OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

Hartford, CT 06106 (860) 240-0200

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

April 15, 2011

ADDENDUM

To Fiscal Note on

sHB-6471, File No. 151

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

The fiscal note, in characterizing the fiscal impact of the prohibition of the Most Favored Nation Clause (MFN) stated there could be a potential cost to the state employee health plan (“the plan”) and municipalities1. However, there may be a potential savings to the state and municipalities which was not addressed in the fiscal note. The intent of this addendum is to further clarify the fiscal note and characterize the potential savings. The potential cost or savings associated with the prohibition of the MFN from contracts between an insurer and providers is clarified and explained herein.

To clarify, the potential cost to the state and municipalities is indeterminate but would depend on the rates the insurer with the MFN is able to secure when they negotiate with providers2. The potential cost would accrue to the state and municipalities as the insurer would no longer be assured that they received the lowest price for services from the provider. The potential increase in price 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 potential savings to the state and municipalities which is also indeterminate. 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. 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 offered by the provider to the insurer with the MFN3.

It is unclear to what extent the prohibition of the MFN will impact the price of health care and the rates paid to providers, an assessment of which is outside the scope of this fiscal note. There exists competing information as to the effect of the MFN on health plans and the broader health care market, an assessment of which is also outside of the scope of this fiscal note.

For illustrative purposes the following table presents the effect of a 1% increase or decrease 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 just one option. The state's share of premium costs range from $3,408 to $19,654 depending on the type and scope of coverage for employee through family plans.

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 offered 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).