High Court Hears Arguments on State-Action Doctrine in Hospital Merger Case

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on Nov. 26 heard oral arguments regarding whether the state-action doctrine applied to immunize a merger between two Georgia hospitals from the Federal Trade Commission's challenge that the transaction substantially lessened competition or tended to create a monopoly (Federal Trade Commission v. Phoebe Putney Health System, Inc., et al., No. 11-1160, U.S. Sup.; See November 2012) (lexis.com subscribers may access an enhanced version of the 11th Circuit opinion under review and the Supreme Court briefs for this case).

Arguing for the FTC, Assistant to the U.S. Solicitor General Benjamin J. Horwich said that the 11th Circuit U.S. Court of Appeals erred in ruling that the state-action doctrine immunized a merger between Phoebe Putney Memorial Hospital, which is a wholly owned subsidiary of Phoebe Putney Health Systems Inc. (PPHS), and Palmyra Park Hospital Inc.  The Hospital Authority of Albany/Dougherty County approved the acquisition.

Horwich argued that by granting hospital authorities a corporate power to acquire property in the Hospital Authorities Law, the Georgia Legislature did not "clearly articulate . . . and affirmatively express . . . an intent to displace competition" and, therefore, the state-action doctrine did not provide a defense to the antitrust lawsuit.

Justice Sonia Sotomayor questioned whether "the grant of powers in this case would permit the hospital authorities, the corporation, to set prices for their services that are below the competitive prices in order to serve the needy?"  In response to Justice Antonin Scalia's question whether an entity may be "a state actor for some anticompetitive purposes and not for others," Horwich responded that the Supreme Court has held just that.

Horwich said there is a distinction between pricing decisions and mergers.  Chief Justice John G. Roberts Jr. commented that "when this law was passed giving them the power to acquire hospitals, wasn't it the case that there would likely be only on other hospital or two, so that any acquisition of another hospital would have the merger consequences that this one had?"

Horwich commented that "[t]he point of this law is to grant counties the opportunity to participate in this market by providing care to indigents.  This is not a law about public utility regulation."

'Mandate'

Representing the respondents, Seth P. Waxman of Wilmer Cutler Pickering Hale and Dorr in Washington argued that the Hospital Authorities Law created local public authorities to "exercise public and essential government functions to provide hospital care for residents, especially residents who cannot pay" and that "the powers that the legislature has given hospital authorities are not by any means general corporate powers.  They are broader than what a corporation may have in certain respects and much narrower in other respects."

Justice Elena Kagan described the position of several states that filed an amicus brief in the case as saying that "to construe these very normal powers that we would give to a state entity in order to allow it to operate as a permission to violate the antitrust laws is not at all consistent with our own intentions."

Waxman responded that "[t]hese special purpose authorities do not simply have general corporate powers.  They have a mandate.  There is a Georgia constitutional amendment that coincided with the enactment of the Hospital Authorities Law that derogated the State's duty to provide indigent care to its -- hospital care to its citizens."

Waxman argued that the state indicated that it made a choice to allow hospital authorities to make anti-competitive purchases by "the context of the law."

In rebuttal, Horwich said, "States always have some purpose in mind when they set up some sub-State entity.  The question isn't whether there is particular ends the State is trying to pursue.  The question here is whether the State intended to pursue those ends through the particular means of displacing competition, here, displacing competition in the market for paid health care services."

'Foreseeable Result'

In its Dec. 9, 2011, opinion, the 11th Circuit found that the state "authorized the Authority's acquisition of Palmyra and, in doing so, clearly articulated a policy to displace competition."  The appeals panel concluded that the "anticompetitive consequences were a foreseeable result of the statute authorizing the Authority's conduct."

Through the Hospital Authorities Law, "the Georgia legislature granted powers of impressive breadth to the hospital authorities," including the powers to "operate projects," including hospitals, to "construct, reconstruct, improve, alter, and repair projects," to "establish rates and charges for the services and use of the facilities of the authority," to "sue and be sued," to "exchange, transfer, assign, pledge, mortgage, or dispose of any real or personal property or interest therein" and to "borrow money for any corporate purpose," the 11th Circuit said.

"Most important in this case, however, is the Georgia legislature's grant of the power to 'acquire by purchase, lease, or otherwise . . . projects,' . . . which, again, include hospitals, . . . and the power to 'lease . . . for operation by others any project.' . . .  This grant makes clear that the Authority is authorized to acquire and lease Palmyra.  Moreover, in granting the power to acquire hospitals, the legislature must have anticipated that such acquisitions would produce anticompetitive effects.  Foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them," the appeals court said.

The FTC is also represented by Solicitor General Donald B. Verrilli Jr., Deputy Solicitor General Malcolm L. Stewart, Deputy Assistant Attorney General Renata B. Hesse of the U.S. Department of Justice and General Counsel Willard K. Tom, Deputy General Counsel for Litigation John F. Daly and Attorneys Imad D. Abyad and Michele Arington of the FTC.  All are in Washington.

The respondents are also represented by Edward C. DuMont and Daniel P. Kearney Jr. of Wilmer Cutler in Washington and Alan E. Schoenfeld of Wilmer Cutler in New York.  The Hospital Authority is also represented by James E. Reynolds Jr. of Perry & Walters in Albany, Ga.  PPMH and Palmyra are also represented by Thomas S. Chambless of PPHS in Albany.

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