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Supremes To Return To Health Care Market

Posted  July 9, 2012

As the United States continues to process the Supreme Court’s opinion on the constitutionality of the Affordable Care Act, the Court has accepted another important case in the health care industry.

The Supreme Court has granted the FTC’s petition challenging a hospital merger in Federal Trade Commission v. Phoebe Putney Health System, Inc.  Antitrust practitioners are closely following the case because the decision could provide valuable guidance on the boundaries of state action immunity in antitrust cases.

As described in a previous Antitrust Today post, the FTC brought a federal action in April 2011 to preliminarily enjoin this hospital merger in Georgia.  The terms of the merger are somewhat complicated: Phoebe Putney Health System, Inc. (“PPHS”) announced a plan to have a political subdivision, the Hospital Authority of Albany-Dougherty County (“Hospital Authority”), use its general corporate powers to acquire Palmyra Park Hospital, Inc. (“Palmyra”) and lease Palmyra’s assets to PPHS or one of its subsidiaries.

The FTC claims that the acquisition is practically a “merger to monopoly” that threatens harm to competition.  Defendants argue that the statutory authorization and the involvement of the Hospital Authority triggered the state-action doctrine, which immunized the plan from antitrust scrutiny.  The FTC counters by arguing that the Hospital Authority is merely a strawman that was included solely for the purpose of immunizing the transaction from antitrust scrutiny.  The U.S. District Court for the Middle District of Georgia and the Eleventh Circuit Court of Appeals sided with the defendants.  Now the FTC gets to take its case to the Supreme Court.

The Supreme Court will consider two specific questions raised by the FTC: (1) “Whether the Georgia legislature, by vesting the [Hospital Authority] with general corporate powers to acquire and lease out hospitals and other property, has ‘clearly articulated and affirmatively expressed’ a ‘state policy to displace competition’ in the market for hospital services,” and (2) “Whether such a state policy, even if clearly articulated, would be sufficient to validate the anticompetitive conduct in this case, given that the [Hospital Authority] neither actively participated in negotiating the terms of the hospital sale nor has any practical means of overseeing the hospital’s operation.”

The FTC makes two main arguments.  First, the FTC argues that the state action doctrine does not apply because the Georgia legislature did not go far enough in expressing a policy displacing competition.  The FTC states that the statute is “silent” or “neutral[]” on anticompetitive conduct.  Petition for a Writ of Certiorari at 16-17, FTC v. Phoebe Putney Health System, Inc., (No. 11-1160).  The FTC suggests that this fails to meet the standard that the political subdivision act “pursuant to an affirmatively expressed state public policy or regulatory structure … that ‘inherently,’ by ‘design[],’ or ‘necessarily,’ would be incompatible with, or would depart significantly from, federal law’s ‘assumption that competition is the best method of allocating resources.’”  Id. at 16 (internal citation omitted).

Second, the FTC argues that even if the Georgia legislature clearly articulated its intent to displace competition, the state action doctrine does not apply because the state failed to supervise, and failed to exercise sufficient independent judgment or control over, the transfer of monopoly power to a private entity.  The FTC cites the facts that private parties – as opposed to a governmental entity – negotiated the transfer, and that there’s “no reasonable likelihood” that a governmental entity will “meaningfully supervise” the operation of Palmyra after the transfer.  Id. at 28.  The FTC argues that as a result, the law fails to provide an alternative regulatory mechanism to displace the open market.

The Supreme Court’s decision will likely have significant implications on hospital mergers.  According to the FTC’s petition, “In 2008, nearly 20% of hospitals were owned by States and local governments.”  Id. at 30 (citing Nat’l Ctr. for Health Statistics, U.S. Dep’t of Health & Human Servs., Health, United States, 2010: With Special Feature on Death and Dying, 354 (2011).

Tagged in: Antitrust Enforcement, Antitrust Litigation, Monopolization,