Andrea Agathoklis Murino, Wilson Sonsini Goodrich & Rosati
Consolidation in the health care industry, and the Federal Trade Commission’s (“FTC” or “Commission”) perspective on such activity, are being closely watched in antitrust law and policy circles. In April 2011, the FTC challenged the acquisition of Palmyra Park Hospital by Phoebe Putney Health System Inc. (“Phoebe”) in Albany, Georgia. The Commission argued that the combination would result in unduly high market shares (>85%) in the provision of acute care services in a six-county region and result in anticompetitive price increases. Shortly thereafter, the FTC sought and obtained a preliminary injunction (“PI”) from the United States District Court for the Middle District of Georgia halting the transaction pending trial. Typical enough. But here’s where our story starts to take some strange twists. What began that April in a federal district court is an adventure leading from the Supreme Court to local Georgia healthcare regulatory bodies…and possibly, back again. Here’s what happened.
Phoebe responded to the PI not by throwing itself into a trial on the merits, but rather by filing a motion to dismiss on the grounds that by virtue of the state action doctrine, Phoebe’s conduct was permissible. Generally, the state action doctrine provides that where (1) there is a clearly articulated state policy to displace competition and (2) there is active supervision by the state of the policy or activity, otherwise anticompetitive activity will be permitted. Here, Phoebe argued that because it was owned by the Hospital Authority of Albany-Dougherty County, and operated under Georgia’s Hospital Authorities Law, it was immune. Phoebe prevailed on its motion to dismiss in the district court and then again at the U.S. Court of Appeals for the Eleventh Circuit. Phoebe then completed its purchase of Palmyra, closing the transaction.
Not surprisingly, the constriction of its ability to enforce the antitrust laws on jurisdictional grounds such as the state action doctrine displeased the FTC. They appealed to the Supreme Court in mid-2012. In early 2013, the Supreme Court unanimously reversed the Eleventh Circuit and remanded the case to the district court for further proceedings.
The FTC made clear it wanted to resolve this matter by forcing a divestiture, as is its preference in most horizontal merger enforcement actions. Its view is that structural remedies that inject competition into the market are the best mechanism to restore competitive balance. But the FTC was of the view that Georgia’s healthcare system only permitted divestitures like what the FTC hoped to exact where a Certificate of Need (“CON”) is granted first. The FTC did not believe a CON would be granted, so its hands were tied.
Accordingly, the FTC entered into a Consent Order that provided for only conduct or behavioral remedies, such as prohibiting Phoebe from acquiring any other hospitals in the six-county area without prior approval and objecting to any other entities’ CON applications. The Consent Order was clearly not their first preference but at least it was something. As is their rule, the FTC published the Consent Order for public comment. In response, the FTC received an initial opinion from staff at the Georgia’s Department of Community Health (“GDCH”) that a CON would not be needed to effectuate a divestiture. The FTC withdrew its Consent Order and returned this matter to its administrative litigation arm and prepared for trial. Again.*
And yet….earlier this month, an administrative hearing officer at the GDCH reversed the initial opinion that a CON would not be required to effect the divestiture. The GDCH review is not complete. There is at least one more layer internally, and then the external Georgia state courts. An appeal to the Georgia Supreme Court is conceivable—and from there, who knows. Perhaps the Supreme Court will choose to revisit. Perhaps the FTC will choose to resurrect the Consent Order. Or perhaps some third option will emerge. Time will tell. Probably.
*Despite being able to pursue litigation in the federal courts, the FTC maintains an in-house Administrative Law Court. Often, merger challenges are placed into this trial-level court.