In The Wake Of Phoebe Putney, New York Passes Law Giving Antitrust Immunity To State Health Care System

by Pepper Hamilton LLP

Earlier this year, the Supreme Court issued its decision in FTC v. Phoebe Putney Health System, Inc., 133 S.Ct. 1003 (2013), which held that the state action antitrust immunity doctrine applies only when the state legislature has “clearly articulated and affirmatively expressed” a policy displacing competition. In the wake of Phoebe Putney, last week New York passed a bill amending Public Authority Law Sections 3401 and 3405 (“the new law”), which concerns Nassau Health Care Corporation (NuHealth). The new law is modeled under the Supreme Court’s standard and permits a specific entity to enter into health care-related affiliations and to receive immunity from federal and state antitrust laws.

The “state action doctrine” allows the extension of state immunity from the federal antitrust laws to municipalities and even private parties, but only when they act pursuant to a “clearly articulated and affirmatively expressed state policy” to displace competition. Justice Sonia Sotomayor, writing for a unanimous Court in Phoebe Putney, held that state regulatory statutes that confer general corporate powers are not sufficient to meet the “clearly articulated” standard and cannot be interpreted to mean that the state intended to displace competition. In summary, the Supreme Court reined in the state action doctrine by requiring a specific mandate in legislation conferring immunity from antitrust scrutiny.

Despite strong objections by both the New York Attorney General and Antitrust Bureau Chief, Gov. Andrew Cuomo signed the new law, which then went into effect, protecting state-chartered NuHealth from state and federal antitrust laws. NuHealth is a New York public benefit corporation that includes Nassau University Medical Center, the A. Holly Patterson Extended Care Facility in East Meadow, and five community health centers. The new law is intended to clear the way for NuHealth to enter a planned public-private partnership with North Shore-LIJ Health System, a network of 16 hospitals and about 400 ambulatory and physician practices on Long Island and Staten Island. The partnership would strengthen an already existing affiliation agreement between the two systems, which dates back to 2005, by creating a jointly owned limited liability company. The new structure will allow the two systems to consolidate duplicative health care service units and jointly negotiate rates with insurance companies, along with a host of other consolidation activities.

The new law states that NuHealth “is authorized to engage in arrangements, contracts, information sharing and other collaborative activities with public or private entities and individuals regardless of the competitive consequences of these activities and notwithstanding that these activities may have the effect of displacing competition in the provision of hospital, physician, or other health care-related services.” In undertaking these collaborative activities, NuHealth “and the public or private entities or individuals with which it collaborates shall be immunized from liability under the federal and state antitrust laws.” (emphasis added.) Under the new law, NuHealth must file an annual report with the State Department of Health regarding the impact of the collaborations. The Department of State (which does not have antitrust enforcement authority) has the authority to request that NuHealth voluntarily make changes to its policies.

Eric Schneiderman, New York’s Attorney General since 2011, and Eric Stock, recently named Chief of the Antitrust Bureau, vehemently opposed the new law. They argued that it gives NuHealth and any company it partners with an overly broad exemption that may negatively affect patients by allowing NuHealth to accumulate too much market power. Schneiderman, who is typically regarded as an aggressive enforcer of the antitrust laws, would have preferred that the state retain a right to review any of the company’s potential collaborations and provide “very narrow” exemptions on a case-by-case basis.

The New York State Assembly and Senate passed the new law unanimously, with some legislators arguing that, without the new law, NuHealth is at risk of going out of business because of low reimbursement rates. Legislators also recognized that the new law as drafted was necessary to afford “state action” protection in light of the Supreme Court’s decision in Phoebe Putney. The new law avoids any doubt that the state has “clearly articulated and affirmatively expressed” a policy to displace competition.

A state, however, need not go so far as New York to satisfy the Phoebe Putney standard. For example, the state might have chosen to immunize only the North Shore-LIJ collaboration, to limit the exemption to certain types of health services, or to immunize joint negotiations with certain groups (like physicians), but not others (like payors). Because of the new law’s wide breadth and vocal opposition from Schneiderman and Stock, critics view it as the ill-considered consequence of both intense lobbying and the political aspirations of New York lawmakers, including Gov. Cuomo, who is rumored to be considering a presidential run in 2016.

In any event, it will be interesting to see what collaborations are protected in New York in the future stemming from the present legislation. Further, as consolidation continues in the health care space, we can anticipate seeing additional health care entities pressing for antitrust legislative protections akin to NuHealth’s.

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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