OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

Hartford, CT 06106 (860) 240-0200

http: //www. cga. ct. gov/ofa

sHB-6471

AN ACT PROHIBITING MOST FAVORED NATION CLAUSES IN HEALTH CARE PROVIDER CONTRACTS.

As Amended by House "A" (LCO 6154)

House Calendar No. : 104

OFA Fiscal Note

State Impact:

Agency Affected

Fund-Effect

FY 12 $

FY 13 $

State Comptroller - Fringe Benefits

GF & TF – Cost or Savings

Indeterminate

Indeterminate

Note: GF=General Fund and TF= Transportation Fund

Municipal Impact:

Municipalities

Effect

FY 12 $

FY 13 $

Various Municipalities

Cost or Savings

Indeterminate

Indeterminate

Explanation

The bill may result in a potential cost or a savings to the state employee health plan1 and municipalities which is indeterminate. The potential cost or savings are a result of the bill's prohibition of Most Favored Nation Clauses (MFN) from contracts entered into, renewed, amended or offered on or after October 1, 2011. In addition, for those contracts with MFN clauses that are in effect prior to October 1, 2011; these contracts are void and unenforceable on the contract renewal date or January 1, 2014, whichever is earlier.

The potential cost to the state and municipalities would depend on the rates the insurer with the MFN is able to secure when the insurer negotiates rates with providers2. The potential cost would accrue to the state and municipalities as the insurer would no longer be assured they received the lowest price for services from the provider. The potential increase in cost assumes any increase in provider rates is passed through to the state or municipalities by way of increased rates or premium costs. If the increase is passed through to the state or municipalities the cost of providing healthcare for employees may increase.

Conversely, there could be a potential savings to the state and municipalities. The savings would accrue to the state and municipalities if insurers who otherwise would not have been able to negotiate the MFN clause into a contract with a provider are able to secure lower prices as a result of MFN clauses being prohibited. The savings assumes two factors are true. First, the insurers secure lower pricing and the lower prices are passed on to the state or municipalities by way of decreased rates or premium costs. Secondly, the insurer who previously was not allowed to negotiate the MFN clause into the contract was not otherwise able to secure the lowest price that was offered by the provider to the insurer with the MFN3.

For illustrative purposes the following table presents the effect of a 1% change in the state's portion of the premium for a state employee plus one dependent enrolled in the POE plan4:

 

Incremental Increase

Adjusted Premium

1% Increase in State Share

Approximately $104

$10,470

1% Decrease in State Share

Approximately ($104)

$10,262

The state employee health plan currently covers approximately 202,157 lives. Employees and retirees have the option of selecting coverage for which the POE plan is one option. The state's share of premium costs range from $3,408 to $19,654 depending on the type and scope of coverage selected by the employee.

Lastly, the state employee health plan and many municipal health plans are recognized as “grandfathered” health plans under the Patient Protection and Affordable Care Act (PPACA). It is unclear what effect potential changes in plan costs will have on the grandfathered status of the state employee health plan or grandfathered municipal plans PPACA5.

House “A” specifies that (1) for contracts in effect prior to October 1, 2011 with a MFN clause; these contracts are void and unenforceable on the contract renewal date or January 1, 2014, whichever is earlier and (2) the contracting health organization has the right to enforce the a MFN clause before its invalidation. The changes result in the fiscal note explained herein and expands the potential contracts impacted.

The Out Years

The annualized ongoing fiscal impact identified above would continue into the future subject to inflation.

It is unclear what effect the PPACA will have on health care contracts and therefore what the impact to the state and municipalities will be as a result of the bill's provisions in the out-years.

1 The state employee health plan is self insured and uses a third party administrator to negotiate with insurers to provide health packages to employees and retirees. The packages offered to state employees are provided by three separate insurance carriers.

2 The nature of the MFN is such that only one insurer's contract with a provider contains the clause. According to the Federal Trade Commision, in general, the MFN is a promise by one party, for example a supplier, to treat a buyer as well as the supplier treats its best, "most favored" customer. If the supplier lowers the price to someone else, then the buyer's price will be lowered to match. To characterize it in the context of the health care market, it is a contractual requirement by a healthcare payor for the lowest price that a provider of services (like a hospital) offers to any payor.

3 MFN clauses take on different forms depending on what language is negotiated into the contract. One type of MFN is the equal rate provision, which assures the insurer gets the lowest price or greatest discount offered to another insurer. In, this case multiple insurers could theoretically have the same lower rate.

4 The state share and therefore the base for the example is $10,366 (rounded to the nearest dollar).

5 According to the PPACA, compared to the plans' policies as of March 23, 2010, grandfathered plans who make any of the following changes within a certain margin may lose their grandfathered status: 1) Significantly cut or reduce benefits, 2) Raise co-insurance charges, 3) Significantly raise co-payment charges, 4) Significantly raise deductibles, 5) Significantly lower employer contributions, and 5) Add or tighten annual limits on what insurer pays. (www. healthcare. gov)