Fend­ing off the FTC

De­fense that worked in Ge­or­gia may be in­creas­ingly used in an­titrust cases

Modern Healthcare - - The Week In Healthcare - Joe Carl­son

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.

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