The United States Department of Justice and The State of Arizona Act to Enjoin Enforcement of Most-Favored Nation Pricing Clauses in Health Care Contracts

January 1, 1999 Advisory


The Antitrust Division of the United States Department of Justice and the Office of the Attorney General for the State of Arizona recently filed an action, along with a proposed settlement agreement, that promises to have nationwide repercussions in the health care industry. Declaring that price protection contract provisions - commonly known as "Most-Favored Buyer" or "Most-Favored-Nation" clauses - in some health care services contracts act to stifle price competition and raise costs to health-care consumers, the two agencies brought suit to enjoin the enforcement of such a provision by an Arizona provider of pre-paid dental services. The action, United States v. Delta Dental Plan of Arizona, Inc., Civil No. 941793 (D. Ariz.), represented the first time that the practice of including "Most Favored Nation" ("MFN") clauses in health care contracts has bean challenged by the Justice Department under federal antitrust laws. The Department stressed that it would act against price protection clauses when they serve to restrain price competition.
The types of agreements challenged in Delta Dental are common in the health care industry. Large purchasers of health care services have demanded and received contractual assurances that they will pay the lowest rates available. Courts generally have upheld NIFN clauses in payor agreements against antitrust attacks by health care providers. Now, however, when the surrounding circumstances parallel those found to exist by the Justice Department in Delta Dental, these agreements may face challenge.

Factual Background

Delta Dental was a member of a nationwide network of dental insurers. Dentists made up a majority of its board of directors. Delta Dental contracted with businesses, government agencies, and other organizations to provide pre-paid dental care services to the employees of those organizations. Delta Dental's contracts with participating dentists always contained some version of a Most-Favored-Nation clause requiring all participating dentists to charge Delta Dental the lowest rate charged to any patient or competing dental care plan.
Delta Dental was allegedly the dominant dental care provider in Arizona with approximately 85 percent of all dentists licensed to practice in Arizona providing services for Delta Dental. The complaint alleges that most dentists in Arizona received a significant portion of their income from serving Delta Dental patients. But neither the complaint nor any documents filed with the settlement agreement indicate the specific percentage of Arizona dentists' revenues accounted for by Delta Dental. According to the complaint, the cost to participating dentists of accepting lower fees from Delta Dental was too great to permit them to discount the fees charged to other providers. Conversely, the complaint alleged that it would be too costly to participating dentists to terminate their participation in Delta Dental's plan to avoid the NIFN clause and continue to offer discount services. In short, Delta Dental was alleged to have sought to restrain or eliminate discounting of fees for dental services provided to competing dental plans or other consumers of dental services.

Claiming that the enforcement of the price protection clauses constituted an unreasonable restraint of trade in violation of Section I of be Sherman Antitrust Act, the complaint sought the elimination of the price protection clause from Delta Dental's contracts, an end to the enforcement of the provision in existing contracts, reinstatement of all dentists terminated for a failure to honor the WN clauses, and a promise to refrain from seeking pricing information from participating dentists and to take no punitive action against participating dentists that offer lower rates to other consumers of dental services. Although denying liability, Delta Dental agreed, before the action was even filed, to all the relief requested in the complaint. This settlement is not yet final, requiring a period of public comment after publication of the settlement and a competitive impact statement in the Federal Register. and certain newspapers.

Discussion

Not every price protection clause is anticompetitive, and some, in fact, may be competitively neutral or even act to enhance competition. Because they are not uniformly anticompetitive, the factual context in which they are imposed and their actual effect on the relevant market must be examined. The facts critical to the government's claims of anticompetitive conduct leveled against Delta Dental were that: 1) Delta Dental was the dominant dental plan in the State of Arizona and participating dentists in the State received a substantial percentage of their total income from Delta Dental; 2) dentists comprised a majority of Delta Dental's board of directors; 3) participating dentists in the State ended discounts to other plans to avoid providing discounts to Delta Dental; and 4) discount plans were unable to Bind dentists willing to perform dental services.
While the Government in Delta Dental seemed to treat the facts as being of equal importance, in our view the first market dominance, was and will be the key issue, with the second, provider control, also being significant. The market share of a payor will be a focal point of any Justice Department challenge to a price protection clause, and price protection clauses negotiated by small payors are much less likely to raise any antitrust concerns. Provider control may be important to the Justice Department as indicative of an anticompetitive intent. The remaining facts identified by the Government will be examined where a price protection clause is imposed by a large payor to determine whether price competition has suffered, and whether a challenge to the price protection clause is warranted. These secondary facts will be important as empirical evidence of market power and the effect of the agreement.

Precisely what will constitute a market share sufficiently significant to trigger Justice Department scrutiny was not defined in the complaint or the documents filed with the settlement agreement. Nor did these documents indicate how dramatic an effect the price protection clause needed to have on other competitors before action would be taken. No further detail on the facts prompting Justice Department action were made available.

As mentioned above, courts generally have upheld the validity of NIFN clauses when challenged by private parties. There is a possibility that the Justice Department will fare no better than these private litigants if a payor decides to litigate rather than settle the action.

Conclusion

The Justice Department has identified price protection clauses as a serious impediment to vigorous price competition in the health services industry. Challenges to such agreements must be viewed as a near certainty. The circumstances under which the Justice Department will deem a price protection clause to be anticompetitive, and seek to enjoin its enforcement, is one open question. Whether courts will reverse their course to accept such challenges is another. Given the heightened scrutiny these agreements will face and the potential for Government challenge, careful analysis of potential antitrust issues is urged whenever a price protection clause is included in a contract.