The contract clause in question is often referred to as the “most-favored nation” clause in that it requires a supplier—such as a body shop—to provide the buyer with which it has a contract such as an insurer—with the same pricing it offers its “best” or “most-favored” customer.
Most-favored nation (MFN) clauses have been the subject of lawsuits and regulatory scrutiny in the health care industry in recent years, and the Automotive Service Association (ASA) is among the groups hoping to turn that attention to similar clauses in DRP contracts.
State Farm initiates
MFNs first gained prominence in the collision repair industry in 2006 when State Farm announced some significant changes to its Select Service agreements. One of the changes was an MFN requirement.
George Avery, a claims consultant with State Farm, defended the new requirement at the time by saying that because State Farm writes more than twice as many estimates as its nearest competitor, it felt it should be getting any discounts that shops offer to other insurers or customers.
“If you choose to give no discounts whatsoever, that’s perfectly fine with us,” Avery said in a 2006 interview. “I don’t have a problem with that. But if your business model includes some discounts, then we want to be part of it.”
He said he recognizes that shops may offer one insurer a discount on parts but not labor, and another insurer a discount on labor but not parts. Under the new agreement, Avery said, the shop must provide State Farm with all the best discounts it offers in any category.
“If anyone or everyone gets a 10% discount except State Farm, for example, if you’re interested in our program and I select you, I would like that 10%,” Avery said. “That’s when repair facilities need to make a decision. Please understand I’m saying this with the most respect I can muster: If your business practice is that you give discounts but you can’t afford to give me the discount, then perhaps this program is not for you.”
State Farm said it could check on how a shop bills other insurers when subrogating claims paid by the other carrier for which State Farm is ultimately responsible.
“Am I going to scour that stuff? I’m not going to look at your business. I’m going to trust you,” Avery said. “But if it comes to my attention, I’m going to take appropriate action and I’m going to take it now.”
Shops, regulators, courts respond
Collision repair shops took a variety of paths in dealing with the new MFN policy, which has since been emulated by a number of other insurers. Those that had previously offered other insurers little in the way of discounts were not widely impacted. Some that had offered discounts didn’t see it as a good business option to extend those discounts to the largest auto insurer—and raised their charges to the other insurers or dropped those programs. Still others just began giving State Farm the MFN status the insurer was seeking.
Some, too, parted ways with the State Farm program—of their own choice or that of the insurer. State Farm reduced the number of shops participating in “Select Service” by about 40% in 2006 and 2007 as it rolled out the new agreement.
But by 2010, MFNs that insurers had implemented in the health care industry were beginning to creep in the news:
• In March 2010, Connecticut Attorney General Richard Blumenthal challenged the MFN clause of a health insurer-provider contract. Blumenthal notified the U.S. Health and Human Services Secretary of his ongoing investigation into what he termed the “anti-competitive clause” that Anthem Blue Cross & Blue Shield of Connecticut has in its contracts with hospitals and doctors. Blumenthal said such clauses “may drive up health care costs and drown out competition.”
• In late 2010, Blue Cross Blue Shield of Michigan filed a motion in U.S. District Court in Detroit seeking dismissal of a federal antitrust lawsuit that alleges that the “most favored nation” clauses of the insurer’s contract with hospitals is anti-competitive. The U.S. Department of Justice and Michigan’s Attorney General had brought the lawsuit against the health insurer, saying MFN clauses raise hospital prices, discourage discounting and prevent other insurers from entering the marketplace. It said that some Blue Cross clauses required Michigan hospitals to charge the insurer’s competitors up to 40% more for services. Blue Cross was unsuccessful in arguing the suit should be dismissed because as a state-created entity, the company is protected from federal antitrust lawsuits, and because the government failed to show specific economic harm caused by its behavior.
“This cannot be allowed in Michigan, and let me be clear: We will challenge similar anti-competitive behavior anywhere else in the United States,” Christine Varney, the U.S. Assistant Attorney General’s Office antitrust chief at the time, said.
• Most recently, the Department of Justice (DOJ) and Federal Trade Commission (FTC) held a joint workshop this past fall that many saw an indication that anti-trust regulators have “a reinvigorated focus on most-favored-nation (MFN) clauses.”
“Although at times employed for benign purposes, MFNs can, under certain circumstances, present competitive concerns,” the two agencies noted prior to the workshop. “This is because they may, especially when used by a dominant buyer, raise other buyers’ costs or (prevent) would-be competitors from accessing the market. Additionally, MFNs can facilitate collusion and stabilize coordinated pricing among sellers.”
ASA’s Bob Redding participated in the workshop and said, “What was evident from the workshop is that public policy regarding MFN clauses is still evolving. There are a number of outstanding questions such as whether these clauses - a common practice in many business sectors - have a net benefit for consumers. The FTC and the DOJ have a difficult task in determining how to regulate MFN clauses in order to protect consumers and small businesses.”
Following the workshop, ASA wrote a letter to the Department of Justice asking for a full review of the clauses as used in direct repair agreements.
“The anti-competitive nature of these clauses ensures both our members and consumers are at a disadvantage,” Redding said in the letter.
Redding seems hopeful the issue will remain within the focus of regulators.
“This is an area that has not worked in our favor as collision repairers in the past,” Redding said. “But we’re going to see more interest in this area by the FTC and the Department of Justice.”