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February 20, 2013

Supreme Court declines to grant state-action immunity, holds that Georgia hospital merger violated anti-competition laws

By Sarah E. Baumann, JD

The Supreme Court has determined that a hospital merger approved by a Georgia county hospital authority violated anti-competition laws and was not subject to state-action immunity (Federal Trade Commission v Phoebe Putney Health System, Inc., February 19, 2013, Sotomayor, S). State-action immunity is generally disfavored under federal antitrust laws. Because the state did not affirmatively express a state policy to displace competition when it granted the hospital authority general corporate powers, the Supreme Court reversed an Eleventh Circuit decision granting the hospitals’ motion for summary judgment.

Hospital authority. In 1941, Georgia enacted its Hospital Authorities Law (Ga. Code Ann. Sec. 31-7-70) to manage the operation and maintenance of health care facilities to serve the indigent population. As amended, the law allows counties and municipalities to create public bodies called hospital authorities, governed by boards that are granted various powers to implement the law’s purpose. These powers include the ability “[t]o acquire by purchase, lease, or otherwise and to operate projects, “including, among others, hospitals, public health facilities, dormitories, clinics, and rehabilitation facilities. In 1941, the Hospital Authority of Albany-Dougherty County (Authority) acquired Phoebe Putney Memorial Hospital (Memorial).

Merger. In 1990, the Authority formed two non-profit corporations to manage Memorial: Phoebe Putney Health System, Inc. (PPHS) and Phoebe Putney Memorial Hospital, Inc. (PPMH). Memorial, one of only two hospitals in Dougherty County, accounted for 75 percent of the acute-care hospital services market in the surrounding six counties. HCA, Inc. (HCA) owned the only other hospital in Dougherty County, Palmyra Medical Center (Palmyra), which accounted for 11 percent of the acute-care hospital services market. After negotiating with HCA, PPHS asked the Authority to purchase Palmyra with funds that PPHS controlled and lease Palmyra to a PPHS subsidiary for $1 per year. The Authority agreed.

Case history. The Federal Trade Commission (FTC) filed suit against PPHS, PPMH, the Authority, HCA, Palmyra, and a PPHS subsidiary created to manage Palmyra (collectively PPHS), alleging that the merger would create a monopoly and arguing that it violated Section 5 of the Federal Trade Commission Act (15 U.S.C. 45) and Section 7 of the Clayton Act (15 U.S.C. 12-27). In its complaint, the FTC claimed that PPHS used the Authority as a strawman for the sole purpose of transferring funds. It alleged that PPHS’ intent was to end a long-standing rivalry with Palmyra by acquiring all of the licensed general acute care hospital beds in the county. The district court granted PPHS’ motion for summary judgment, finding that it derived immunity from antitrust liability through the state-action doctrine. The Eleventh Circuit Court of Appeals affirmed. The Supreme Court granted certiorari to determine whether the state “clearly articulated and affirmatively expressed a state policy to displace competition in the market for hospitals services,” (the clear articulation test) and, if so, whether the Authority’s limited participation in the merger prevented the application of the state-action doctrine.

State-action doctrine. The state-action doctrine permits states, in their sovereign capacities, to impose market restraints. However, in light of federal antitrust laws, such immunity is disfavored. When anti-competitive actions are taken by sub-state entities entrusted with duties by the state, such immunity will only be granted where a court finds that the state clearly articulated and affirmatively expressed a policy to restrain competition. Here, the Court unanimously determined that Georgia did not express such a policy.

The Court noted that Georgia granted the Authority powers no greater than those of most other corporate entities and likely did not expect for them to be used anti-competitively. In response to arguments that the state must have foreseen potential anti-competition caused by hospital mergers arising from the Authority’s power to acquire hospitals, the Court stated that hospital acquisition was not the focus of the Authority’s powers. Indeed, the Authority was granted the ability to acquire many types of “projects,” including dormitories, office buildings, and housing accommodations. Additionally, when enacted, a main purpose of the Hospital Authorities Law was to allow authorities to initially acquire hospitals, such as Memorial, from private entities, which would not have increased market concentration. The Court agreed with an amici brief filed by 20 states in support of the FTC, which argued that loosely applying the clear articulation test could require states to explicitly include language disavowing any intention to support anti-competition when delegating authority to sub-state entities, or risk encouraging such conduct.

Because the Court determined that no clearly articulated state policy existed, it did not reach the issue of the Authority’s limited participation. It reversed the Eleventh Circuit decision and remanded the case.

The case number is 11-160.

Attorneys: Donald B. Verrilli, Jr., U.S. Department of Justice, for the Federal Trade Commission. Kevin James Arquit (Simpson Thatcher & Bartlett, LLP) for HCA, Inc. and Palmyra Park Hospital, Inc. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr, LLP) for Phoebe Putney Health System, Inc. Jack R. Bierig (Sidley Austin LLP) for the American Medical Association, et al. Jarod M. Bona (DLA Piper LLP) for the Federation of Independent Business. Richard M. Brunell, Director of Legal Advocacy, for the American Antitrust Institute. Beth Heifetz (Jones Day) for Lee Memorial Health System. John H. Parker (Parker Hudson Rainer & Dobbs LLP) for Georgia Alliance of Community Hospitals, Inc., et al. Michael A. Scodro, Office of the Attorney General, for the State of Illinois, et al.

Companies: HCA, Inc.; Palmyra Park Hospital, Inc.; Phoebe Putney Health System, Inc.; Phoebe Putney Memorial Hospital, Inc.; Phoebe North, Inc.; American Medical Association; Federation of Independent Business; American Antitrust Institute; Lee Memorial Health System; Georgia Alliance of Community Hospitals, Inc.; Hospital Authority of Albany-Dougherty County

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