A Most Favoured Nation’s Rant

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

News yesterday:

U.S. Sues Michigan Blue Cross Over Pricing

The US Department of Justice and the State of Michigan have sued Michigan Blue Cross over their practice of having a clause in their contracts requiring that hospitals never charge other insurance companies less than they charge Blue Cross. In some cases they allegedly required the hospitals to charge 25-39% more than they charged other insurance companies The plaintiffs charge this is anti-competitive behavior.

US purchasing shorthand calls such clauses ‘MFN’ (Most Favored Nation) clauses.

My response:

Well duh, it's about dxxx time! These clauses are a refuge of lazy-axx purchasers who rely on their competitors to do their price negotiations. The clauses I've run into also would require sellers to open their books to audit so buyers can actually check what a seller charges others. If that isn't anti-competitive, I don't know what is.

It's also futile and, in some cases, comical. I had a major client who wanted me to agree to such a clause. They were some of the most lackadaisical price negotiators I've seen. They had just asked me to become an employee of their temp agency (for the same consultant rate) because they didn't have a process to reliably send 1099 tax forms reporting my income to the US Internal Revenue Service. That raised their cost 20% and increased my profit by 7% because now they didn't have to pay the employer's share of Social Security and Medicare. I was waiting for them to ask for a 7% price reduction but the request never came. Sure I signed their agreement but I made sure that my services to them were 'different' than services to others.

So if anyone thinks you're accomplishing anything with these clauses, look again. If it's not a more or less standardly defined good or service, all you've done is increase bureaucracy. If it's a standard product, I agree with the plaintiffs that it's anti-competitive.

Thanks, Dick!

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