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Supreme Court knocks down Georgia hospital merger

by William McConnell In Washington  |  Published February 20, 2013 at 1:24 PM
The Federal Trade Commission scored a big win Tuesday as the Supreme Court reversed lower court rulings that had allowed a monopoly-creating hospital merger in Georgia.

The court found that Phoebe Putney Health System Inc.'s $195 million 2011 acquisition of Palmyra Park Hospital Inc. in Albany, Ga., arranged by a local hospital authority, was not covered by an exemption that shields states from federal antitrust law. The victory is a relief to the commission, which had argued that broadening the exemption could allow a rash of hospital and utility mergers.

Lower courts had found that the merger was protected by the so-called state action doctrine, which allows states to authorize anticompetitive conduct in some instances.

The acquisition gave Phoebe Putney Health System 85% of the Albany market, a share that would otherwise be presumptively illegal. A federal district court said even though the deal harmed competition, it was permitted under the state action doctrine because approval of anticompetitive mergers was a foreseeable result of the Georgia law authorizing the local hospital authority to rule on hospital mergers. The ruling was upheld by the U.S. Court of Appeals in Atlanta.

The Supreme Court decision remands the case back to the lower courts.

The FTC fought the case at every step, arguing that the lower courts' actions would vastly expand the state action doctrine and would permit more anticompetitive deals between hospitals and utilities overseen by state and local government.

FTC Chairman Jon Leibowitz, who had delayed his departure from the commission by a week, praised the justices' decision in a statement. "Today's ruling is a big victory for consumers who want to see lower healthcare costs, and the court's opinion will ensure competition in a variety of other industries, as well."

Robert Leibenluft, a partner at Hogan Lovells LLP who specializes in healthcare antitrust cases, said the ruling will bolster the FTC's effort to limit the reach of antitrust immunity under the state action doctrine. "The FTC not only won with a unanimous opinion, the court also repeated its admonition that state action immunity should be disfavored pointing to the 'essential national policies' enumerated in the antitrust laws. The case will likely embolden the FTC to continue to urge courts to interpret state action immunity claims narrowly -- whether brought by political subdivisions or private actors."

The Supreme Court unanimously reversed and remanded the previous rulings in an opinion written by Justice Sonia Sotomayor. "Georgia's grant of general corporate powers to hospital authorities does not include permission to use those powers anticompetitively," she wrote.

Under the state action doctrine, state activities are exempt from federal antitrust enforcement when a state has a "clearly articulated and affirmatively expressed" policy to displace competition. Under a 1943 Supreme Court precedent, anticompetitive conduct can be shielded from federal antitrust enforcement when the conduct furthers such a clearly articulated state policy and the conduct is actively supervised by the state or its authorized agent. Aside from anticompetitive mergers, the doctrine has allowed states to protect price coordination and other types of collusion between competitors. Actions by agricultural producers are often exempt from federal antitrust oversight because of the doctrine.

The merger ostensibly put both hospitals under the ownership of the Hospital Authority of Albany-Dougherty County and under the operational control of Phoebe Putney Health System, the private operator that also runs Phoebe Putney Memorial Hospital. PPHS was formed by the hospital authority in 1941 and was granted authority to approve mergers of hospitals within its jurisdiction.

The FTC and a number of states argued that the hospital authority's power to approve mergers was nothing more than a grant of general powers, not a blank check to disregard antitrust law.

The justices, who heard argument in the case Nov. 26, agreed.

The hospitals' "state-action immunity defense fails under the clear-articulation test because there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership," Sotomayor wrote. "The authority's powers, including its acquisition and leasing powers, mirror general powers routinely conferred by state law on private corporations. More is required to establish state-action immunity; the authority must show that it has been delegated authority not just to act, but to act or regulate anticompetitively."

The justices found that designation of general corporate power by the state to municipal and other substate governmental entities don't typically raise antitrust concerns, so the mere grant of those powers does not meet the test of showing that the state contemplated those powers would be used anticompetitively.

The Supreme Court also took the U.S. 11th Circuit Court of Appeals in Atlanta to task for finding that approval of an anticompetitive merger was foreseeable. "The 11th Circuit applied the concept of 'foreseeability' too loosely," Sotomayor wrote. "When a state grants an entity a general power to act, it does so against the backdrop of federal antitrust law. Entities might transgress antitrust requirements by exercising their powers anticompetitively, but a reasonable legislature's ability to anticipate that possibility falls well short of clearly articulating an affirmative state policy to displace competition."

McDermott Will & Emery LLP antitrust partner Stephen Wu said both the FTC and the Department of Justice had been trying to rein in the scope of the state action doctrine during the George W. Bush administration. In 2003, during the chairmanship of Timothy Muris, the FTC issued a report recommending tighter criteria for applying the doctrine. The report was overseen by then-FTC general counsel and future chairman William Kovacic. Current FTC Commissioner Maureen Ohlausen, then a staffer in the Office of Policy and Planning, was a member of the report's task force.

Wu said Tuesday's opinion does more than remove the doctrine's application to the Phoebe Putney hospital deal. "This does narrow the scope of immunity from how it has been understood," he said.

The court has offered guidance as to what qualifies as a "foreseeable effect" of state regulation and whether an action meets the "clear articulation' test," Wu added. "Even if there's not an explicit statement [by the state] that an anticompetitive result is permissible, the court is saying such a result at least has to be an 'inherent, logical, or ordinary result' of the authority delegated by the state."

Tags: FTC | Hospital Authority of Albany-Dougherty County | Jon Leibowitz | Maureen Ohlausen | Palmyra Park Hospital Inc. | Phoebe Putney Health System Inc. | Sonia Sotomayor | Supreme Court | William Kovacic

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