The Supreme Court Tightens Up State-Action Immunity: Justices Rule that Phoebe-Putney/Palmyra Transaction Is Not Immune from Antitrust Scrutiny

by Bradley Arant Boult Cummings LLP
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On February 19, 2013, the Supreme Court unanimously held that the effective acquisition of Palmyra Medical Center (“Palmyra”) by Phoebe Putney Health System, Inc. (“PPHS") in Southwestern Georgia was not immune from antitrust scrutiny, reversing the Eleventh Circuit’s decision to the contrary. In doing so, the Court clarified the standard for qualifying for “state-action immunity” and reinforced the importance of the country’s antitrust law in the hierarchy of competing legal interests.

Background

Georgia’s Hospital Authorities Law allowed municipalities and counties to create a Hospital Authority. The law confers on these municipal authorities 27 enumerated powers, including the power to acquire hospitals and other public health facilities. The Hospital Authority of Albany-Dougherty County (“Authority”) already owned the largest hospital in the county and leased it to a private nonprofit corporation it had formed – PPHS – to manage its operations. In 2010, PPHS proposed to acquire Palmyra, and it structured the transaction such that the Authority purchased Palmyra with PPHS funds and leased it to PPHS. The two hospitals, which are only 2 miles apart, account for 86% of the acute-care hospital services provided to commercial health care plans and their customers in the six counties surrounding Albany.

The FTC filed an administrative complaint alleging that the transaction violates the antitrust laws. It also filed an action in federal district court to enjoin the transaction. The federal district court denied the request for a preliminary injunction and dismissed the case, holding that the transaction was immune from antitrust liability under the “state-action” exemption. That exemption stems from the recognition that the antitrust laws were not meant to restrict a state from regulating its own economy as a sovereign entity. When the act is undertaken by political subdivisions (e.g., county), as opposed to the state itself, the conduct can be exempt, but only when the state has “clearly articulated and affirmatively expressed a state policy to displace competition.” On appeal, the United States Court of Appeals for the Eleventh Circuit affirmed the lower court decision.

Analysis

The case essentially turned on the definition of “foreseeability.” Back in 1985, the Supreme Court held that a state need not explicitly declare that its legislation is intended to have an anticompetitive effect, but rather it was sufficient “if the anticompetitive effect was the “foreseeable result” of what the state authorized.” The Eleventh Circuit defined this as whether the outcome was “reasonably anticipated” by the state legislature. It reasoned that because many markets in Georgia have relatively few hospitals, a hospital acquisition that would lead to a near monopoly was a reasonably foreseeable result of the state’s conferring upon the Authority the power to acquire and lease facilities.

The Supreme Court disagreed, stating that the appellate court “applied the concept of ‘foreseeability’ from our clear-articulation test too loosely.” Rather, foreseeability occurs when the displacement of competition is “the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” As the Court stressed, “simple permission to play in a market” does not “foreseeably entail permission to roughhouse in that market unlawfully.”

The hospitals also argued that given the “unique powers and responsibilities” afforded to hospital authorities to provide adequate and affordable health and hospital care, it was foreseeable that authorities would acquire competing facilities, especially when facing capacity constraints. The Supreme Court rejected this argument as well, holding that nothing in the law clearly articulated a state policy to allow authorities to exercise their general corporate powers without regard to any negative effect on competition. “Particularly in light of our national policy favoring competition, these restrictions should be read to reflect more modest aims.”

Finally, the hospitals argued that any ambiguity regarding whether the clear-articulation test is satisfied should be resolved in favor of finding immunity so as not to improperly interfere with state policy choices. The Supreme Court summarily rejected this argument by stating that it did not find the law ambiguous on this issue. But more importantly, the Court took the opportunity to stress again the importance of the antitrust laws, stating that “federalism 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.” The Supreme Court also pointed out the burden of loosely defining foreseeability. As an amici brief filed by 20 States pointed out, a broad interpretation of the clear articulation test could lead to unintended anticompetitive consequences when state legislatures delegate corporate authority to local bodies. This would require states to disclaim any intent to displace competition to avoid inadvertently authorizing anticompetitive conduct. The Supreme Court flatly stated that, “We decline to set such a trap for unwary state legislatures.”

What this decision means for you

While the Court‘s decision concerns a relatively limited exemption to the antitrust laws, there are three things you should note:

  1. The state-action doctrine comes up in a number of scenarios – both within and outside of healthcare. To the extent that you are involved in a matter where private or municipal actors are claiming to act under a state mandate, the Supreme Court has stiffened the nexus requirement between the allegedly harmful conduct and the articulated state policy.
  2. Structuring a transaction using a governmental authority as a go-between will not likely immunize the transaction from antitrust scrutiny. It is unclear how many parties would actually take advantage of such a transaction structure, but with this decision it is clear that unless the state mandate is very clear, the transaction will get looked at by state or federal regulators.
  3. With the continued desire among providers to integrate and collaborate (e.g. formation of ACOs), coupled with the need for states to establish insurance exchanges, states may well pass legislation incentivizing parties to act in certain ways. Whether healthcare companies of all sorts may point to that legislation for protection from the antitrust laws will now depend on whether the intended conduct is “the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.”

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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