State Efforts to Restrict Health Insurer Use of “Most Favored Nation” Clauses in Provider Contracts Continue to Multiply

Over the last several years, several states have considered legislation that prohibits health insurers from including “most favored nation” clauses – provisions that guarantee the insurer is receiving as favorable a reimbursement rate from the provider as it offers any other insurer – in their provider contracts. The frequency with which such legislation has been introduced is rather surprising, given that the underlying justification for banning such provisions remains quite controversial. While proponents of such legislation claim that MFN clauses are being used by insurers for anticompetitive purposes, and thus a ban is both justified and necessary, supporters claim that MFN clauses simply ensure that an insurer obtains the lowest possible price from a provider, reducing insurer costs and, ultimately, premiums for insureds.
Despite this lingering controversy about the competitive implications of MFN clauses, Connecticut passed such legislation in 2011, and Maine did so in 2012. More recently, Michigan joined the list of states restricting insurer use of MFN clauses in provider contracts when, on March 18, Michigan Governor Rick Snyder signed Senate Bill 62 into law. Even more recently, on April 29, the North Carolina Assembly passed similar legislation (H.B. 247), which, if signed by the Governor, will bring to approximately twenty the number of states with such prohibitions.
In Michigan, the new law, which is effective beginning on January 1, 2014, will (1) ban any clause that prohibits a provider from contracting with another party to provide health care services at a lower rate than the payment or reimbursement rate specified in the contract; (2) bar clauses that require the provider to accept a lower reimbursement rate if it subsequently enters into an agreement with another insurer at a lower rate; (3) prohibit provisions requiring the provider to renegotiate the terms of its agreement with the insurer if it subsequently enters into an agreement with a lower rate with another insurer; or (4) require the provider to disclose its rates with other insurers to the contracting insurer. Notably, these provisions are virtually identical to those in the legislation that was passed in Maine last year. The new Michigan law also restricts the use of MFN clauses this year, providing that they may not be utilized unless they have been reviewed and approved by the Michigan Insurance Commissioner.
In North Carolina, the MFN legislation is similar to the new law in Michigan, but contains some notable differences. The North Carolina bill not only bans contract provisions that prohibit a provider from contracting with another health insurer at a rate that is lower than the payment specified in the contract, but it also prohibits clauses that seek to ensure that the contracting insurer’s rate is “equal to” those of other insurers. This “equal to” language appears to be patterned after the Connecticut MFN law, and is significantly more restrictive than the language adopted in Michigan and Maine. If signed by the Governor, the new law will become effective beginning October 1, 2013. The legislation does provide, however, that the change in the law shall not be construed to affect any litigation pending at the time the new law becomes effective.