Michigan Governor Vetoes Legislation Banning Health Insurers from Utilizing Most Favored Nation Clauses in Provider Contracts

On December 6, the Michigan Legislature passed legislation (S.B. 1293) that would have prohibited health insurers and health maintenance organizations in the state from including “most favored nation” clauses in any provider contract. The legislation was expected to be signed into law by Michigan Governor Rick Snyder, but in an unexpected move, on December 28 he vetoed the legislation, reportedly because another provision in the legislation (involving abortion coverage) that he opposed was added to the bill at the eleventh hour. Had the legislation been enacted, Michigan would have become the latest in a growing list of states that statutorily restrict or prohibit the use of “most favored nation” provisions in health care provider contracts.
A “most favored nation” clause, when used by a health insurer or HMO, generally requires that a health care provider offer its services to the insurer/HMO at the lowest price that the provider offers its services to any party. While such provisions have been used by many industries for many years without raising any significant antitrust issues, over the last several years they have become somewhat controversial in the health care industry, particularly when used by allegedly “dominant” insurers. Specifically, those opposed to such provisions contend that their use – rather than ensuring that insurers receive the lowest prices from providers, thus lowering their costs and permitting them to keep insurance premiums as low as possible – instead limit the ability of other insurers to compete for insurance business, and thus can have anticompetitive effects. While the courts have yet to decide this issue in any definitive way, the legislatures in several states have passed legislation barring the inclusion of such clauses in health care contracts in their states. In 2011, for example, both Connecticut and Maine enacted legislation barring such provisions, and similar legislation was proposed, but not enacted, in Kansas, Missouri and North Carolina, among other states.
The Michigan legislature (S.B. 1293) would have provided that “…beginning in January 1, 2014, an insurer or health maintenance organization shall not use a most favored nation clause in any provider contract.” In addition, the legislation would have rendered any provision in an existing contract unenforceable, and an insurer/HMO would have been prohibited from terminating an existing provider contract based upon the provider’s decision to offer another insurer/HMO a lower rate than that offered to the contracting insurer/HMO. These provisions were quite similar to those included in MFN legislation enacted in other states, but would not have been the first regulations in Michigan regarding the use of MFN clauses. Senate Bill 1293 was introduced on September 19, 2012; two months earlier, on July 18, 2012, Michigan Insurance Commissioner Kevin Clinton issued Order 12-035-M, which provides that, “…as of February 1, 2013, any attempt by an insurer to enforce a most favored nation clause in any provider contract, without the commissioner’s prior approval, is prohibited…” The Order also states, however, that it “…does not constitute a determination regarding the permissibility of the use of any particular most favored nation clause…”

While Governor Snyder’s veto of S.B. 1293 means that no statutory ban on MFN clauses goes into effect in Michigan now, recent press reports suggest that a new bill will likely be introduced in early 2013 that omits the coverage provisions that the Governor opposed. Accordingly, it seems likely that some type of legislative restriction on the use of MFN clauses in health care contracts may be on the horizon in Michigan.