The Justice Department is suing Blue Cross Blue Shield of Michigan for its use of “most favored nation” clauses in contracts with hospitals:

Blue Cross and Blue Shield, like most insurers, contracts with hospitals, doctors, labs and other providers for services. The lawsuit took direct aim at contract 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.

This kind of contract has several effects. Most obviously, it deters entry by other health insurance companies that automatically face higher costs than BCBS Michigan because of the most favored nation clause. BCBS then has more monopoly power and can charge higher prices for its products. Second, a competitor is going to have a hard time negotiating a low price with a hospital as any low price they negotiate also has to be passed on to BCBS to maintain the 40% difference. The hospital is in effect giving a double discount and is less likely to accept such a large cut in profits on a large BCBS contract to get incremental business from a small health insurance company. Third, BCBS has less incentive to negotiate lower prices for itself: its competitors prices are automatically higher anyway. BCBS is even willing to pay higher prices to hospitals to get the most favored nation clause put in:

The lawsuit also asserts that Blue Cross, in effect, bought protection from competition — by agreeing to pay higher prices to certain hospitals to induce them to agree to the “most favored nation” clauses.

Lots of interesting stuff. I’m looking forward to following this case to see what happens.