December 20, 2010
Antitrust Suit in Michigan Tests Health Law
By REED ABELSON

DETROIT — When the Justice Department filed an antitrust lawsuit against Blue Cross Blue Shield of Michigan in October, the unusual action was widely seen as a warning shot to dominant health insurance carriers in many other states.

The case is viewed as a test for the Obama administration’s introduction of the federal health care law, which is aimed at spurring competition and driving down costs.

About half the states in the country, including Alabama, Rhode Island and Iowa, share circumstances similar to Michigan’s, in their relationships with a big single insurance carrier. Proponents of the new legislation have long argued that these dominant companies could subvert the competitive goals of the exchanges planned for 2014, which are intended to foster new business and cheaper coverage.

Officials “have been struggling for a while with the fact that in health insurance markets, small players are not able to enter and expand in a way to make them significant competitors,” said Jonathan M. Grossman, an antitrust lawyer at Cozen O’Connor. “Nobody can look at the suit against Michigan and say they didn’t put everybody on notice.”

Regulators worry that this prevailing dominance in markets across the country is a formidable obstacle. “Once you have a health plan that is that large, it’s really hard to change the dynamics of the market,” said Robert W. McCann, a health care lawyer in Washington at Drinker Biddle & Reath.

Blue Cross and others paint a far more complex picture, involving intertwined economic and demographic layers. Michigan might also become a proving ground for whether a federal overhaul of the markets would attract any new insurer, especially in tough economic times and with unabated health care costs. It may become increasingly apparent, some argue, that the battle to change the health care system will play out state by state, especially with the separate constitutional challenges mounted by nearly a dozen states against the law itself.

In Michigan, economic conditions alone pose steep challenges for Blue Cross, which still employs 7,100 people in the state. The recession further crippled an already deteriorating manufacturing base. Unemployment is well above the nation’s average, at 12.4 percent to the country’s 9.8 percent. Its population is declining, growing older and getting sicker.

While it remained profitable through investment and other income last year, with $22 billion in revenue, Blue Cross lost money from operations, including nearly a hundred million dollars because of its status in the state as the insurer of last resort.

Federal prosecutors contend that Blue Cross in Michigan thwarts competitors by pressuring hospitals to charge rival insurers more to provide care, a practice prosecutors say has made health care extremely expensive in a state that can’t afford it.

“It is deeply disturbing that Blue Cross, a nonprofit created to help Michigan citizens, would strong-arm hospitals at the expense of hard-working families,” said Mike Cox, the state’s attorney general.

This past Friday in its court response, Blue Cross fired back at the antitrust charges, relying mainly on states’ rights arguments to contend that the federal government was usurping the state’s ability to provide affordable health care coverage to its residents. The Justice Department says it continues to believe the insurer is stifling competition.

In a recent interview, Daniel J. Loepp, the insurer’s chief executive, said Blue Cross, which provides coverage for 4.3 million people, had done nothing wrong. “Our size is a benefit to the hospitals, and it is a benefit to our customers,” he said.

Many Blue Cross plans, which are frequently run as not-for-profits and operate in highly regulated states like New York and Michigan, argue that they are exactly the kind of insurer envisioned under the new law. Blue Cross Blue Shield of Michigan says it is required to offer a policy for the same price to anyone who asks, regardless of whether that person has an expensive pre-existing condition. “It’s as close as you can come to a privately run public plan,” said Mr. Loepp.

The federal lawsuit is not the first attempt to curtail Blue Cross’s position in Michigan. Last year, state regulators blocked the insurer’s request for a 56 percent increase on some individual policies, and the Justice Department recently prevented Blue Cross from swallowing one of its rivals. Its main competitors are large hospital systems like Henry Ford and Spectrum Health, which largely offer H.M.O. plans. A few national carriers like Aetna and Humana also offer coverage.

Some state officials argue that the market is healthy enough. “Consumers have a variety of choices,” said Ken Ross, the state insurance commissioner. “They can buy high-quality affordable products other than Blue Cross.”

And some competitors even contend that their smaller size gives them an advantage. The plans “survive based on service, based on value and based on agility,” Nancy M. Schlichting, the chief executive of Henry Ford, a strong competitor in southeast Michigan, where it is based.

Blue Cross drew the attention of federal prosecutors because of its use of what are known as most-favored-nation clauses in the contracts it signed with dozens of hospitals. Prosecutors charged that Blue Cross squashed competition by demanding that hospitals charge as much as 40 percent more to rivals, and it was even willing to pay hospitals more to sign these contracts.

That practice seems to have stymied competition. Priority Health, the insurer owned by Spectrum Health, says it has not been able to negotiate reasonable contracts with hospitals in places like Lansing. Blue Cross says it is a business decision being made by Priority Health to stay out of any market.

Other insurers also use these contracts, and regulators in Georgia, for example, have questioned their use. WellPoint, which owns the Blue Cross plan in Georgia, declined to comment.

Blue Cross of Michigan defends its use of these provisions. The Blue Cross contracts with hospitals simply reflect the company’s insistence on getting the best prices available, amounting to $13 billion in savings through discounts, according to its general counsel, Jeffrey P. Rumley. “It’s part of what our customers expect from bringing significant volume to the table,” he said.

Blue Cross lost $94 million covering individuals last year. It lost an additional $186 million selling Medicare supplemental policies under state rules. Because of ample investment income and profits from its workers’ compensation business, the insurer reported net income of $233 million.

Blue Cross also says it has effectively controlled costs. While the cost of employer-sponsored family coverage more than doubled in the majority of other states from 1999 to 2009, according to a recent government report, Michigan’s premiums increased by 88 percent. “We seem to be managing this pretty well,” Mr. Loepp said.

He also pointed to various initiatives to improve the quality of care, like working closely with the state’s hospitals to reduce infections and with hundreds of doctors’ practices to coordinate patient care. “I’m trying to figure out what is wrong with what we’re doing,” said Mr. Loepp.

But the picture is more complicated. The state attorney general and others have frequently argued that the insurer is raising rates too sharply, even on the supplemental Medicare policies it offers. Even if the government prevails in preventing the use of these contracts, Blue Cross plans like the one in Michigan may still deter competition by being so big. “It doesn’t fundamentally alter the power dynamic and the fact the Blues are dominant players,” said Axel Bernabe, an antitrust lawyer at Constantine Cannon in New York.

And some insurers may choose not to compete in Michigan because of its dwindling prospects. “I can’t see why it would be a very attractive market,” said Thomas Buchmueller, a professor at the University of Michigan who focuses on health insurance.

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