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Do Most Favored Nation clauses give insurance carriers an unfair advantage, or save their customers money?

There's a great joke in the form of a dog's diary, where everything is the canine's favorite treat. In the political world, countries vie to earn Most Favored Nation status, which engenders great economic (and ancillary) benefits.

In the insurance world, carriers and providers reach similar agreements, which have come to be known as "Most Favored Nation" (MFN) contracts. It's probably true that some carriers' assets approach those of some smaller countries, but this particular appellation has to do with pricing for services rendered.

MFN agreements require a provider (such as your doctor or hospital) to guarantee a given insurer the same best price as its market competitors. Whether or not these are a good idea is arguable, but there is much consternation is in the area of cash discounts. When one purchases health care services, one agrees to pay for them in a timely fashion. Most of us are insured (whether by the government or a private carrier), and so there is a third party to the transaction. Most of the time, these third parties have agreements with the provider, whereby the services are discounted. The consumer benefits from this arrangement, as well, because the portion for which he's responsible is also (usually) discounted.

But what if one isn't insured, or has a plan with no discounts (e.g. Fee For Service Plan)? Can that person also negotiate with the provider for a lower rate?

Well, to quote Senator Dole, it depends.

Some folks handle this situation by purchasing medical discount cards. These ubiquitous plans range in price from $10 or $12 a month to $100 or more. They all promise essentially the same thing: if you (the member) agree to pay in full at time of service (or VERY shortly thereafter), the provider agrees to give you a break on the price. If you don't pay up right away, then the deal's off, and you owe the full, non-discounted amount.

But what if you don't have one of those cards, either? Can you still negotiate with the provider?

The simple answer is: hey, it's a free country, go ahead. The challenge is that the provider is under no obligation to offer you a "deal," and may actually be breaking the terms of his insurance contracts if he does so.

Come again? You mean he's not even allowed to offer you a deal if he wants to?

Remember, provider contracts are just that: contracts. The provider has stated, in writing, that he agrees to the terms set forth (as does the carrier, of course). So a medical practice may want to help you out, but they may be contractually constrained from doing so.

But all that may be changing:

If passed and signed into law, Indiana's Senate Bill 114 would do away with MFN clauses in such contracts. According to folks who oppose them, MFN clauses unfairly keep competitors at bay, and hinder efforts to help those without insurance (or discount cards) from saving money on medical services.

Carriers, of course, have a different take: they contend that such clauses help to keep health care prices (and hence health insurance premiums) down. They believe that, absent MFN, providers (especially hospitals) might give deeper discounts to one insurer, then try to offset that by giving smaller discounts to every other insurer, which sort of defeats the purpose.

Indiana's not the only state looking at these little beauties, either: South Carolina's House Bill 3674 would also do away with them.

Sometimes change is good, sometimes not. The jury's still out on this one.

Henry Stern, LUTCF, CBC is an independent insurance agent in Dayton, OH. A licensed Continuing Education instructor for Ohio and Kentucky, he has well over 20 years of experience in “the biz.” He blogs every day (or so it seems) at InsureBlog.

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from InsureBlog on Sun, 04/08/2007 - 8:26am

In this week's 'Dispatch, we look at whether Most Favored Nation (MFN) clauses give insurance carriers an unfair advantage, or save their customers money. Here's a taste:

Comments (3)

Submitted by Vince Kuraitis (not verified) on Sun, 04/08/2007 - 3:13pm.

My experience is that MFN clauses can be very restrictive of competition and lower prices.  These clauses can increase the strength of already dominant contractors; hospitals and doctors are reluctant to give a better deal to ANYBODY because theyd have to give the same discount to EVERYBODY that has a MFN clause.

I agree,  there are arguments both ways. I'd love to hear some economists weight in.

Submitted by hgstern on Mon, 04/09/2007 - 6:08am.

When you say "(m)y experience," could you be a little more specific? Not trying to catch you out, but would be interested in your perspective. Are you speaking as a provider, consumer or insurer (or other)?

I'd also be interested in an economist's view on this subject. Not sure if we have any here, but I know one or two econ-bloggers. I'll see if they have any thoughts on the matter.

Have a great week! 

Submitted by hgstern on Tue, 04/10/2007 - 10:01am.

Vince: You asked me about what an economist might have to say about the issue, so I contacted one of my favorites, Jason Shafrin (the Healthcare Economist). In characteristically modest fashon, he replied "I'm not an expert in the Industrial Organization literature in either economics in general or in health economics, so I don't really feel qualified to comment myself." So, he attached two articles which were directly on point (and which I'd be happy to forward to you).

Perhaps the best recapitulation of the debate comes from an article in the Journal of Economic Perspectives:

"Such clauses can have the procompetitive effect of allowing buyers of health care services to lower their costs. But they also may serve to facilitate tacit collusion, since a dominant insurer who signs a contract including a mostfavored-nation clause has basically assured that the hospital or physician group will not provide services at lower fees to rival insurers or potential entrants."

As in most aspects of the health care debate, we see that MFN issues are neither black nor white, good nor bad, decidedly pro-business or pro-consumer.

Hope this helps.

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