In an opinion that has implications for the health care industry and beyond, the Supreme Court, in Federal Trade Commission v. Phoebe Putney Health System, Inc., last month clarified the standard for exempting “state-action” from the federal antitrust laws, finding that a grant of general corporate authority by the State of Georgia to hospital authorities, which included the right to acquire hospitals, does not meet the “clear-articulation” test of showing that the State intended hospital acquisitions to be exempt from antitrust scrutiny. At issue in that case was the acquisition of the second largest hospital in Dougherty County Georgia by the Hospital Authority of Albany-Dougherty County (the “Authority”), an entity created and operated under state law, in what the FTC claimed was a merger to monopoly.
First, some background is vital. In 1941, the State of Georgia amended its Constitution to permit political subdivisions to provide health care services and the State enacted legislation — the Hospital Authorities Law, Ga. Code Ann. § 31-7-70 et seq. This legislation provided the mechanism for the operation and maintenance of needed health care facilities in the several counties and municipalities of th[e] state.” Under this law, counties and municipalities are empowered to create “a public body corporate and politic” called a “hospital authority” which is to be governed by boards appointed by the county or municipality. Under this state law, a hospital authority could “exercise public and essential governmental functions,” and could exercise 27 enumerated powers, including the power to “acquire by purchase, lease, or otherwise and to operate projects,” 31-7-75(4), which are defined to include hospitals and other public health facilities.” The Authority was formed under this law.
Promptly after its formation in 1941, the Authority acquired Phoebe Putney Memorial Hospital (“Memorial”). Following the acquisition, the Authority reorganized itself, creating two entities to manage Memorial — Phoebe Putney Health System Inc. (“PPHS”) and its subsidiary, Phoebe Putney Memorial Hospital, Inc., (“PPMH”). The Authority thereafter leased Memorial to PPMH for $1 a year for 40 years. Memorial, by itself, accounted for 75% of the market for acute-care hospital services provided to commercial health care plans and their customers in the six counties surrounding Albany, Georgia.
In 2010, PPHS began discussions to purchase Palmyra Medical Center (“Palmyra”), the second largest acute-care hospital located only two miles from Memorial. Together with Memorial, Palmyra and Memorial had 86% of the market. PPHS proposed that the Authority purchase Palmyra with PPHS controlled-funds and then lease Palmyra to a PPHS subsidiary for $1 per year under a lease arrangement with Memorial. The Authority approved the transaction, effectively placing 86% of the market under the Authority’s (and PPHS and PPMH’s) control.
The FTC issued an administrative complaint against the Authority, PPHS and PPMH and concurrently filed an action in the United States District Court for the Middle District of Georgia against these parties to enjoin the acquisition on the grounds that it would create a virtual monopoly and substantially lessen competition for acute-care hospital services. The District Court denied the injunction and dismissed the complaint on the grounds that the Authority, PPHS and PPMH were immune from antitrust liability under the state-action doctrine. The FTC appealed the District Court’s decision to the Eleventh Circuit, which affirmed the district court’s decision, and thereafter, the FTC petitioned the Supreme Court for review.
The “state-action doctrine” is a legal doctrine which can provide immunity from the federal antitrust laws to states and, in certain cases, non-state actors in the conduct of business. The doctrine emanates from the Supreme Court decision in Parker v. Brown, 317 U.S. 341 (1943), which recognizes the right of the States to regulate their economies in their sovereign capacity. In subsequent opinions, the Supreme Court has considered the state-action doctrine in a variety of contexts, including in the cable industry, sewer management services and billboard advertising, and in the process has helped refine when the doctrine may properly be invoked. In the Phoebe Putney Health System case, the Supreme Court was called upon to see if the state-action doctrine would protect the decision of a hospital authority — which was created and empowered by the State of Georgia — to essentially merge the two largest acute-care facilities in and around Dougherty County, Georgia from antitrust scrutiny. Clearly, accepting the FTC’s allegations as true, the acquisition would result in a merger to monopoly. As such, much was on the line.
The Supreme Court unanimously ruled that the acquisition could not be shielded by the state-action doctrine. In making this finding, the Supreme Court started with the principle that the state-action doctrine is not favored given “the fundamental national values of free enterprise and economic competition that are embodied in the federal antitrust laws.” The Court noted that state-action immunity will only be recognized “when it is clear that the challenged anticompetitive conduct is undertaken pursuant to a regulatory scheme that ‘is the State’s own.’” Here, the central issue for the Supreme Court was whether the Authority’s actions were taken “pursuant to a ‘clearly articulated and affirmatively expressed’ state policy to displace competition.” Federal Trade Commission v. Phoebe Putney Health System, Inc., 568 U.S. __ (2013), quoting Community Communications Co. v. Boulder, 455 U.S. 40, 52 (1982).
In Phoebe Putney Health System, the Supreme Court determined the state-action doctrine did not apply as it found “no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership.” Recognizing that the hospitals in Georgia are highly regulated by the State, the Court continued to note that such regulation does not translate to an expression by the State of a “policy to allow authorities to exercise their general corporate powers, including their acquisition power, without regard to negative effects on competition.” Indeed, the Court rejected as unsupportable the argument advanced by the Authority that because the hospitals were regulated by Georgia and empowered to acquire hospitals, they were therefore exempt from antitrust scrutiny, as the “power to acquire hospitals still does not ordinarily produce anticompetitive effects.” While the Court recognized that the State of Georgia already acts, through its granting of certificates of need for hospitals, to limit competition, that fact does not does not equate to the clear articulation of a state policy to displace competition that the Court was seeking.
“We recognize that Georgia, particularly through its certificate of need requirement, does limit competition in the market for hospital services in some respects. But regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.”
Moreover, while the Supreme Court found that while the State of Georgia authorized the Authority to acquire hospitals, it did not “clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.” As the Court stated: “‘simple permission to play in a market; does not ‘foreseeably entail permission to roughhouse in that market unlawfully.’” Federal Trade Commission v. Phoebe Putney Health System, Inc., 568 U.S. __ (2013), quoting Kay Elec. Cooperative v. Newkirk, 647 F.3d 1039, 1043 (10th Cir. 2011).
The Supreme Court’s decision has many significant implications.
First, the decision provides a clear reminder that competition is the norm, not the exception. Any effort to shield potentially anticompetitive conduct under the state-action doctrine will be closely reviewed.
Second, while the application of this decision is in no way limited to the health care industry, it clearly signals, at least in Georgia, that competition for health care will be robust. Moreover, as other states have some aspect of regulation of hospitals through a certificate of need system, see e.g., N.C.Gen.Stat. § 131E-175, health care consolidation or mergers in those states may suffer similar attack in their attempts to shield acquisitions, mergers or other affiliations from antitrust scrutiny.
Finally, the Supreme Court’s ruling has put the spotlight back on antitrust issues in health care, which of course has been a focal point for some time by the current administration. But the decision also sets the stage, perhaps, for conflicts in the future, as states struggle with implementing the Affordable Care Act. Indeed, the Authority argued to the Supreme Court that if anything, the states should be afforded even greater latitude in managing health care in light of the Federal Government’s stated goals of providing flexibility to states in implementing health care solutions under the Affordable Care Act. This argument, while not gaining any traction with the Court, perhaps provides some foreshadowing of things to come.