Supreme Court Says Hospital Merger Not Immune From Antitrust Scrutiny

Supreme Court Says Hospital Merger Not Immune From Antitrust Scrutiny

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on Feb. 19 ruled that the state-action doctrine does not immunize the merger between two Georgia hospitals from the Federal Trade Commission's challenge that the transaction substantially lessened competition in the market for hospital services or tended to create a monopoly because Georgia did not clearly articulate and affirmatively express a policy allowing hospital authorities to make acquisitions that substantially lessen competition (Federal Trade Commission v. Phoebe Putney Health System, Inc., et al., No. 11-1160, U.S. Sup.) (lexis.com subscribers may access Supreme Court briefs and the opinion for this case).

Writing for the unanimous court, Justice Sonia Sotomayor said that in finding that state-action immunity applied because "anticompetitive consequences were a foreseeable result" of Georgia's Hospital Authorities Law, the 11th Circuit U.S. Court of Appeals applied the concept of "foreseeability" too loosely.

The law, which creates hospital authorities and grants general corporate powers, including the power to acquire hospitals, to the hospital authorities, "does not include permission to use those powers anticompetitively." Therefore, the state-action immunity doctrine, which exempts a local government entity's acts pursuant to a clearly articulated and affirmatively expressed state policy to displace competition from antitrust scrutiny, does not apply, the Supreme Court ruled.

Preliminary Injunction Sought

The FTC challenged Phoebe Putney Memorial Hospital's (PPMH) proposed acquisition of Palmyra Park Hospital Inc. Palmyra, a for-profit institution, is the largest and chief competitor of PPMH for acute-care services in the region. PPMH, a not-for-profit hospital, is a wholly owned subsidiary of Phoebe Putney Health Systems Inc. (PPHS). PPMH's assets are owned by the Hospital Authority of Albany/Dougherty County, which leases the assets to PPMH on a long-term basis but has no control over PPMH's operations.

The acquisition plan, which provided that PPHS would acquire Palmyra's assets and would lease those assets to PPHS or a nonprofit PPHS subsidiary, was approved by the Hospital Authority.

The FTC alleged that the deal would substantially lessen competition or tend to create a monopoly in the inpatient general acute-care hospital services market in Dougherty County and surrounding areas in violation of Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act. The FTC sought a preliminary injunction against the Hospital Authority, PPMH and Palmyra.

The U.S. District Court for the Middle District of Georgia granted the defendants' motion to dismiss the FTC's complaint, holding that the state-action doctrine immunized the defendants from antitrust liability.

In affirming, the 11th Circuit found that the Georgia Legislature granted "powers of impressive breadth to the hospital authorities," including the powers to acquire and lease hospitals. The appeals court reasoned that the Georgia Legislature "must have anticipated that such acquisitions would produce anticompetitive effects. Foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them."

'General Powers'

The Supreme Court ruled that the clear articulation test of the state-action doctrine was not satisfied because the suppression of competition in the hospital-services market was not the foreseeable result of Georgia's statute permitting the consolidation of hospital ownership.

"The acquisition and leasing powers exercised by the Authority in the challenged transaction, which were the principal powers relied upon by the Court of Appeals in finding state-action immunity, . . . mirror general powers routinely conferred by state law upon private corporations. Other powers possessed by hospital authorities that the Court of Appeals characterized as having 'impressive breadth,' . . . also fit this pattern, including the ability to make and execute contracts, . . . to set rates for services, . . . to sue and be sued, . . . to borrow money, . . . and the residual authority to exercise any or all powers possessed by private corporations," the court said.

Justice Sotomayor said "[o]ur case law makes clear that state-law authority to act is insufficient to establish state-action immunity; the substate governmental entity must also show that it has been delegated authority to act or regulate anticompetitively."

"When a State grants some entity general power to act, whether it is a private corporation or a public entity like the Authority, it does so against the backdrop of federal antitrust law," the court explained.

Legislature's Objective

In rejecting the 11th Circuit's reasoning that anti-competitive effects were foreseeable because "[t]he legislature could hardly have thought that Georgia's more rural markets could support so many hospitals that acquisitions by an authority would not harm competition," the Supreme Court noted that "only a relatively small subset of the conduct permitted by the law had the potential to negatively affect competition."

Moreover, "the transfer of ownership from private to public hands does not increase market concentration" and, therefore, "the power to acquire hospitals still does not ordinarily produce anticompetitive effects," the court said.

"While subsequent acquisitions by authorities have the potential to reduce competition, they will raise federal antitrust concerns only in markets that are large enough to support more than one hospital but sufficiently small that the merger of competitors would lead to a significant increase in market concentration. This is too slender a reed to support the Court of Appeals' and respondents' inference," the court said.

"The state legislature's objective of improving access to affordable health care does not logically suggest that the State intended that hospital authorities pursue that end through mergers that create monopolies. Nor do the restrictions imposed on hospital authorities, including the requirement that they operate on a nonprofit basis, reveal such a policy. Particularly in light of our national policy favoring competition, these restrictions should be read to reflect more modest aims. The legislature may have viewed profit generation as incompatible with its goal of providing care for the indigent sick. In addition, the legislature may have believed that some hospital authorities would operate in markets with characteristics of natural monopolies, in which case the legislature could not rely on competition to control prices," the court said.

Amici

Amicus curiae briefs in support of the FTC had been filed by American Antitrust Institute (AAI); Joseph Stubbs, M.D., and Dr. Corleen Thompson; 20 states and commonwealths - Illinois, Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Maryland, Michigan, Minnesota, Nevada, New Hampshire, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Tennessee and West Virginia; economics professors; and National Federation of Independent Business (NFIB).

The American Medical Association and the Medical Association of Georgia (AMA) filed a brief in support of neither party.

Amicus briefs in support of the respondents have been filed by Lee Memorial Health System; American Hospital Association and Georgia Hospital Association; and Georgia Alliance of Community Hospitals Inc. and National Association of Public Hospitals and Health Systems.

Counsel

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 and Assistant to the U.S. Solicitor General Benjamin J. Horwich 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 Seth P. Waxman, Edward C. DuMont and Daniel P. Kearney Jr. of Wilmer Cutler Pickering Hale and Dorr 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.

Economics professors are represented by Bernard S. Black of Northwestern University School of Law in Chicago. AAI is represented by Richard M. Brunell of AAI in Washington. Stubbs and Thompson are represented by Kermit S. Dorough Jr. of Albany. The states are represented by Attorney General of Illinois Lisa Madigan, Solicitor General Michael A. Scodro and Deputy Solicitor General Jane Elinor Notz in Chicago. NFIB is represented by Jarod M. Bona of DLA Piper in Minneapolis. AMA is represented by Jack R. Bierig of Sidley Austin in Chicago. Lee Memorial Health System, American Hospital Association and Georgia Hospital Association are represented by Beth Heifetz of Jones Day in Washington. Georgia Alliance of Community Hospitals and National Association of Public Hospitals and Health Systems are represented by John H. Parker Jr. of Parker Hudgson Rainer & Dobbs in Atlanta.

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