After more than two years of litigation, the U.S. Federal Trade Commission (FTC) and Phoebe Putney Health System Inc. (Phoebe Putney) have reached a settlement resolving the FTC’s complaint challenging Phoebe Putney’s acquisition of Palmyra Park Hospital (“Palmyra Park”) as unlawfully reducing competition. The settlement is notable not only for what it requires, but also for what it does not require. Specifically, the settlement does not require Phoebe Putney to divest the hospital it acquired in the challenged transaction, the FTC’s preferred remedy when challenging hospital mergers. The settlement also does not impose price caps or information firewalls to allow for separate, confidential negotiations between each hospital and managed care plans.
In April 2011, the FTC filed an administrative complaint challenging Phoebe Putney’s acquisition of Palmyra Park in Albany, Georgia, and simultaneously filed a complaint in federal district court seeking a preliminary injunction that would prevent the parties from integrating pending the outcome of the administrative proceeding. Phoebe Putney is a not-for-profit private hospital system created by the Hospital Authority of Albany-Dougherty County (the Authority), a governmental body created by Georgia statute to lease and manage Phoebe Putney Memorial Hospital on behalf of the authority. The FTC alleged that the transaction would result in a monopoly for inpatient general acute care services sold to commercial health plans and violate the antitrust laws.
However, the federal district court denied the FTC’s motion for a preliminary injunction and dismissed the case. The U.S. Court of Appeals for the Eleventh Circuit affirmed. Both courts found that the transaction was immune from antitrust scrutiny under the state action doctrine, which exempts government entities from federal antitrust laws when they act pursuant to a clearly articulated state policy to displace competition with regulation, and the suppression of competition is a reasonably foreseeable result of that policy.
Notwithstanding these defeats, the FTC sought review by the United States Supreme Court, and the Supreme Court granted certiorari to determine whether the Georgia Hospital Authorities Law “clearly articulates and affirmatively expresses a state policy to permit acquisitions that substantially lessen competition.” In a unanimous decision issued on February 19, 2013, the Supreme Court reversed the Eleventh Circuit decision, determining that the Georgia law does not include permission for hospital authorities to use their powers anticompetitively, and that, therefore, state action immunity does not apply. Analyzing Georgia’s Hospital Authorities Law, the Supreme Court reasoned that while the Hospital Authorities Law permits 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.” On remand, the FTC and Phoebe Putney stipulated to a preliminary injunction order from the district court that prevented further integration of Palmyra Park by Phoebe Putney. The FTC also resumed its administrative case on the merits, which had been stayed pending the Supreme Court appeal, with trial scheduled to start in early August 2013.
On August 22, 2013, the FTC announced that it had reached a settlement agreement with Phoebe Putney. As part of the settlement, Phoebe Putney “stipulate[d] that the effect of the consummated Transaction may be substantially to lessen competition within the relevant service and geographic markets alleged in the Complaint.” In addition to routine reporting and compliance requirements, the settlement contains two major provisions.
First, it requires Phoebe Putney to give the FTC 30 days prior notice of certain future acquisitions in the six-county area surrounding Albany, Georgia, for the next 10 years. Acquisitions that fall within this requirement include the acquisition of: (1) any general acute-care hospital, (2) any inpatient or outpatient facility that provides any service provided by Phoebe Putney and (3) all or a controlling interest in a physician group practice of five or more physicians. The provision only applies to proposed transactions that do not meet the pre-merger notification requirements of the Hart-Scott-Rodino (HSR) Act. Proposed transactions that do meet the HSR Act’s pre-merger notification requirements will still follow that process.
Second, the settlement prohibits Phoebe Putney “from raising any objections to or providing negative comments about [state certificate of need (CON)] applications for general acute-care hospitals in the six-county area surrounding Albany, Georgia.” Competitors must receive CON approval from the State of Georgia Department of Community Health prior to entering into or expanding in the marketplace. The FTC noted that this restriction would allow a new hospital entrant to apply for a CON “without the potential additional cost and delay associated with opposition from Phoebe Putney.”
Notable by its absence is the fact that the FTC did not require Phoebe Putney to divest any assets. In its analysis of the settlement to aid public comment, the FTC explained that “Georgia’s CON statutes and regulations effectively prevent the Commission from effectuating a divestiture of either hospital in this case.” The FTC explained that Georgia’s CON laws preclude re-establishing the former Palmyra Park assets as a second competing hospital, “because such relief would require: (1) the re-division of the single state-licensed hospital into two separate hospitals; and (2) the transfer of one of those hospitals from the Hospital Authority to a new owner. Either one of those steps is independently sufficient to require CON approval.” But, to obtain CON approval, an “unmet need” in the area must exist and the applicant would have to show that the new facility would not have an adverse impact on patient volume and revenue of other existing hospitals in the area. The FTC then stated that currently “hundreds of surplus hospital beds” exist in Albany, Georgia, and, therefore, a new buyer could not show an “unmet need” exists.
Besides not requiring a divestiture, the FTC also did not require conduct remedies, such as price caps on reimbursement rates negotiated with managed care plans or separate managed care negotiating teams for Phoebe Putney and Palmyra Park, as it imposed in a prior hospital merger challenge. See In the Matter of Evanston Nw. Healthcare Corp., FTC Dkt. No. 9315 (Apr. 8, 2008). The FTC’s only explanation for not requiring “non-structural” relief was that “such remedies are typically insufficient to replicate pre-merger competition, often involve monitoring costs, are unlikely to address significant harms from lost quality competition, and may even dampen incentives to maintain and improve healthcare quality.”
Hospital systems contemplating mergers or acquisitions that may raise antitrust issues should be aware that the FTC repeatedly emphasized that the remedy it agreed to with Phoebe Putney was unique to the facts and circumstances of the case, particularly in light of Georgia’s CON law and the fact that upon consummation of the transaction, Phoebe Putney and Palmyra Park combined their hospitals under one license, which made it more difficult to separate the two hospitals under Georgia’s CON law. Given this unique situation and the FTC’s distaste for non-structural remedies, it is expected that the FTC will continue to seek divestitures in future hospital merger challenges.
The McDermott Difference
McDermott Will & Emery’s antitrust & competition lawyers have significant experience with these issues and can be a valuable resource to hospital systems that need to analyze the potential antitrust risks that might be raised by the mergers and acquisitions they are contemplating.