As the health insurance sector deals with increasing political pressure and public frustration over rising premiums, industry giant Blue Cross and Blue Shield of Michigan is under scrutiny, thanks to a lawsuit filed by the US Justice Department.

Michigan Attorney General Mike Cox and the US Justice Department filed a complaint in October alleging that Blue Cross and Blue Shield of Michigan’s exclusive hospital contracts caused increased costs for competing companies and effectively made it impossible for other insurers to secure similar rates.

While the company denies the claims, spokesman Andrew Hetzel confirmed that the insurer’s contracts are meant to keep costs as low as possible, but that Blue Cross and Blue Shield of Michigan was not trying to manipulate pricing or even reduce competition. In fact, Hetzel said, the lawsuit “makes absolutely no sense” as the company would have no incentive to negotiate a higher price when a lower one is possible.

But, according to Attorney General Mike Cox and the US Justice Department, what Blue Cross and Blue Shield of Michigan is doing is against the law.

The lawsuit revolves around a “most favored nation clause,” (MFN) which typically requires that the company that has the clause must receive the lowest rates that participating providers offer any other plan, or that providers charge competing companies a certain percentage above the rate provided to the MFN holder.  

According to assistant attorney general in charge of the Justice Department’s antitrust division, Christine Varney, most MFNs aren’t illegal and are widely used. But, said antitrust expert and attorney David Marx Jr., it all depends on how they’re used, as they could potentially have anti-competitive effects.

The lawsuit alleges that Blue Cross and Blue Shield’s Michigan contracts required a hospital system to charge other insurers nearly 40% more for its services, causing at least one company to abandon plans to enter a new market when the hospital proposed rates based on the stipulations in the contracts. Plus, the contracts allegedly signed with more than 40 community hospitals allow Blue Cross and Blue Shield of Michigan to cut their payments by around 16% if any other insurer received lower rates.  The complaint said that these hospitals were required to charge all insurers at least the same as Blue Cross and Blue Shield’s contracted costs and claimed that the company “purchased protection from the competition” by raising its own costs.  

The Blue Cross and Blue Shield of Michigan case should prompt other insurers who use these clauses to quickly and thoroughly review their agreements to avoid similar action. Varney told a group of attorneys in May that authorities are actively reviewing health insurance companies using MFNs to gain exclusive contracts with medical providers. She noted that companies should be prepared for careful scrutiny from the Justice Department, and that it will continue to challenge “exclusionary practices by dominant firms.”