Georgia Hospital Combination Was Immune from FTC Challenge

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The effective merger of two Georgia hospitals was immune under the state action doctrine from an FTC challenge, the U.S. Court of Appeals in Atlanta has ruled. Dismissal of the Commission’s complaint for injunctive relief pending the completion of an administrative proceeding (2011-1 Trade Cases ¶77,508) was affirmed.

In an April 2011 administrative complaint, the FTC alleged that a local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA, Inc. and subsequent lease to Phoebe Putney Health System, Inc.—the operator of Phoebe Putney Memorial Hospital—would substantially lessen competition or tend to create a monopoly in the inpatient general acute-care hospital services market in Georgia’s Dougherty County and surrounding areas.

The agency sought injunctive relief to prevent the consummation of the plan prior to the completion of the administrative proceeding.

The appellate court agreed with the Commission that the joint operation of the two Albany, Georgia, hospitals—Phoebe Putney Memorial Hospital and Palmyra Park Hospital—“would substantially lessen competition or tend to create, if not create, a monopoly.” However, the question was whether the anticompetitive conduct was immunized by the state-action doctrine.

The FTC alleged that the acquisition included three stages:

(1) The local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA using Phoebe Putney’s money,

(2) The hospital authority’s immediate provision of control of the hospital to Phoebe Putney under a management agreement, and

(3) Phoebe Putney’s entry into a lease with the hospital authority to grant the local hospital operator managerial control of Palmyra Park Hospital’s assets for 40 years.

The FTC contended that the private parties used the hospital authority to shield the transaction from antitrust scrutiny.

State Action Immunity

While the doctrine of state action immunity protects the states from liability under the federal antitrust laws, the same protection does not extend automatically to political subdivisions, such as the hospital authority, the appellate court explained.

In order for the hospital authority to enjoy state-action immunity, it had to show that the state generally authorized it to perform the challenged action and clearly articulated a state policy authorizing anticompetitive conduct.

The acquisition of Palmyra Park Hospital, Inc. from hospital operator HCA Inc. and its subsequent operation by Phoebe Putney Health System, Inc., at the behest of the Hospital Authority of Albany–Dougherty County, were “authorized pursuant to a clearly articulated state policy to displace competition, the court held.

Through the Hospital Authorities Law, the Georgia legislature clearly articulated a policy authorizing the displacement of competition. The Georgia legislature granted local hospital authorities the power to acquire hospitals. In granting the power to acquire hospitals, the legislature must have anticipated that such acquisitions would produce anticompetitive effects, the court reasoned. “Foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

The appellate court rejected the Commission’s argument that it could dispose of the immunity issue because the plan at issue constituted only private action, since it was formulated by Phoebe Putney Health System and HCA, Inc. and presented by Phoebe Putney Health System to the hospital authority.

FTC Bureau of Competition Director’s Reaction

“The Eleventh Circuit agrees with the Commission that this deal will create a monopoly and eliminate competition,” said FTC Competition Bureau Director Richard Feinstein in response to the decision. “We remain very concerned that it will raise healthcare costs dramatically in Albany, Georgia. We are considering all our options.”

Details of the December 9, 2011, decision in FTC v. Phoebe Putney Health System, Inc., No. 11-12906, will appear in CCH Trade Regulation Reporter.