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Overturning MFN Clauses in Insurance Contracts

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Most Favored Nation (MFN) clauses were originally rooted in international trade agreements. Within those agreements, countries were required to be treated the same and could not be considered of lesser status than other countries. In more recent times, MFN clauses have become a hot topic within property and casualty insurance contracts.

In early April 2013, Michigan Governor Rick Snyder signed Senate Bills 61 and 62 into law, prohibiting MFN clauses in health insurer contracts. This prompted the U.S. Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights to hold a hearing on “Oversight of the Enforcement of the Antitrust Laws.”

While the legislation and hearing did not address property and casualty insurers, the Automotive Service Association has been an active advocate in urging the U.S. Department of Justice (DOJ) to consider a ban on MFN clauses for automotive insurance contracts as well.

Bob Redding is the Automotive Service Association’s Washington, D.C., representative, and a member of several federal and state advisory committees involved in the automotive industry. Redding recently sat down with FenderBender to discuss the impact of MFN clauses on shop owners, and how the Michigan ban could set a precedent for property and casualty direct-repair agreements.


What do MFN clauses mean for the collision repair industry?

One of the key pieces in the big picture is that MFNs are a contract provision. It’s part of the contract where, in theory, the seller agrees to give the buyer the best terms he makes available to another buyer.

The Department of Justice (DOJ) and the Federal Trade Commission (FTC) said the following about MFNs: “The most commonly used MFN provisions guarantee a customer that it will receive prices that are at least as favorable as those provided to other buyers of the same seller, for the same products or services. Although at times employed for benign purposes, MFNs can, under certain circumstances, present competitive concerns. This is because they may, especially when used by a dominant buyer of intermediate goods, raise other buyers’ costs or foreclose would-be competitors from accessing the market. Additionally, MFNs can facilitate collusion and stabilize coordinated pricing among sellers.”

MFNs are broadly used and they are in a number of agreements offered by major national insurance companies. You see it in a lot of direct repair agreements. It’s in at least one major insurance company, and we see it in regional insurers and state insurers more frequently.


What is the impact of MFN clauses on shop owners?

It’s more pressure on shops, and it continues the cheaper, quicker DRP pressure on shops. Most of our members are direct repairers, and this is a whole subset of the direct repair debate. We’re certainly not anti-DRP, but we do have a problem with these clauses. They move beyond where these agreements should be and put our folks at a competitive disadvantage.

When you have a large insurer who’s demanding the lowest possible price, you’re crunching down on these body shops. What the FTC is worried about is then, how do they respond? You know they have to make a profit and that pressure being placed upon our shops is tremendous. The shops either just go along with it and make less money, or that’s a significant amount of pressure for any small business. They’re worried about collusion or any coordinated pricing amongst the sellers and the shops.

Plus, if you think about it, the MFN agreements also have an impact on the consumer. Because they benefit from that competition, they don’t benefit by having one dominant player making all of the rules and cutting out other insurers from the process. There are two victims here: the consumer and the body shop.


What are the similarities between auto and health insurance industries, in terms of MFN clauses?

The overriding message is the same: They are anticompetitive. When it comes to the meat of this between auto and health insurance, they are mirror images.

This is where it’s dissimilar though: We don’t have the profile that they have with health care. You’ve got Obamacare, which is a very public, nationally debated issue that will be kicking in for 2014. It’s a major focus for the FTC, for the DOJ, for the president, for Congress. It’s a much higher profile issue than the property and casualty case.

So it’s not surprising that in Michigan, out of the box, the DOJ would be in the health care arena, versus the property and casualty arena. There has also been a consensus for many years at places like the FTC that they don’t like to get involved in property/casualty discussions because the state handles it. Health insurance, on the other hand, is an area in which they occasionally delve. So we are a subset right now, even though from our perspective, the MFN issue is still the same.


The Michigan ban was on a state level. How did that ban affect discussions on a federal level?

We think that the legislature taking it up a notch certainly sent a message to the DOJ that they are on the right track. They passed it very quickly and the governor signed it very quickly. It gives energy to the policy side of where the DOJ and FTC have interest. We would have liked to see it cover the property and casualty industry, but it didn’t.

You’ve had a legislature that obviously sees the anticompetitive nature and the impact of these MFNs in the health care industry. The goal would be for shops to go to the legislature, go to the Department of Insurance and try to educate them that this is the same issue for the auto industry. It will have the same impact on the prices that these consumers are paying and that insurance companies are paying. In the long run, it doesn’t work. It certainly doesn’t work to our benefit or the consumers’ benefit. We really want to push these federal agencies, and then Capitol Hill. To do that, it will be a lot of education.


Could you provide a timeline for what is happening with the MFN clauses the rest of the year?

I think for this year, you’ve seen the majority of the activity on a state level. On a federal level, we continue to talk to the FTC and the DOJ and some specific members of Capitol Hill about this issue. Our collision operations committee has made it a priority and it’s ongoing for us.

There aren’t hearings scheduled on Capitol Hill, but the hearing process provides very short notice. There were members that were very interested in the recent testimony from the FTC and the DOJ during the antitrust overview, so there could easily be a hearing.


What is the ASA’s role in getting these clauses banned?

We see our role in getting these clauses banned as working in the state, educating them and getting them involved. I’m not just talking about the state legislatures, but the state agencies too. Because if you remember, the Department of Insurance in Michigan made the first move before the legislature did. At the federal level, we’ve already been in discussions with the U.S. DOJ and we’ve also communicated with the FTC. Our goal is to make sure they’re aware of our position, what this does to body shops, the impact on body shops and the impact on our customers.

I think for the next 18 months, with 2014 being a big Obamacare implementation point, a lot of employers are trying to figure out how that’s going to impact their business. That’s a whole different area, and we know that that is a distraction to the property and casualty MFN issue. Our job is to continue to profile this. If a health care piece starts to move like in Michigan, we want to be part of it. When we contacted these federal agencies, we don’t believe they had a focus on the property and casualty side, and we do know it’s on the radar now. That’s key for us—following through.

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