Thursday, June 30, 2011

FTC, Georgia Denied Preliminary Injunction Blocking Hospital Acquisition

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

Earlier this week, the federal district court in Albany, Georgia, denied a request from the Federal Trade Commission (FTC) and the State of Georgia for a preliminary injunction blocking a proposed hospital acquisition pending FTC administrative proceedings. The court ruled that the challenged transaction was state action immune from the antitrust laws.

In April, the FTC issued an administrative complaint challenging Phoebe Putney Health System, Inc.'s proposed acquisition of rival Palmyra Park Hospital, Inc. from HCA Inc. The FTC alleged that the proposed acquisition would create “a virtual monopoly for inpatient general acute care services sold to commercial health plans and their customers in Albany, Georgia and its surrounding area.” According to the FTC, the acquisition would eliminate competition between the only two hospitals in Albany and in Dougherty County.

The FTC and state 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.

Scope of Transaction

The court began its analysis by defining the scope of the transaction under review. The court rejected the defendants’ contention that only the local hospital authority’s purchase of Palmyra Park Hospital’s assets was at issue. The defendants viewed the breadth of Clayton Act, Section 7 too narrowly. They maintained that the lease and its terms did not yet exist and had not even been negotiated. Moreover, the defendants argued that neither the putative lease nor the management agreement was alleged to have competitive impact beyond the acquisition of the subject hospital itself by the hospital authority. The court decided that the management agreement and lease should constitute a part of the acquisition subject to review.

State Action Immunity

The FTC contended that the private parties used the hospital authority as a “‘strawman’ in an attempt to shield an overtly anticompetitive transaction from antitrust scrutiny.” In order to obtain protection under state action immunity doctrine, the hospital authority had to establish action (1) by a political subdivision of the state, (2) undertaken pursuant to state statutes authorizing the challenged action, (3) the anticompetitive effects of which are reasonably foreseeable to the legislature based on the statutory power granted to the political subdivision.

It was undisputed that the authority was a political subdivision of the State of Georgia. In addition, the Georgia Code authorized the challenged conduct of acquiring and leasing hospital property for purposes of meeting the healthcare needs of the community. The court’s analysis hinged on the third element: whether the alleged suppression of competition was a reasonably foreseeable result of the conduct authorized and the powers granted to the hospital authority under Georgia law.

The court concluded that the conduct was reasonably foreseeable. When the legislature equipped a hospital authority with the broad power to lease a hospital to another (the lessee) and grant the lessee the right to operate said hospital, it contemplated that the lessee could have once been a competitor of the authority’s newly acquired and leased hospital, the court reasoned. Whether the hospital authority authorized the purchase of the hospital without considering, among other factors, the anticompetitive adverse effect of the acquisition on healthcare in the community was irrelevant.

Because the hospital authority was immune for its anticompetitive conduct, any actions taken by the private actors to prompt or engender that conduct was also immune. Phoebe Putney would not be able to exercise control over Palmyra Park Hospital operations independent of the hospital authority. Thus, the Palmyra Park Hospital’s actions in the transaction would be considered those of the hospital authority, which was entitled to immunity, the court concluded.

The June 27, 2011, decision in FTC v. Phoebe Putney Health System, Inc., Case No. 1:11-cv-58 (WLS), will appear at CCH 2011-1 Trade Cases ¶77,508.

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