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Georgia hospital merger may be DOA

by William McConnell in Washington | Published August 22, 2012 at 1:57 PM

The Federal Trade Commission and the Department of Justice have told the U.S. Supreme Court that lower courts' misreading of the "state action doctrine" in a key hospital merger case has harmed consumers in Georgia.

In a brief filed late Monday, the FTC and the Obama administration warned that if the justices validate the lower court rulings that cleared Phoebe Putney Health System Inc.'s $195 million purchase of Palmyra Park Hospital Inc. last year, there will be more anticompetitive hospital and utility acquisitions.

In June, the Supreme Court said it would accept the FTC's appeal of rulings by federal courts in Georgia allowing the hospitals to merge. On June 27, 2011, the U.S. District Court for the Middle District of Georgia dismissed an FTC complaint seeking to stop the deal and denied its motion for a preliminary injunction halting the merger. The U.S. Court of Appeals for the 11th Circuit affirmed the district court ruling Dec. 9.

The lower courts found that even though the merger would give Phoebe Putney 85% of the Albany, Ga., hospital market, a level that is presumptively illegal, it was permissible because the anticompetitive result was a foreseeable result of a clear state policy and there will be active supervision of the hospitals by the state-created Hospital Authority of Albany-Dougherty County. At issue is the state action doctrine, a principle established under a 1943 Supreme Court precedent that shields anticompetitive conduct from federal antitrust enforcement when the conduct furthers a clearly articulated state policy. Aside from anticompetitive mergers, the doctrine has allowed states to protect price coordination and other types of collusion between competitors. Actions by agricultural producers, for example, are often exempt from federal antitrust oversight because of the doctrine.

In their brief, the FTC and the DOJ said the Palmyra deal fails both tests necessary for it to pass muster under the state action doctrine: one, whether the Georgia legislature has "clearly articulated" a state policy to displace competition in the hospital market; and two, whether the local government body that supervises the merged hospital actually has the means to oversee its operations. 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.

In upholding the district court's ruling against the FTC, the 11th Circuit found that the deal was permissible because anticompetitive consolidation was a "foreseeable result" of the Georgia legislature's decision to enable the hospital authority to acquire and lease hospitals. By enabling such a predictable outcome, the 11th Circuit said the legislature was fulfilling the state action doctrine's requirement that a policy be "clearly articulated and affirmatively expressed" by the state.

Yet the FTC and the DOJ insisted that the Georgia legislature established no such "clearly articulated" policy.

"A broad grant of general corporate powers [to the hospital authority], which can readily be exercised in either procompetitive or anticompetitive ways, does not give rise to any sound inference that the state anticipated and condoned particular anticompetitive conduct," the federal government petitioners wrote.

Additionally, even when such a policy has been laid out, the petitioners said anticompetitive action is permissible only when a state's objectives cannot be realized without displacing competition -- a requirement the agencies said does not exist in Palmyra's case.

The FTC and the DOJ also argued that anticompetitive mergers were not a "foreseeable" result of Georgia's empowering the Hospital Authority of Albany-Dougherty County to buy and sell hospitals as the lower courts ruled.

"Anticompetitive conduct is the 'foreseeable' result of a state-law authorization only if state law speaks with relative specificity to the particular conduct involved and the conduct is inherently anticompetitive," the agencies wrote.

Finally, because the Palmyra deal involves an acquisition of monopoly power by a private party -- Phoebe Putney -- there must be practical supervision by a state authorized body. The lack of practical supervision by the hospital authority would make the deal illegal even if Georgia had a policy of allowing anticompetitive behavior, the agencies said.

"The authority now has no budget, no staff, and no employees," the agencies argued. "It has never countermanded, approved, modified, or otherwise affected [Phoebe Putney Health System's] actions on matters such as setting rates, offering services, making staffing decisions or managing facilities capacity."

Phoebe Putney's lawyers have until Oct. 1 to respond.

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