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By DAVID A. CENTAFONT, principal of ForensiCorp, a Chadds Ford, Pa.-based provider of litigation support in healthcare disputes.

Two recent news stories highlight what has historically been one of the most litigious issues between health insurers and hospitals. This issue is what is known as "most favored nation" clauses in contracts.

Two recent news stories show different approaches that providers and the government have recently taken in trying to eliminate these types of clauses.

In Maine, the Portland Press Herald reports that Gov. Paul LePage has vetoed a bill that would have restricted insurance companies from including certain provisions in their contracts because he claimed that the legislation was too all-encompassing.

However, he is introducing new legislation that would specifically ban the inclusion of "most favored nation" clauses in contracts. Along with this proposed ban would be the ability of the superintendent of insurance to issue a waiver on a case-by-case basis. It is unclear what criteria will be used in determining if a wavier should be granted.

The U.S. Department of Justice and former Michigan Attorney General Mike Cox have filed suit in federal court against Blue Cross Blue Shield of Michigan. The government alleges that the use of the "most favored nation" clause is anti-competitive and drives up the cost of healthcare in Michigan.

"The state and federal governments contend the Blues signed contracts with more than half of Michigan's acute care hospitals that prevent them from charging other insurance companies lower prices," according to the Detroit Free Press. "In some cases, the governments argue, Blue Cross Blue Shield of Michigan agreed to boost reimbursements to hospitals if they charged competing insurance companies higher rates."

In response, Blue Cross Blue Shield of Michigan has stated that these clauses have already been approved by the state's insurance commissioner, and that they play an important role in keeping down healthcare costs.

U.S. District Judge Denise Page Hood in June denied the insurer's attempts to dismiss the case, and has allowed it to proceed.

This case is particularly interesting because of the Patient Protection and Affordable Care Act enacted last year.

The justice department has stated that it's increasing efforts to ensure that healthcare insurance markets are competitive and that patients have the ability to choose from a variety of plans. The department has singled out "most favored nation" clauses as a potential roadblock to competition, specifically as a barrier to entry for new insurance companies wanting to expand into a new market.

These "most favored nation" clauses have been a risk to the hospital industry for many years. Payers argue that these clauses are a legitimate way for the payer to control costs and, therefore, premiums to their subscribers. The hospital community argues that the clauses are anti-competitive and raise the barrier for any new insurance companies that might want to enter the market.

Either way, it appears obvious that these clauses continue to be included in contracts around the nation and that hospitals need to be able to successfully defend against the risk of a potential payback if an insurance company invokes these clauses.

One of the most perplexing problems in dealing with this issue is how exactly to account for what a hospital is charging a particular insurance carrier for a particular service. This is because of the different ways that hospitals get paid for their services.

For instance, suppose that the insurance company that has the "most favored nation" clause in their contract pays the hospital on a prospective, per-case methodology, based on the acuity of illness. There is also a second insurance company in this market that pays the hospital on percentage of charges basis, with carve-outs for particular services and supplies. Finally, there is a third payer in this market that pays a flat per diem amount for each day a patient spends in the hospital.

In this example, a hospital could be paid radically different amounts from each of these insurance companies for the same service. The real complexity in this situation is the examination and normalizing of the data so that a valid comparison can be made. It is in this area where many varied interpretations of the data and contract clauses can lead to prolonged battles, and lawsuits, between insurance companies and hospital providers.

Because of these complexities, it is typical for contracts to include a provision that allows the insurance company to audit the books and records of the hospital to verify that they are indeed receiving the best pricing. This is another risk that a hospital faces. These provisions tend to be very heavily favored in the insurance company's benefit.

An example of this is that even though the audit is supposed to be performed by an independent auditor, in a typical contract, the insurance company has sole discretion as to what auditing firm is chosen (even though the provider may be contractually obligated to pay for the audit). Because these firms can become reliant on these audits as a viable and profitable line of business, it is in their best interest to keep the insurance company hiring them happy and satisfied with the results of the audit.

It is essential that a hospital try and negotiate the ability to participate in the selection of an audit firm so that the audit firm is incentivized to remain objective and fair in its review.

It is also vital that a hospital have in place the necessary systems that will enable it to present and analyze its data. It is very difficult to defend a "most favored nation" case if the hospital is unable to gather the required and necessary data.

Another important factor to consider is in the negotiating of rates with insurance companies, either new to the market or with insurance companies that have relatively few subscribers.

All hospital personnel involved in the negotiation of rates with insurance companies must realize that offering a low rate to a new insurance company because there is relatively little risk that the insurance company will insure a high number of the hospital's patients could backfire.

The strategy could backfire if and when the insurance company that does insure a high number of the hospital's patients, and has a "most favored nation" clause, requires that hospital apply the lower rates resulting in a big payback.

When negotiating these agreements, it is helpful to negotiate for exclusions to the clause.

Some exclusions that could be included are government programs such as Medicare and Medicaid, uninsured patients that the hospital may wish to negotiate lower rates with, employees of the hospital that get discounted services, and other groups that may be entitled to discounted services such as the medical staff, volunteers.

"Most favored nation" clauses have posed a substantial risk to the hospital industry for many years.

With new healthcare legislation being passed, these clauses will be subject to increased scrutiny in the future. It is still very important that hospitals remain vigilant in the negotiation of these clauses and in the enforcement of them by insurance companies.

With all of the many payer contracts that a hospital can enter into and with the complexity of the different payment system, it can be easy to enter into a contract with very little upside to it but with a large, potential downside.

September 1, 2011

Copyright 2011© LRP Publications