Fending off the FTC
Defense that worked in Georgia may be increasingly used in antitrust cases
Employing a legal defense that insiders say may become more common, Phoebe Putney Health System in Albany, Ga., persuaded a U.S. District Court judge to dismiss a complaint against a $195 million acquisition by arguing that the transaction was immune from antitrust scrutiny because it was an action of a state political subdivision.
U.S. District Judge W. Louis Sands on June 27 ruled that the deal involving 439-bed Phoebe Putney Memorial Hospital is immune to antitrust challenge and threw out the Federal Trade Commission’s request for a temporary restraining order that would hold up the purchase of 120-bed Palmyra Medical Center, a rival Albany, Ga., hospital owned by HCA. The FTC has not withdrawn its related administrative court complaint against the merger, and has vowed an appeal of Sands’ opinion.
Sands ruled that the acquisition of Palmyra was beyond the FTC’s jurisdiction because it is protected by the defense of “state action.” Legally, Phoebe Putney Memorial Hospital is owned by the public Hospital Authority of Albany/Dougherty County, which then leases it to a private, notfor-profit hospital operator, Phoebe Putney Health System, for $1 a year.
Attorneys for Phoebe argued and Sands agreed that the deal to buy the hospital’s sole acute-care rival was immune from FTC oversight because Georgia law indirectly allows publicly owned businesses to “displace competition” to provide for public benefit.
Sands’ 40-page order notes the purchase price for Palmyra was so high that it was difficult to find an outside investment bank to certify the price was fair. Therefore, Phoebe and HCA agreed among themselves to have the hospital authority purchase Palmyra specifically to avoid FTC scrutiny of the deal.
FTC Bureau of Competition Director Richard Feinstein said during a panel discussion June 28 in Boston at a health lawyers’ conference that Phoebe Putney attorneys never disputed the government’s allegations that the merger would be anti-competitive. (For more on the American Health Lawyers Association annual meeting, see p. 14).
Rather, Feinstein said, Phoebe argued that it didn’t matter whether the acquisition displaced competition because states like Georgia have passed laws that allow for monopolistic actions by political subdivisions like Albany County’s hospital authority.
A spokeswoman for Phoebe wouldn’t address direct questions on the decision, but said in an e-mailed statement that the judge’s “well-reasoned and well-documented order” affirmed the hospital’s position in the case by ruling that the FTC does not have jurisdiction over the matter.
Douglas Ross, a partner with Davis Wright Tremaine who has expertise in healthcare antitrust issues, said the “state action” defense was becoming a more common way for healthcare providers to consolidate without facing FTC scrutiny. Several states have passed or are considering laws to expand state-action defenses.
Although the FTC regards market competition as essential to price competition in healthcare, “states can take a different view: that competition in healthcare is not the paramount value, and there are other ways of providing for the public interest,” Ross said. “There is a real focus on state action at the FTC and (the Justice Department), and this is a significant loss because they’re going to have to think long and hard about when they pick fights.”
The state action defense has cropped up in other cases in recent months, including a 2010 antitrust challenge in which the FTC accused Blue Cross and Blue Shield of Michigan of using its market clout to drive up hospital prices for payers other than itself (Oct. 25, 2010, p. 6).
Blue Cross argued that since it was a state-created “quasi-public” entity serving the public good of keeping prices low for its own beneficiaries, its actions were exempt from FTC challenge. The FTC has since acknowledged it is investigating similar contract-pricing provisions by Blue Cross insurers in at least five other states.
In a June 2 oral ruling, U.S. District Judge Denise Page Hood denied the Michigan Blues’ motion to dismiss the case on state-action and other grounds, though she hasn’t issued her written ruling on the matter. On June 30, Blue Cross filed a motion for Hood to consider the example of the Phoebe Putney decision and whether it was relevant to her ruling.
State-action defenses have also been raised in recent years in cases as diverse as a rural Minnesota physician network merger and a North Carolina dental board that sought to regulate teeth-whitening services.
In the Phoebe case, Feinstein vowed to appeal Sands’ ruling to the 11th U.S. Circuit Court of Appeals—although he noted during a panel discussion at the AHLA meeting that that particular appeals court already has case law in favor of state-action healthcare merger defenses. “We went into this with eyes wide open,” Feinstein said. “We understand the state of the law on state action in the 11th Circuit, and we will attempt to convince the court that the facts in this case should compel a different decision.”
FTC officials argued in trial-court records that the Phoebe-Palmyra transaction failed one of the key tests to gain state-action protection, because the public entity in question wasn’t “actively supervising” the actions of the not-for-profit hospital operator. In written arguments, FTC attorneys painted a scenario in which the hospital authority acted as a “straw man” whose only job was to “rubber stamp” whatever the not-for-profit wanted.
Phoebe attorneys strongly disputed that characterization, saying system executives had for years been aware of the hospital authority’s ongoing desire to purchase Palmyra if the chance ever arose. When that day came in 2010, Phoebe officials ironed out all the details of the transaction and then presented them to the authority for approval.