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.

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.