For those that are not involved in the collision industry, the term Most Favored Nation (MFN) clause may appear to refer to some international trade agreement. These clauses do have an important meaning for the collision industry. How do they apply to collision repairers? MFN clauses, in direct repair agreements (DRP), between insurers and collision repair facilities guarantee an insurer that it will receive prices that are at least as favorable as those provided to other carriers doing business with the collision repair facility, for the same products or services. MFN clauses can, under certain circumstances, present competitive concerns. One instance is when the MFN clause is used by a dominant buyer of intermediate goods, raising other buyers’ costs or foreclosing would-be competitors from accessing the market.
Insurer MFN Clause Example: Provider agrees that if it gives a bottom line discount, rebate or other estimate discount on the overall repair costs to any insurer, such discount constitutes an estimate and bill for repairs for purposes of this section. In that event, pricing provided to the insurer and its customers by Provider shall include the bottom line discount given to any other such insurer.
Examples of the negative impact of MFN Clauses
Collision shops: If the largest or a larger insurer insists on an MFN clause, shops are forced to make decisions as to whether to participate with other insurers that may have smaller market share but require higher discount(s). This could negatively impact the collision shop as well as limit the repair choices of the vehicle owner (consumer).
Consumers: Shops are pressured to reduce direct repair program participation with carriers that require discounts yet have a smaller market share. Consumers may not be allowed to have their vehicle repaired where they prefer to have it repaired. Consumers could face physical inconveniences with the lack of repair shop choice. The cost to repair a vehicle could increase with smaller insurer discounts becoming problematic for collision repairers.
Insurers: Smaller carriers, and some larger carriers that require discounts are at a disadvantage due to shops having to drop their programs in order to avoid the financial pressure of providing all these same discounts to an insurer(s) that is dominant in the marketplace.
The Obama Administration did not look favorably on MFN clauses relative to health care. Unfortunately, their interest did not include property and casualty. In October 2010, the U.S. Department of Justice (DOJ) filed a complaint against Blue Cross Blue Shield of Michigan about the use of MFN clauses. In 2012, Michigan’s Insurance Commissioner issued a regulation prohibiting the use and enforcement of MFN clauses in health insurer contracts. Michigan’s Governor signed the legislation into law that banned the use of MFN clauses by health insurers, HMO’s and nonprofit health care corporations.
In the fall of 2012, the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice held a joint public workshop on MFN clauses.
The Automotive Service Association (ASA) wrote the U.S. DOJ Assistant Attorney General for the Antitrust Division following the Workshop. In the letter, ASA stated: “ASA’s collision repair members have raised a significant concern regarding insurer-repairer direct repair agreements. An increasing number of our collision repair shop owners are faced with direct repair agreements, offered by insurance companies, which include Most Favored Nation (MFN) or Most Favored Customer clauses. Not all insurer agreements contain these clauses, but they are appearing in agreements offered by major national insurance companies as well as some insurance companies that are dominant only in a particular state…
“For the large majority of collision repairers, not participating in insurer direct repair programs is not a viable option. It is our understanding that the Department has raised concerns about MFN clauses in recent litigation as well as in testimony on Capitol Hill. ASA encourages the Department to continue to pursue the MFN clause issue. The anti-competitive nature of these clauses ensures both our members and consumers are at a disadvantage.”
Although at least one major insurer has dropped the use of MFN clauses, they are still included in some insurer DRP agreements. Many repairers view these clauses as harmful to their businesses. This Administration and the new 116th Congress may want to take another look at the impact these MFN clauses have on consumers and repairers.