Supreme Court Holds Antitrust Law Applies to State Hospital Authority Transaction

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In one of the most closely watched healthcare antitrust cases in years, the Supreme Court issued its decision in the FTC merger challenge to a Georgia hospital merger, Phoebe Putney Health System’s acquisition of Palmyra Medical Center. In reversing the Eleventh Circuit Court of Appeals finding that Phoebe’s acquisition of Palmyra was immune from antitrust scrutiny under the so-called state-action doctrine – which provides antitrust immunity for the activities of governmental entities if the activities are undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition – the Supreme Court found that “nothing in the Law” providing for the formation of hospital authorities to operate healthcare facilities, “or any other provision of Georgia law articulates a state policy to allow authorities to exercise their general corporate powers, including their acquisition power, without regard to negative effects on competition.” As a result, Phoebe will have to defend the transaction against the FTC’s charge that it was anticompetitive.

Like numerous other states, Georgia’s Hospital Authorities Law was enacted “to provide a mechanism for the operation and maintenance of needed health care facilities in several counties and municipalities of th[e] state.” In addition to delegating “all the powers necessary or convenient to carry out and effectuate” the law’s purposes, Georgia hospital authorities are conferred with 27 powers, including the power “[t]o acquire by purchase, lease, or otherwise and to operate projects.” The same year that Georgia’s Hospital Authorities Law was enacted (1941) the city of Albany and Dougherty County, Georgia established the Hospital Authority of Albany-Dougherty County and promptly acquired Phoebe Putney Memorial Hospital.

In 2010, Phoebe agreed to acquire Palmyra, which is located in Albany just two miles away from Phoebe, from HCA, Inc. Yet despite the fact that Phoebe and Palmyra accounted for a combined 86% of the acute-care hospital services provided to patients covered by commercial health care plans in the six counties surrounding Albany, and agreeing with the FTC “that, on the facts alleged, the joint operation of [Phoebe] and Palmyra would substantially lessen competition or tend to create, if not create, a monopoly,” the Eleventh Circuit concluded that Georgia’s law contemplated and shielded the allegedly anticompetitive conduct challenged by the FTC. In doing so, the Eleventh Circuit noted the breadth of powers given to Georgia hospital authorities and reasoned that Georgia’s legislature must have anticipated the grant of power to the hospital authorities to acquire and lease projects would produce anticompetitive effects because “[f]oreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

In rejecting the Eleventh Circuit’s conclusion, the Supreme Court found that the claim for “state-action immunity fails because there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership.” The Court soundly rejected that argument, because the acquisition and leasing powers exercised by the authority in the challenged transaction merely “mirror general powers routinely conferred by state law upon private corporations.” Importantly, the Court found that “while the Law does allow the Authority to acquire hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.”

More broadly, the decision has implications for other health care transactions that are intertwined with state or local government regulation. The Court’s unanimous decision in Phoebe Putney signals that claims of antitrust immunity based on state involvement will be closely scrutinized and skeptically evaluated.  Justice Sotomayor’s opinion reiterates that state action immunity is disfavored, and rejects the notion that the antitrust laws should defer to state laws and regulations unless the state’s intention to displace competition is clearly evident. The Court said: “[F]ederalism and state sovereignty are poorly served by a rule of construction that would allow ‘essential national policies’ embodied in the antitrust laws to be displaced by state delegations of authority ‘intended to achieve more limited ends.’”