District Court Dismisses Follow-On Suit Challenging Blue Cross's "MFN-Plus' Contracts Under Both Per Se and Rule of Reason Standards

[author: Helen C. Eckert]

The District Court for the Eastern District of Michigan recently dismissed antitrust claims brought by the City of Pontiac against Blue Cross Blue Shield of Michigan's practice of requiring hospitals to enter into "MFN-Plus" contracts, which was alleged to have significantly raised prices to Blue Cross's competitors. City of Pontiac v. Blue Cross Blue Shield of Michigan, 2:11-cv-10276, Mem. Opinion and Order Regarding Blue Cross Blue Shield of Michigan's Motion to Dismiss (E.D. Mich. Mar. 30, 2012) ("Order"). The City's complaint was a follow-on to an antitrust suit filed by the U.S. Department of Justice and the Michigan Attorney General in the same Court, alleging Sherman Act violations of the same nature as set forth in the City's complaint. Despite the fact, however, that the DOJ's allegations were deemed to state viable antitrust claims, the same Court dismissed the City's complaint under both per se and rule of reason analyses.

Blue Cross is the largest commercial health insurance provider in Michigan, covering more than 60% of the commercially-insured population, and insures more than nine times as many Michigan residents as its next largest commercial health insurance competitor. Blue Cross has sought to include most-favored-nations clauses in many of its contracts with hospitals. The MFN-Plus clauses require the hospitals to charge some or all other commercial insurers more than the hospitals charge Blue Cross, typically by a much higher margin, ranging from 23% to 39%.

Moreover, Blue Cross has sought and obtained MFN-Plus in many hospital contracts in exchange for increases in the prices Blue Cross pays for that hospital's services. In these instances, the City of Pontiac alleged, Blue Cross purchased protection from competition by other insurers by causing hospitals to raise the minimum prices charged to those competitors, but in doing so has also increased Blue Cross's own costs. The City alleged that these MFNs have caused many hospitals to: "(1) raise prices to Blue Cross's competitors and all non-Blue Cross purchasers and insured by substantial amounts; or (2) demand prices that are too high to allow competitors to compete, effectively excluding them from the market." (Order, at 3).

In opposing Blue Cross's motion to dismiss, the City principally argued that its antitrust claims were properly evaluated under the per se violation standard. The Court, however, disagreed, holding that all vertical price restraints between entities at different levels of the market structure are to be judged under the rule of reason standard. (Id. at 13). As Blue Cross and the hospitals were at different level of the market structure – i.e., Blue Cross as the purchaser of hospital services – the per se rule did not apply.

Thus, in order to survive a motion to dismiss, the City had to satisfy the rule of reason standard, which required sufficient allegations that the MFN-Plus contracts produced adverse anticompetitive effects within relevant product and geographic markets. The Court found that the City's complaint, as well as its arguments in opposition to Blue Cross's motion to dismiss, gave sparse treatment to the rule of reason standard, instead focusing almost exclusively on the per se standard. (Id. at 14). While the Court held that the relevant product market was sufficiently pled at the pleading stage (noting that courts hesitate to dismiss claims for failure to plead such fact-driven inquiries), it was not so forgiving of the City's lack of factual allegations that the MFN-Plus contracts harmed competition.

While the Court, as well as Blue Cross, acknowledged allegations that one competitor had been deterred from entering the market, "[o]ne single competitor is not an antitrust concern." In the absence of any additional allegations, the Court held that such bare factual allegations failed to state a plausible claim under the rule of reason standard. Notably, in the DOJ suit, both parties agreed from the outset that the rule of reason standard applied to Blue Cross's MFN clauses. United States of America v. Blue Cross Blue Shield of Michigan, 2:10-cv-14155-DPH, Mem. Opinion and Order Denying Motion to Dismiss (E.D. Mich. Aug. 12, 2011).