On March 31, 2015, the Federal Trade Commission (FTC) announced that it had entered into a consent agreement with Phoebe Putney Health System, Inc., the Hospital Authority of Albany-Dougherty County and HCA, Inc. This agreement settled a four-year battle arising out of the FTC’s allegations that the Hospital Authority’s acquisition of Palmyra Park Hospital from HCA, Inc., Phoebe Putney’s only competitor in Albany, and its lease to Phoebe Putney would reduce competition for acute care hospital services in Albany, Georgia, in violation of federal antitrust laws.1
The FTC’s usual approach in transactions that it believes will lessen competition is to seek to prevent the transaction from closing, or, if the transaction is consummated, seek divestiture of the acquired business to restore competition. In this case, although the FTC would have preferred that Phoebe Putney divest Palmyra Park, Georgia’s Certificate of Need (CON) laws precluded such a remedy, because any proposed purchaser of Palmyra Park could not obtain CON approval to operate the hospital independently.
The Phoebe Putney Case: An Overview
Although divestiture was an available remedy when the FTC commenced this case in 2011, the FTC ultimately was left with no choice but to challenge the transaction after it had closed. The transaction was held open for several years through federal litigation, in which the district and appellate courts thwarted the FTC’s attempts to challenge the transaction, finding that the transaction was protected from federal antitrust scrutiny under the state action doctrine and refusing to hold the transaction open pending further appeal.2 In a seminal ruling in June 2013—after the transaction had closed—the U.S. Supreme Court ultimately ruled that state action protection did not apply, and the FTC resumed its proceeding challenging the transaction.
In August 2013, the FTC and the parties agreed upon a settlement based on the FTC’s understanding that Georgia’s CON laws would preclude a divestiture of the Palmyra Park Hospital, even assuming the FTC ultimately found that Phoebe Putney’s acquisition of Palmyra was anticompetitive. One month later, however, the FTC withdrew its provisional acceptance of the settlement in response to new information received through public comments.
The public comment in question raised doubts that Georgia’s CON laws would bar a divestiture. Following withdrawal of the FTC’s acceptance of the settlement, in March 2014, a newly formed entity filed a formal request with the Georgia Department of Community Health (DCH), inquiring whether Georgia’s CON laws would permit it to acquire and operate Palmyra Park Hospital. In June 2014, DCH issued an initial determination indicating that the acquisition would not require CON review and approval. However, in October 2014, DCH reversed its initial determination and issued a written finding that the CON laws would apply to the proposed acquisition.
The FTC accepted that Georgia’s CON laws would ultimately preclude sale of Palmyra Park Hospital to an independent third party. The consent agreement that was eventually entered:
- Contains a stipulation that the effect of the transaction was to substantially lessen competition within the relevant markets at issue;
- Requires Phoebe Putney and the Hospital Authority to provide the FTC with prior notice of transactions to acquire any part of a general acute-care hospital, or controlling interest in any inpatient, outpatient clinic or facility, or physician group practice in the Albany area; and
- Prohibits Phoebe Putney and the Hospital Authority from opposing CON applications for general acute-care hospitals in the Albany area for up to five years.
State CON Laws
Generally speaking, CON laws and programs seek to reduce healthcare costs by requiring state approval before construction of certain new health facilities or capital improvements of certain existing health facilities, based on community need. The underlying rationale is that excess capacity—for example, in the number of inpatient beds or the number of expensive devices—artificially increases healthcare costs.
Many states established CON programs in response to federal legislation issued in 1974. When this mandate was repealed in 1987, several states discontinued their programs. Notwithstanding this, a majority of states today—36 plus the District of Columbia—still have some sort of CON program, though the scope and focus of these programs vary. Debate about the future of state CON programs is ongoing.3
FTC Opposition to State CON Laws
The Phoebe Putney case is not the first time that the FTC has raised concerns about the inconsistency between federal antitrust policy and state CON laws and programs. In 2008, the FTC and the Antitrust Division of the U.S. Department of Justice issued a Joint Statement to the Illinois Task Force on Health Planning Reform, arguing that Illinois’s CON laws impede the efficient performance of healthcare markets.4 In the joint statement, the agencies set forth several arguments against CON laws:
- The market cost-control rationale, which initially drove adoption of CON laws, no longer applies, because costs are negotiated. In fact, CON laws have not controlled market costs.
- CON laws impose additional costs and may even facilitate anticompetitive behavior, because they interfere with the entry of firms that could provide higher-quality services than incumbents. CON laws also can be subject to abuse by incumbents who use the ensuing lengthy regulatory processes to delay entry of new competition (through diversion of competitors’ time and resources), preserving the anticompetitive status quo.
- There are several examples where the CON process itself facilitated the establishment of anticompetitive agreements.
- CON laws do not protect incumbent hospitals’ financial investments and resources and maintain revenue that can be put to charitable use. Instead, CON laws stifle competition that could otherwise encourage incumbents to improve performance and efficiency.
The agencies advocate for more narrowly tailored policies, targeted at specific social needs (such as charity care) in lieu of broad-sweeping CON policies.
The Phoebe Putney case further highlights the tension between federal antitrust and state CON laws. In the FTC’s statement concerning the settlement, the FTC noted that because Georgia regulators deemed the Albany region to be “over-bedded,” it was unlikely that any divestiture buyer could obtain the necessary CON approval to operate an independent hospital.5 By rendering the FTC’s remedy infeasible in this case, state CON laws effectively “tied the hands” of federal regulators in their efforts to preserve market competition, to the detriment of both the competitive environment and healthcare consumers.
The tension between federal antitrust policy and state CON laws, as demonstrated in the Phoebe Putney case, is an issue that is likely to continue to arise in cases where the FTC challenges consummated hospital mergers. An overwhelming majority of states still have CON laws or programs in place, even though the federal mandate was withdrawn almost two decades ago.
In unconsummated mergers under review by the FTC, CON laws may be cited as a barrier to entry that may count against arguments in favor of consolidation. Conversely, as was the case in the Phoebe Putney acquisition, CON laws also may prevent divestiture of healthcare entities by larger conglomerates, preventing market innovation and harming consumers. The FTC’s inability to restore competitive market conditions in the Phoebe Putney case may prompt states to reconsider their CON programs in the future.