FTC's Challenge to Phoebe Putney Merger Ends in Settlement Without Divestiture

by Baker Donelson

On August 22, 2013, the FTC accepted, subject to final approval, a Consent Agreement Containing Order from Respondents Phoebe Putney Health System, Inc., Phoebe Putney Memorial Hospital, Inc., Phoebe North, Inc. (collectively “Phoebe Putney”), HCA, Inc., Palmyra Park Hospital, Inc., and the Hospital Authority of Albany-Dougherty County, Georgia. The Agreement and Order settle the FTC’s challenge to the Hospital Authority’s 2011 acquisition of Palmyra Park Hospital from HCA and subsequent transfer of Palmyra Park control from the Authority to Phoebe Putney.

The Agreement and Order followed the FTC’s February 19, 2013, victory in the United States Supreme Court. In FTC v. Phoebe Putney Health System, Inc., No. 11-1160, 568 U.S. __ (2013), the Court made clear that a state’s authorization to act in a manner with potentially anticompetitive consequences is insufficient to confer state action doctrine immunity from antitrust liability on the actor.

At issue in the Phoebe Putney litigation was the 2011 consolidation of Palmyra Medical Center and Phoebe-Putney Memorial Hospital in Dougherty County, Georgia. The FTC challenged the transaction, arguing that the consolidation of these two hospitals, which together accounted for 86 percent of the market for acute-care hospital services provided to commercial payers across six counties, created a virtual monopoly and substantially reduced competition. Because the Authority operated the acquiring hospital, the merging parties argued that the acquisition was exempt from antitrust liability under the state action immunity doctrine. The Supreme Court held that because Georgia’s Hospital Authorities Law—which both authorized the creation of the Authority and articulated its powers—did not clearly articulate a state policy that hospital authorities exercise their powers anti-competitively, state action immunity did not apply to the Authority.

Despite the FTC’s legal victory, it settled its claims with Phoebe Putney and the Authority without requiring divestiture of Palmyra Park Hospital, as was widely expected, because, the agency explained, divestiture would trigger Georgia’s certificate of need review, and the region is deemed “over-bedded,” thus it would be unlikely that any divestiture purchaser could obtain a certificate of need to operate an independent competing hospital.

Instead, the FTC’s Consent Agreement and Order requires Phoebe Putney and the Authority to notify the FTC, for a period of 10 years, of their intent to directly or indirectly acquire: (1) all or any part of a general acute care hospital in the region; (2) all or a controlling interest in any inpatient or outpatient clinic or facility in the region that may not be part of a general acute care hospital but provides any of the services provided by Phoebe-Putney or the Authority in the region; and (3) all or a controlling interest in a physician group practice in the region.

The Order also places limitations on Phoebe Putney and the Authority’s rights to object to entities applying for certificates of need to operate in the region. The Order provides that until the earlier of five years from the date the Order becomes final or the issuance of a certificate of need for a general acute care hospital in the region, Phoebe Putney and the Authority shall not file objections or negative comments about an application for a certificate of need for a general acute care hospital in the region. The Order further provides that for a period of five years from the date the Order becomes final, if Phoebe Putney or the Authority file objections to an application for an inpatient or outpatient clinic, facility or service in the region, which may or may not be part of a general acute care hospital but provides any of the services provided by Phoebe Putney or the Authority in the region, they must submit those objections to the FTC within five days of filing them with the state.

While this Order may seem surprising in light of the FTC’s legal victory and preferred remedy of divestiture, Georgia’s certificate of need laws presented relatively unique circumstances precluding the FTC from requiring divestiture in this case. It seems unlikely these circumstances would be present in most other hospital merger scenarios to preclude the FTC from seeking divestiture in cases where it prevails in litigation or obtains a consent decree.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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