In 2006, the South Carolina Legislature repealed a decades-old insurance code, stripping the state's authority to regulate discounting in contracts between hospitals and insurers.
S.C. Blue Cross flush with cash; As premiums rise, so has executives’ pay, published 05/01/11
The deletion allowed the state's biggest health insurance company, Blue Cross Blue Shield, to negotiate contracts that could cripple its competitors and raise costs for consumers. And Blue Cross was among the special-interest groups lobbying for the repeal, according to a legislator who requested it.
Although the state apparently had not enforced that section of the law, the repeal stripped regulators of authority to step in if it became necessary to regulate anticompetitive activities.
The code appears to have forbidden types of "most-favored-nation" contracts with hospitals and doctors, which some economists said have played a significant role in driving up health care costs in South Carolina.
Here, annual premiums for private health insurance have risen about 85 percent for individuals and 75 percent for families in the past decade, federal data show.
Insurers use most-favored-nation contracts with hospitals and doctors to ensure that they get the best discounts on medical services -- rates equal to or better than those of their competitors.
The U.S. Department of Justice is probing whether dominant insurers are abusing the provision in six states and the District of Columbia, where it is investigating possible anticompetitive practices that could drive up the overall costs of health care.
The Justice Department expanded its inquiry to include Blue Cross Blue Shield of South Carolina this year.
"Most-favored-nation clauses are the handcuffs that make a monopoly work," said David Balto, an antitrust attorney who has served in the Justice Department and on the Federal Trade Commission.
Frank Knapp, president of the S.C. Small Business Chamber of Commerce, called most-favored-nation "one of the important reasons that there is no real competition between carriers in South Carolina."
"The big dog gets the best deal in town because it's in their contract," he said.
Covering more than 60 percent of insured South Carolinians, Blue Cross Blue Shield has so much negotiating leverage that doctors and hospitals must bend to its contract demands, according to people familiar with such negotiations in South Carolina.
Medical University of South Carolina President Ray Greenberg said Blue Cross Blue Shield has a "huge amount of negotiating clout" that makes it difficult for the hospital to resist granting most-favored-nation status -- a part of its contract with the insurance giant since 1996.
A Blue Cross Blue Shield spokesman said in a statement the clauses are intended "to ensure that our customers get the best possible pricing for their health care services" and "reflect our intention to obtain the best value for our customers as we possibly can."
The insurer believes "the use of (most-favored-nation) clauses is lawful and appropriate in our business," according to the statement.
When the Justice Department conducted a similar probe in 2005 -- the year before the repeal -- the case was closed "a few weeks after receiving the S.C. Blue Cross response," Blue Cross Blue Shield has said.
"We have provided information the Department of Justice has requested, and will continue to fully cooperate," according to the statement.
State Sen. A. Shane Massey, an Edgefield Republican, introduced legislation this year to ban the use of most-favored-nation clauses in health care contracts, joining at least a dozen states that already have restrictions on their use.
"Most-favored-nation appears to be one of the hindrances to competition in the state," he said. "My goal ... was to break that up."
The bill got nowhere this legislative session, due in part to what Massey called the "evolving situation" involving the Justice Department inquiry.
At least one other legislator, Lexington Republican Rep. Todd Atwater, also is paying attention.
Blue Cross Blue Shield said it has most-favored-nation status in only a small number of its contracts. Atwater, who is CEO of the S.C. Medical Association, said use of the clauses in physician contracts is widespread.
If the clauses were gone, doctors could offer discounts to smaller insurers to bring in more patients. Price breaks, even if they are short-term, could help smaller insurers get a foothold in the market, he said.
In the current environment, however, a doctor's practice could end up losing money because the most-favored insurer also would get the lower rate.
"Their purpose when imposed by a dominant insurer is to dissuade physicians from contracting with other health insurers who may offer lower reimbursement rates," Atwater said.
That means fewer health care options for patients in South Carolina, which was identified this year by the American Medical Association as a state where dominant insurers have among the highest market concentration of all states nationally.
The S.C. Medical Association's concerns about most-favored-nation date back at least a decade. Former Medical Association CEO William Mahon griped about Blue Cross Blue Shield's use of the clauses in an August 2001 letter to the S.C. Department of Insurance.
He called the insurer's use of the clauses "the main issue that discourages new insurance companies from moving into the state."
The letter said, "Physicians cannot afford to drop Blue Cross Blue Shield contracts from their practice because the percentage of patients covered by (the insurer)."
Asked about the complaints, a spokeswoman for the S.C. Department of Insurance said the agency "does not have statutory authority to regulate provider contracts with insurers."
But at the time Mahon and others lodged their complaints, the department still had oversight power on hospital contracts, because the 1962 code still was on the books.
That code, repealed in 2006 as part of a four-page act that addressed a variety of insurance issues, said any insurance company making hospital contracts "is entitled to the same discounts allowed to any insurer."
It also said that any patients paying hospital bills out-of-pocket were entitled to the best discounts, if they paid within seven days of getting the bill. In effect, any payer was entitled to the lowest rate, which would have banned the most-favored-nation clauses alleged to have required higher prices for competing insurers.
Legislative records show that two senators requested the repeal, Gerald Malloy, a Darlington Democrat, and David L. Thomas, a Greenville Republican -- both members of the S.C. Senate Banking and Finance Committee, where Thomas serves as chairman.
Malloy said last week that he asked for the repeal at the request of people in the health care and insurance industries, including lobbyists from Blue Cross Blue Shield.
Asked what the most compelling argument lobbyists gave for wanting the repeal, Malloy said, "I have no idea. It was an antiquated law."
A class-action lawsuit pending at the time also might have come into play. Patients said the code should have entitled them to discounts on their hospital bills, according to the suit. Two years later the S.C. Supreme Court rejected that argument.
Malloy said his hospital sources feared that they would suffer financially if forced to give everyone discounts. He said he worried that the strain could force rural and isolated facilities to close.
Following initial contact with the newspaper, Thomas' legislative aides did not return calls seeking comment.
The Department of Insurance did not answer questions concerning its involvement in the repeal.
Rhode Island and Massachusetts are among the states with laws restricting use of most-favored-nation clauses in health care contracts, said Steve DeToy, director of government and public affairs for the Rhode Island Medical Society.
In those states, the restrictions have helped smaller physician practices gain some negotiating leverage, DeToy said.
But they also have opened the door for the opposite problem to emerge -- large hospital systems have gained so much clout that they demand artificially high rates in their contracts with insurers, DeToy said.
In those cases, insurance companies cannot afford to stop doing business with hospitals, because too few alternatives exist.
"Our premium increases are almost entirely attributed to hospital contracts," DeToy said. "If you're the only one with something that someone needs, you get to name your price."
In South Carolina and nationally, hospital systems bulk their clout against insurers in part by purchasing physician practices and outpatient facilities, said David Cluchey, an expert in antitrust law and a professor at the University of Maine School of Law.
Such acquisitions have been widespread in South Carolina in recent years, as hospital systems such as Charleston's Roper St. Francis Healthcare absorb smaller physician groups.
As they grow, "it could make it hard for an insurer to live without a hospital system, which could find itself in a position to resist most-favored-nation contracts," Cluchey said.
The most-favored-nation clauses have proven so constricting in South Carolina that “even large insurers can find it hard” to enter or remain in the market, according to the S.C. Medical Association, which represents the state’s physicians.
National health insurer Cigna, which said it does not have any most-favored-nation contracts in South Carolina, said in a statement the clauses “hinder fair competition by artificially inflating rates, forcing area employers and customers to pay more.”
UnitedHealthcare, South Carolina’s second biggest insurer, echoed Cigna’s remarks, but declined to say whether it uses the clauses in the state.
Carolina Care Plan, a regional insurer, does not use the clauses in its South Carolina contracts and is worried about their use by other carriers, said Donald Pifer, a Carolina Care Plan vice president. In a statement, he said: “We have concerns about the potential anti-competitive effects in South Carolina, particularly given the concentration of market power in the state.”
Officials from Aetna, which also declined to say whether it uses the contract provision in South Carolina, recently wrote a letter to the Insurance Commissioner in Georgia in support of legislation prohibiting the use of the clauses in contracts between hospitals and insurers.
“Use of (most-favored-nation) clauses by dominant insurers can dissuade hospitals or other providers from doing business with competing plans and sometimes result in a price floor for health care services to the detriment of consumers,” the June 15 letter said. “Competing health plans which may have received a lower price from the hospital in the absence of the clause are now prevented from obtaining one, preventing a reduction in the cost of health care services which ultimately harms consumers.”
The letter also warned Georgia officials of a “price buffer” that leads to higher rates for medical services for insurers that do not use the clauses. Fear of breaking the most-favored-nation contract leads hospitals and doctors to charge other insurers higher rates to “ensure that they can never be accused by the dominant health plan of violating the (most-favored-nation) provision,” the letter said.
Doctors and hospitals contacted by the Post and Courier declined to discuss specific details of their contracts with insurers. But here is how most-favored-nation contracts generally work:
A doctor or hospital must offer any discount it gives any insurer to the most-favored-nation insurer. If the doctor or hospital increases rates on services, they must raise them less for the most-favored insurer than for other insurers.
For example, if a most-favored-nation insurer reimburses a doctor $50 for annual physicals, the doctor cannot accept a lower payment for the same service from a competing insurer. If the doctor agrees to accept a $40 reimbursement for the check-up from another insurer, he also must give the discount to the most-favored insurer.
The doctor could raise the check-up fee, as long as he raises it for everyone -- or more for the competitors.
Like the practice sometimes used in international trade and in many business contracts, use of most-favored-nation agreements in health care contracts is legal.
On the surface, they would seem to drive down overall health care costs when big insurers get discounts.
But in reality, the practice can drive up costs by setting a floor below which prices will not go or by requiring rivals to pay higher prices, economists said.
In Michigan, for example, Blue Cross Blue Shield has most-favored-nation contracts that require some hospitals to charge Blue Cross' competitors up to 40 percent more for the same services, the U.S. Justice Department has alleged in an antitrust suit.
The federal department accused the insurer of stifling competition, likely raising health care costs and premiums.
There and in states such as South Carolina, where Blue Cross Blue Shield dominates the health insurance market, some doctors and hospitals might stop offering discounts to the smaller insurers altogether because they then would have to offer the same lowered rates to Blue Cross, health economists said.
The high costs are passed to consumers through higher insurance premiums, they said. And smaller insurers who cannot afford to compete are likely to withdraw from the market. Lack of competition among health insurers could drive premiums even higher.
Doctors and hospitals feel little power to deny the clauses because the overwhelming majority of their patients are insured by Blue Cross Blue Shield. If the insurer decided not to negotiate at all, the practice could lose most of its patients, according to people familiar with such negotiations in South Carolina, including officials from the S.C. Medical Association.
The U.S. Department of Justice declined to release any details of its inquiry, saying only that its antitrust division was investigating the possibility of anticompetitive practices involving the most-favored-nation clauses in "various parts of the country."The Justice Department did not engage the S.C. Department of Insurance in the inquiry, said Ann Roberson, a spokeswoman for the state agency.Blue Cross Blue Shield provided the same documents to the state insurance department that it provided to the Justice Department, but Roberson said she could not "find any documents relating to the 2011 inquiry that are subject to disclosure." The S.C. Attorney General's office did not respond to multiple requests for comment.The states with Blue Cross Blue Shield units involved in the U.S. Department of Justice probe are Kansas, Missouri, North Carolina, Ohio, South Carolina and West Virginia, plus the District of Columbia.