Federal and state courts are expected to rule on several nationally watched antitrust health care cases during the first half of 2015. 

As we enter into the first week of the New Year, Nexsen Pruet associate Rachel Anna examines how the cases involve issues such as state action, health care provider mergers and certificate of need regulations.

Will Georgia Certificate of Need Laws Prevent the FTC from Requiring the Divestiture of Palmyra by Phoebe Putney?

In April 2011, the FTC challenged Phoebe Putney Health System Inc.’s (“Phoebe Putney”) acquisition of Palmyra Park Hospital (“Palmyra”) in Albany, Georgia.  Phoebe Putney is a not-for-profit hospital system established by the Hospital Authority of Albany-Dougherty County (“the Authority”), a government entity that leases and manages Phoebe Putney Memorial Hospital on behalf of the Authority.  The FTC contends that the transaction created a “virtual monopoly.” 

In dismissing the FTC’s complaint, the Georgia district court determined that the Authority, as a state entity, was immune from antitrust scrutiny under the state action doctrine.[1]   The Eleventh Circuit affirmed the lower court and the transaction was consummated in December 2011.[2]  The U.S. Supreme Court granted certiorari to address whether Phoebe Putney’s acquisition of Palmyra was executed pursuant to a clearly articulated state policy to lessen competition.

The Supreme Court reversed the Eleventh Circuit’s dismissal of the FTC’s complaint, holding that “[i]mmunity will only attach to the activities of local government entities if they are undertaken pursuant to a clearly articulated and affirmatively expressed state policy to displace competition.”[3]  Although a state’s policy to displace competition need not be explicit in the statute, it must be the “inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.”  The state legislature must have “foreseen and implicitly endorsed” the anticompetitive effects in its policy goals and “delegated authority to act or regulate anticompetitively.”  Applying the “clearly articulated” standard, the Supreme Court determined that “there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership.”  General corporate powers conferred upon hospital authorities (e.g., ability to purchase or acquire assets, enter into contracts, sue or be sued, borrow money, set prices, etc.) are insufficient to meet the clearly articulated standard. 

The FTC later reached a settlement agreement with Phoebe Putney, which notably, did not require Phoebe Putney to divest Palmyra.  At the time, the FTC believed the sale of Palmyra required certificate of need (“CON”) approval under Georgia law.  The FTC explained that “Georgia’s CON statutes and regulations effectively prevent the Commission from effectuating a divestiture of either hospital in this case.”  The FTC stressed that the agreement it reached with Phoebe Putney—and not seeking a divestiture—was “highly unusual” and “acceptable” only “under the unique circumstances” of the case in light of Georgia’s CON laws.  Under the proposed settlement agreement, Phoebe Putney agreed to (1) stipulate that the transaction substantially lessened competition for hospital services in the Albany area, (2) refrain from objecting to CON applications by competitors to enter or expand into the geographic market for general-acute care hospitals, (3) submit any CON-related objections to the FTC related to inpatient or outpatient clinic facilities, and (4) provide prior notice to the FTC before acquiring any hospitals, inpatient or outpatient facilities, or physician practices for the next ten years.

However, on September 4, 2014, the FTC withdrew its proposed agreement with Phoebe Putney after receiving information from the Georgia Department of Community Health (“DCH”) indicating that Georgia CON laws would not impede a divestiture.  Shortly after the parties resumed litigating whether the merger was anticompetitive in the FTC’s administrative court, a Georgia DCH official decided that a CON would indeed be necessary to separate Phoebe Putney and Palmyra.  That decision is currently under appeal to the DCH Commissioner and potentially the state court.  In light of the uncertainty regarding the applicability of the Georgia CON laws, the FTC has stayed the administrative litigation.  The twists and turns of this case illustrate the lengths the FTC will go to in order to impose a structural remedy in merger cases.  Yet if the DCH decision stands, the FTC will likely be forced to settle for the conduct remedies tendered in the original proposed agreement.