prices charged to its competitors. Blue Cross has such clauses in contracts with some 40 small community hospitals. This is the standard type of MFN, in the general case. Here, however, a community hospital that declines to enter into such agreements is paid about 16 percent less by Blue Cross than if it accepts the MFN. Thus, the MFN, rather than lowering prices, raises the price floor for all purchasers, making it harder for Blue Cross’s rivals to compete and likely resulting in higher prices for consumers.

The MFN-Plus clauses guarantee that hospitals will charge Blue Cross lower prices for services than those charged to its competitors. Its MFN-Plus contract clauses with some 22 hospitals (which operate 45 percent of the state’s tertiary care hospital beds) typically specify the greater percentage amount that they must charge to competing insurers, requiring some to charge as much as 40 percent more than they charge Blue Cross. The percentage increment—the “Plus” factor—guarantees that Blue Cross’s competitors cannot obtain hospital services at prices comparable to those Blue Cross pays, and this limits other health insurers’ ability to compete, according to the complaint.

“We allege that these MFNs guarantee that no other insurer can get a better rate than Blue Cross,” said Sharis Pozen, then-acting assistant attorney general for the DOJ’s antitrust division, during a speech in March [PDF]. “Blue Cross’s MFNs inhibit competitive entry and expansion from other health insurance plans and likely raise insurance rates.”

In that same speech, Pozen also put the rest of the industry on notice, saying that the Justice Department had already begun to coordinate with attorneys general in every state, the District of Columbia, and Puerto Rico on the MFN issue. “We have combined the division’s MFN expertise with the states’ knowledge of local market conditions to open investigations of various MFN clauses in an number of markets.”

Those are words to pay attention to, says Wolfram. “Companies that use MFNs in the health care arena, and outside [the industry], would be very well-advised to make sure that the MFNs are structured in such a way that the fair interpretation of the intent and the effect are at least no worse than competitively neutral,” he says.

Antitrust analysis is no different in health care than it is in any other industry, says Miles. “The difference is, in few other industries do you see market shares the size you see in some health insurance markets.”

He adds: “Market share is the key variable.”

Miles cautions that it could be “dangerous” for health plans with market share above 30 or 35 percent to use an MFN. He urges health care companies to “carefully calculate your market share as both a seller of health insurance and a buyer of provider services,” he says, “and if that market share is above a certain level, you had better have a very good justification for using the clause.”

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