Health Plan Demands Lowest Rates and This Raises Prices

Today’s Managing Health Care Costs Indicator is 70

The US Department of Justice and the Attorney General in Michigan announced on Tuesday a suit against Blue Cross Blue Shield of Michigan (BCBSM) for demanding the lowest prices of hospitals in the state.   BCBSM has in place a “most favored nation” contract with at least 70 of the 131 acute care hospitals in the state.

Here is the Justice Department statement:

The department’s lawsuit alleges that the intent and effect of Blue Cross Blue Shield of Michigan’s MFNs is to raise hospital costs for competing health plans and reduce competition for the sale of health insurance. As a result, consumers in Michigan are paying more for their healthcare services and health insurance

Here is the BCBSM VP for Corporate Communications: 
Through this lawsuit, the federal government seeks to deny millions of Michigan residents the lowest cost possible when they visit the hospital.

Who is right here?  Is it really bad for society for BCBSM to insist for its members on always getting the lowest rate?

It certainly is!  

Most favored nation clauses feel like a good deal (“I get the best price.”) But what they really do is make it tough for suppliers to lower their prices for anyone else. See a recent blog on the effect of most favored nation pricing on pharmaceuticals.   The BCBSM contracts are especially inflationary –because they don’t merely demand the lowest price, but they specify how much higher a price other insurers would have to pay.

This is especially damaging to competition in Michigan, where BCBSM has a 60% market share.    There is no way for other insurers to compete effectively in that market, since hospitals cannot sell extra capacity at marginal prices.   Hence, despite the BCBSM cries that they are simply getting a good deal for their customers, BCBSM is causing all consumers in the state (including their own customers) to pay higher prices for health care.