U.S. sues Michigan Blue Cross over prices

By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, October 19, 2010

The federal government sued Michigan's largest health insurer Monday, alleging that it abused its market clout to inflate health-care costs and impede competition.

The government alleged that Blue Cross Blue Shield of Michigan negotiated contracts that prohibited hospitals from granting deeper price discounts to other insurers.

In some cases, Blue Cross's contracts required hospitals to charge other insurers significantly more than they charged Blue Cross, the federal antitrust suit said. In other cases, Blue Cross agreed to increase the prices it pays hospitals - boosting costs for its own customers - in return for commitments that other insurers would be charged no less, the lawsuit said.

"As a result, consumers in Michigan are paying more for their healthcare services and health insurance," Christine Varney, the assistant attorney general for antitrust matters, said in a statement.

Blue Cross vowed to fight the lawsuit, saying it was "without merit."

"At a time when the focus on health insurance affordability has never been more intense, it seems strange and ironic that the federal government would be suing a health plan that has worked very hard to negotiate the lowest prices for its customers with hospitals," said Andrew Hetzel, Blue Cross vice president for corporate communications.

The lawsuit highlights the concentration of power that dominant health insurers wield in many parts of the country.

It also opens another front in the government's running conflict with insurers over health-care costs.

During the long, bitter battle over President Obama's health-care legislation, Obama and some members of Congress argued that private insurers needed stiffer competition. Obama and his allies pushed unsuccessfully to create a government-run insurance option, arguing that it would hold private insurers more accountable.

Republicans and other opponents argued that the "public option" would destroy the private market for insurance.

The nonprofit Blue Cross plan in Michigan covers more than nine times as many Michigan residents as its next-largest commercial competitor and more than 60 percent of the state's commercially insured population, the government said.

In light of the company's market share, Michigan hospitals could be hard pressed to operate without access to Blue Cross customers.

The insurer included language in its hospital contracts assuring it of favorable pricing. Borrowing a term from international relations, the provisions are known as "most favored nations" clauses.

Such clauses are not inherently illegal, but the government says Blue Cross's use of them went too far.

Blue Cross's contracts have caused many hospitals to raise prices for rival insurers, the government alleged. The clauses have made it difficult for other insurers to compete, deterring them from entering Michigan markets "and preserving Blue Cross's leading market position," according to the federal lawsuit.

Blue Cross defended the contracts, saying they are "a vital part" of the insurer's mission to provide health care at a reasonable cost.

"It does not make good business sense for Blue Cross Blue Shield of Michigan to reimburse a provider at a higher rate than we can otherwise negotiate," the company spokesman said in a statement.

The Justice Department settled a spate of similar cases in the 1990s. Department officials would not say whether the government is pursuing similar cases against other insurers.

© 2010 The Washington Post Company