Aetna Sues Michigan Blues Over Alleged ‘Exclusionary’ Hospital Contracts

Aetna Inc. has sued Blue Cross Blue Shield of Michigan, alleging the state's dominant health insurer's use of "exclusionary contracts" with hospitals stifles competition in Michigan's health insurance market by inflating prices paid to hospitals by Blue Cross's competitors, including Aetna, and the customers they serve.

Filed in the U.S. District Court for the Eastern District of Michigan, the Connecticut-based Aetna (NYSE: AET), which demands a jury trial, seeks triple the damages it sustained and injunctive relief against the nonprofit Michigan Blues, alleging it violates Section 2 of the federal Sherman Act and Section 2 of the Michigan Antitrust Reform Act.

"Aetna made a significant investment in the state of Michigan in recent years," said Bill Berenson, president of the Michigan market for Aetna, in an email. Aetna contends the most-favored-nation clauses that Blue Cross Blue Shield of Michigan is using "are a violation of the antitrust act and seeks an end to their use, as well as damages for the harm they have done to our business."

Blue Cross, the dominant provider of health insurance in Michigan, has "implemented a scheme to use ever increasing premiums from the patients and employers it serves in order to protect its dominant position and thwart competition from Aetna and other competitors," Aetna alleges in its complaint.

"Stated simply, Blue Cross has entered into exclusionary contracts with hospitals under which it agreed to pay hospitals more money if the hospitals increased the rates they demanded to treat patients covered by its competitors' health plans," Aetna claims.

Unlike traditional most-favored-nation clauses, Blue Cross's exclusionary contracts "were not designed to secure the lowest price possible from suppliers," Aetna alleges. Instead, Blue Cross "agreed to pay higher rates to those hospitals that entered into exclusionary contracts and it explicitly threatened to pay lower rates if hospitals declined to enter into such agreements."

Blue Cross Blue Shield of Michigan said Aetna's civil lawsuit is "without merit." The suit "piggybacks on litigation" by the Department of Justice and seeks to restrict its ability to receive the best possible discounts for hospital services for customers, Blue Cross said.

"Aetna is not making the types of investments here it needs to compete successfully," said Andrew Hetzel, vice president of corporate communications for Blue Cross Blue Shield of Michigan, in a statement. "Instead, Aetna is resorting to litigation as a business strategy to tear down a competitor that is invested here."

Earlier this year, an antitrust lawsuit brought by the U.S. Department of Justice accusing Blue Cross Blue Shield of Michigan of making deals with some hospitals that blocked competitors and raised costs for consumers was to proceed after a federal judge denied its motion to dismiss the complaint (Best's News Service, June 9, 2011).

The civil suit, joined by Michigan's attorney general, was filed in the fall of 2010 in the same Michigan federal district court and challenges its use of the most-favored-nation clauses in contracts with area hospitals. The clauses allegedly block competitor plans from obtaining superior rates, and the Michigan Blues allegedly made such arrangements with at least 70 of 131 general acute care hospitals in the state (Best's News Service, Oct. 18, 2010).

In 2005, Aetna made an investment to expand its business in Michigan and to challenge Blue Cross's dominance, including a nearly $390 million acquisition of Michigan-based HMS Healthcare, Aetna alleges. Aetna says it sought to bring competition by selling its products and services to the state's employers and residents.

"When Aetna started to make inroads in Michigan and threatened Blue Cross's dominance, Blue Cross responded with an anticompetitive scheme aimed at thwarting competition by increasing the rates that Aetna and other competitors would pay for hospital services," Aetna alleges.

Blue Cross received the funds it used to pay hospitals more by consistently increasing the premiums its customers must pay, Aetna contends. "Likewise, Blue Cross pushed its competitors' premiums higher by forcing hospitals to increase the rates they charged to those competitors."

Blue Cross said it represents more members in Michigan than its competitors so it expects Michigan hospitals to give the company better discounts than they give to competitors because of the volume of its members. "Negotiated hospital discounts are an important tool that BCBSM uses to protect the affordability of health insurance for millions of Michigan residents."

The cumulative savings of its discounts with hospitals and pharmacies, and other medical providers, was around $13 billion in 2009, Blue Cross said.

Aetna wants to permanently stop Blue Cross from seeking, negotiating for, agreeing to, renewing, using or enforcing any MFNs in any agreement or other arrangement having the same effect as an MFN with any hospital in Michigan and reforming the agreements between Blue Cross and hospitals to strike the exclusionary clauses as unenforceable, among other relief.

Aetna Life Insurance Co., the lead operating entity for Aetna Inc., according to BestLink, currently has a Best's Financial Strength Rating of A (Excellent). Blue Cross Blue Shield of Michigan currently has a Best's Financial Strength Rating of A- (Excellent).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)