Do State Bans of Most‐Favored‐Nation Contract Clauses Restrain Price Growth? Evidence From Hospital Prices

Policy Points Looking for a way to curtail market power abuses in health care and rein in prices, 20 states have restricted most-favored-nation (MFN) clauses in some health care contracts. Little is known as to whether restrictions on MFN clauses slow health care price growth. Banning MFN clauses between insurers and hospitals in highly concentrated insurer markets seems to improve competition and lead to lower hospital prices.Most-favored-nation (MFN) contract clauses have recently garnered attention from both Congress and state legislatures looking for ways to curtail market power abuses in health care and rein in prices. In health care, a typical MFN contract clause is stipulated by the insurer and requires a health care provider to grant the insurer the lowest (i.e., the most-favored) price among the insurers it contracts with. As of August 2020, 20 states restrict the use of MFN clauses in health care contracts (19 states ban their use in at least some health care contracts), with 8 states prohibiting their use between 2010 and 2016.Using event study and difference-in-differences research designs, we compared prices for a standardized hospital admission in states that banned MFN clauses between 2010 and 2016 with standardized hospital admission prices in states without MFN bans.Our results show that bans on MFN clauses reduced hospital price growth in metropolitan statistical areas (MSAs) with highly concentrated insurer markets. Specifically, we found that mean hospital prices in MSAs with highly concentrated insurer markets would have been $472 (2.8%) lower in 2016 had the MSAs been in states that banned MFN clauses in 2010. In 2016, the population in our sample that resided in MSAs with highly concentrated insurer markets was just under 75 million (23% of the US population). Hence, banning MFN clauses in all MSAs in our sample with highly concentrated insurer markets in 2010 would have generated savings on hospital expenditures in the range of $2.4 billion per year.Our empirical findings suggest banning MFN clauses between insurers and providers in highly concentrated insurer markets would improve competition and lead to lower prices and expenditures.